WINDERMERE, Fla. ( Stockpickr) -- U.S. stocks are trading modestly higher today as market bulls added to their gains for the week, following yesterday's move by the European Central Bank to inject liquidity in the European banking system.
The ECB and its partners in the U.S., Britain, Japan and Switzerland opened new lines of credit to European banks, allowing them to borrow dollars for as long as three months. The hope among the bulls on Wall Street is that this move shows that European leaders are serious about containing their sovereign debt crisis. The less optimistic crowd is viewing this action as nothing more than a bandage on massive wound.
Nothing demonstrates the bear view more than
this recent Bloomberg report
that bearish bets by hedge fund managers at the end of August on
index futures increased to the highest level in almost four years.
5 Stocks Under $10 Setting Up to Trade Higher
The last time bearish bets were that high was in September 2007 before the S&P 500 plunged dramatically. The bears clearly think that Europe is going to be hit with a major debt crisis that could result in a large drop in equity prices around the globe. Some of the bears are even predicting a massive slide in the euro -- if, for example, a debt-laden country such as Greece were to be kicked out of the eurozone.
Those huge bearish bets could end up backfiring on the bears if a crisis never materializes. This will lead to a face-ripping short-covering stock market rally as the bulls flood the market with buy programs to squeeze the bears out of their positions. This is just one scenario you should be considering, so follow the trend, volume and price action in the markets. If you start seeing lots of market leaders roll over like
did this week, then get more defensive.
The top traders in the world know that markets are made up of thousands of stocks and tons of sectors. With so many moving parts, there's always some sector or stock that's acting strong and setting up to break out.
is not a new game on Wall Street; the strategy has been pioneered by legendary traders such as William O'Neal, Stan Weinstein and Nicolas Darvas.
Here's a look at a number of
stocks that look poised to break out
and trade higher from current levels.