The Market Gives a Green Light

What do you need to know that U.S. equities -- and thereby stock index futures -- are in rally mode? Not much. You don't need your broker to say so. You don't need an analyst to give the go-ahead. The market itself will give the green light.

Here's all you need. First, the market makes a multimonth low and reversal like the one that occurred March 12. Four to 10 days later, at least one of the major market indices rallies more than 2% on rising volume, a trend confirmer known as an O'Neil follow-through day. As many of you already know, both the Nasdaq and S&P 500 followed through on March 17.

Just as important, you want to see the market continue higher on rising volume and pull back on reduced trade -- price action that the market has displayed since the reversal. You also want to see a new cadre of leadership names breaking out of bases on strong volume. If leading stocks fail to sustain breakouts, the market is not confirming a new bull phase.

True leadership does not include names in defensive groups such as gold, a hallmark of the October 2002 rally. You want to see growth names from more speculative groups holding on to gains after breaking out. Last week I pointed out that the current market leaders were growth issues from groups normally associated with a higher degree of risk-taking, such as e-commerce, enterprise software and Internet content. From these respective groups, leaders such as University of Phoenix Online (UOPX), Progress Software (PRGS) and Yahoo! (YHOO) are examples of growth names that have held on to gains since breaking out.

Coupled with the broad averages' correct behavior of moving up on heavier volume and down on lightened trade, the market itself is giving the green light to locate defined-risk areas to buy stock index futures.