The Week Ahead: Breakout As Expected — So What’s Next?

In last week’s Fakeout or Breakout? I made the case based on the technical evidence that “despite Friday’s drop, I expect last week’s highs in the major averages to be surpassed in the coming weeks.” As you may recall, the S&P 500 was down over 1% on Friday April 17 and the bearish sentiment spiked.

In last Thursday’s trading, the NYSE Composite, Nasdaq 100, Nasadaq Composite, and S&P 500 all broke out to new multi-year highs. The small-cap Russell 2000 had already made new all time highs on April 15. The Dow Industrials are still below the March high of 18,188.

The Nasdaq Composite got the majority of attention as it ended Thursday above the March 10, 2000 closing high. While some think this is just another reason the market must be making a major top, many experts have concluded that the Composite is a much different market now than it was in 2000.

The widespread dismal outlook for earnings has kept many investors on the sidelines and a large number of analysts were not expecting anything to happen to stocks in the next few months. The bullish %—according to AAII—had dropped to a low of 27.16% on March 19 and was at 31.47% last Thursday.

This is not the extremely low level of bullishness that was recorded at the 2010 and 2011 lows when it was close to 20%. Still, I think it is low enough to fuel a substantial stock market rally. In addition, there is quite a bit of evidence that the public is still generally not invested in stocks, despite the incredible bull market since the March 2009 lows.

Markets probably need to close 0.5% above last week’s lows to really convince the skeptics that the breakout is real. But if that occurs, what is next?

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The % Change chart of the Spyder Trust (SPY) reviews what happened after some of the recent breakouts. In 2012, once the March highs were overcome (Area 1), the SPY rallied 8% before dropping 17% into the 2011 low (point 1).

Link:

The Week Ahead: Breakout As Expected — So What’s Next?

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