Why You Shouldn’t Heed Calls of a Market Top

Dow Jones 2006 (Photo credit: caseorganic)

Some well-respected technicians are calling for a breakdown, but I see the market building a bullish base

By Sam Collins, InvestorPlace Chief Technical Analyst

New York, Jun.19, hot stock picks .- A volatile session Monday ended with a triple-digit gain for the Dow industrials despite a scary dip that occurred in the afternoon. The Dow fell 140 points at 1 p.m. following a Financial Times story that said Fed Chairman Ben Bernanke would most likely discuss “tapering at his Wednesday press conference.” The story was later softened and the markets rebounded to close with gains. Better-than-expected results from the housing market also contributed to the late advance.

At Monday’s close, the Dow Jones Industrial Average was up 110 points at 15,180, the S&P 500 gained 12 points at 1,639, and the Nasdaq rose 29 points to 3,452. The NYSE traded 679 million shares and the Nasdaq crossed 383 million. Advancers led decliners by about 2-to-1 on both exchanges.

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The Dow industrials are still trading in the narrow range between the 50-day moving average at 15,003 and the 20-day moving average at 15,212. The index is also supported by its intermediate trendline at about Monday’s low of 15,079. Internal indicator MACD is close to a buy signal.

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Like the industrials, the transports are in a bull market with intermediate trendline support — at about 6,200. It is also trading in the space between its 50-day and 20-day moving averages (6,249 to 6,331). Its MACD indicator is also close to a buy signal.

Conclusion: On Monday, Jeffrey Saut, of Raymond James, pointed out that he doesn’t believe that anyone can consistently “time” the stock market. But Saut does believe that the Dow Theory, for the primary trend of the market, is like a “roadmap.” He points out that it gave a sell signal in September 1999, a buy signal in June 2003, a sell signal in November 2007, and a buy signal earlier this year that remains in force.

The Dow Theory, though not perfect, has had a remarkable record of calling tops and bottoms. Combined with our own 17-month moving average chart, which I include at the end of each month, a strategy can be implemented that could provide investors with superb long-term gains.

But Saut, along with other technicians, thinks that “we are in a short/intermediate topping process. The timing models that have worked so well year to date targeted June 11/12th as the days that a feint to the downside would start.”

I have always respected Saut’s opinion but would advise our readers not to anticipate this breakdown. The market is building a base that looks bullish. Unless the 50-day moving averages and the intermediate trendlines are broken, we should remain bullish. Mr. Market will tell us of his next move, and I believe it will be up but will extend the current base through the summer..

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