STOCK BREAKOUTS IN LEADING GROUPS -- SMALL CAPS ARE LEADING -- SO ARE LARGE CAP VALUE STOCKS -- ANOTHER OIL INDICATOR

DUPONT IS DOW LEADER... Today I'm going to focus on individual stock leaders in several major indexes. I'm looking for stocks that are showing the best percentage gains combined with good chart action. What I mean by good chart action is a stock that's breaking through some type of resistance barrier. In most cases, the stocks are part of an industry group or sector that's already been rallying for awhile with many stocks at or near 52-week highs. Today's selections show breakout stocks that are still relatively cheaper than some of their group counterparts. Within the Dow Industrials, DuPont is today's selection. Chart 1 shows the chemical stock breaking through its September high and its 200-day moving average. Chart 2 adds another bullish element. That yearlong version shows the stock also breaking through an eight-month down trendline. DuPont is part of a strong chemical group that's also part of a strong basic material sector, but has been a relative laggard up to now. Its relative strength line has started climbing versus the Dow. That suggests new Dow leadership.

Chart 1

Chart 2

UNION PACIFIC BREAKS OUT IN STRONG RAIL GROUP... The Dow Transports continue to hit new 52-week highs led by air freight, truckers, and rails. Several of the big rail stocks are at new 52-week highs. That's why Union Pacific caught my eye. Chart 3 shows the rail laggard breaking through its 200-day average today. Today's upside breakout puts it at the highest level since the spring, but nowhere near its early 2004 peak near 69 (Chart 4). For conservative investors who don't like to chase leaders in a strong rail group, UNP may provide a cheaper rail alternative.

Chart 3

Chart 4

US STEEL HITS 52-WEEK HIGH ... Steel stocks have been among the strongest of the basic material stocks and were very strong again today. US Steel had a notable chart day by breaking through its early 2004 highs near 40. Its relative strength has broken out as well.

Chart 5

DELL NEARS TOP OF 2004 PRICE RANGE... Big technology stocks have started to take a leadership role in the recent market rally. One of the biggest is Dell. And its chart pattern looks bullish to me. As chart 6 shows, DELL is moving to the top of its 2004 trading ranage. Its relative strength line has been stable since May. That qualifies the stock as a potential upside leader in any fourth quarter Nasdaq rally. The weekly bars in Chart 7 put this year's trading range in better perspective. They show Dell trading sideways in a "triangular" shaped fashion that's usually a continuation pattern. Since the prior trend was up, odds favor an eventual upside breakout. All it needs is a little more help from the Nasdaq market.

Chart 6

Chart 7

SMALL CAP LEADERSHIP... One of the factors that's turned me more positive on the market's intermediate trend is the upside leadership by small cap stocks. I've pointed out before that small caps usually rally ahead of large caps. It's a good sign for the entire market when small caps are breaking out to the upside. And they are. Chart 8 shows the S&P 600 Small Cap Index breaking out to a new record high. The broader Russell 2000 Small Cap Index has broken its 2004 down trendline and is challenging its mid-year peak. Its relative strength line (versus the S&P 500 Large Cap Index) has broken its resistance line as well. That bodes well for large cap stocks which should follow the small caps higher.

Chart 8

Chart 9

LARGE CAP VALUE ETF TESTING OLD HIGH ... Although the S&P 500 Large Cap Index has been lagging behind smaller stocks, that's not true of the S&P 500 Large Cap Value Index. In fact, the S&P 500 Value iShares ETF has already broken through its summer high and is challenging its early 2004 peak. The relative strength line along the bottom of the chart is the S&P Value Index divided by the S&P 500 Large Cap Index. It shows that large S&P value stocks have been much stronger than the S&P 500 itself (which means that the S&P is being held back by its growth stocks). The main message in the chart is that a whole category of large cap stocks has already turned up. One simple way to participate in the large cap value group is through the Exchange Traded Fund plotted in Chart 10. Another ETF alternative is the Russell 1000 Value iShares (IWD). The groups that dominate the large value funds are dividend-paying stocks like financial services, utilities, and oils. It just so happens that Exxon Mobil is the biggest holding in both funds, which may account for some of their recent strength. Other big holdings that have been market leaders are Bank of America, Chevron Texaco, Home Depot, SBC, and Verizon.

Chart 10

ANOTHER WAY TO TRADE ENERGY SECTOR... Yesterday I talked about how to deal with an overbought energy sector that keeps on rising. As one of our members correctly pointed out, overbought markets can stay overbought for a long time. The problem with most trend-following indicators (like moving averages) is that they can keep you in a rising trend, but usually give back too much when a downturn comes. There's a technical indicator that can prove helpful at such times -- the Parabolic SAR system. This indicator is available under the "Price Overlays" feature on StockCharts (just below Bollinger Bands). The Parabolic Stop and Reversal points (SARS) look like dots plotted under a rising trend as shown in Chart 11. They are designed to trail closely behind a rising market as they have been doing since late August when the latest uptrend started. Today's SAR is at 35.07 on the Energy Select Sector SPDR (XLE). The rising dots act as protective sell stops under the market. When one of the dots is touched, the sytem issues a short-term sell signal. As long as the market keeps rising, the SAR stopout points will keep rising as well. It's one way to stay in a trend while it's rising, but also having a reasonably early stopout point when the market starts to turn down. There's a companion indicator that can be used with this indicator which I'll talk about tomorrow.

Chart 11

NASDAQ CLOSED OVER 200-DAY AVERAGE... Once again, the Nasdaq had the biggest percentage gain of the major stock indexes. More importantly, the Nasdaq Composite Index closed above its 200-day average for the first time in three months. It's the last of the major indices to accomplish that bullish feat. Today's volume was the heaviest of the new rally. The big green volume bars over the last week point to new institutional buying, which is a necessary ingredient in an important upturn. Earlier on, I talked about the bullish implications of small cap leadership. The same holds true for new signs of Nasdaq leadership. I've seen nothing to change my bullish market outlook for the balance of the fourth quarter. Even $52 oil isn't enough to keep the rest of the market from rising.

Chart 12