Tuesday, July 26, 2011

7 Month Trading Range: Breakdown or Breakout (Part 6)

Summary of Last 5 Parts:
US and European stocks are in a 7 month long trading range. This trading range can either give way to a significant rally, or we might be witnessing a top formation and can result in a sharp decline. However, keeping in mind the market structure and analyzing the sentiment prevalent in the global markets especially due to the European and US debt problems (money being pulled out of the market), it is evident that market will most likely breakout rather than breakdown - Behavioral stock market analysis.

Risk Management:
SP500 is in a trading range from 1250 to 1360.
Current trend: UP
Up trend defining level: 1320

As long as the market stays above 1320, there is a very high probability of the market breaking out above 1350 to high 1400s. However, if the market closes below 1320, then the trend will turn neutral and the best strategy will be to go in cash and wait for the trend to turn up.

If the market breaks below 1250, it would signal the completion of a H&S topping formation, which could give way to significant selling pressure.

The thing that bothers me is that: How come everyone knows that we are heading for a recession with all the layoff announcements, bad housing market, Global debt issues and slow economic growth, but still the market does not sells-off. It will be very ironic, if in the midst of all of this bad news market (SP500) rallies to new all time highs by the year's end (We will discuss this potential, over the next few months).

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