Technical Analysis: Is This Rally Running Out Of Steam?

| January 20, 2012 | 0 Comments

No question about it… stocks have officially broken out to the upside in recent weeks.

The Dow’s up over 3% from 2011’s closing price while the Nasdaq is up over 7%.  That’s a pretty sweet rally considering the ongoing uncertainty in global economic headlines.

I’m sure many of you remember I pointed out the high probability of a broad market breakout in late December 2011.  At the time, a technical pattern had me thinking a push higher for stocks was right around the corner.  Turns out, that technical call was right on the money.

But here’s what’s interesting…

Investors are now starting to realize they’re missing out… and they’re chasing this rally.  For many, fear of missing out on stock gains is bigger than their fear of losses.  That’s why they’re chasing stocks and pushing markets to higher levels with each passing day.

But if you’re thinking of buying stocks at these lofty levels, you need to reconsider.  It’s time for smart investors to sit on their hands for a while.

Why?

Take a look…

The Dow has broken firmly above the triangle pattern I pointed out in late December (blue lines).  But as you can see, the recent rally is pushing the Dow up to the 12,750 area… a level not seen since last July.

You may recall, that’s where the bottom fell out of the market last summer.  Investors ran for cover late last July as Europe’s debt troubles reached a boiling point.  Within a few weeks, the Dow had dropped 2,000 points from the July 2011 highs.

Now that we’re approaching those highs again, we’ll likely see some renewed selling.  Many investors who bought in at that area last July will use this recent rally as a means to recover their initial capital.

And that’s not all…

There’s also a seasonal pattern of short-term market weakness in late January.  In each of the last two years, US markets saw big multi-day selloffs in the last two weeks of January.

However, both sell-offs were eventually overcome as the markets rallied to new highs in following months.  That’s exactly what I think will happen this time around.

Plus there’s yet another potential downside catalyst ahead…

We’re getting into the heart of earnings season next week.  Big name companies like Apple (AAPL), Amazon (AMZN), and Caterpillar (CAT) are all reporting.  These market bellwethers measure the strength of the US consumer as well as the global economy.

And their earnings reports always have a big impact on the market.

In order for the current rally to continue, these three companies need to beat analysts’ estimates.  If they disappoint, the markets will likely fall in coming weeks.

So like I said earlier…

If you’re looking to buy stocks, you may want to sit on your hands for a while.  We’re probably going to see a broad market pullback soon.  And you should be able to get better prices a few weeks down the road.

Now don’t get me wrong, I still think US markets are going to move much higher in 2012.  But it’s likely we’ll see a short break in the recent rally before it happens.

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Category: Technical Analysis

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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