Technical Analysis: Watch These Levels Closely…

| December 29, 2011 | 0 Comments

Last week I shared with you a highly important technical pattern developing in the broad market indexes.  The pattern I highlighted is a triangle consolidation- which usually leads to big market moves.

I went on to say that if the Dow broke above a crucial technical level, we’d be looking for a nice rally in US markets.

Well, the explosive pattern I talked about last week is developing even quicker than I anticipated.

Take a look at the same chart I showed you last Thursday- only updated with current prices…

As you can see, the Santa Claus rally has carried stocks higher… up until yesterday.  But even though Wednesday was a down day, the Dow is still holding above the top blue line (green circle).

And that’s a great sign for stocks…

However, caution is definitely warranted at these levels.  Even though the technical picture appears bullish, we can’t ignore what got us here.

The Santa rally has moved stocks higher, but on very low-volume. Many of Wall Street’s big wigs are taking this week off due to the holidays.  And that means there’s not a lot of ‘oomph’ behind the recent rally.

This low volume rise increases the likelihood of a quick turnaround once the New Year rolls around.

The next few trading days are crucial…

If investors decide to start selling in early January, we could see markets quickly reverse to the downside.  If that’s the case, be on the lookout for the Dow to drop back to the bottom of the trading range.

Let me show you what I mean…

There’s a big long-term Italian bond auction today and it needs to go well.  If it doesn’t, US stocks may get hosed the final two trading days of 2011.

If that happens, the Dow may fall back to the bottom uptrending blue line at 12,000.  And if it doesn’t hold, we could see the Dow drop to the 11,750 support level (green line).

At that point, I would consider buying the stocks on your wish list.  It’s not the best-case scenario, but not a bad one either.

On the other hand, if the auction goes well and the markets rise to close out the week, I think we’re in store for an early 2012 market rally.  The incredibly volatile market of the last six months may finally succumb to a steady rise in stocks.

How nice would that be!?!

What makes me so bullish?

Aside from the high potential technical pattern I talked about earlier, a number of important stocks are already shooting to new 52-week and all-time highs.

Names like McDonald’s (MCD), Visa (V), Google (GOOG), and a handful of other market bellwethers are attracting huge investor interest… and they’re surging as a result.

That’s something we wouldn’t be seeing if investors are truly worried Europe was about to fall into anarchy.

So what’s the bottom line for you and your portfolio?

Keep an eye on the triangle consolidation in the top chart.  If the Dow breaks higher over the next few days, I’m considering it a technical breakout.  And there’s no doubt about it… I’ll be buying my favorite stocks.

However, if markets fall a bit in coming days, look to the second chart for guidance on where to buy your favorite stocks.

Either way, I think there’s a very good chance the markets are moving higher in coming months.

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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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