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BREAKOUTS


Cyclicals Lead Market Higher

11/16/04 08:00:33 AM
by Arthur Hill

The Amex Cyclicals Index recently broke to a new 52-week high, and this bodes well for the overall market.

Security:   $CYC
Position:   Buy

As the name suggests, the Amex Cyclicals Index ($CYC) represents a group of companies that are considered sensitive to the economic cycle. This group is expected to outperform when the economy turns up and underperform when the economy turns down. As such, strength in this group should translate into strength in the overall economy. Some of the components include Alcoa (AA), Deere (DE), FedEx (FDX), International Paper (IP), 3M (MMM), Whirlpool (WHR), and US Steel (X).

Looking at the weekly chart, we can see two big breakouts in the last two and a half years. The first was a double bottom breakout in June 2003. Second, there was a consolidation breakout in November 2004. The first breakout marked a bullish reversal and the second breakout signaled a continuation of the March 2003 to January 2004 advance.

Figure 1: MACD, Bullish Divergence, Head and Shoulders
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
There are a number of bullish patterns that fit the consolidation. First, it could be a continuation head-and-shoulders with neckline resistance around 712. Second, it could be a long flag that extended throughout 2004. Third, the portion from May to November could be an ascending triangle. No matter how you slice it, the breakout at 712 confirms all three bullish patterns and opens the door to further gains into 2005.

The moving average convergence/divergence (MACD) has been with the price chart every step of the way. The indicator formed a positive divergence with the double bottom and advanced into positive territory in 2003. The indicator moved below its signal line during the correction, but managed to stay above the zero line. The most recent bullish signal line crossover confirmed the breakout at 712 and put momentum back on bullish footing.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

Title: Editor
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Address: Willem Geetsstraat 17
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Website: www.tdtrader.com
E-mail address: arthurh@tdtrader.com

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Date: 11/17/04Rank: 4Comment: 
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