Week In Review: Stocks On The Verge Of A Major Breakout

The Bulls Are Getting Stronger 05.23.14

The bulls emerged victorious on Wall Street as they not only quelled the bearish pressure but also set the bullish stage for a very strong breakout. At its deepest this year, the S&P 500 only fell -6% below its record high which is impressive. In fact, we have not had a 10% pullback in the benchmark S&P 500 in two years which speaks volumes to how strong this market is right now. After last year’s 29% rally, the market built a new 5.5-month base and is now on the verge of breaking out and beginning/continuing its uptrend- which is very healthy. Additionally, the lagging (Biotechs, Growth, and momentum stocks) areas of the market are now showing signs of life which is also healthy. Finally, the economy is showing signs of strength (slowly but surely) which bodes well for the second half of the year.

MON-WED: Stocks Steadily Advance

Stocks edged higher on Monday as investors digested the latest round of M&A news was announced AT&T (T) agreed to buy DirecTV (DTV) for $95/share but shares did not rally that much due to regulatory concerns. Elsewhere, AstraZeneca (AZN) plunged after rejecting Pfizer’s (PFE) buyout offer. It was encouraging to see a slew of beaten down areas bounce which bodes well for the major averages (biotechs, growth, and momentum names). The good news was that the Nasdaq 100 (QQQ) jumped above its 50 DMA line which has been resistance for the past few months.

Stocks were clobbered on Tuesday as investors dumped stocks after several Fed officials said the Fed may raise rates sooner than originally expected. The S&P 500 pulled back but found support near its 50 DMA line.

Stocks rallied on Wednesday after the Fed released the minutes of their April 29-30 meeting. The minutes did not reveal any new material information. Briefing reported, the minutes showed a discussion of the expected path to an eventual rate hike, but there was no mention regarding the potential timing. The minutes also indicated that the committee sees inflation reaching the 2.0% target in the next “few” years with little risk of spillover inflation resulting from fueling payroll growth.”

THURS-FRI: Strong Action Continues

Stocks enjoyed nice gains on Thursday helping the Nasdaq composite and Biotech ETF (IBB) jump above their respective 50 DMA lines. The action is healthy and suggests the latest pullback maybe close to over. Existing home sales, leading economic indicators, and initial jobless were released. The data is now slowly coming in stronger than expected which bodes well for the market (assuming it continues). Stocks edged higher on Friday as traders prepared for the long weekend.

MARKET OUTLOOK: BullsAre Getting Stronger

There are lots of reasons one could be bearish but that is why we trade on what we see happening, not what we think will happen. Keep in mind that this bull market is aging (turned 5 in March 2014 and the last two major bull markets ended shortly after their 5th anniversary; 1994-March 2000 & Oct 2002-Oct 2007) but until we see signs of distribution (heavy selling) the market deserves the bullish benefit of the doubt. I get in trouble anytime I try to fight the tape. The path of least resistance is higher, until technical areas of support are definitively breached. As always, keep your losses small and never argue with the tape.

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