Stocks were up yesterday, but what does the big picture look like? Does the overall market support higher prices?

From a technical viewpoint there are four areas I like to consider that either directly impact the market or can be studied to help us determine the direction of the market. They are: the price of the U.S. dollar, which has a major impact on stock and commodity prices; the Russell 2000 Index of small-cap stocks; the Russell 3000, which contains 98% of all stocks traded; and the Dow Jones Transportation Index since it not only tracks the carriers of goods and services, but is also used by economists as a forward indicator of economic conditions.

During the past year, both stocks and commodities have reacted inversely to the trend of the U.S. dollar as measured against a basket of currencies. On Thursday, it appeared that the dollar broke an important trendline. But I pointed out that it has done this twice since April, and both times fell below the line. In the past two days, the dollar has closed lower, and if it closes below the 74 level, it will again have failed to confirm a clean breakout. 

The Russell 2000 is an important tool for measuring the sentiment of stock buyers since the small-cap stocks that make up this index are more speculative. Note that the iShares Russell 2000 Index Fund (NYSE: IWM) has taken on a very bullish channel trend with higher highs and higher lows. In addition, its Relative Strength Index (RSI), a measure of the magnitude of recent gains to recent losses, is at a modest 59, which means that it is not overpriced. Yesterday, it opened with a surge of optimism that created a “gap” and closed at the high of the day — two very bullish signs. Initial support is at $81 to $82. 

The Russell 3000 Index measures the performance of most stocks traded in the United States. Note the bullish triple-top breakout that is holding above its 50-day moving average and an RSI reading of 61, which indicates that the index could move higher before being “overbought.” The triple- top breakout indicates that the upside target is 860.

The Dow Jones Transportation Index, a key forward economic indicator, has an established bull channel that was reinforced with a new high last week. The index is modestly priced at just 66 RSI, and has strong support at its 50-day moving average.

Conclusion: The U.S. stock market is exhibiting unusual strength even as we enter what is generally considered to be the weakest six months of the year. Investors should hold their winning positions and “ride it out” since stocks could advance another 5%-plus before encountering resistance. Weakness should be used as opportunities to take on new positions.

For one such stock to buy, see the Trade of the Day.

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.

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.