Will the Nasdaq and S&P 500 break out to new highs? Does it really matter? ($QQQ, $SPY, $DIA, $IWM, $MDY)

The S&P 500, Dow Jones Industrial Average, and Nasdaq 100 indices have reached pivotal “make it or break it” levels that may lead to a tug-of-war between bulls and bears and a bit of volatility in the coming days. Specifically, each of these indexes are now testing key resistance of their multi-year highs that were formed in March or April of this year. As such, breakouts to new 52-week highs may be coming soon, but does it really matter? We’ll tell you why it does not matter later in this article, but let’s first take a quick look at the daily chart pattern of the S&P 500 SPDR ($SPY), a popular ETF trading proxy for the benchmark S&P 500 Index:

Over the past several days, notice that $SPY has been toying with resistance of its April 2 high (the dashed horizontal line), which also correlates to the 4-year high of the benchmark ETF. The PowerShares QQQ Trust ($QQQ), an ETF trading proxy for the Nasdaq 100 index, has a very similar daily chart pattern:

The Dow Jones SPDR ($DIA), which tracks the performance of the Dow Jones Industrial Average, is now testing a band of resistance between the $132.50 to $133 area. As with $SPY and $QQQ, a breakout above this horizontal price resistance would cause $DIA to move to its highest level since mid-2008:

When an index, ETF, or stock approaches the level of its 52-week high (or multi-year high), the price action often becomes a volatile tug-of-war for at least a few days. This occurs when the bulls are fight for control over long-term investors who previously bought at higher prices, and whom are therefore selling into strength of the rally in the hope of “just breaking even” on their original position. However, when a convincing, high volume breakout to a new 52-week high eventually occurs, the price of the index, ETF, or stock usually continues much higher in the near and intermediate-term because there becomes a complete lack of overhead supply (resistance) to hold the price down. This is why one of our main swing trading strategies is to buy ETFs and stocks breaking out of solid bases of consolidation to new 52-week highs. Also, remember that our new ETF and stock screener (currently free for all traders) is preprogrammed to quickly and easily find these types of Potential Breakouts.

The obvious question on the minds of traders and investors right now is whether or not the main stock market indexes and these broad-based ETFs possess the necessary bullish momentum to break out to new multi-year highs in the coming days. Obviously, nobody really knows. However, don’t forget that markets have a tendency to do what the least number of market participants expect, AND at a time when they least expect it. Therefore, the greater the public opinion that the major indices will stall near these resistance levels and reverse back down, the more likely these indexes will actually surge to fresh multi-year highs. This is why following the mentality of “the herd” is usually a losing proposition.

Although the talking heads of the financial media place great daily emphasis on the direction of the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average, we suggest active swing traders not pay much attention to the actual price action of the broad-based indexes (leave that to the “buy-and-pray” long-term investors). Rather, what really matters right now is the performance of leading individual growth stocks because these stocks lead the broad market (not the other way around). So, this being the case, how are leading stocks acting right now? Just fine. The strongest stocks in the market are already breaking out to new 52-week highs and holding, which increases the odds of the major indices eventually following suit (although a moderate pullback or “shakeout” in the interim would not be surprising).

We showed you the three ETF charts above, each indicating pivotal price resistance of their 52-week highs, simply because the public’s perception of the importance of these indexes does indeed have a bearing on the broad market’s near-term direction. However, we challenge you not to care too much about whether these indexes break out or not. As long as our market timing system remains in “buy” mode, we will continue to focus our efforts exclusively on buying the strongest stocks and ETFs in the market as they break out of consolidation or pull back to support. If our timing model next receives the necessary proprietary signals to shift from “buy” to “confirmed buy” mode (click here for a summary of the 5 different modes), we will continue doing the same thing we are doing now, but just with higher share size and a greater quantity of positions (more exposure).

So far, the open ETF and stock positions of our model trading portfolios are acting just fine. Although the light seasonal volume has been keeping upside momentum in check, 2 of our 4 open stock positions jumped to new 52-week highs yesterday, even as the major indices were unchanged. Overall, we remain well-positioned to profit from continued bullish momentum in the market, while still maintaining our firm, protective stop prices (as always) in case things don’t go as planned.