Small Caps and Mid Caps Break Out...Will Transports Follow?

By The Wall Street Fox Thursday, February 19, 2015
Over the past few trading sessions, key indexes with technical significance to the overall stock market have been breaking out of their respected trading ranges, and some have been notching new all time highs. Will these breakouts serve as another head-fake for the market and move lower, or are these signs that the market is ready to continue its trend higher?


Small Caps have decisively broken out of its 1+ year consolidation range and is now displaying some relative strength as it continues to record new all time highs. Small caps tend to correct and recover before the overall market does. A break above this one year consolidation range is significant because it signals that investors may now have a larger appetite for risk than originally expected.



Mid Caps have proven to be the true winner performance wise. The index has been eking out new highs at the top of resistance in a long term rising channel. The break above the neckline of the inverted head and shoulders pattern signals that there are more highs to be made in the future, but it should be noted that the index can only flirt with the upward channel resistance for so long, and there are multiple support levels that would prove to be healthy consolidation zones, unless of course, mid caps decide to break above its rising channel and declare it support, as it was for almost all of 2013.



Components of the DJ Transports were very close to decisively breaking out of the recent down trend today, until they ultimately sold off to end right on top of resistance. If the transports fail to break out, it will send a conflicting message to investors who are watching the two charts above. It is also important to note that the transports failed to make new all time highs when the market did back in December. The transports need to break above resistance to confirm that the market is indeed ready for even more upside.



Today the Fed signaled that a rise in interest rates may not occur until later in the year. This helps set the stage for more upside in U.S. equity markets. There is a lot of headline risk out there right now, between Greece, Russia and ISIS, the West coast port shutdown, the 7 month oil plunge, and possible stagnation in global growth, but headline risk is always out there, whether it's Ebola, the fiscal cliff or...Greece. While it may look scary now, the market always seems to overcome headline risks, and when you look back, they looks like tiny pebbles rather than boulders.
The Wall Street Fox

The Wall Street Fox utilizes fundamental and technical analysis to generate investment ideas. TWSF holds a MBA, and is currently preparing for the Chartered Market Technician (CMT) designation.

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