Dow’s Unique Breakout Looks Like the Real Deal

"TUESDAY" production sign (Photo credit: Vaguely Artistic)

In my 45 years of studying charts, I don’t ever remember seeing a major breakout from a bearish horn formation

By Sam Collins, InvestorPlace Chief Technical Analyst 

New York, Mar.6, national stock exchange .- Tuesday’s opening will be remembered as a historical moment when both the Dow Jones Industrial Average and the Dow Jones Transportation Average blasted to new highs. Both retained their gains after reaching the high point of the day at about 11 a.m. Afternoon prices sagged from the intraday high, but the majority of the gains held through the close.

In almost exactly four years, from the bottom made on March 9, 2009, at 6,547.05, the Dow has risen to the new closing high of 14,253.77 and an intraday high of 14,286.37. The transports also made a new all-time high at 6,162.84, which marked an important bull market confirmation for devotees of the Dow Theory.

The reason for the new highs was attributed to U.S. factory expansions, higher business and consumer spending, and a housing recovery. But there is little doubt that Federal Reserve policy to drive interest rates to historic lows, while injecting huge amounts of buying power into the system through the Quantitative Easing plans, influenced prices of equities more than anything else.

At Tuesday’s close, the Dow Jones Industrial Average was up 126 points at 14,254, the S&P 500 gained 15 points to 1,540, and the Nasdaq rose 42 points to 3,224. The NYSE traded 683 million shares and the Nasdaq crossed 433 million. On the Big Board, advancers led decliners by 2.8-to-1, and on the Nasdaq, advancers were ahead by 2.4-to-1.

Now that is an impressive breakout. Accompanied by a new MACD buy signal, this break from a bearish horn (see Monday’s chart) at 14,150 may be unique — at least in my 45 years of studying charts I don’t remember a major breakout from this formation. But I also don’t recall a major breakout with such tepid volume. Nevertheless, Tuesday’s breakout must be accepted as the “real deal,” especially when accompanied by a similar blast-off from the Dow transports.

After slogging around at the 3,180 area for over a week, the Nasdaq came to life breaking through February’s high at 3,214 and demonstrating that the mid and small caps are ready to roll.

This monthly chart of the S&P 500 clearly shows the index’s next goals: first the March 2000 high at 1,552, and then the October 2007 high at 1,576. The red line is that of the 200-day moving average, which acts as major support. That support is now a considerable distance down from Tuesday’s close — a good news/bad news situation since a decline to that area would mean a correction of almost 14%.

Conclusion: Even after the jump to new highs, the Dow’s valuation — as measured by the price-to-earnings (P/E) ratio of 14 — is 20% cheaper than in late 2007, according to The Wall Street Journal.

Tuesday’s blast-off should convince the watchers that they need to be players, since the market has demonstrated that even with low volume and generally weak breadth, stocks are capable of further major moves higher. ...