Wednesday, November 16, 2011

Watching the Triangle

While the latest news on the economy, Europe’s ongoing debt crisis, and the progress (or lack thereof) of the debt “supercommittee” continues to cause plenty of day-to-day volatility in the market, in reality, stocks have been going sideways for nearly three weeks. The bulls are encouraged, viewing this as a healthy pause after strong gains in October. But the bears are also heartened, noting that the market is still struggling to clear its 200-day moving average or surpass the late October high.

Several market technicians have pointed out that the sideways action has produced a triangle formation (shown below using the S&P 500). The pattern basically represents increasing indecision on the part of investors. Typically, the direction stocks take in breaking out of the triangle is a good signal of the next significant move for the market. More often than not, it will continue in the same direction as the prior move, which in this case would be higher, based on the October rally. But that is far from certain, given the current environment. In any case, with the triangle narrowing rapidly, we shouldn’t have to wait long to find out.