Chart Smarts: Why You Should Expect Continued Gains in Stocks

A new week of market action is sending the talking heads spouting off about a potential top in stocks. Don’t believe the hype – investors should be expecting continued gains in the market to end January.

Today, we’re taking a look at the market’s technicals – and what you need to watch for to profit in this environment…

Right now, a lot of attention is being put on the movement of the S&P 500 index. That’s not surprising – after all, the S&P is widely known as a good proxy for the broad market. In the past six months, price action for this mammoth index has been fairly one-sided: all told, the market has rallied 17% over that time, bringing many analysts to question just how much longer the market can hold up its highs.

Those highs have the market at pretty critical levels, after all. Just this month, the S&P hit a new 52-week high of 1296.25, the highest point in the S&P 500 since September 2008. And at present, around 72% of market analysts and institutional investors are bullish – an incredibly high number given the market’s mixed economic fundamentals and the already impressive run stocks have taken in the last six months.

So, should you be unloading your assets right now? Not quite…

Tempering Our Technical Predictions

To make accurate, actionable predictions about the market, it’s crucial to adapt to the way the market moves. As traders, our predictions should be a series of “if, then” statements: if this happens, then I think that will happen. If the market pushes above a key resistance level, for instance, then we’ll probably see another bull run in 2011; if the S&P slides through support, then it’s time to bet on the short side of stocks.

So, what’s our “if, then” mentality telling us at the beginning of 2011?

Take a look at this three-year weekly chart of the S&P 500 below:

Sure enough, the S&P hit an upside barrier as expected at 1296.06 last week, a level that’s within 0.30% of our pre-determined resistance price. As a result, I think we can make a fairly good case for stocks to behave as predicted in the short-term. While traders may see continued consolidation to end January, it’s still too early to call a top in the market.

It’s crucial to remember that stocks can move lower and still remain in a bull market. Just look at June 2009 or Spring 2010, periods in the chart where stocks moved lower, but ultimately reached higher ground.

So, while the potential for a momentum bleed off in stocks is very real right now (either through a pullback to support or sideways action), calling a top in stocks is a bit ambitious. Instead, we should expect that the S&P will hold above 1275 as it makes another attempt at breaking above that 1300 resistance level.

It’s only if the S&P 500 falls below 1275 that traders need to worry…

Cheers,
Jonas Elmerraji
Managing Editor, Penny Sleuth

January 25, 2011

Chart Smarts: Why You Should Expect Continued Gains in Stocks was originally featured in the Penny Sleuth. Check out Wall Street’s 5 Most Profitable Penny Stock Patterns Report.

This story was originally featured on Penny Sleuth.

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