Rob asked in an email today why I had turned bullish? The answer to that comes in several parts. First, take a look at the chart of the Wilshire 5000 on the daily scale. I show a right-angled and descending broadening formation outlined by two red trendlines. The broadening pattern is characterized by trendlines that outline a flat top and down-sloping bottom. Premature breakouts are very rare according to my Encyclopedia of Chart Patterns, Second Edition book. The breakout is upward 51% of the time. That, of course, is no help at all to determine whether the market is bullish or bearish.
What I find interesting in this pattern is the partial decline, which I highlight in the figure. A partial decline correctly predicts an upward breakout 63% of the time. When searching for partial declines, the chart pattern must be established. By that, I mean it must obey all of the identification guidelines for that pattern. Mostly, this applies to the number of trendline touches. Price touches the top trendline and then drops but does not come that close to the bottom trendline before curling back up. When price touches the top trendline again, it often stages an immediate breakout. By immediate breakout, I mean price does not cross the pattern again. However, it may dance along the top trendline before closing above the line and eventually breaking out. Breaking out reminds me of pimples, but I digress...
If the Wilshire leads the other indexes by signaling an upward breakout, then that is bullish.
Another signal is the chart pattern indicator has flipped from bearish to bullish. I show the indicator at the top of this page, along with the diamond strength indication. There is currently just one diamond showing, so the bullish turn is a weak one. It could strengthen or revert to bearish in the coming days, depending on what happens to the markets.
If you believe in Elliott Wave, then the recent March low marks the end of a bear market motive wave. I do not follow Elliott because I find wave counting confusing and gave up trying to do it long ago. However, using the Dow industrials, I see a bear market extended wave 1 beginning from the high in October 2008. The ABC corrective phase began at the March low. Looking at the Dow chart or even the one above, the wave A of the ABC correction has just begun, so I see the upward correction of the bear market downturn continuing. Of course, I could be way off in my wave analysis...so you can try your hand at wave counting and create your own prediction. It is possible that the March low has marked the beginning of a 5 wave motive phase and not a corrective phase. That would be delicious.
Finally, my blog entry discussed the Dow utility average. That measured move up followed by a return to the corrective phase looks as if it has completed, too. My guess is the utilities are headed higher, but that is difficult to tell from the utility stocks in my portfolio.
Since summer is about to start, the indexes could move sideways, waiting for September to come and bad new to arrive about the default rate in commercial mortgages (such as strip malls). That could take the indexes down to form a complex head-and-shoulders bottom, a pattern that I wrote about in an earlier blog.
So, Rob, those are some of the reasons why I think the market is heading up. Keep in mind that I am frequently wrong.
-- Thomas Bulkowski