Editor’s Note: While even the best investors can’t tell the future, technical analysis can tell studied analysts what to expect before it happens. Jonas is back today to give you a glimpse of where the market could be headed next week. Jonas recently signed on as the newest co-editor of Penny Stock Fortunes — to celebrate, we’re offering you our next sixcks absolutely free. Click here for the full details…
What This Week’s Gains Mean for the Market
By Jonas Elmerraji
July 17, 2009
The market looks as if it’s finally taking a breather today after the S&P 500 rocketed up 6.33% in the last week. But while things have been good for investors this week, that doesn’t mean stocks are out of the woods just yet.
Here’s a look at what to expect next week…
Coming into this week, investors — particularly traders — were watching the market intently as a textbook bearish head-and-shoulders pattern started to form. While the market set itself up for a colossal fall, it stopped short of catastrophe when it ran into the 200-day moving average (the red line that shows the S&P’s average price over the trailing 200 days). That changes the game:
The 200-day moving average acted as support (a price level that a stock has trouble falling below) for the S&P 500, causing it to bounce back this week in a big way. The “head-and-shoulders” pattern I mentioned — and which you can see in the chart above — is usually a signal that a stock’s preparing for a fall. Because it’s such a powerful pattern, the fact that the S&P caught itself at its 200-day moving average means that there are still a lot of bullish investors right now.
That support level also gives the market a chance to form a base, and makes the rally after the market bottomed on March 9 look like more than just a “dead cat bounce.”
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What to Watch for Next Week
Right now market levels are “dangerously” close to resistance at around 947 — a breakout above that level could be the signal for the second part of the stock market’s rally. That said, it’d be foolish to count this week’s movement as the start of a second rally before the S&P breaks out above 960. That could be a key number.
There are two bullish signals to read from this chart right now: that bounce off the 200-day moving average I already mentioned, and the MACD line crossover down below the chart.
The MACD (or moving average convergence divergence) is essentially an indicator of where trends are headed. It’s calculated using moving averages (like the 200-day moving average that the market bounced off of), but you can get MACD at any big charting website — now including Google Finance.
When the MACD line crosses above the signal line, as it did above, it’s a bullish sign that suggests it could be time to go long on stocks. Additionally, a negative MACD, like we’re seeing right now, is often an indicator that the market’s oversold and could be overdue for a rally.
Coupled with the price action we’re seeing, things could be very good for investors for the next few weeks…
But I’m going to add one caveat to keep an eye on as the market does its thing over the course of the next few trading days: Watch for the S&P 500 to breakout above the 950-960 level before you think about calling this the start to another period of ever-rising stock prices.
We could easily see another downward bounce at 950…
Cheers,
Jonas Elmerraji
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