Tuesday, October 05, 2010

The Stock Market: Now What?

Zacks Investment Research
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The Stock Market: Now What? By Zacks Investment Research

Why does the market always seem to be at a crossroads? Especially this year?

Oh yeah -- we just came off one of the worst bear markets in history in 2008 (second only to the Great Depression) and then we followed it with one of the most powerful one-year rallies on record in 2009.

2010 has so far been a year of indecision for the market as it's currently up only a few percent from where the year began. And it has crossed above and below that threshold no less than 11 times in only 10 months of trading.

Each time it went down, it looked like the end of the world was starting all over again. And each time it came back, the market grew with excitement.

Now we're back on the plus side -- up about 3.9% from where the year began, but off about 3.8% from the highs of the year.

But this time it looks like the market will finally make up its mind and pick a direction.

Head and Shoulders

Isn't that a head and shoulders pattern on the market?

Yes it is.

And typically, a head and shoulders pattern can signal a market top.

HOWEVER, there are times when a head and shoulders pattern can produce a powerful upside breakout as well. In fact, this is literally one of the most potentially explosive upside signals out there.

Why do I think it could lead to an upside breakout this time?

1) A bearish signal comes when the market breaks through the neckline of the pattern. The market attempted that just a few months ago but was quickly bid back up as those lower prices were rejected.

2) A bullish signal comes when the market trades up through the descending trendline from the head to the right shoulder (which we've just seen in the last few weeks). Additionally, it has crossed the horizontal plane drawn from the highs of the left shoulder.

3) And this move has also taken out the longer-term trendline that can be drawn from the top in 2007 to the highs earlier this year.

Dow Jones Industrial Average
Dow Jones Industrial Average

What does all of this mumbo-jumbo mean?

It means the stage could be set for an explosive upside rally.

Fundamental Reasoning

Unemployment is still pretty high. And growth has slowed.

But even when the double-dippers were at their loudest, the market still kept itself together. An encouraging sign.

Now couple this with literally record corporate profits of $1.383 trillion dollars (as reported on Thursday, 9/30/10) and corporate growth rates expected to grow even more in 2011 and things start getting interesting.


And let's not forget about history. In looking at the top 10 worst bear markets and their subsequent rebounds, year 1 returns averaged 55.62%. By year 3, the returns averaged 77.56%. And by year 5, the returns averaged 103.41%.

2011 marks the beginning of year 3 for this recent rebound, and with it the potential for even more gains based on this historical perspective.

Of course, we don't want to get ahead of ourselves. There are still plenty of problems out there.

But as the saying goes, 'the market climbs a wall of worry and slides down a slope of hope'. There's a sufficiently large enough wall of worry to climb at present. And on the other side is opportunity.

This is what the charts are telling us. (Who knew charts could be so talkative.) And this is what the fundamentals and history are suggesting as well.

Will the market listen? We'll soon find out. But one thing is certain, there are plenty of stocks making their own rebounds and breakouts and you can get positioned in these right now. Take heed of which chart patterns are taking shape and what they mean, and you could be riding the next big move in the market.

To get started profiting with charts, you may want to check out our Chart Patterns Trader service. Follow along as we apply all of the principles above and select the best chart pattern stocks. Both bullish and bearish. Feel what it's like to be in on the right side of a breakout and gain a level of confidence in your trading that you may never have experienced before.

There's no better time to look into this than now, just as the market is poised for a major move.

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