Let's first start with a monthly chart of SPY that goes back to the early 1990's:
As you can see, it appears that a double bottom is now forming with the lows of the previous bear market. To many technical analysts, this would be considered bullish. However, the long-term trend is still down, so to long-term trend followers, the picture is still bearish.Perhaps a daily chart will help clarify things. Below is a daily chart of SPY, which goes back 1 year:
The blog, The Art of Trading, calls this the world's most famous rising wedge, as it appears that every blogger has noticed it, and has drawn bearish implications from it. Therefore, it is a bearish piece of evidence to traditional technical analysts, but a bullish piece of evidence for contrarian traders with the rationale being that if everyone is expecting the wedge to breakdown, then it probably won't.The next layer to this puzzle involves a daily chart of the Dow:
The above chart shows the Dow stalling out against the 8000 level, which used to be support, but is now resistance. Surely, this must be a bad sign.
But next is a daily chart of the VIX:
In the chart above, the VIX appears to be breaking down below support. A falling VIX, of course, is bullish for stocks. But perhaps, since everyone has there eye on this breakdown, it is bound to be a false?
Let's have a look at the health of the carry trade by dividing the Australian Dollar by the Japanese Yen:
Currently, the Aussie Dollar is outperforming the Yen, which indicates that investor's appetite for risk is increasing again. Notice how in September and October the opposite was true, as investors shunned high yielding assets, such as the Australian Dollar. So, all in all, this fact must be bullish for stocks. But notice how this ratio bounced off its 200dma resistance level?The next chart shows the number of stocks, within the S&P 500, that above their 200 day moving average:
The bullish breakout shown above, I think, is conducive to the bulls. But the long term trend, of course, is still down, indicating that the market is still in a long term bear market.
The bottom line is that there is plenty of bullish evidence for the stocks market, as well as plenty of bearish evidence. What this means is that the stock market could go up next week or it could go down.
And this is the mentality that I try to maintain. At any given point in time, the stock market could up or it could go down. But rather than losing sleep trying to outsmart the market, is it not easier to simply buy when the market is rising and short when it is falling. In other words, not predicting what the market will do in the future, but merely reacting to what it actually ends up doing.
