The Charts Say More Gains Ahead

01/14/2010 1:00 pm EST

Focus: MARKETS

Dan Sullivan

Editor, The Chartist

Dan Sullivan, editor of The Chartist, says some of the better technical indicators suggest continued gains for stocks in the coming weeks and months.

Despite the fact that stock market newsletter writers are highly bullish—with the latest from Investors Intelligence showing 48.3% in the bullish camp versus 16.9% bears—the public has yet to embrace this bull market, and that is one of the best things that it has going for it.

Between August 1st and December 29th, investors pulled $46 billion out of domestic equity funds, [while pumping more than $175] billion into bonds. Investors who are on the sidelines view the rally with a great deal of suspicion, wondering when the next shoe will drop with the bear market reasserting itself; however, they will come back as they always have as the economy continues to improve.

One strong inducement is the fact that the yield from money market funds is at historically low levels. This bodes well for the market, and if the past is any criteria, we would expect a series of monthly inflows into the coffers of mutual funds prior to the end of the bull market.

With our models in a positive mode, we continue to advise a fully invested position. The obvious question is: How do we know that the economy is going to improve? Over the past 100 years, the stock market has had the most accurate record of predicting the direction of the economy. Granted, the market does not always get it right, but its overall record as a predictor of the economy is unequaled.

[Currently], all of the key indices are above their ten-, 50-, and 200-day moving averages and all are at or slightly below their respective bull market highs. The Advance/Decline Line reflecting common stocks only has also made a recovery high, which is another plus for the market, because the A/D Line often tops out ahead of the major averages

The high-low differential, which is a ten-day moving average of new highs versus new lows on the New York Stock Exchange, has been in a pronounced up trend over the past three weeks and is very close to its peak of the cycle. Similar to the A/D Line, it is confirming the market’s upward trend.

A Fibonacci retracement level is created by taking two extreme points, usually a major peak and a trough on a chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%. The expectation is that once a retracement level is reached there is a high likelihood of achieving the next retracement point.

The Dow Jones Industrial Average has passed the 50% level of 10,334.03 with the next retracement level (61.8%) at Dow intraday high of 11,245.95. The Standard & Poor’s 500 has also passed its 50% retracement level, with the next retracement level (61.8%) at S&P 500 intraday high of 1228.74.

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