Stocks Look Primed for Breakout

NEW YORK ( TheStreet) -- July's rally, especially the impressive move seen this week, may have laid the technical groundwork for the S&P 500 to surge to new highs.

"With Tuesday's strong stock market rally off of multiple pieces of technical support, and the nice follow-through buying on Thursday, we think it is possible that the major indices are finally setting up for a breakout to the upside, and at last, breaking from the price consolidation that started back in February," writes Mark Arbeter, chief technical strategist at Standard & Poor's, in a research note Friday afternoon. "Looking back, the market has been hit with a fair amount of bad news in recent months, but the bears were unable to take prices below the key lows we saw in March."

Arbeter explains that the S&P 500's bounce since pulling back to the 1,295 top of its June base this past Monday was a positive sign, as that level represents a nearly 62% retracement of the rally the index saw from June until early July. He says that to complete the price base, the S&P 500 would need to exceed its April closing high of 1363.61 on April 29, as well as the intraday high just north of 1370 at the beginning of May.

"We think an upside breakout would open the door for a move to the 1,450 to 1,475 area some time in the fourth quarter," he writes. "This, in our view, would complete a five-wave structure off the March 2009 bear-market bottom."

The recent action in two downtrodden sectors -- the financials and the semiconductors -- is also heartening, according to Arbeter.

"While these areas are still in a downtrend, we are starting to see some early signs that they may be bottoming," he says. "Both the SOX Philadelphia Semiconductor index and the XLF Financial Select Sector SPDR recently went to new corrective lows, but daily momentum put in a higher high, so we finally have a bullish momentum divergence."

Year-to-date, the Dow Jones Industrial Average, while turning lower on Friday because of a disappointing quarter from Caterpillar ( CAT), has appreciated the most among the major U.S. equity indexes, rising 9.6% vs. gains of 7% for the S&P 500 and 7.7% for the Nasdaq Composite.

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