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Breakout or Breakdown ?

05/13/2015

There are many approaches to investing, one of which is usually called “channel” investing.  Basically, it holds that stock values normally move within a predictable range.  Unless something unusual happens, it will stay within that range.  So, a channel investor will buy the stock when it is near the lower level of the range and sell it when it is near the upper level of the range.

That approach also applies to the stock market as a whole.  Using this approach, we see the Dow is well within the range and should be expected to continue within the upward channel.  In fact, take a closer look at this graph:

Chart of the Day
You can see the Dow has clearly broken above its line of resistance (the broken red line in the top right).  This suggests a breakout to the upside is more likely than a breakout to the downside in the near term.
In the long term, it is admittedly a wide channel, but it is has remained upward sloping for the last hundred years.  Very little is guaranteed in the investment world, but I do guarantee there will be another recession and another stock market “crash” — when that happens, just remember the long-term channel is upward sloping!

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