While we expect a serious bear market to begin at some point in the next year or two, we aren't yet seeing the telltale signs that tend to accompany a major market top. For now, we're willing to give this long bull market the benefit of the doubt.
But we've also noted several times over the past few weeks that we may not be "out of the woods" just yet. The biggest reason has something to do with the "triangle" formation seen late last month. Check it out below.
The key resistance level (the top line) is near 2,700. And the key support level (the bottom line) is near 2,580. Back then, stocks were trading near the middle of that range, at about 2,640.
Here's how that same chart looks today...
Typically, this would be a bullish development, suggesting stocks were likely headed to new highs. But we weren't so sure.
First, the move higher wasn't as powerful as you'd typically expect to see in this type of setup. More important, we noticed the financial media were suddenly obsessed with the pattern.
As you and I know, when "the crowd" is all betting on one outcome, it usually pays to take the other side. We suspected stocks were likely to pull back once again and "test" the breakout from this pattern at least. We could be seeing the start of this pullback. Take another look at the updated chart above. The red line is the 200-day moving average we've discussed several times in recent months. As you can see, it's on track to intersect the triangle pattern around the 2,630 level. This would be the logical place for the market to find support if the bull market is indeed set to resume.
For now, our advice remains: Hold some extra cash and gold... consider adding a few "hedges" in the form of short sales or long put options... invest new money only in high-quality companies and high-conviction ideas... and keep a close eye on your trailing stops, just in case.
