Since there's no holy grail to analyze financial markets, the best approach is an eclectic one. So I incorporate as many tools as possible in my analysis, including: Fundamental valuations, macroeconomic models, monetary and fiscal policies, interest rate developments, sentiment and momentum indicators, and chart analysis.
Major market turning points are usually characterized by many of these tools. That was clearly the case in 2007 when everything fell neatly into place to call the end of a bull market that had started in 2003.
To a somewhat lesser degree that has also been the case starting this June, signaling a medium-term up trend. And that's why I still expect it to continue during the coming months.
But even the strongest bull markets aren't one-way affairs. They're often interrupted by short-term corrections typically lasting six to eight weeks with prices falling 10 percent to 15 percent. And right now I think such a correction has just begun.
Here's why …
All Major U.S. Stock Market Indexes Are
Bumping Against Important Resistance
These technical resistance points are important enough to warrant the beginning of the first large correction since this medium-term rally began in March 2009.
Let's start with the S&P 500 …
As you can see on my first chart, this index hit the resistance line going back all the way to its October 2007 high.
Source: Bloomberg
This trend line is very significant, because it defines the bear market of 2007 to 2009 when the S&P 500 lost 57 percent. And I think it's highly unlikely that this resistance line will be broken through on the very first try.
It's much more likely that the market — which is already tired after the huge runup of the past months — will have to retreat from here to gather enough strength to overcome this technical hurdle.
Next, have a look at chart below of the Dow Jones Industrial Average …
On a first glance you may think there isn't any resistance below 11,000, especially if you only look back two or three years. But if you go back a bit further, to 2005 and 2004, you can see the massive resistance around the 10,000 area. This marks the lower boundary of a very massive trading range.
