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Imagine a Breakout in Small Caps


This chart updates one that I posted a few days ago, the march higher in small caps continues as we are now sitting at the resistance line. If we are able to break through the resistance line and retest it as support, that is the traditional time from a technical standpoint that you want to increase your allocations to small cap stocks.

Traditionally, you set a target after the breakout based upon the magnitude of the move from the low to the resistance line. In our case, the move started at 600 on the index with resistance at 772. So, if we can close above resistance at some point, stay above for three days or move 3% above it, retest 772, then you calculate your target as follows:

772 + (772-600) = 884 Target Level = 14.50% potential gain from breakout to target

I am focused on the small and mid-cap portion of the market as I previously wrote because I think the more entrepreneurial areas of our economy should outperform the larger cap less flexible areas – particularly those small and mid cap companies that have developed an export stream to the high GDP grow areas of the world. Am I a dreamer here? If so, I’m not the only one.

I mentioned that this is the traditional methodology because we have the unknown impact of QE2 and Fed policy, but intuitively, flooding our economy with liquidity could eventually increase credit availability plus it devalues the dollar making exports more desirable to other economies. At least in theory. I’ll keep you updated as things move forward with this scenario.

Yesterday was the anniversary of John Lennon’s death, so I thought you might enjoy one of my favorites:

Click Here to watch John Lennon on You Tube