The bulls have, for now, broken the downtrend in the U.S. stock market. The Dow Jones Industrial Average on Friday could post its longest winning streak since November as the benchmark index is up over 2% this week.
Will it last? Let’s explore with the help of a chart.
Please click here for an annotated chart of the S&P 500 ETF SPY, +0.30% Similar observations can be made from the charts of the Dow Jones Industrial Average DJIA, +0.42% Nasdaq 100 ETF QQQ, +0.00% and small-cap ETF IWM, +0.23%
Read: Red-hot chip stocks are actually getting cheaper as their prices rise
Please observe the following from the chart:
• The downtrend line has been broken. Even if the market slips below this trend line again, this break is significant.
• The chart shows the formation of a descending triangle. If the breakout becomes decisive, it is an indication of a potential significant “up” move.
• The chart shows a triple bottom. The triple bottom will offer support for any subsequent correction.
• In formation of the triple bottom, it is significant to note the pattern of higher lows. This is positive.
• The relative strength index (RSI) shows a higher low before the rally. This is positive.
• The rally is occurring on low volume. This is negative.
• The market has moved up too quickly, too far. There may be a short-term pullback.
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Will it last?
Based on the traditional technical analysis, the “up” move should last.
But if traditional technical analysis always worked, good technicians would be trillionaires. Forget trillionaires — do you know any technicians who are billionaires?
Furthermore, as the time progresses, traditional technical analysis does not work as well as it did in the past. To understand the reasons behind this, please click here.
At The Arora Report we use ZYX Global Asset Allocation Model that has inputs in the following 10 categories: leading economic indicators, money flow, currency moves, sentiment, risk appetite, price action, commodity moves, valuation vs. future prospects, valuation vs. competition and internals of the market.
Based on the model, The Arora Report is reducing its allocation to cash and hedges. The plan is to deploy cash into special situations.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.