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Major Breakout Ahead?


Markets on the cusp of potentially big move.

I suspect sales of throat lozenges soared last night because the bears were making the rounds, practically screaming, that this rally is yet another head fake.

They mostly pointed to the twin disasters, Fannie Mae (FNM) and Freddie Mac (FRE). The latter posted a disappointing earnings report and the other is expected to match or exceed that degree of letdown. But let's get serious. Nobody is looking for these companies to beat earnings estimates. There shouldn't even be a consensus estimate on these companies.

Nonetheless, this was the focal point of the bears. The easier argument is the fact that folks have been let down so often the emotional risk/reward outweighs the potential financial windfall. How could investors weather yet another false rally, after all?

We actually saw some doubts creep into the action yesterday as the rally began to fade swiftly into the last hour of trading, but it did recover before the final bell. It wasn't a coincidence the index tickled the 50-day moving average and failed. Despite the massive malaise that we feel or are supposed to feel the market is on the cusp of a tradable breakout. It seems surreal. I think the key closing number for the Dow on the upside is 11,800. Volume has to pick up, too, but there's room for a quick 600 point move.

Click to enlarge

Of course, the flip side of being on the cusp of a major breakout is the possibility it will fail and investors will mope so much that before you know it we are looking at testing the bottom. One thing is for sure: If you are in this market you'd better be prepared for an assortment of head fakes, false rallies and rides that make the largest rollercoaster seem like a merry-go-round. I always write about "weak sisters" and shaking out vulnerable investors.

Those folks can't take even a modicum of pain and bail out on the any investment at the first sign of pressure. Because so many of those kinds of investors are already out of the mix, those in the game are holding on tighter but that means the effort to shake them out is more intense. Just understand this idea and understand what you own and why. The gyrations are establishing new paradigms for day to day action.

Check out these two statistics my research team has put together: Over the past year, there have been 121 sessions that have seen 300 point intra-day swings for the Dow, and 36 sessions that have seen 400 point intra-day swings for the Dow.
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