We're About to Get the Last Great Buying Opportunity of 2016

U.S. indexes are flashing green all the way across the board. This market is headed in one direction.

But when it seems like everyone is on the same investing page, the contrarian in me says, "Get ready for a pullback."

Don't get me wrong - it's not necessarily smart to stand in the way of the market's prevailing narrative on the basis of a hunch: The trend is your friend.

But here's the bottom line: The pullback is coming, and if we move at the right time, we'll get a crack at some of the best prices we've seen in some weeks.

Here's how I know...

This Is the Story the Market Is Telling Me

The market is saying, not in so many words, that the combo of an incoming Trump administration and Republican control of both chambers of Congress is lending a shot in the arm.

The market is anticipating tax reduction, less regulation, infrastructure and defense spending, repatriation, and keeping manufacturing jobs here in the United States.

The market is reassured that the U.S. Federal Reserve and central banks worldwide are still backstopping the economy, and lastly, there's an expectation that the United States will take a tougher line on trading partners - especially China - although this hasn't "firmed up" yet.

This narrative has given the market a serious upward push: The Dow has hit 14 new all-time highs since the election.

Technical analysis tells us what to do with this narrative.

Here's What the Charts Are Saying

[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]

If we're expecting a pullback followed by more upside, there are just two things to look at right now:

  • Validating the prospects for a quick pullback
  • Anticipating how low the pullback can go

Here's the hands-down poster child for the blow-off top we're seeing: the Russell 2000 Index, as tracked by the iShares Russell 2000 Index ETF (NYSE Arca: IWM)

This is a basket of 2,000 small-cap stocks. This index has been the biggest winner of the four major U.S. indexes since the lows hit days before the election:

buying opportunity

And if we look at a daily chart of Russell 2000, we can see that we are quickly getting into a price move that we can say has gone too far, too fast:

buying opportunity

Within a week, I expect us to see a pullback off of this extreme move.

If that's the case, then we need to look at how low the pullback might go...

A New "Line in the Sand"

From a technical perspective, until we decisively break a strong support area, the bulls will retain control and the intermediate-term upward price trend will remain intact.

And the current significant support area - our new "Line in the Sand" - is very clear on the charts.

The S&P 500, as tracked by the SPDR S&P 500 ETF Trust (NYSE Arca: SPY), shows it most clearly:


So my prediction for the rest of 2016 looks like this...

The modestly over-excited markets will pull back from an extreme, handing us a beautiful buying opportunity (by the way, we'll be trading the living daylights out of this in Stealth Profits Trader, and you're invited to participate).

But our new "Line in the Sand" will hold - price won't be able to significantly penetrate this.

And the markets will rebound from the pullback to make new highs - again. That's just the rhythm of the markets - price taking a breather before pushing higher.

Follow Money Morning on Facebook and Twitter.

About the Author

D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.

Read full bio