A Look at the Big Picture for Stocks
Drama from Europe is flooding into stocks this morning after the results of the Greek vote and ugly Spanish debt numbers play tug-of-war with Mr. Market.
While the Greeks elected pro-bailout leaders on Sunday — limiting the risks that the country would completely leave investors in the lurch — record-high yields on Spanish debt is more than compensating for any confidence that had come into stocks.
But you shouldn’t get hamstrung on the news items that the media is focusing on…
Ultimately, today’s price action is a minor hiccup for stocks. Instead of focusing on the short-term back-and-forth price action, I want to try to shed some light on the big picture for investors this summer.
Right now, the S&P 500 is looking “bottomy”. By that, I mean that it looks like the market is reversing and turning higher right now. One clue is the inverse head and shoulders pattern that’s been working itself out in the market for the past few weeks. The inverse head and shoulders is a pattern that indicates exhaustion among sellers — and we all want to be buyers when sellers are exhausted.
The top of the head and shoulders pattern is called the neckline. The fact that Mr. Market shoved above that price level on Friday tells us that the pattern is complete and a bigger move upside is the likeliest outcome for the end of June. But there’s a little more to it than that.
RSI adds some extra evidence towards a move higher. RSI is a measure of momentum, a term that traders use to describe how fast price is moving. The fact that momentum’s downtrend (at the top of the S&P chart above) broke is a good sign for the market. After all, momentum is a leading indicator of price, so a broken RSI downtrend points to increasing momentum as the market finds its bottom.
Now, it’s important to remember that the chart above isn’t static. Factors are constantly changing, and the buying and selling pressures that present our technical picture for stocks can change, too. But at this point, I think that higher ground is the likelier outcome for stocks in the near-term.
So, what does that mean for you?
Put simply, it means that it makes sense to be on the lookout for attractive technical trading opportunities where individual names are breaking out.
With a rising tide in the broad market lifting all ships, it could be a solid time to be a buyer…
P.S.: Greg and I have joined forces to use our method of analysis to pick the individual stocks with the most upside potential. And we’ve been dishing out that advice to a small group of readers in real-time. In July, we’ll be telling you how you can join them risk-free — watch this space to find out more…
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