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  • Written by Zero Hedge
  • Published in Economics

Authored by Lance Roberts via RealInvestmentAdvice.com,

It’s A Breakout…

Early Wednesday morning I penned a Quick Take” discussing the breakout of the two-month long consolidation process. To wit:

The bulls are ‘attempting a jailbreak’ of the ‘compression’ that has pressured markets over the last two months. 

This breakout will provide a reasonable short-term trading opportunity for portfolios as I still think the most probable paths for the market currently are the #3a or #3b pathways shown above.

If we get a confirmed break out of this ‘compression range’ we have been in, we will likely add some equity risk exposure to portfolios from a ‘trading’ perspective. That means each position will carry both a very tight ‘stop price’ where it will be sold if we are wrong as well as a “profit taking” objective if we are right.”

On Thursday, that “jailbreak” occurred with a move above resistance and the previous closing high downtrend.

From a bullish perspective there are several points to consider:

  1. The short-term “sell signal” was quickly reversed with the breakout of the consolidation range.

  2. The break above the cluster of resistance (75 and 100-dma and closing high downtrend line) clears the way for an advance back to initial resistance at 2780.

  3. On an intermediate-term basis the “price compression” gives the market enough energy for a further advance. 

With the market close on Friday, we do indeed have a confirmed breakout of the recent consolidation process.Therefore, as stated previously, we reallocated some of our cash back into the equity side of our portfolios.

From a bearish perspective the are also several points to consider:

  1. The volume and breadth of the market rally has been “okay” but not stellar, which suggests this was more of a forced “short-covering” rally than a turn in overall conviction. 

  2. The rally, as Doug Kass notes below, was led by a surge in energy prices due to the Iran escalation over the nuclear agreement. 

  3. With everyone seemingly short the U.S. dollar, short Treasury bonds and long oil prices, a reversal of that excess positioning seems likely from a contrarian point of view. Such would definitely pressure stock prices lower.

  4. Complacency has once again returned to the market very quickly following such a long consolidation process as noted in the chart below, not only is there a breakout in stocks but also volatility.

As I noted in last Tuesday’s update:

“Despite the recent corrective process, investors still remain primarily allocated to equities as shown by the Rydex allocation measures below. With the market testing its longer-term bullish trendline from the 2016 lows, Rydex Bear and Cash allocations remain at...

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