StocksPayWell

From Bear Market To Bull

October 14th, 2010

The U.S. and emerging stock markets have shrugged off their bearish chart patterns and are now in what appears to be another leg of the bull market that began in March, 2009. This is the result of reflation and the fact that emerging market economies such as China and India are booming. While the U.S. economy may not look so good on Main Street, it looks great on Wall Street as companies are turning in record profits and hoarding cash. While the U.S. and world economies used to be propped up by the U.S. consumer, that is now changing. The untapped consumer markets in India, China, Brazil and other emerging markets is where U.S. businesses will have to concentrate. That doesn’t mean the U.S. consumer is totally dead in the water, but it does mean that U.S. corporation can no longer rely on doing business just in this country.

In my prior entry of Sept. 28th I indicated that GDX broke through the neckline of a large inverse head and shoulders pattern, a bullish chart formation. There are numerous other charts that have done likewise or are very close to breaking through. All of them started to form around Oct-Nov, 2007.

Here is a chart of EEM, the emerging markets etf. This appears to have solidly broken through the neckline on large volume. Since the neckline is downward sloping to the right, I have used the midpoint of $45. as the neckline price. The projected target price for EEM is ($45. – $20) = $25 + $45. = $70. or approximately a 50% move from todays’ closing price of $46.78

Here is a chart of the SPY. It has just moved above the neckline on good volume. The right shoulder is another inverse head and shoulder pattern as can seen in the second chart. The target price of the smaller pattern is in the 1220 -1230 area. The target price of the larger pattern is around S&P 1930. While this may sound unlikely, if we consider that the U.S. dollar appears to be headed to at least 72 and then probably lower, the inflation in stock prices will follow suit. In almost every single incidence where the currency of a country has been severly devalued its stock market has moved up in price astronomically.

The final chart is that of the QQQQ. It has formed an inverse head and shoulders pattern but has not broken through the neckline yet. The right shoulder is also a smaller inverse head and shoulders pattern. There has been heavy selling at the April high price of $50.65 but buyers now seem to be coming in. A breakthrough of the neckline would confirm the bull market. The target price of the larger pattern is $75. or approximately a 50% gain from today’s closing price of $50.42.

While many analysts are telling the public to stay out of the market, the technicals are saying that now is a good time to invest as there could be a long leg up in the major indices. That doesn’t mean the market will head straight up, but the short and intermediate term trends are definitely up. Until the Oct. 2007 market highs are broken through the long term trend is still considered to be down. There are also positive moving average crossovers on the major indices in addition to the bullish chart patterns. As with any investment, risk management is the key to staying in the game. Knowing when to take profits or sell at a small loss is critical to proper portfolio management.

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