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Are US Equities Setting Up To Breakout?

By:
John DiRico
Published: Jul 13, 2017, 14:01 UTC

Across the board US-based equity indexes are displaying recent price strength as we enter the end of the week. After undergoing sector rotation over the

Are US Equities Setting Up To Breakout?

Across the board US-based equity indexes are displaying recent price strength as we enter the end of the week.

After undergoing sector rotation over the past month, new names and indexes are beginning to show their strength.

Transportation Index

In particular the Dow Jones Transportation Average (TRAN) is leading the pack with its new high to finish last week. So far this week TRAN has displayed good follow-through action with its price trending even higher.

Typically, when the transportation index is performing well and outperforming other indexes it is a good sign for the expected returns for the market as well as good news for the economy.

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Dow Jones Transportation Average (TRAN) Chart

Large Cap Indexes

Elsewhere, large cap stocks represented by the S&P 500 (SPX) and Dow Jones Industrial Average (INDU) have moved off of recent support that was formed over the past few weeks. Moreover, Wednesday’s price action displayed a gap up day which may be followed with more buying that could push each index into new high territory.  However, gap-ups in indexes can also be filled in time but that does not necessarily derail the dominant trend in place.

S&P 500 Daily Chart
S&P 500 Daily Chart
Dow Jones Daily Chart
Dow Jones Daily Chart

New York Stock Exchange

The broad strength in equities as represented by the NYSE Composite Index (NYA) should be seen as a sign of potential good things to come for stocks as well. As with the large cap indexes the NYA has yet to breakout but is forming a constructive base to support a move higher. If NYA can close above 11850 this will be a clear breakout signal.

NYA Daily Chart
NYA Daily Chart

Sector Rotation and Nasdaq Indexes

While equity markets underwent sector rotation over the past month money left previous leading sectors like Technology. As a result, tech-heavy indexes like the Nasdaq 100 (NDX) and Nasdaq Composite (COMPQ) have lagged the broader large cap indexes in relative short-term performance.

However, in the context of an ongoing uptrend the pull back in the NDX and COMPQ should be viewed as very normal.

Nasdaq Composite Daily Chart
Nasdaq Composite Daily Chart
Nasdaq 100 Daily Chart
Nasdaq 100 Daily Chart

Small Cap Indexes

Despite the drag on performance by technology companies, small cap firms which are also included in the Nasdaq indexes have held up well.  For example, both the Russell 2000 Index (RUT) and the S&P 600 Small Cap Index (SML) are forming a higher consolidation zone along the upper boundary which has formed since the indexes trended sideways from 2016 to present.

Russel 2000 Daily Chart
Russel 2000 Daily Chart
S&P 600 Small Cap Index
S&P 600 Small Cap Index

In the business of trading all good things will come to an end eventually. Until then it will be best to continue to align your trades with the uptrend before presented with a reason to sell. The primary uptrend in US equities has been in place for several months after the indexes broke out of a multi-year consolidation zone from 2015-2016. Historically, breakouts of this magnitude are often followed by good things in the market.

This post was originally published by A Discounted View

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