A Rectangle In The Broad Market

07/24/09 02:27:18 PM

by Mike Carr, CMT

The Value Line Index is understudied but one of the broadest measures of the stock market. Right now, it seems to be breaking out of a rectangle.

Security: $XVG
Position: N/A

Rectangles are useful price patterns that can signify a reversal or a continuation. After the market's rapid rise from the March lows, a consolidation pattern was the best-case scenario for the market bulls. Looking at Figure 1, we can see that a rectangle has contained the price action for almost two months in the Value Line Geometric Index ($XVG).

FIGURE 1: $XVG: DAILY. Prices are at the upper boundary of the rectangle and the RSI points to an upside breakout.

Graphic provided by: Trade Navigator.

While not as commonly used as other indexes as the Standard & Poor's 500 or Dow Jones Industrial Average (DJIA), $XVG is monitored by many traders. It is intended to offer a rough approximation of how the average stock in the Value Line universe is performing and offers exposure across market capitalizations. It is usually thought of as more representative of a typical investor's portfolio.

The middle frame in Figure 1 shows the relative strength index (RSI) after applying a moving average convergence/divergence (MACD)-style calculation. This is a technique pioneered by Andrew Cardwell, who has done a great deal of innovative work with the RSI. We see that it is currently indicating upward momentum in the indicator, a good sign that higher prices are ahead.

We can also see the RSI in the bottom part of the chart is bullish. Cardwell advocates putting moving averages on the RSI. In this case, we see that the nine-day moving average is just crossing above the 45-day moving average, another sign that the market should move higher.

Overall, this is supportive of higher prices for the broad market.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."