and welcome back to Stock Charts R US blog.
The double bottom we have been waiting for has finally come in. Over the course of the past four months the market has sold off, rallied away, tested the sell-off low and then turned around and closed higher than the rally peak. This is a classic technical 'double bottom' and suggests there is good buying support for stocks at or near these levels. As well, the market has broken the down-trend (red dashed line) that represented the bear run since the fall of last year. We are still very early in the bottoming process though as the moving averages are still pointing lower and the market is getting overbought from a daily & intraday basis. However, the general message should be clear, Instead of looking for further downside targets (as the market made lower highs and lower lows) we now can start pondering upside targets.
If one draws a channel from the bottom of '06 to the recent bottom and then project that same angled line off the top (market peak in late '07) we see a nice upward sloping trend. For further confirmation of this trend we would like to see a serious test of the lower trend line soon. Considering market seasonality (Sell in May and walk away) and what a typical US Presidential election year looks like (market bottoms near end of Nomination process), one shouldn't be surprised to see that test come in over the next month or two. Ideally, the peak in selling would occur at or near where the red dashed down-trend-line and the blue solid up-trend line meet.
Should this massive channel hold, one might consider a test of the '07 highs as one target and then ultimately a test of the upper channel line as another somewhere down the road. For the short term however one ought to be looking for a pullback into the 'summer doldrums'.
Brian Beamish FMA, FCSI
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