Dow On Breakout....S&P 500 and Nasdaq At Critical Resistance.....Froth Rising Fast....

By: Jack_Steiman

No shock that the area of the market that has the lowest P/E's and the highest dividends broke out first. The Dow has been the safety trade by far and continues to be so. The S&P 500 is a point away. A move over 1897 is the breakout for the S&P 500, and with today's close basically at the highs, it bodes well that it should break out over time. The Nasdaq, however, is also trying for a breakout, but it's quite different than the breakout of the Dow or S&P 500. The Nasdaq is trying to just get through its 50-day exponential moving average and trend line. We close a point above the 50's, but does not mean we have a true breakout yet. Give me at least half a percent if not a full percent, and I'm happier that the move is for real.

The Nasdaq has been the big laggard, and although it's the weakest overall, it did at least lead the way today. That is good to see as it's always healthiest when Disneyland leads the market higher. When froth is what people want, it's bullish that the move is more sustainable. That's what we saw today. Therefore, the bulls can feel confident that a move strongly through 4141 is in the cards, although we all know by now not to take anything for granted. It just, if I can say it, looks pretty good that the bulls will get the move to new highs in the S&P 500, and that the Nasdaq will at least get through its 50-day exponential moving average with force. These are interesting times for the indexes. The four plus month chop may finally be ready for another move higher. We shall see soon enough.

Today we saw the indexes gapping up pre-market. The futures started slowly creeping higher last night, but gained some steam when Germany, the market we follow most closely, started to bid higher pre-market. We gapped up and never looked back. It wasn't a straight up move, but there were few moves lower during the day more than a few S&P 500 points. As the Dow broke out we saw the S&P 500 and Nasdaq make their moves towards their critical levels of resistance at 1897 and 4141 respectively. No need for rotation here as just about everyone participated.

The Nasdaq led as those froth stocks, which have been slaughtered, look to be making some near-term lows. With moves down of between 20 and 70 percent it's easy to understand how these stocks are at least due for some relief. If the Nasdaq clears 4141 with force, the next level of resistance is 4177. If that clears, who knows how far it can run. But first it needs to clear 4141 with force. 4177 isn't nearly as tough a level of resistance as 4141 is, but by then, if it gets there, it'll be very overbought short-term. It may need a little move down to unwind those short-term charts. With the market closing at the highs, the bottom line is you have to feel the bulls gaining traction over this long-term chop handle we've been in for quite some time.

We have a problem folks. Froth is rising fast. Coming in to last week we were at 36.1% on the bull-bear spread. Based on the market action of last week, it probably rose a bit. We'll get those numbers on Wednesday. If we break out this week, we will almost assuredly be over the 40% number that constitutes a sell-signal. A get-out-of-the-market fast sell-signal. Let me explain further please. When you're on a sell-signal in a bull market, you never know when that sell-signal will kick in, thus, you stay long until you get the big gap down that runs lower all day on increasing volume.

Once that kicks in, you know to get out. But getting out too soon makes little to no sense since we can stay on that sell-signal without it kicking for longer than you'd think. You simply respect the fact that we're on a sell-signal, and be ready to take action when the signal says it's here. For now we keep exposure to the long side and continue to stay away from shorting. I still wouldn't spend much time in the land of froth. But that's always up to each individual. We watch 4141 on the Nasdaq with a keen eye along with 1897 on the S&P 500. We are experiencing some very interesting times.

Let's see what happens next.

Peace,

Jack

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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