Breakouts Tell the Tale

 | Dec 08, 2011 | 6:50 AM EST
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Sometimes it hits you like that. You will be watching the ticker go by and you will say, "Holy cow, did I just see a 4 handle on Home Depot (HD)?" Or, "Wait a second, did McDonald's (MCD) just take out $95? Is Verizon (VZ) finally out of the $35 orb? IBM (IBM) about to take out $200? No way!"

That's where we are right now: Stocks are hitting levels we haven't seen before -- not "haven't seen in a while" ... never before.

Few things are as bullish as seeing stocks break out of the ranges they have traded in, and in this market the range handcuffs have been horrendous. Stocks hit these ceilings and it is almost as if it is the kiss of death. How many times has DuPont (DD) been rebuffed from $50 in the past three months? Does anyone think that Disney (DIS) can actually take out $40? Can American Express (AXP) punch through $50?

Those are more the lingering-doubt trades that want us to take profits instead of the stay-the-course strategy that has worked so well for MCD, IBM, HD and now others as the move broadens.

Why does this matter? Why do breakouts mean so much? I think it's because of the "Fool me twice, shame on me" factor. Meaning that it has become a sucker's bet to stay through the course for so many stocks only to see them go right back to the bottom end of the range in a heartbeat. The idea that this time is different and the move will last has been costly, except for some of these breakouts.

But if the frequency of breakouts increases, it emboldens you into thinking that something big could be going on here.

If you want to look at stocks in the aggregate, you can see what I mean. After tracing out a horrendous head-and-shoulders pattern from the dark days of summer until the end of November, where it looked like the right shoulder was going to produce a dramatic breakdown, we've been on a tear up. In fact, now the prevalent patent is a reverse head-and-shoulders, with the right shoulder upon us.

So tempting ... except we saw that same pattern developing at the end of July before things really fell apart. Identical pattern.

I have, like everyone else, been impressed with this rally. I have, like everyone else, seen some of these breakouts. But I also have, like everyone else, become quite skeptical every time we get here and are thrown back.

There's one big difference, though. We haven't been thrown back from a couple of big-cap stocks this time. We've taken out the highs in HD and IBM and MCD. They look like real breakouts.

And it makes me feel that we aren't done yet. That more are ahead, if we can just find those doing as well as HD, IBM and MCD. Unfortunately, there aren't many of them. Fortunately, they do break out though -- something that hadn't been happening for most of 2011.

Random musings: Put Intel (INTC) on that list of stocks that finally seems to be able to complete its assault of the next level. $25 has bedeviled it. Now Intel, included in the new Apple Macs, looks like it can finally breach that elusive territory.

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