A Very Bullish Chart Pattern is Emerging in the Major Stock Indexes
I rarely use chart patterns as I find them to be difficult to consistently quantify and describe. However, I do find them useful in my “weight of the evidence” approach to the financial markets. The current pattern forming on the S&P 500 appears to be a very bullish chart pattern called a “Reverse Head-and-Shoulders” — a deep valley preceded and succeeded by lesser declines. The pattern is described more accurately in Thomas Bulkowski’s authority on the subject “Encyclopedia of Chart Patterns”. The pattern is listed among the most reliable at determining market bottoms.
Digging deeper I look at the action of the major indexes themselves. How are the underlying instruments that make up those indexes performing? I use a variety of measures to analyze the health of an index, but for this quick post I’ll focus on one of my favorite. The ‘percentage of stocks greater than their 200-day moving average’ is an excellent indicator of underlying market health. The 200-day moving average is widely-used among analysts as the final arbiter between a bull and a bear market. Many quantitative models no longer allow trading in equities that are below their 200-day MA’s. According to this indicator, the latest dip is showing a positive divergence, i.e., while the first valley in late January showed just 40% of stocks in the S&P 500 remained above their 200-day MA, the latest dip now shows 49% are above the key level. This signifies underlying strength in the main U.S. benchmark index.
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