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Major Breakout? We Need More Evidence

On Wednesday, stocks approached new highs as a peace deal in Ukraine took center stage. The S&P 500 closed 0.2% from a new record, while the Dow ended 0.7% under its all-time high. The Nasdaq gained 1.2% to its highest close since March 2000, and the Russell 2000 closed just 0.4% shy of a new high.

The trigger for the advance was a pre-opening announcement of a ceasefire by leaders of Russia, Ukraine, Germany and France. European indices rallied as well, closing 1% to 2% higher.

On the corporate earnings front, Cisco Systems, Inc. (NASDAQ:CSCO) jumped 9.4% on higher-than-expected revenues and net income. The company also raised its dividend by 10.5%.

Chipmakers posted solid gains with NVIDIA Corporation(NASDAQ:NVDA) leading the pack, up 7.2% after beating estimates. The PHLX Semiconductor (INDEXNASDAQ:SOX) rose 1.6%.

American Express Company (NYSE:AXP) fell 6.4% following an announcement that it will end its agreement with Costco Wholesale Corporation (NASDAQ:COST), which was up 0.2%.

Tesla Motors Inc (NASDAQ:TSLA) fell 4.7% following a disappointing Q4 report in which losses widened to $108 million and car deliveries fell short.

Retail sales declined in January for the second consecutive month despite a drop in the price of gasoline. The Commerce Department said sales fell 0.8%, which was more than economists’ forecast.

Crude oil futures gained 4.9% to $51.21 a barrel. Gold was up 0.1% to $1,220.70 an ounce. And the 10-year Treasury note rose while the yield fell slightly.

At Thursday’s close, the Dow Jones Industrial Average gained 110 points at 17,972, the S&P 500 rose 20 points to 2,088, the Nasdaq jumped 57 points at 4,858, and the Russell 2000 spiked 15 points to 1,216.

The NYSE’s primary market traded 803 million shares with total volume of 3.7 billion. The Nasdaq crossed 2 billion shares. On the Big Board, advancers outpaced decliners by 3.3-to-1, and on the Nasdaq, advancers led by 2.3-to-1.

IWM Chart
Click to Enlarge

iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) broke above resistance at a triple-top that has impeded its progress since December.

The rally started with a triple-bottom with a pair of buy signals from my proprietary indicator, the Collins-Bollinger Reversal (CBR), and is targeting the next objective — the all-time high at $121. But note the declining volume and breadth at between 2-to-1 and 3-to-1.

MDY Chart
Click to Enlarge

Chart Key

SPDR S&P MidCap 400 ETF (NYSEARCA:MDY) broke to a new high Thursday on what appeared to be confirming volume. But a closer look at the volume bar shows slightly less than the failed new high of December.

MACD is in the bull zone, which supports a move higher. Another positive is the almost 3-point advance, which shows more momentum than the three-day December failure.


With respect to our readers, who by now must be muttering something akin to, “There he goes again, old bear Collins,” I know this is tedious analysis. But I’m still not satisfied with either the breadth (at a measly 2-to-1 or 3-to-1) or the volume (803 million shares on the NYSE).

When compared to the bull traps of September, November and December, when the two charts above “broke out” on similar volume and breadth and then failed to follow through, how can anyone truly believe that a big advance is in the immediate future?

Perhaps there is a reason that volume and breadth are not as significant as famous technicians of the past led us to believe. But until I see evidence of a continuation of a major breakout, I’ll stick to what has worked before.

An anecdotal indicator: If you have scanned literally hundreds of stocks searching for value, you may have noticed how difficult it is to find something worthy of your investment dollars. One sector that appears undervalued is the energy group. There are also some biotech and technology stocks that fit the bill, but not many.

Check out my Trade of the Day for ideas. These picks are the result of hours of research and could provide some valuable trading and investment gems. Certainly, there are some losers, like Virgin America Inc (NASDAQ:VA), down 11% since Jan. 28. But there are winners, as well, like FireEye Inc (NASDAQ:FEYE), up 12% since Jan. 13. I don’t claim perfection, just hard work that could benefit my readers.

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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