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Charts and Fundamentals: Why the Rally Should Have Legs


Indications that the rally will continue, both fundamental and technical -- and the levels bears need to reclaim to recover.


In my opinion, the Dow Jones Industrials (INDEXDJX:.DJI) continues to make the bear count low probability. The pattern here is a bit harder to reconcile as an expanded flat and -- while there are always corrections along the way -- that suggests the rally will continue to have legs for the foreseeable future. I have outlined the first two key levels bears need to reclaim in order to begin creating doubt.

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Finally, a quick update to the Nasdaq 100 (INDEXNASDAQ:NDX), which ended up following the roadmap I outlined as my first alternate count, published on December 24 (well, to be fair, it missed my target for the bottom by one point). Note the recent island reversal (an isolated bottom separated by a gap down and a gap up) -- in the past, these have frequently been bad news for bears, and signaled that a move had real legs.

Click to enlarge

The fundamental factor I wanted to mention is important. The Federal Reserve has, of course, continued to feed QE-Infinity liquidity to the Primary Dealers throughout recent weeks -- however, data indicates that once the fiscal cliff situation started to get hairy, the Primary Dealers largely withheld those funds from the equities markets. This means that there's an above-average pile of money suddenly being thrust into the market, now that resolution has been reached.

In addition to that, there are surely many bears who were caught short, and likely many who are trapped that way (hopefully, none of my readers were taken by surprise by the strength of this move). Those shorts should provide additional rally fuel in the form of short-covering, since undoubtedly many of the more stubborn bears saw no reason to cover after that massive gap up. The psychology of many traders at that point is usually, "Well, I might as well wait now and see if it can crack the prior swing high."

In conclusion, the price pattern is indicating that higher prices remain very likely. There is also solid potential for a long-lasting rally, and that must be respected. The bear count is running on fumes at the moment, and very close to becoming invalidated -- I've never liked that count, but maybe bears will surprise me in the last hour. As much as I remain in awe of the ability of the central banks to print this market into oblivion, given the price charts, my conclusion can only be to remain intermediate bullish. In the next few updates, we'll cover even more detail on the long-term potentials. Trade safe.

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