Preparing for a Strong Directional Move, by D. R. Barton, Jr.

DR's photoGreetings from the home of Joyce and Yates – the land of Guinness and Jameson. Yes, the Bartons are spending a few days in delightful Dublin, Ireland before popping over to London for the weekend. We just arrived and the combination of jet lag and a heavy touring schedule necessitates a concise note this week – but it’s a fairly important one.

Markets are poised for a break out of consolidation patterns and are heading back to strong directional movement soon. A couple of weeks ago, I showed you this pattern in the S&P 500:

DR Chart 1

That intermediate-term consolidation pattern still remains in place. Tight consolidations on multiple indexes (both in the U.S. and globally) suggest breakouts can result in a trend period. Trends follow consolidations and vice versa.

To understand how this shift from consolidation to directional trend might play out, let’s look at a longer-term chart. Here’s the S&P 500 index using weekly bars:

DR Chart 2
Here is that same chart showing an intact trendline and also revealing how tight our current consolidation looks relative to a longer-term view:
DR Chart 3
You can see a confirming long-term uptrend channel also in the emerging markets ETF (EEM) from chart analyst extraordinaire Aksel Kibar :
DR Chart 4

What Next?

The compelling case for a bull run has received some technical damage as of late. If we were to break the combined support provided by the long term trendline and the 200-day MA, that would lead to a much deeper correction.

The fundamental case, however, remains very much in place for continued strong economic growth globally and very strong earnings growth in the U.S. In addition, we are still in a long-term uptrend and are still at or above the 200-day moving average. This means the most likely direction for our next major move remains to the upside.

What we know won’t happen is an indefinite consolidation so I continue to like patiently buying pattern bottoms for now.

I always love to hear your thoughts and comments — especially additional insights(!) – please send them to drbarton “at”

Great trading and God bless you,

D.R. Barton, Jr.

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