Thursday was a volatile session that opened on a strong upside gap that vanished in 90 minutes. But after the day’s low, steady buying drove the S&P 500 to a new five-year closing high. The gains were attributed to strong export growth in China and analysts’ projections that indicate stronger-than-expected growth in Q4.
At the close, the Dow Jones Industrial Average was up 81 points to 13,471, the S&P 500 rose 11 points at 1,472, and the Nasdaq gained 16 points at 3,122. The NYSE traded 727 million shares and the Nasdaq crossed 366 million. On the Big Board, advancers exceeded decliners by over 2-to-1, and on the Nasdaq, advancers were ahead by 1.4-to-1.
The Nasdaq broke the important October high at 3,112 on Thursday. But more importantly, it broke free from the small consolidation with its narrow trading range. This is a bullish development and should bring in enough buyers to put pressure on the next objective — the October high at 3,171.
The financial sector is one of my three favorite sectors for 2013. The Financial Select Sector SPDR’s (NYSE:XLF) chart is an example of a cup-and-handle breakout. The break is punctuated by a breakaway gap.
This type of gap only appears on a break from a major chart formation. A trend-changing gap, like last week’s, may not be closed by a correction. On the other hand, continuation gaps, called so because they follow later on in the trend, confirm the trend and seldom remain open for long.
Another of my top three sectors is the construction industry. The iShares Dow Jones US Home Construction ETF (NYSE:ITB) illustrates a powerful trend that began with a breakaway gap in late June. The recent break from a double-top at about $21.25 was executed by a continuation gap, and high volume is a convincing factor that leads me to conclude that the builders are going to have a good year.
Conclusion: January has started with a bang, but not all industries and sectors will participate as well as others. For example, I don’t expect much from the utility sector. But banks and builders look like potential winners. I want to keep you guessing on my third favorite, and perhaps the sector with the highest potential, so I’ll provide charts of it on Monday.
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.