If you’re going long, focus on these stocks

The broad market finally broke out of
its five-day sideways consolidation Thursday,
as the Nasdaq 100 Index
(
NDX |
Quote |
Chart |
News |
PowerRating) rallied to close at a fresh 52-week high.
Although stocks traded lower throughout the morning session, buyers stepped in
at mid-day and sparked a rally that enabled the major indices to close above
their recent trading ranges. The S&P 500
(
SPX |
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Chart |
News |
PowerRating), Dow Jones Industrials
(
DJX |
Quote |
Chart |
News |
PowerRating),
and Nasdaq Composite
(
COMP |
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News |
PowerRating) locked in gains of 0.8%, 0.9%, and 1.0%
respectively. The small cap Russell 2000 Index advanced by 0.8%, but the S&P 400
Midcap Index showed relative weakness and gained only 0.4%.
(
BBH |
Quote |
Chart |
News |
PowerRating) (Biotech
HOLDR) rallied 1.6% yesterday and our long position is now showing us a marked
to market gain of exactly 8 points. We did, however, cover
(
MDY |
Quote |
Chart |
News |
PowerRating) (S&P 400
Midcap) with a loss of just over 1 point due to a tightened trailing stop.

Confirming yesterday’s rally was the fact that turnover
increased sharply across the board. Total volume in the Nasdaq surged 19%
higher, while volume in the NYSE was 7% higher than the previous day’s level.
This gave both the S&P 500 and Nasdaq another bullish “accumulation day” that
confirmed the presence of institutional buying interest. Volume rose above
50-day average levels in both exchanges as well. Market internals began the day
firmly negative, but finished the session with advancing volume exceeding
declining volume by a comfortable margin.

Since the major indices broke out of their five-day trading
ranges yesterday, let’s take an updated look at the short term support and
resistance levels of the major indices. Most notably, the Nasdaq 100 Index
closed at a new 52-week high yesterday. The other broad-based indices remain
well below their recent highs, but relative strength in the Nasdaq 100 enabled
the index to break out. As the chart below illustrates,
(
QQQQ |
Quote |
Chart |
News |
PowerRating) (Nasdaq 100
Index) will finish the week at a 52-week closing high if it holds above the
40.13 level today. Therefore, traders may consider buying QQQQ and trailing a
stop based on the hourly or daily uptrend line. The lack of overhead resistance
means it will probably go higher in the coming weeks:

The S&P 500 Index closed yesterday above resistance of its
prior high from September, meaning the index has now erased all of last month’s
1.8% loss. It is bullish that the index is now poised to set a “higher high” on
its weekly chart, but a mess of overhead supply remains all the way up to its
prior highs from August and September. However, the prior high from September
should now act as the new support level. The chart of
(
SPY |
Quote |
Chart |
News |
PowerRating) (S&P 500 Index)
illustrates this:

The most ideal scenario would now be for the S&P to trade in a
sideways manner to build a base of support from which to attempt breaking out
above its prior highs. Realize that it will be difficult for the S&P to bust out
to new highs if it rallies straight up without a decent weekly consolidation
first.

The daily chart of the Dow looks very similar to the S&P in
that it closed above its prior high from September, but has resistance all the
way up to its prior highs from August and September. As you can see on the chart
of
(
DIA |
Quote |
Chart |
News |
PowerRating), the Dow Jones Industrials has a clear resistance level at 10,700
(multiply the price of DIA times ten for the approximate value of the Dow
Jones):

Overall, the broad market is beginning to look better. The
Nasdaq is showing a lot of strength, fueled by Biotechs, Internets, and
Semiconductors. However, the Dow and S&P still have overhead supply to contend
with. If you’re long, odds favor the tech-related sectors of the Nasdaq more
than the “old economy” sectors that are beginning to show negative money flow.
Trade in the direction of institutional sector rotation and you will increase
your odds of profitability even if the broad market deliberates.

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