Where Are Stocks Headed?

Includes: DIA, QQQ, SPY
by: Wyatt Investment Research

Back in the Spring, the S&P 500 ran from 1,050 to 1,210. It was virtually a straight line. There were no meaningful pullbacks to buy. Even a dip of 5 points quickly reversed.

I had taken to calling that stock market rally the "bulletproof" rally because it simply would not reverse...

Of course, the "bulletproof" rally did indeed reverse. And part of that reversal was the infamous May 6 "flash crash" that drove the Dow Industrials down more than 1,000 points intra-day.

But there are a couple similarities between the current rally and the "bulletproof" rally from Spring that I want to point out.

First, there's the relentless nature of both rallies.

Next, when the "bulletproof" Spring rally ended, there were signs on the chart that the bullish enthusiasm was starting to wane. I'm not going to get into a long-winded explanation of those signs here, but if you look closely at the S&P 500 chart I've included, you can see the pause before the plunge...

Now I want to share a quote from trading strategist Jason Cimpl's morning alert to his TradeMaster Daily Stock Alerts subscribers:

Overall, the bulls dominate this market. Either add to current positions, or jump in banks and gold miners with tight stops. No matter what, keep tight stops, if this market turns it will happen quickly. Until it turns, and I have no reason to believe it should, there are no reversal candles present, stay longsided.

It is the phrase "no reversal candles present" that is important. (Please understand that by "candles", Jason means candlestick glyphs that mark a day's open price, closing price and intra-day range.) Jason is basically saying that there no signs that the current rally is about to reverse.

That's a contrast to the "bulletproof" Spring rally. Jason had begun warning his TradeMaster Daily Stock Alerts members that weakness was showing in the chart and that they should tighten their stop losses. In fact, TradeMaster Daily Stock Alerts exited all of their upside positions during the morning of May 6, well before the flash crash occurred.

What's my point in telling you this? Well, aside from the fact that Jason is damn good at his job, I want us to understand that the stock market has yet to show that the current rally is weakening.

Of course, there's always the potential for some kind of shock to cause a reversal. Otherwise, there will be signs. And we will stay on the lookout for them.

In the meantime, use stop losses on your positions. This simple step can spare you much pain when the market does reverse, as it inevitably will.