It is almost a fact: the U.S. stock market, which many deemed ripe for a 2008-style collapse, is about to break out. Readers know that we attach significant value to trendlines and trend channels (only if they are clear and, consequently, valid). So let’s revise what the trends on the charts of U.S. stocks are signaling. We choose to analyze the S&P 500 as we consider it the bellwether of U.S. stock markets.
First, the daily chart, showing short term trend patterns, points to a test of a consolidation pattern that started more than a year ago. This test can either result in a break out or in a failed test followed by a retracement. The key to watch is whether (1) price breaks above 2085 (2) the way in which the breakout takes place (3) market breadth when doing so (4) sentiment.
Market breadth is definitely supportive. The next chart (lower pane) shows one of the key market breadth indicators, i.e. new highs minus new lows in the S&P 500 index. As seen, the rally was largely supported by the broad market because than 90% of stocks reached new 52 week highs. That is a strong sign which, combined with price action and sentiment, certainly suggests there is a high probability that U.S. stocks break out to all-time highs.
The weekly chart of the S&P 500 confirms the observation of the daily chart. In other words, as soon as the S&P 500 breaks out above 2085, and remains above that level, we know for a fact that the breakout is confirmed and that the long term stock bull market is continuing.
Admittedly, our conclusions are not in line with expectations of many, but we rely on the message of the charts rather than the talking heads or the news streams, and recommend every investor to do the same.
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