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Midweek Market Trend for October 18, 2017

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It is obviously no secret that the US stock market has been strong, with most major indices at or near all-time highs.  Encouragingly, the global equity markets are supportive of our move higher.  Figure 1 shows that the S&P Global 100 Index is also trading around new all-time highs. Also notice that over the last few weeks, the global markets have actually been outperforming the S&P 500 (Figure 1)(A).

Source: StreetSmart Edge®

One contributing factor to the global strength has been the performance of Japanese stocks.  They are currently trading at a 21-year high (Figure 2) with especially strong relative performance since mid-September (Figure 2) (A).

Source: StreetSmart Edge®

One of the reasons for the Japanese strength is the action in the Yen. As can be seen in Figure 3, Japanese stocks often have an inverse relationship with the Yen, and the Yen has weakened considerably since mid-2016.

Source: StreetSmart Edge®

Speaking of currencies, as I mentioned several weeks ago, it appears that the dollar might be bottoming out.  Since then we have been in the process of forming what looks to be a Head and Shoulders bottom chart formation (Figure 4).

Source: StreetSmart Edge®

A head and shoulders bottom has three sharp low points created by three successive reactions in the price of the financial instrument. It is essential that this pattern form following a major downtrend in the financial instrument's price. We obviously have this with the dollar.

The first point - the left shoulder - occurs as the price of the financial instrument in a falling market hits a new low and then rises in a minor recovery. The second point - the head –forms 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 lows of the shoulders are definitely higher than that of the head and, in a classic formation, are often roughly equal to one another.

The neckline is a key element of this pattern. The neckline is formed by drawing a line connecting the two high price points of the formation. The first high point occurs at the end of the left shoulder and beginning of the downtrend to the head. The second marks the end of the head and the beginning of the downturn to the right shoulder. The pattern is complete when the resistance marked by the neckline is "broken."

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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.

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