Buy the ‘No. 1 Rule’ of Technical Analysis

The market is making new highs, and it appears that we now have reached escape velocity from the vortex created by Fed Chairman Bernanke’s introduction of the “taper” narrative.

As it turned out, traders got way too out in front of the taper talk, anticipating much more of a “hawkish” Fed analysis than it turns out there actually was based on the FOMC minutes. The selling generated by Fed Chairman Bernanke’s post-FOMC meeting press comments, which offered a timeline for QE tapering beginning in September, and possibly ending in mid-2014, took stocks down about 6% from their May highs.

Yet over the past three weeks, stocks have come roaring back, and much of those gains can be attributed to the “tapering is not tightening” campaign waged by numerous Fed officials, and to a large extent Chairman Bernanke himself in Wednesday’s public appearance, where he told a group of economist in Boston, “Highly accommodative monetary policy for the foreseeable future is what’s needed for the U.S. economy.”

Now that the Fed appears to be out of our way, at least for now, I keep coming back to what I learned early on in this business, and that would be the No. 1 rule of technical analysis—buy what’s making new highs.

For traders, following this No. 1 rule is an easy proposition. Simply buy the big exchange-traded funds (ETFs) pegged to three main segments of the market—small-caps, large-cap tech and broad-based domestic equities.

Here I am referring to the iShares Russell 2000 (IWM), the PowerShares QQQ Trust (QQQ) and the S&P 500 SPDR (SPY).

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All three of these sectors have vaulted to new highs after a selloff that took them below support at their respective 50-day moving averages. More importantly, the money coming back into equities is likely to keep coming back now that the market realizes the taper narrative is more fear than reality.

So, now is the time to go to your rule book, and follow the No.1  rule of technical analysis—and get long those new highs.

At the time of publication, Jim Woods held no positions in the funds mentioned.

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