Even though the DJIA has rallied just over 1400 points off of the March lows, the markets are setting up for another 1000 point run. The rally off the bottom was just under 22% in 30 trading days. Bears that are building short positions, are doing so under the false assumptions 1) the market is overbought 2) it cannot go any higher. These two delusions couldn’t be further from reality. Markets are never overbought or oversold. Maybe relatively overbought or oversold, but you show me a time period we are overbought, and I’ll show you a different time frame where we are oversold. For example, many bears argue the markets are severely overbought. I might agree that they are relatively overbought, but in the last year, they are most definitely still oversold. Saying the markets cannot go any higher is the same mistake many people made on the way down from 14,000. At 10,000 I heard many people saying, no way we can go any lower. Wrong. This time is no different.
The SPX chart above illustrates the markets are in the middle of the channel, and currently neither too “overbought” or “oversold.” This chart illustrates why the markets are headed much higher: higher lows and higher highs. The pattern of higher lows and higher highs is extremely bullish. In keeping with this pattern, the next time the SPX touches the top of the channel, it will happen above 875, I expect this to happen around 900.
The CBOE Volatility Index chart above supports the uptrend. The CBOE Volatility Index is commonly referred to as the fear index as it reflects the implied volatility of the S&P 500 index options. The down trending channel suggests fear and uncertainty are leaving the markets. It should also be noted that the index typically trades within a channel, usually a horizontal channel. The fact that the index did not breach 40 today is extremely bullish. Previously 40 had been support. Now 40 is resistance. The translates into further extensions of this rally. Today’s market movement was healthy and very indicative of bull markets. Bull markets see many smaller up days and few larger down days. Until early March, the scenario was reversed. Before March, up days were large and there were many more down days. The Fibonacci retracements show 33.22 as the next support level. On Friday, the index traded very close to this without closing below it. Based on the retracement pattern, if the index closes below 33.22, it will trade towards 17. If the index touches 17, I will guarantee the DJIA is at least 1000 points higher.
Lastly, for those who do not believe in technicals, I can show fundamental support of this prediction. Dating back to 1959, the 7 recessions that have occurred have lasted on average just over 1 year. The current recession is in its 17th month. Of the 7 recessions that have occurred since 1959, only 5 are technically recessions. Economists will generally agree that recessions are defined by two consecutive quarters of negative growth. Only 1 of the last 7 recessions had three consecutive quarters of negative growth. The current recession has had two. The economic data is showing empirical support that the economy is improving, or at the very least, that housing has bottomed. Considering the level of government spending coupled with quantitative easing and the significantly increasing money supply, once growth begins, it will explode. Although most of this growth can be attributed to inflation, it is growth nonetheless. Once the all clear signal is given, the unprecedented level of cash on the sidelines will pour into the equity markets causing a huge rally.