Yes, You Can Really, Really, Trust it

Remember last week when Dow Jones was trading at 12,900, and we pointed out that one can believe in that 300-point rally that occurred the day after (see Can You Really, Really Trust it? Yeah, Baby!)?

Yup. We strongly suggested staying long, as we used the most simple gauge for predicting the upside- the key technical indicator used by many professionals. There are so many different indicators that one can use to trade stocks, and that one should use, but the one indicator used by almost all technicians when verifying the trend, whether it has broken, and/or if a turnaround is forthcoming, has proven to be right yet again!

Let’s see.

At that time (see the chart below) both S&P and Dow Jones tested the 325 Exponential Moving Average, popped above that critical level, and confirmed it with a high volume. As you can see, markets always bounced off of this critical support line, every time in the last three years, and it did it again last week! So, as we can see from bellow's charts, during all this credit crunch and subprime mess turmoil in the last few months, the long-term bullish trend has really never been broken!

As I pointed out, most of us don’t look at such a long line, as our attention span is much shorter, so we usually use the 10 day moving averages, or 20 day, sometimes 50, and with this kind of shorter-term volatility we pay attention to any move, any news, we jitter, we fear, we panic. But as you can see again this time, most professionals on Wall Street, in addition to shorter-term swing moves, pay particular attention to this extended moving average, as you can clearly see from both S&P and Dow Jones bounces from that line on the 3-year charts below. The chart below pointed a buy signal at 12,900. We are now at 13,500.

So, just as we said last week, while we were below 13,000 in Dow Jones Industrials and 1,440 in S&P 500, we indeed had a capitulation-sell off, and are now indeed closer to 14,000 in Dow and 1550 in S&P (targets from last week pointed out 1,585 for S&P while it was 1,440, and $14,333 for Dow, while it was trading at $12,900).

As we pointed out, testing the key support and reversal trend line proves to be especially accurate if one takes into consideration the negativity and fear that surrounded us last week. Once the fear and negative sentiment is too high, chances of a reversal are even higher. The rally will probably continue getting fuel from those who were sitting on the sidelines, once they start pumping all that cash in equities on the fears of missing out.

Hopefully you have bought some high quality names at discount prices last week.