Breakout or Breakdown?

February 17, 2012, 3:56 pmYahoo7

A glance in the rearview mirror tells us that December and January were positive months for equities markets - in some cases strongly so.

We can argue the reasons for this but the simple truth is the trend has been up and the long side of markets is where the profits have been.

U.S. and European issues will likely determine the next step. As a technical trader, I look at the patterns in indices such as the Dow Jones and S&P 500, both of which are currently stuttering near the major resistance levels of last year’s highs. From here there are two possibilities – a breakout of the old highs and a surge to new highs or a failure to cover the previous resistance and a fade away. These patterns are reliable enough historically but not to the point where you can ‘autopilot’ your response.

In the charts below you can see that the 2011 highs are very much to the fore as potential points of reaction. As we have crept towards these levels in recent sessions the trading ranges have narrowed, which suggests that traders and investors seem to waiting to see who might drag the markets higher or what news or event might act as a catalyst.

Chart 1 – S&P 500 Cash Daily Bar Chart

Chart2 -Dow Jones Cash Daily Bar Chart

One of the signals for confirmation of more upside will be whether money develops a greater appetite for risk and starts to exit the bonds markets. There is considerable investment capital sitting on the sidelines earning a safe but ridiculously low rate of return. Australia has some of the highest cash rates in the world but in the US the rate is practically 0%.

Traders with a systematic approach will be watching for a signal to enter one way or another based on their trading plans. False breaks (either way) are the bane of a trader’s existence and sometimes trigger an entry that sees the market run the exact opposite way. This is why a predetermined system is so critical. I think we will see a break of these highs but consolidation at higher levels will depend on just how bullish the U.S. is about their future.

European confusion continues with Greece still struggling to tie up its loose ends. The Greek problem is probably already factored into market prices so we may need to look to other European debt bombs to emerge as hereto unseen catalysts.

Patience can be a virtue in the markets. They can take time to unfold, as we saw with the sideways tendency in the Australian market in 2011. February could be the month we see resolution in a sustained direction and, as always, your participation will require attention and care. But if you have a proactive strategy towards your investing or trading, it’s time to get interested.

Good Trading!

Aaron is a regular contributor to Trading Tutors newsletter and blog, a resource for all active traders.

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