Major Consolidation in Stocks Since December - Breakout to Upside Probably

The action in stocks since early December has been very choppy but with a slight upside bias.  I have posted previously that the pattern may be an ending diagonal which would imply a very sharp downside move to follow.  However, another break to new highs would strongly suggest that the market is not ready to break down.  Any declines have been repeatedly bought, and there is no downside price action confirmation of anything larger than minor multi day moves.

So at this point it seems with markets hovering just below all time highs, that an upside breakout is awaiting.  I would suggest that it would be sensible to buy new all time highs in the S&P or Dow with stops under recent minor support.  Then a trailing stop technique can be used to lock in profits if they come to the upside.  Also, we can monitor closely for bearish divergences to develop after another run up.

An interesting point to note is that on Wednesday's decline last week, the low of the day was below the Dec 5th high, basically putting the market at a flat or tiny negative gain for the past 5 months.  Understand that in a bull market, that is a significant consolidation - 5 months with no price gain.

Then Thursday the markets rebounded from oversold conditions.  On my bottom spotting algorithm, it was not flagged because Thursday did not make a lower low.  However, the futures from Wednesday to Thursday morning did make a lower low.  So in the futures session, it was basically the type of action that my system will flag as a short term bottom inflection point.  Then Friday the markets gapped substantially higher, which I have seen many times the day following successful bottom reversal picked up by my system.

So my take here is that stock prices are behaving still in bull market fashion and appear to be more likely to break to new highs.  That would also allow the Nasdaq to push into new all time highs which would seem sensible given the way old highs and lows typically are exceeded prior to major directional changes.

Given this outlook, I exited my XLF put options and SKF position at losses.

I plan to buy the breakout to new highs with expectation that a substantial run up for about 3 months may occur.  I view the May 6th low as the last sentiment and price logic point at which a consolidation could have completed, and I view a break of that low to be a stop loss point for longs buying the breakout.

I will adjust stops using a moving average channel technique if price breaks out and continues higher following the breakout.  Additionally, if there is a classic topping candlestick pattern on the Dow 30 after a breakout to new highs, that still falls within the bounds of the rising wedge (below 190.00 on DIA) I will make note and either exit, partial exit, or move stops up to reduce risk in the face of a market with bearish divergence and a topping formation.

Pete