The good news is the Dow Jones Industrial Average broke out on the first trading day of 2012.
The bad news is the market’s overbought so it likely won’t blast higher.
DJIA Chart
The chart on the right is a daily chart of the Dow Jones Industrial Average. What’s nice about this is the Dow has just broke out of a cup-and-handle pattern. The cup formed during the Summer of 2011 — the left side of the chart — when the Dow fell from 12,000, based around 11,000, then broke through 12,000 again. The handle was the sideways pattern the Dow formed during the Winter of 2011.
Now the Dow’s broke past the handle. Breaking out of a cup-and-handle is a bullish signal for the market.
Overbought Oversold Indicator
The Dow breaking out was the good news. The bad news is the market’s overbought and doesn’t have enough power left to surge higher.
The chart on the right is the Overbought Oversold reading. An extreme reading often poits towards shift in the market.
This month the market’s been overbought. Since this reading goes back-and-forth, we are due for a resting period.
Bottom Line
I’m very pleased with the outlook for 2012 because stocks are very undervalued. The market should be 20-25% higher right now. Plus the Dow just broke out — on the first trading day of the year no less — so the trend is in our favor. Still, the market seems tired and due for a break.
