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When This Happens, Buy, Buy, Buy!

Here is what I want to see to confirm a breakout safely through tough resistance


The S&P 500 failed for its third successive day to register a new high, despite closing on the plus side Wednesday. A lack of conviction held buyers back after the morning’s forward momentum ran out of steam at noon.

Better-than-expected new home sales in January sent some stocks to new highs early in the day. Sales of new single-family homes rose 9.6%, according to the Commerce Department. But by the close, 8 of the S&P’s 10 sectors were in the red, and energy, off 0.6%, had the biggest loss.

Target (TGT) gained 7% and Lowe’s (LOW) rose 5.4%, both on better-than-expected quarterly results, and this drove the retail sector up 1.9%.

At the close, the Dow Jones Industrial Average gained 19 points at 16,198, the S&P 500 rose less than a point to 1,845, and the Nasdaq was up 4 points at 4,292. The NYSE traded a total of 3.7 billion shares and the Nasdaq crossed 2.1 billion. Advancers outpaced decliners on both major exchanges by about 1.55-to-1.

SPX Chart
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Chart Key

The S&P 500 has closed within 3 points of its closing high for three successive days. Low volume suggests that there is light selling at the top; however, there is also light buying.

With both buyers and sellers too timid to take a stand, we turn to our sentiment indicators. MACD is still in bullish territory but losing steam, and momentum is definitely falling.

RUT Chart
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The Russell 2000 closed at a new high Wednesday, by all of 0.28 points.

On Friday, the Nasdaq closed at a new 13-year high, which led me to comment, “The resumption of this trend is reminiscent of last year’s run from Jan. 1 to April 1, which was also led by the small and mid caps.”

Conclusion: Volume is light, but breadth is still on the side of the bulls. However, it is unusual for a major index like the S&P 500 to take more than three or four thrusts at resistance before breaking out.

Wednesday morning, Jeff Saut of Raymond James said it best: “The bulls had better mount a ‘charge’ pretty soon, because if the SPX trades below 1,838, it could embolden the bears for at least a downside move to 1,806.”

One of our readers referred to a comment that I made Wednesday and asked what I would consider a breakout that is “safely through what has been very tenacious resistance.” I would consider a 1% higher close along with a pickup in volume and breadth of at least 3-to-1 or higher to be confirmation of a solid breakout. When that happens, you should call your friends and neighbors and persuade them to “get on the horn” to their broker and get this over with — “time’s a wastin.”

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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