It is every rational investor’s duty to position themselves as best possible to profit from market conditions. Here we are 20 weeks deep in a rally that has advanced over 35% and the Dow just crossed over 9000.
Now, taking a look around, there is a lot of discussion about an inverse heads-and-shoulders pattern being formed in a long-term range. Here is a chart with the supposed pattern drawn on it:
I must admit, it was a bit challenging to try and fit the pattern on the chart. I don’t buy that the market is forming this pattern. We did not get enough of a dip on either of the shoulders and the head is a V-bottom, not a rounded bottom.
There’s no doubt we are still in a rally. The markets have moved over 11% higher in the last 10 days and the Dow has just moved above the 200MA. With that said, there are some red flags popping out at me.
First, the Dow is right at a significant resistance level. Until the Dow passes 9200, I am not classifying a breakout as “true.” I get 9200 because it is 2% higher than the resistance level of 9190.
Here is a chart of the resistance level:
Even in the light of the possibility of a breakout, I am very skeptical that the market can keep moving higher. Volume is the reason I doubt this move.
Think of it this way: If a car is going up a hill, you have to keep giving it gas in order to make it up the hill. Now, the markets must have volume to surpass hills (resistance levels). If the volume is significantly reduced, how can the market keep moving over hills?
Take a look at this chart and you can see the divergence in the price action and volume levels:
Unless the professionals step up their buying, I don’t think the rally will be able to continue. Also, unfortunately for bulls, I see no economic reason to be optimistic.
If you have similar views, keep in mind that the market can be irrational much longer than we can keep our capital. Shorting the market is not the right move here. We have to wait and witness the distribution associated with a reversal (5-7 days in a 2 or 3 week span) and at least one follow through day.