These days it is fashionable for analysts to say they base their analysis on fundamentals and not on charts.
But the chart is at such a critical juncture that even such analysts may want to take a look at it.
Please click here for an annotated chart of the S&P 500 ETF
which is based on the benchmark S&P 500 Index
Please note the following from the chart:
• The market is right up against the resistance, as shown on the chart.
• The volume is low. Based on traditional technical analysis, this is negative.
• In recent years, I have repeatedly noted that when the volume is low on an approach to the resistance, significant volume often comes in after the breakout. The reason is that after the breakout, the momo crowd becomes aggressive. Based on this observation, these days the traditional technical analysis should not be strictly applied.
• The chart shows that there is a potential “double top” if the market turns down from here. A double top is considered a negative pattern.
• The chart shows that when the market was at this level last time, the relative strength index (RSI) was overbought.
• The chart shows that, this time, RSI can go either way.
• The pattern looks different for the Dow Jones Industrial Average
Nasdaq 100 ETF
and small-cap ETF
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Which way will it break?
Let us start with Arora’s Second Law of Investing: “No one knows with certainty what is going to happen next.” The indication from market leaders such as Amazon
and other popular stocks such as AMD
is that the probability of a break to the upside is high.
Investors should not make decisions based only on the chart. They should look at a more comprehensive model with a proven record in both bull and bear markets such as ZYX Global Multi Asset Allocation Model with 10 inputs. Please click here to see the 10 inputs. Furthermore, markets are dynamic and static models do not work over a long period.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.