Two Stocks for a Market Breakout

07/30/2009 11:00 am EST

Focus: STOCKS

Dan Sullivan

Editor, The Chartist

Dan Sullivan, editor of The Chartist, says the market is holding above key technical levels, and he recommends a couple of stocks that should profit in the months ahead.

In our July 1st newsletter, we showed a chart of the Standard & Poor’s 500 index with a horizontal line drawn approximately in the 950 area. We made the following comment: “A breakout through the 950 area would be bullish and would be interpreted as a continuation of the bullish trend.”

The previous closing high was on June 11th at 944.89 on the S&P 500 while the Nasdaq Composite index closed at 1862.37. The Dow Jones Industrial Average saw its high the next day, June 12th, at 8799.20. The NYSE advance/decline (A/D) line had a peak reading of 25,217 on June 11th, concurrent with [that of] the S&P 500 and the Nasdaq.

An interesting divergence took place on July 1st as the A/D line was slightly higher at 25,048 than it was on June 11th. The other three indices were all lower on that day compared with their previous higher readings. The A/D apparently was the precursor for the breakout. Again, all four gauges closed above their resistance levels convincingly on Monday, July 20th—the Dow closing at 8848, the Nasdaq at 1909, and the S&P 500 at 951.

With our momentum models turning positive on July 20th, we recommended a 100% invested position. [As of last week,] the Dow Jones Transportation Average has also broken out above prior resistance and, we assume, giving a Dow Theory buy confirmation.

AK Steel Holding Corporation (NYSE: AKS) produces flat-rolled carbon, stainless, and electrical steel products for automotive, appliance, construction, and manufacturing markets in the US and internationally. In 2008, a quarterly dividend was introduced and the Ohio-based company was named to the S & P 500.

Although the company reported a loss of $47.2 million, or [43 cents] per share, for the second quarter, it was up from a first-quarter loss of $73.4 million, or [67 cents] per share. Managers have greatly reduced operating costs and expect increased operating profitability as prices and production in the industry show improvement. (The stock closed above $18 Wednesday—Editor.)

Arch Coal (NYSE: ACI) engages in the production and sale of steam and metallurgical coal from surface and underground mines to power plants, steel mills, and industrial facilities in the US.

As of December 31st, the company operated 20 active mines and owned or controlled approximately 2.8 billion tons of reserves. Founded in 1969 and headquartered in St. Louis, Missouri, Arch Coal’s stock increased 560% over five years until June 2008. It reported net income of $30.6 million, or 21 cents per share, for the three months ended March 31st, and recently reported a quarterly dividend of nine cents per share. (Arch’s stock closed below $17 Wednesday—Editor.)

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