Yesterday's breakout over the previously established August huhs left little doubt that the bulls continue to be in charge despite all of the hand wringing and doubt.
One of the patterns that has been largely ignored amid all of the angst and doubt surrounding this rally is the upside targets produced by the head and shoulders bottom formations in the indices. These patterns were traced out in classic fashion as the market hit its November low, followed by the now famous March low, then finally formed the right shoulder in July.
In the chart of the Dow below, I have plotted the head & shoulders target as measured from the head to the neckline and projected higher. I have also plotted the major retracement levels of the October 2007 – March 2009 decline (the blue dashed lines labeled 50% and 61.8%). Finally, I have plotted resistance bands which are shaded in yellow. These bands are computed using Fibonacci numbers in conjunction with major highs and lows in the market.
Notice how the price broke through the first resistance band off of the March low after being turned away at the June high. After it broke through, it ‘rested’ on the top of the band in late July before mounting its next push higher in August. The fact that price rested on the top of the band validates that area as a resistance level now turned into support. Price then pulled back to within 73 points of the top end of the band on Monday before turning and heading higher. We now have the next resistance band coming into play in the 10,300 – 10,500 range. That range also contains the 50% retracement level which could trigger our first meaningful correction. After that we will see if the bulls have enough left in the tank to take the Dow to its upside target in the 11,500 area. One step at a time, but the next target is 10,300 – 10,500. All of the liquidity still sloshing around in the system needs to find a home.
With rates as low as they are in the fixed income arena, we can expect more flows into equities as traders and investors chase higher returns and are willing to take on the higher risk levels associated with it. Yes it is a long way up from here, but until we see signs to the contrary, the trend is up.