Will Bulls or Bears Win the Stock Market Battle at Highs?

This blog will focus on the very important price levels in the stock markets and whether a battle at the former highs will be won by the bulls or the bears.

The stock markets continued to defy gravity with a very small move up last week. The S&P 500 closed above the closing high of 2011 by a few points but still hasn’t tested the 1371 intraday high from 2011. The DJIA had its second intraday high above 13,000 last week but still closed below it at 12,981 on Friday. And the COMP is approaching the 3,000 level after its close at 2,964. These are all big milestones for the stock markets that haven’t seen these levels since 2008 or even earlier for the COMP.

So now that the markets have reached these elevated levels, albeit very slowly in recent weeks, what will they do next? Here are some stats for you on the DJIA move up that started 45 trading days ago (9 weeks) on December 20, 2011. There has been only 1 day in 45 that has exceeded a 1% or more closing loss and only 1 other day more than 0.7% down. There were only 3 more days that had more than a 0.5% loss. In fact, the stock markets have had only a few small consecutive down days. The rest of the days were up days or close to flat days.

Needless to say, that is very unusual statistically for such a long and extended move without more of a pullback.Another reason to believe a pullback is near in the stock markets is that the CBOE Volatility Index is setting up a double bottom at very strong support near the 16 to 17 level. That is bullish for the volatility increasing which means that a pullback is likely very soon.

So with that backdrop in mind, the stock markets will decide this week whether they will all breakout to new highs or whether the short sellers will win. Remember that some traders and investors have been waiting for the test of these 2011 highs in the first quarter since the beginning of the year. Momentum Rider forecasted this move in their yearly 2012 forecast – although not straight up. However, we also predicted a pullback from these levels when they were reached so this week means a lot and it is very important.

Reading Stock Markets

While MR provides stock market predictions and forecasts that assist in determining the next move of the stock markets in our newsletters and subscription services, we still ultimately trade on the ACTUAL PRICE ACTION AND TREND OF THE STOCK MARKETS. In other words, while we discuss divergences in indicators and stretched stats out of the norm that would normally produce a pullback, we still buy and sell stocks based on what the stock markets actually do. But it can be important sometimes to anticipate future moves.
If the stock markets continue to trend higher and stay above their 20 SMA trendline, we will continue to recommend staying long in the stock market in the short term (see chart below). As long as the markets trend higher and stay above their 50 SMA, we recommend staying long for intermediate term traders.

It certainly seems that the improved consumer sentiment on Friday and the rest of the better than expected US data that continues to show up every week are keeping the stock market bulls happy. And, fortunately, the European and world leaders are also getting more sensible. This weekend’s report was encouraging from the G20 and also from a proposed European bailout merger plan.

The G20 finance chiefs are actively working on Germany as they try to secure roughly $2 trillion in resources by the time they next meet in April and draw a line under the two-year-old euro-zone crisis. And, a merger plan was proposed between the EFSF and ESM to create a single $1 Trillion fund and increased IMF resources would back that up. The bottom line on this “alphabet soup” is that credible plans are being formed to help secure more financial stability going forward and all of that is good for investors and confidence.

The fundamental valuation for most US stocks is still attractive based on a PE ratio of 15 benchmark. So assuming that another Euro crisis or a crazy Iran move doesn’t hit the stock markets in the next few weeks, and that the Euro plans described above move ahead, the bulls would seem to have the edge to keep moving higher. Any pullback would likely be bought quickly based on the past two months’ price action. The rising oil prices are only a minor concern at the current levels and probably won’t adversely affect the stock markets until above $115 or more.

So with that overview in mind, we still are looking at longs, and will look to buy the stock markets on pullbacks.

Investor Notes:

We wrote several recent blogs that identified gold and silver price breakouts. Here are some of those blogs and also some of the recommended ways to invest in higher gold and silver prices.

 
Top Gold and Silver Stocks – Junior Miners (B)

Top Gold and Silver Stocks – Big Miners (B)

Best Gold and Silver Stocks To Buy for 2012 – Large List (B)

It looks like gold is headed to $1,800 in the short term and silver to $37.00. MR is going to write a blog later in the week about a potential for silver to make a huge move later in 2012. Watch out for it as silver could be one of the best investments this year if certain events happen as anticipated.