How High Can We Go?

If you look at the chart of the domestic Trend Tracking Index (TTI), it’s obvious that the market has rallied since March without regards to the laws of gravity—so far.

The million dollar question is “how high can we go?” Every investor expects a serious pullback, but so far it has not happened. Maybe the chart of the TTI can give us some clue as to where a (temporary) top may occur.

When the markets headed south last year, and entered freefall mode, 2 gaps were created on the domestic TTI (see red arrows) price chart. Since they occurred to the downside, they are called exhaustion gaps, meaning that selling activity far outpaced buying activity.

Chart technicians will tell you that gaps will always be closed. In this case, that would translate to prices moving to a point that is higher than the beginning of the gap opening. The lower gap (lower red arrow) has been closed already, and we’re now half way (44.00 price level) through closing the upper gap. This process would be completed at around 44.50.

Having looked at thousands of charts over the past 20 years, this pattern occurs with regularity, the big unknown is always the timing of it. Just because the exhaustion gaps occurred last year does not mean they will be closed this year. However, we seem to be on track with the TTI only having to move up another 1.14% from the 44.00 level.

Here’s the rub. Once the closing of the gap occurs, odds are high that the trend will reverse. However, as anything that has to do with investment concepts, nothing is 100%.

This is not a prediction on my part; it’s simply a pattern that I look at from time to time to try to get some sense as to how high we could go. So, let’s watch out for the 44.50 level.

If this nugget of wisdom does not play out, there is a good chance that still higher prices are ahead.