Technical Analysis Update: Stocks Stage a Breakout

Stocks finally broke out to the upside of the consolidation pattern I showed you last week.

Stocks Finally Correct

In the near term, this breakout opens the door for a move to new all-time highs. In the intermediate term, the final target of this pattern is as high as 3,250.

Does this mean we’ll go there in a straight line? Not at all.

In investing, no asset goes up in a straight line. Indeed, market volume has been extraordinarily low on this breakout. This suggests a lack of buying from larger institutions.

Unless the big players step in soon, we could see a back test of that top trend line before we make a break higher.

Stocks May Back Test Before Moving Higher

What would drive a move to 3,250?

Three things:

  • Economic data is improving
  • Investors are far too bearish
  • The Fed is pumping liquidity into the system again.

Let’s analyze these now.

Three Reasons Stocks Could Move Higher

1) Economic data is improving

Calls for an imminent recession in the U.S. look increasingly political in nature. Meaning the actual data suggests an economic rebound is underway. Consumer sentiment and current economic conditions both surprised to the upside. The consumer is 70% of the U.S. economy.

2) Investors are far too bearish

Investor surveys show the lowest number of bulls in years. This is truly astonishing when you consider that stocks are less than 3% from their all-time highs. Put another way, investors are extremely bearish given where the market is trading today.

3) The Fed is pumping liquidity into the system again

Finally, the Fed is aggressively pumping liquidity into the system again. On Wednesday, the Fed announced it was increasing its overnight liquidity pumps from $75 billion to $120 billion and its term liquidity pumps from $30 billion to $45 billion.

Throw in QE 4’s $60 billion in money printing per month and the Fed is on pace to add $160-200 billion in liquidity to the system every single month.

As I’ve noted time and again, liquidity – not the economy – is what drives stock prices. With the Fed pumping this much money into the system, we should see stocks move higher.

Until Monday…

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