|Since March 10, the Dow has moved up nearly 16% and the S&P 500 is up more than 12%. Both have hardly taken a breath. The question in the minds of both bulls and bears is, what will happen when they finally do?|
Figure 1 - Weekly DJIA showing long-term trendline and the stochastic RSI looking overbought. The last time the indicator was this overbought was back in December 2002 after which the index lost 1500 points before rebounding.
|Figure 2 – Weekly S&P500 index showing similar long-term trendline and stochastic RSI firmly in overbought territory. Note the bearish rising wedge pattern that has formed on falling volume. The solid dark red line is the long-term head & shoulders top (HST) neckline that will provide significant overhead resistance to a continued rise in prices.|
|Graphic provided by: MetaStock.|
Figure 3 - The Standard & Poor's Deposits/Receipts (SPY) is a good North American market proxy. Note a similar rising wedge pattern to the S&P 500 and overbought stochastic RSI indicator and HST neckline.
|If the market takes a breather without establishing lower lows, it will bode well for a sustained upward move. This will mean staying above 7420 for the Dow and above 790 for the S&P500. The less the downside move during this upcoming rest phase, the more bullish it will be.|
|The bad news is that if the breather comes before the indexes are able to set higher highs (above 955 for the S&P and 9044 for the Dow), it will mean more lower highs which would be bearish from a weekly perspective. From where I sit, it looks like we still have a way to go before we are out of the bear-infested woods. |
No matter what your outlook for the long term, it is high time that the market took a breather and a good time to take some profits off the table for those who have been enjoying the equity elevator ride in the last six weeks.
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