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Caution: Major Breakout Has Yet to Be Confirmed

Trend appears to be strongly up, but volume is very low and breadth is weak


After months of testing resistance, stocks finally broke to new highs on Thursday. The break occurred on higher-than-normal volume and was triggered by the European Central Bank’s promise of a new stimulus program focused on buying bonds of troubled sovereigns who ask for aid.

Economic gains in theUnited Statesalso fueled the rally that set a new 12-year high for the Nasdaq, the highest level for the S&P 500 since January 2008, and the highest level for the Dow industrials since December 2007.

On Thursday, the Dow Jones Industrial Average closed at 13,292, up 245 points, the S&P 500 gained 29 points to close at 1,432, and the Nasdaq jumped 67 points to 3,136. The NYSE traded 735 million shares and the Nasdaq crossed 458 million. Advancers led decliners on both exchanges by about 2.5-to-1.

Dow Chart
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Trade of the Day Chart Key

Thursday’s new five-year closing high for the Dow industrials slightly exceeded three prior highs of the year. The chart may be showing a quadruple-top formation, unless the current advance continues and confirms that a genuine breakout has occurred. The MACD internal indicator is now oversold and, if the uptrend continues, will most likely flash a buy signal in several sessions.

DJT Chart
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Despite a new closing high for the industrials, the Dow Jones Transportation Average has hardly budged. In fact, it closed Thursday below its three major moving averages. In order for it to confirm the new high for the industrials, it must at a minimum break the resistance line (downward sloping red dash) at about 5,200.

Conclusion: Despite new highs in the major indices, we cannot yet call what happened Thursday a major breakout. Breaking into a new trend not only requires that certain barriers be overcome, but the way that the trend is broken is important.

The trend appears to be strongly up, but volume is very low and breadth at just 2.5-to-1 is unacceptably puny. Thursday’s closing highs may yet attract the necessary factors that will confirm a new uptrend. However, for now, it is wiser to take profits and remain on the sidelines and protect long-term gains with options-writing strategies.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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