GE LEADS INDUSTRIALS ETF HIGHER -- MICROSOFT NEARS MAJOR BREAKOUT

MICROSOFT TESTING TWO-YEAR HIGH ... Microsoft carries a lot of influence on the Dow and the Nasdaq because of its large size. That's why it's worth noting that the technology giant is on the verge of a major bullish breakout. Chart 1 shows MSFT moving up to test its July peak just below 30. Its relative strength line is turning up as well. But that's only a small part of the story. The monthly bars in Chart 2 show the true significance of the upcoming challenge. It shows that Microsoft is challenging the highs of the last two years around 30. Notice the slopes of the converging trendlines. A flat upper line and a rising lower line is called an "ascending triangle" and is a bullish pattern. That greatly increases the odds that Microsoft will succeed in its breakout attempt. Its relative strength line is on the verge of breaking through a two-year down trendline.

Chart 1

Chart 2

GE LEADS INDUSTRIAL ETF HIGHER ... Another big stock that's having a positive market influence is GE. Back on October 27 I wrote that General Electric would have a big influence in the Industrials ETF because it was the biggest holding in that fund. Chart 3 shows that GE has broken out to a new two-year high over the last week. Right on cue, the Materials Select Sector SPDR has done the same. Their relative strength lines are rising as well. There are some other notable breakouts in the XLI including Deere, Ingersoll Rand, and Tyco.

Chart 3

Chart 4

NASDAQ REACHES OVERBOUGHT TERRITORY... Some of our readers asked if the recent run up has put the market in a short-term overbought condition. The answer is yes. Chart 5 shows the 14-day RSI for the Nasdaq over 70, which is overbought territory. The Nasdaq is also up against chart resistance at its June high. That leaves room for some consolidation -- or even a short-term pullback. Traders may also be nervous ahead of tomorrow's Fed meeting. In my opinion, any short-term setback should be viewed as another buying opportunity. Oil fell $1.78 today. That should be another plus for the market.

Chart 5