Index’s Runaway Gap Could Accelerate Its Advance

New York Stock Exchange (Photo credit: inkwellmusings)

Nasdaq's huge breakout appears to have come with a powerful technical signal

By Sam Collins, InvestorPlace Chief Technical Analyst

New York, May.7, online stock trading .- On Monday, stocks closed on a mixed note with light trading, but the S&P 500 managed to squeak out a gain, which resulted in another new record high. The lack of major economic news and holiday closings of various foreign markets resulted in a narrow band of trading that persisted throughout the day.

Financial and technology stocks were the leading sectors. But food stocks Sysco (NYSE:SYY) and Tyson Foods (NYSE:TSN) missed top-line growth estimates, and defensive sectors, including utilities, finished in the red.

At Monday’s close, the Dow Jones Industrial Average was off 5 points at 14,969, the S&P 500 rose 3 points to 1,618, and the Nasdaq closed up 14 points at 3,393. The NYSE traded 619 million shares and the Nasdaq crossed 345 million. On both major exchanges, advancers outpaced decliners by about 1.4-to-1.

Regarding Friday’s huge breakout of the Nasdaq, I pondered a bit as to whether to label the gap that was created a “continuation gap” or a “breakaway gap, which is also called a “runaway gap.” And I noted today that fellow technician Michael Ashbaugh also struggled with this, but finally labeled it a “runaway gap.”

Upon further reflection, I tend to agree with Ashbaugh because of the crucial timing of the event and the strong buying today of the technology stocks. It may be an arcane point to most investors, but to the technician, it is a much more powerful technical signal that could lead to an acceleration of the advance.

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The chart of the iShares PHLX Semiconductor Sector Fund (NYSE:SOXX) graphically illustrates the important shift to technology stocks. Last week’s breakout from a 15-month cup-and-handle represents a huge shift to the technology sector. The target for SOXX is at least $70.

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We may have to change the nickname of the CBOE Volatility Index (VIX) from the “fear index” to the “no fear index.” In March, this measure of fear showed the most complacent number in years as it fell under 12. On Monday, it gapped down to under 13, and even though stocks were mixed, this index is telling us that the chances are very high of another move up in stocks.

Conclusion: All technical signs continue to point to higher stock prices. It is always possible for such a positive outlook to turn ugly, but we must go with the message that the market is giving, and that message is bullish.