The recent market momentum is relentless. In two months, the markets have moved up from the depths of despair (remember Christmas Eve?) to within striking distance of all-time highs.
Of course, there are plenty of us wondering when this run will end. Ignore the predictions, because they will be wrong. In fact, the markets made fools of those who called for a pullback or increased volatility recently. If you want to understand what’s next, just look at the technicals.
What the technicals say about market momentum
Market momentum is a powerful force. With so many participants in the markets right now, turning around the giant “momentum” ship is difficult. Money flow dictates the direction of the market, and it has been flowing into ETF’s, mutual funds and stocks. With that said, markets don’t go straight up forever (though some may disagree by looking at a very long-term monthly chart).
There are various ways to interpret market action. Momentum is one variable that can be explained with some precision. Price action is the chief indicator. If prices are rising and turnover is increasing, markets are clearly bullish. Now, that seems rather simplistic, but if all you had was price and volume, you could read the market action pretty well.
However, I like to go a bit deeper. Like an auto mechanic, I know that just listening to the engine doesn’t tell the entire story. I also look at breadth, which also signals the strength of the market move.
Since after Christmas, the breadth indicators have been uber-bullish, and they have stayed that way for weeks. As I already mentioned, markets have enjoyed substantial gains in a short period of time. This has been just breath-taking. Eventually those who remain on the sidelines, will get back in on the action.
