WHERE’S THE STOCK MARKET HEADED? . . . HIGHER!
Most investors are nervous these days, and, the headlines on any given day can provide fuel for that anxiety without limit.
Studies have shown that Human Beings are hard-wired to avoid risk.
But, this programming usually works to our detriment when it comes to investments.
The news and financial crises today create a sense of risk everywhere, so, the result of this aura of fear is to stand back or get out of the markets.
This is also why the masses of investors MISS most bull markets until very late in the game. People perceive what’s presented as risk instead of opportunity.
Take the Stock Market for example. One should always remain flexible when it comes to patterns in the markets.
Here’s the DOW showing a pattern of a double-top. It’s taught that this pattern precedes a decline. But, while patterns can be extremely useful, they don’t always mean the same thing each time you see them.
Here’s the hazard. If you’re convinced that double or triple tops always mean a crash or decline ahead, then, you’ll perceive that the lowest risk is to the downside for all trades. (remember that study about people being wired to take the lowest perceived risk and not the high perceived risk situations)?
If that opinion is shared by most traders (because they’ve all learned the same response to this price pattern), then, they’ll stand aside or watch in wonder as stock prices rise and continue to rise, all while waiting for the crash that never comes and feeling (perceiving) that they took the least risky decision by waiting .
This why profits elude so many.
There is something one can do to offset this prevalent crowd attitude and reaction. Pull back to the relative non-emotional decision platform of interpreting price charts instead of news broadcasts.
This will free you up to SEE what’s actually occurring instead of reacting to WHAT OTHERS THINK IS HAPPENING.
The first approach is based on objective reality while the second is all emotion based primarily on fear.
PATTERNS ARE MADE SPECIFICALLY TO BE BROKEN
We’ve been flirting with double and triple tops in various Stock Market indices which often are a prelude to the market going lower. This then is a trading pattern along with many others which only work sometimes but, which are given far too much weight for reliability. The truth is that price patterns are promoted so they can be broken at strategic times by market makers.
Patterns viewed in this manner become less dangerous to the investor as expectations can be lowered when coming across them.
Although the double and triple tops we’re seeing now in the Dow & S&P 500 are strong price resistance points going back in time, one must realize that eventually all tops and bottoms are penetrated by new and stronger trends.
When these price patterns are broken, their strong resistance turns into equally strong support for a newly rising market trend.
The problem with today’s stock market outlook is that everyone is expecting the market to go lower for a large number of reasons all of which seem rational. This means that average investors perceive the lowest risk to be on the short side of the market (after all, everyone ‘knows’ the market is going to decline, right?). Sadly, the throng are mostly wrong.
This type of large investment crowd perception is just what market makers look for as a base to go solidly in the other direction.
I believe we’re now seeing that ‘higher market’ card being played.
The ‘proof’ for this is coming from a perspective that few look at.
The most common markets discussed are the Dow Jones Industrial Averages or the S&P 500. These markets are endlessly analyzed during each trading day.
But, we need to look at a broader based selection of stocks that just the 30 of the Dow or the 500 of the S&P.
If we instead examine . . .
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If we instead examine a broad index like the Russell 2000, we’ll find a solid clue on the future for the Stock Market as shown on the chart following.
Note that this chart reveals that small business is already in a Bull Market and has bolted out of the coral earlier than the other indices. This is, in all likelihood, a leading indicator for what will follow in the indexes shown above.
The Russell 2000 has already broken out of the traditional Head and Shoulders price formation and is gaining at a rate greater than 17 % per year. A handsome return. – George
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