These Shares Could Break Out Any Day Now

Although the first two weeks of any given year can be the most volatile ones for the stock market, the first two trading days of 2017 have not yet seen much volatility.

In fact, the benchmark S&P 500 — as represented by the popular SPDR S&P 500 ETF Trust (NYSEARCA:SPY) — along with many of its constituent stocks and sectors looks to be coiling up for another leg higher. With a well-defined upside price target, to boot.

While no single attribute distinguishes profitable traders from losing ones, the ability to respect and quickly react to a change in market behavior has to rank among the top differences.

As such, when I describe the current bullish trade setup in the SPY ETF, for the sake of good risk management, please keep in mind that any quick bearish turnaround (bearish reversal) would be a clear stop-loss signal for the trade.

From a seasonal perspective, despite the tendency for price appreciation, I find the first two months of the year for the stock market to be somewhat more complex than most other periods during the year. It may be the shuffling around of portfolios by institutional investors or just a bad new year’s hangover (kidding) that confuses me.

But over the years, I have found a solution. Instead of judging the markets solely by the major indices, such as the S&P 500, I pay more attention to individual sectors and stocks for opportunities.

Applying this process over the past few trading days has led me to not only spot a plethora of single-name stocks and sectors setting up a similar pattern. But as a result, the SPY ETF is also flagging a new near-term bullish pattern.

SPY ETF Charts
Before looking at the daily chart of the SPY, let’s first look at the multiyear weekly chart.

In early November, the ETF bounced off a confluence of support made up of the 50-week (yellow) and 100-week (blue) moving averages. This led to the sharp year-end and post-election rally, which began to stall by mid-December.

Also note the series of higher lows since early 2016, all of which has this index in a well-defined uptrend.

There will no doubt be hiccups along the way in this rally, but for the time being — and as long as this bigger-picture structure remains intact — I don’t want to bet against this index structurally, and for anything less than a small trade here and there.

On the daily chart, we see that instead of meaningfully retracing lower after losing steam in mid-December, the SPY ETF settled into a sideways consolidation phase that took the shape of a so-called bull flag pattern.

The rally on Wednesday, Jan. 4, pushed the ETF back to the very upper end of this pattern. While no breakout has yet occurred, it could take place any day now.

How much further can this rally go?

While I do not pretend to have a crystal ball, the second half of January brings about two events that could potentially put a halt to the rally for some time:

  1. The presidential inauguration on Jan. 20
  2. The fourth-quarter corporate earnings season, which kicks into higher gear around Jan. 17.

In terms of price, once the SPY clears above $227, it should gravitate toward $230-$231 rather quickly.

— Serge Berger

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Source: Investor Place