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Remember that we are still navigating our way through earnings season, so be sure to check when each of your holdings and potential setups are reporting. In fact, I was set to present a set of enticing regional banks to you, only to discover that they are reporting early this week. Apart from the financials, the other infamous sector that saw plenty of government-infused bailout money in 2008 and 2009 was the auto sector. The notion that every single auto-related firm is a gimp is simply unfair. Regardless of your stance on General Motors, though, the technicals are improving, as are a few other auto parts plays. Ironically, the financial and auto gimps look to have as much potential to move this week as any other sector that I see.

NOTE: I was going to chart DAN and SAH as quality auto-parts setups, but they report this week as well.

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I pulled the following three trading ideas loaded with shorts from a custom screen in The PPT. PPT and 12631 members can click here to view the screen, which is not even my most comprehensive short squeeze screen. However, it is a good starting off point for ideas in an apparently improving market.

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Just as with Japanese candlesticks, the placement of a “gap” in the price action on a chart is important to your analysis. Generally speaking, there are three main types of gaps: 1) Common gaps, which get filled rather quickly and punish short-term traders chasing the initial move, 2) Breakaway gaps, seen in a jump in price and volume out of an area of consolidation (I am merging “runaway gaps” in with breakaway gaps here), and 3) Exhaustion gaps, seen at the end of extended move, or a blow-off signaling an imminent reversal in trend. In trying to identify the nature of a gap, the key is avoiding confirmation bias when looking at the chart, and being as objective as you can about when and where the gap occurs.

Looking at the healthcare stocks, my main long position inside 12631 is BIIB, which I have held for roughly one week. Friday’s big move higher was accompanied by very strong buying volume, which has me looking at other large biotechnology and major drug firms. In particular, AZN and GSK, two major drug firms, are sporting gaps out of their respective areas of congestion. Note the price action in AZN and GSK on Friday was well above not only Thursday’s range, but above the ranges of the prior several months. Again, given the placement of these gaps, I think there is a good chance for them to be breakaway gaps out of consolidation.

To be sure, there has been much ballyhoo about why these dominant drug firms are “must-buys,” namely because of the aging baby boomer generation and their need for healthcare’s latest and tastiest treats. In the end, though, these stocks are only going to get going when they are good and ready, regardless of how many times a socially inept Wall Street analyst or portfolio manager goes on CNBC pumping the thesis.

I have also included the charts of AMGN CELG and GILD as long ideas in the sector, should you not feel up to chasing those potential breakaway gaps.

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The central theme of my video market recap on Friday was that the rally we saw to close last week differed in nature from what we saw last year when breaking out of a multi-month trading range. The traditional marquee names, leaders if you will, simply did not participate anywhere close to what you would expect when the Dow is up 267 points and the S&P 500 is threatening a major weekly breakout from the now-ubiquitous range. Contrast that with the idea that in the early-stages of a fresh uptrend, you expect there to be widespread energy in numerous charts.

From that analysis, many would deduce that the rally is entirely bogus and it is now correct to position aggressively short. However, the main issue with that argument is that the market may very well be telling us, instead, that just because it is ready to breakout from our 1120-1220 S&P 500 trading range, we are not off the races. In other words, we could still be within the confines of a more massive trading range, such as 1120 up to 52-week highs at 1370. In that scenario, you are looking at much more of a selective, stock/sector-picker’s market.

To support this notion, look no further than the increasingly constructive action in many of the transportation stocks. For much of 2011, they have been duds, often lagging the market. Historically, the trannies are market-leading indicators, and even when they have seen mini-rallies during the year, they were almost always short-lived. Recently, though, many of the key transportation stocks have seen strong buying volume come in to support sharp rallies.

Earlier last week, I created this PPT screen for members of the 12631 Trading Service, which isolates railroad firms under strong accumulation. The working thesis here is that the trannies should be one of those areas of the market that sees inflows, even if the hotshot names in the Nasdaq Composite take a back seat.

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The FXI is setting up an enticing inverted head and shoulders bottoming formation here. I will be watching it closely early next week to stalk an entry. Note how the right shoulder is higher than the left shoulder, which tends to illustrate the strength exuded by bulls on that inverse pattern. Should the pattern work out, I expect a move to at least $40.

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[youtube:http://www.youtube.com/watch?v=39YUXIKrOFk&ob=av2e 550 412]

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I charted FRED earlier this week as a retail play flirting with a major breakout above $11.75. Today, the stock is moving through that level, and is more consistent and potent intraday than many of the wishy-washy moves in other stocks today. As you can see on the daily chart below, there is quite a bit of room to run above if the breakout holds true.

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