S&P revives
I find the strength of the Nasdaq 100 and FTSE 250 especially heartening. The FTSE 250 has clawed back almost all its losses since late May, while the Nasdaq has pierced above its May highs. These indices - which are heavily laden with technology and cyclical stocks respectively - ought to lead the way when investors are in risk-seeking mood. That they are doing so gives me greater faith in the rally.
Mid-caps motor onward
Very shortly, a further bullish development could occur. The Dow Theory is not far off giving a buy signal. The Dow Jones Industrials and the S&P 500 index have already made new closing highs above May's levels. If the Dow Transportation Average now joins them, the 21st century version of the Dow Theory to which I subscribe (www.thedowtheory.com) will be in buy mode once more.
Awaiting Transport strength
The swing charts and the Dow Theory are kissing cousins. Their underlying principles are very similar indeed, with change-of-trend signals coming from the breach of previous significant highs and lows. There are differences between them, though. For example, the Dow Theory works with closing prices alone, whereas the swing charts use both highs and lows. For a reminder of the principles involved, you can watch my videos: http://bit.ly/N46SCC and http://bit.ly/1dEzpwn
Given the similarities between the two approaches, readers have asked me whether we should just look at the one which gives the timelier signals - ie, the swing charts. The answer to this is no. The two approaches are complimentary, not competing. I would use the Dow Theory for position trading purposes - ie, for getting long or short for weeks at a time, probably via an exchange-traded fund. The swing-trading method is better for grabbing moves over a shorter horizon with spread bets.
Despite what I see as the clearly bullish messages coming from these established trend-following methods, there is no shortage of pundits calling for an imminent resumption of the downtrend. I can't really discern any evidence-based analysis behind this argument, mainly just invocation of deteriorating fundamentals and the usual lashing of esoterica. The first is moot, and the second unworthy of debate.
I did raise the potential for a bearish double top in stocks to form last week. I am a pattern-sceptic these days. Patterns are largely subjective by nature and not therefore back-testable, unlike, Dow Theory or swing-chart signals. (The possible exception here is point-and-figure patterns, but I do not use these charts much.) Anyway, I can see no reason for worrying about the mere possibility of a certain pattern forming, especially when objective technical measures are plainly positive right now.
FTSE's objective
My focus is therefore upon further gains for now. In the case of the S&P, I am looking for new highs at 1723, and around 15800. For the FTSE 100, the index's most obvious objective lies at its May peak at 6875. I have already switched some of my Isa cash back into the UK market, but into the FTSE 250, the case for which I outlined in my recent Market Tactics report: http://bit.ly/13HdOiZ.
