Daily Gains Letter

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Should You Prepare for a Downturn in Key Stock Indices?

By for Daily Gains Letter | Sep 26, 2013

Key Stock IndicesTwo lines from the song “For What It’s Worth” by Buffalo Springfield pretty much sum up what we are seeing on the key stock indices here in the U.S. economy: “There’s something’ happening’ here/What it is ain’t exactly clear.” There is too much noise out there: some are saying key stock indices are going to head lower, while others are saying they have much more room to the upside.

In the summer, the bears said key stock indices would start to decline in the fall due to markets rallying on low volume. The bulls, on the other hand, insisted that earnings are good and consumers are buying, so a higher stock market is ahead.

From a technical point of view, there’s a particular formation that can be seen on this chart that’s not really talked about in the mainstream—a pattern called the “rising wedge.” According to technical analysts, this is considered a reversal pattern, meaning that it suggests the prices will turn in the opposite direction, heading lower from their current higher standing.

Some of the indications that the rising wedge pattern is in the making are the slowing rate of increase (gains and losses are smaller over time), the ideal three resistances on the upper trend line, at least two supports on the lower trend line, and the volume declining as the pattern emerges.

Please look at the chart of the S&P 500 below.

500 Large Cap Chart

              Chart courtesy of www.StockCharts.com

But this is all too technical. In a nutshell, the fundamentals of key stock indices aren’t getting any rosier. Companies are warning about their earnings, the economy is growing slowly, the … Read More