Is Another Market Breakout Imminent?

The NASDAQ Composite led the way to the upside last week as the benchmark index sprinted to a 2% gain.

We now sit just 20 points below a new 52-week high, and 40 points off the all significant 2007 prior bull market high.

For the month, the NASDAQ is currently higher by about 1.4%.

At this point, it looks like a resumption of the prior intermediate-term trend is all but guaranteed. The bulls made some serious progress last week, driving prices substantially higher in just four days with two runaway gaps.

Still though, our intermediate-term outlook for the market is overall unchanged because we continue to trade below key resistance near the mid-February peak on both of the indices that we track.

A clear breakout through this key resistance area would confirm the new uptrend. If the bulls manage to clear this level, there is a good chance we see even higher stock prices. However, we will remain patient and trade cautiously until we see a decisive breakout to new highs. (Image: jurvetson on Flickr)

Looking at a chart of last week's price action, we can see that the bulls were in complete control of the underlying trend. We opened the week near the low end of the range, and finished the week near upper right edge of the chart.

Two key short-term support levels to watch based on last week's action include the top of Wednesday's gap (1319), and Thursday's gap (1333).

 

 

In the prior Market Digest, I focused on a potential head and shoulders bottom (of the consolidation variety) that appeared to be forming on the charts of the key market indices.

"However, its worth mentioning that we may be in the process of forming a bullish head and shoulders bottom here, which has been outlined on the chart. If the bulls can hold on and defend Thursday's low near the 50-day MA support line (blue), we may have a right shoulder in place. A breakout from this range (and through the neckline of the H&S pattern) would confirm a new bull market high, and further upside from that point would be likely."

Last week, as the bulls managed to hold on to Thursday's low and subsequently drive prices higher, it became increasingly apparent that this pattern may be coming to fruition.

As Edwards and Magee explain in Technical Analyis of Stock Trends, "...one of these patterns which develops in a rising market will take the form of a Head and Shoulders Bottom. By the time these price formations are completed (left shoulder, head and right shoulder evident), there is no question as to their implications. But at the head stage, before the right shoulder is constructed, there may be considerable doubt as to what is really going on."

Now that we have a better idea of where the market stands, it is easy to setup a clear, actionable strategy for allocating capital. We know that this H&S pattern is only confirmed with a breakout through the neckline (red resistance line). So, once we have a new 52-week price high and confirmed market breakout, we know that the odds of upside follow-through are in our favor.

 

 

"This is a long-term update, and we focus on the big picture. Is there any reason to think that this multi-year bull market is over? At this point, unlikely. Until we see the confirmation of a major intermediate-term lower low, or lower high, the long-term bull market remains in play. What are some of the key support levels that we would need to see taken out here? Well on the NASDAQ, this means a clear break below 2500, and on the S&P 500, we would need to see 1230 taken out".

It still appears as though the NASDAQ may be setting up for a key retest of the 2007 bull market high. On October 31st, 2007, the benchmark index hit 2861, a level that would ultimately serve as the peak of a five year bull market. A clean breakout through this highlighted resistance level would be an important psychological milestone for this bull market.

Last week, the NASDAQ and S&P 500 moved dramatically closer to new 52-week price highs, and a confirmed intermediate-term breakout.

At this point, the long-term trend is decisively to the upside, and the intermediate-term trend has dramatically improved after a 7-week correction. We are currently trading above the 10-week MA support line on both of the indices that we track, and prices sit near new bull market highs.

Key intermediate-term levels to watch on the NASDAQ include resistance at the 2007 bull market high (2860), support near 2500, and the 10-week moving average line near 2761.

On the S&P 500, keep an eye on resistance near 1350, and the 10-week moving average support line near 1316.

 

 

Both of the key indices we track have recently confirmed a new bull market high. Our Dow Theory outlook has been updated with new potential intermediate-term support levels. These areas have been circled in blue.

The Dow Jones Industrial Average and the Dow Transports simultaneously confirmed new bull market highs recently, and key intermediate-term support levels have been updated accordingly. There are no other changes to our Dow Theory outlook, and we remain on a long-term buy signal.

 

 

The Dollar plunged through support last week as the benchmark index fell about 1.1%, and confirmed a multi-year low.

At this point, the short/intermediate-term trend is still to the downside. The next major short/intermediate-term support levels to watch have been highlighted.

Also, the long-term trend is still bearish, as we remain on a 10/40 week MA sell signal.

 

 

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