The stock market has been detached from economic reality. Investors, drunk with “hopium,” bored at home and unable to bet on sports, have turned the stock market into a casino.

The stock market always looks ahead. It’s sensible for investors to gaze beyond the valley caused by the coronavirus toward good news on earnings in 2021 and a vaccine for the deadly virus.

Pfizer PFE has released promising early results on a coronavirus vaccine, along with partner BioNTech BNTX. Other companies are also in the running.

However, such optimism does not justify the extent of the strong stock market rally from the lows. The real impetus behind the market’s strength is money printing by the Federal Reserve and borrowing by the government. Now politicians have set up the stock market for a decline this month. (More on this below.) You can expect more stimulus and support to keep the stock market rising.

How might things play out? Let’s explore with the help of a chart.


Please click here for an annotated chart of the Dow Jones Industrial Average DIA which tracks the Dow Jones Industrial Average DJIA.

Note the following:

• The chart shows an island reversal.

• The island reversal pattern has been accompanied by high volume, the Arora sentiment indicator giving a sell signal, an inside day following the island reversal, RSI (relative strength index) at an extremely overbought level of 95 and the smart money selling near the highs. All of the foregoing makes this an especially important pattern to watch.

• The chart shows the resistance line.

• In a separate pane, the chart also shows the resistance line for S&P 500 ETF SPY which tracks the S&P 500 SPX.

• The chart shows that in spite of several strong rallies, the stock market has not been able to break the resistance line. The stock market will have to break the resistance line and stay there for at least a few days before going higher than the island to negate the negative pattern.

• Before turning bearish because of the pattern described, know that the whole pattern can be negated in a jiffy on good news on a vaccine or more money printing and borrowing announcements from Washington, D.C.

• This stock market has been controlled by the momo (momentum) crowd.

• The chart shows in the RSI pane that the stock market has lost its momentum.

• The chart shows that volume is consistently not high. Compare the recent volume to the volume on the day that the island reversal occurred, as shown on the chart.

• The chart also shows in separate panes the price action in two of the momo crowd’s favorite stocks: American Airlines AAL and Carnival CCL.

• The chart shows both stocks have lost their momentum, and the momo crowd is now sitting on big losses….Read more at MarketWatch.

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