Rekindling Mr. Market’s Love Affair with Trannies

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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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Direct Vimeo Link Click Here

 

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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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We had another huge morning gap, which has been so prevalent in either direction over the past few months that there does not seem to be much excitement about them any more. Since this morning’s gap, though, the action has tapered off significantly. Breakouts have drifted lower, and the energy level is just not there. I recognize that this is an options expiration Friday, and there remains to be seen a ton of news out of Europe over the weekend. All of those factors may be preventing a bonafide, rock ’em, sock ’em type of move from happening. Either way, the lack of energy after this morning’s gap is preventing me from becoming more aggressive.

On a more pleasant note, though, inside the 12631 Trading Service in our famous “Pelican Room” state of the art chat, we are crushing the BIIB long trade, and have been long for several day, with a high volume breakout today. If you have been considering joining 12631, take a look at how much value you get for your money, as it costs as little as $25 per month. Who knows? Perhaps we will not always keep the price that low. For now, though, it is too much value for you to pass up. Come check us out inside The PPT. Click on this 12631 hyperlink for more details.

 

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The market is off and running and those knocks on the door that I discussed last night turned out to be the bulls pushing through resistance. We still have a lot of trading left to do on an options expiration Friday, but so far the bulls are dominating the action. I am seeing squeezes all over the place, and stocks that were in limbo are starting to resolve higher. On a weekly basis, if the bulls can close above 1230 on the S&P 500 I think it will be a huge advantage for them headed into next week.

To my eye, the retail/consumer discretionary and financials are the most impressive sector. If the session progresses today without a major fade, I am looking to add more exposure there.

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