For the last four years stocks have been moving higher almost in lockstep with the investor suspicion that the gains are built on a foundation of sand. Blame it on the Fed, false hope, or another inflating bubble, but the truth is most people have missed the bulk of the stock market rally.
When emotions run this hot it's a perfect time to consider the technical picture. For the all the doubters of charting as a trading tool, technical analysis has two undeniable merits. First, they take emotion out of the equation. A chart is simply a depiction of historical price levels. No smiley or frowny faces allowed.
Much more importantly, other traders believe in charts. If enough traders think a chart "works" they'll buy or sell at that level. Ensuing price movement is simply a function of supply and demand.
Louise Yamada, National Treasure and founder of Louise Yamada Technical Advisors, suggests taking a step back and looking at the big picture. Despite the headline record-highs, Yamada views the intermediate picture as mixed, if not downright bearish.
Transports, small caps are mid-cap stocks are all giving sell-signals on a weekly basis. When individual sectors start meaningfully lagging the broader market, technicians call it a "divergence." Think of them as a flashing yellow light; there's no pressing need to stomp on the breaks, but a bit of prudence is in order.Yamada is keeping it simple. "As long as those uptrends are in place and you have the series of higher lows, I think you have to go with it."