Tops are complicated beasts that usually take time to evolve. Bottoms, on the other hand, form quicker and often feature some sort of quick "V" reversal. Stocks are well off their March lows after a powerful rally the last nine months. The Dow, S&P 500 and Nasdaq recorded new highs for the year this month. Even though the Russell 2000 fell short of its October high, it is still up substantially. After such a prolonged advance, buying pressure is unlikely to dissipate overnight. This is why distribution patterns or extended tops form. Selling pressure from smart money pushes stocks lower, but fund managers with performance anxiety buy the dips. This push-me-pull-you action creates a high-level trading range that can also be known as a distribution pattern.
Bullish seasonals could also limit declines until yearend. I noted earlier this week that the November-April period was the best 6-month period for the Dow. Since 1950, the Dow has gained an average of 7.5% during this six month period. Even though the Dow is already up over 6% this month, there are other bullish seasonal patterns that could come into play soon. The Stock Trader's Almanac publishes a market probability calendar. Over the next five trading days, the Dow has a better than 60% chance of rising on each day. There is a 71.4% chance of an advance the Tuesday before Thanksgiving. SPY and QQQQ may be on the verge of short-term bearish signals, but keep in mind this bullish seasonality coming up over the next five days. It could make for choppy trading ahead.
Bullish seasonals could also limit declines until yearend. I noted earlier this week that the November-April period was the best 6-month period for the Dow. Since 1950, the Dow has gained an average of 7.5% during this six month period. Even though the Dow is already up over 6% this month, there are other bullish seasonal patterns that could come into play soon. The Stock Trader's Almanac publishes a market probability calendar. Over the next five trading days, the Dow has a better than 60% chance of rising on each day. There is a 71.4% chance of an advance the Tuesday before Thanksgiving. SPY and QQQQ may be on the verge of short-term bearish signals, but keep in mind this bullish seasonality coming up over the next five days. It could make for choppy trading ahead.
About the author:
Arthur Hill, CMT, is the Chief Technical Strategist at TrendInvestorPro.com. Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London.
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