An image of a pen and a calculator
Markets

Is This a Bona Fide Breakout?

On Friday, the Dow Jones Industrial Average jumped 1.9%, with a rise of 2.4% for the week. The big run last week gives the Dow an 8.4% gain for the month, and if it holds, it will be the best September in 71 years.

The S&P 500's 2.9% gain for the week embraced all of its 10 sectors, while the small-cap Russell 2000 Index gained 3% for the week, illustrating the broad-based nature of the buying, and the Nasdaq was up 2.8% for the week.

Friday's Dow punch was led by Caterpillar Inc. (NYSE: CAT ), up 4.6%. A handful of other stocks also did very well:

Alcoa Inc. (NYSE : AA ), up 3.9% Bank of America Corporation (NYSE: BAC ), up 3.3% General Electric Company (NYSE: GE ), up 3.28% The Boeing Company (NYSE: BA ), up 3.11%

All 30 of the Dow's components closed on the plus side. By closing higher for the fourth week in a row, the index has not had such a successful run since the eight-week explosion ending in April.

But Friday's gains left some analysts perplexed in that they came amidst disappointing economic news. Weaker-than-expected August new home sales and lower durable goods orders highlighted the list. Earlier in the week, initial jobless claims rose to 465,000, which was above an estimate of 450,000.

One of the primary reasons for both the gain on Friday and for the week was the increase in the rise of economic activity in Europe. Germany's Ifo Index, a gauge of business sentiment, unexpectedly rose, and since Germany is the biggest economy in Europe, the impact on the euro was very positive. At the end of Friday's session, the euro closed at $1.3492 versus the U.S. dollar, up from $1.3317 on Thursday, while the greenback fell 0.9% versus a basket of currencies.

At the close on Friday, the Dow Jones Industrial Average was up 198 points to 10,860, the S&P 500 rose 24 points to 1,149, and the Nasdaq gained 54 points at 2,381.

The NYSE traded almost 1.1 billion shares with advancers ahead of decliners by 4.7-to-1. The Nasdaq crossed 570 million shares with advancers ahead by 4.2-to-1.

On Friday, crude oil for November delivery rose $1.31 to $76.49 a barrel as trading was impacted by the rising U.S. stock prices and a falling dollar. The Energy Select Sector SPDR (NYSE: XLE ) rose $1.17 to $55.27.

Gold posted its third straight record close with the December contract at $1,298.10 an ounce, up $1.80. The PHLX Gold/Silver Sector Index (NASDAQ: XAU ) rose 66 cents to $197.08.

What the Markets Are Saying

Whether in a bull market or a bear market, last week's drive against some formidable resistance was impressive. After a reversal on Tuesday from a high of 1,153 on the S&P 500, the index fell for two days straight hitting a low of 1,123 on Thursday, with a close at 1,125. This appeared to signal that the advance has run its course since the breakout support at 1,130 had been violated and virtually all of the internal indicators were either grossly overbought or had issued sell signals, as had the sentiment indicators.

Before we examine the reason for the dramatic moves higher, let's consider the next areas of resistance. With Friday's pop, each of the major indices has one more significant resistance numbers at which to take aim before going for the big prize - the all-time highs of April. That target is the May high following the "flash crash" low of May 6:

Dow 10,952 S&P 500 1,174 Nasdaq 2,434.

Then there is the matter of the inverse head-and-shoulders that we discussed in the Sept. 21 Daily Market Outlook. I won't go into each of the requirements needed to confirm the formation since readers can refer back to them , but in order to satisfy the requirements of that most bullish of formations, several major hurdles must still be met. First, the breakout from the neckline is supposed to be accompanied by a notable increase volume, and just over 1 billion shares traded on Friday, which is hardly notable. Then there is the matter of a complete penetration of the neckline, which requires that the S&P 500 exceed 1,163.

Finally, there is a possible "non-confirmation" with the Dow's two major indices - the Industrials and the Transports. While the Industrials have clearly penetrated the August high of 10,720, the Dow Transportation Average is still a few points shy of it. The high of 4,525 made on Aug. 9 is just 10 points above Friday's close, but the market is now clearly overbought and at least due for a normal consolidation.

Call me picky, but just as the August low failed to conform to a normal head-and-shoulders, missing the needed 3% penetration of its neckline by only 0.5%, so the recent exuberant buying does not yet qualify as a bona fide breakout. If it does finally qualify, there will be lots of money to be made as the market explodes through the May highs. But if it does not and investors load up on stocks now in anticipation of a breakout, their equity could be seriously depleted.

It is better to wait a few days for a clear signal than to miscalculate and have to dig yourself out of a hole

To get one blue chip that is a good buy here, see my Trade of the Day .

Today's Trading Landscape

Earnings to be reported before the opening include: Cal-Maine Foods and Zales. Earnings to be reported after the close include: Jabil Circuit and Paychex.

There are no significant economic reports due today.

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net .

The Options Trader's Guide to Technical Analysis -Learn how to leverage the power of technical analysis to go after money-doublers with every trade you make. Includes two trades to get you started.Get your FREE copy here!

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

CAT

Other Topics

Stocks