Is it a breakout or fake-out? The market is making a move here. Is it sustainable or just a technical head-fake?
Chris Verrone, technical analyst from Strategas, sees stock strength remaining through the rest of 2011. Verrone cites several factors in supporting this bullish case. Noting the S&P's recent breakout through the 1,345 resistance level, he says the next resistance area doesn't arrive for another 100-odd points, a 6 percent or 7 percent move he thinks may prove too conservative.
Pressed to defend the validity of the breakout for the index that matters, Verrone quickly refers to the move higher in the Dow Jones Transportation Index. The transports index has been used for ages by traders as an indicator of the broader market's next move. According to the traders' playbook (read: the collected wisdom and superstitions of traders and brokers), the market is going to lead the tape, generally by a few months. Verrone cites transports breaking down well ahead of the peaks in 2000 and 2007; traders who paid heed saved themselves from two of the hardest bear markets in generations.
In terms of names to play, Verrone says, logically enough, to start within the transportation sector. He suggests getting long railroad names such as Union Pacific (UNP) and CSX Corp. (CSX). For those loath to buy trains, Chris says long-time-whipping boy Boeing (BA) has made a bearish to bullish reversal. Finally he says not to be scared away by the all-time highs being made in names like United Technologies (UTX). These lead to new highs in the world of technical analysis, which is counter-intuitive but logical thinking from both a fundamental and psychological perspective.
A fly in the ointment is that the bullish case remains intact for 100 pts on the S&P, suggesting a market halfway between resistance and support. Regardless, the greater risk is staying out of stocks, according to Chris Verrone.
Let us know which way you're playing it in the space below or by sending an email to BreakoutCrew@yahoo.com.