Schwab Live: Midweek Market Trend for February 15, 2017

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With the markets and many sectors making new highs, an obvious question is how far could they run, at least in the short term?  First, let’s take a look at a weekly chart of the S&P 500 (Figure 1). 

Source: StreetSmart Edge®

After the correction at the beginning of 2016, the S&P appears to have carved out a head and shoulders bottom.  The pattern forms as follows:  the first point - the left shoulder - occurs as the price of the financial instrument hits a new low and then rises in a minor recovery. The second point - the head -happens when prices fall from the high of the left shoulder to an even lower level and then rise again. The third point - the right shoulder - occurs when prices fall again but don't hit the low of the head. Prices then rise again once they have hit the low of the right shoulder. The neckline is a key element of this pattern. The neckline is formed by drawing a line connecting the high price points of the formation.  A breakout through the neckline is considered to be a bullish signal.  A rough target can be set by taking the distance between the head and the neckline (2100-1800 = 300) and adding this amount to the breakout price (2100).  This gives us a rough target of 2400 for the S&P.

Similar calculations give a rough target for the Russell 2000 of 1430 (Figure 2).

Source: StreetSmart Edge®

Looking at sectors, the banks, which were leaders after the election, have recently broken out again out of horizontal trading range (Figure 3).  Some technical analysts would add the height of the range (around 220) to the breakout price (around 4970) to set a rough potential target of 5190.

Source: StreetSmart Edge®

Please keep in mind, though, that all these “targets” are based on historical performance, and should therefore not be considered a certainty

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Examples are not intended to be reflective of results you can expect to achieve.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Past performance is no indication (or "guarantee") of future results.

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