What can be said other than stocks are strong? The rally defied the odds, and as a
result we're getting some pretty optimistic indications, the most important one
possibly being the upturned 200 day moving average. As of Friday, all four of the
major indexes have rising 200 day lines - for the first time since September of 2000
Nasdaq Commentary
We're going to continue with the exact same chart and indicators we took a look at on
the Mid-Week Update, as it makes for an interesting lesson in the pros and cons of
the stochastics indicator. We'll also look again at the DMI analysis for the Nasdaq
Composite.
One of the most basic premises of technical analysis is the concept of surpassing (or
not surpassing) previous highs. The primary reason our stance was bearish was based
on the fact that we haven't been able to climb above December's peak at 1521. In
fact, each time stocks rose, they rose to a lower high. On the other hand, each time
they dropped, they dropped to a lower low. The math is simple: lower lows + lower
highs = down trend.
Once its been established that you're in a down trend, the only (real) way to know
you've bucked the trend is to start making new highs. Well, we did. If you recall,
our resistance zone was between 1430 and 1465, which were levels based on previous
highs. With Friday's close at 1502.88, we've gotten over all the major hurdles except
December's high of 1521. That will be the last step to solidifying bullishness.
In the meantime, let's analyze what concerned us (and still does) about the
stochastics chart. When the stochastic lines move above 80, stocks are technically
overbought, implying that a correction (pullback) is due to bring the market into
equilibrium. The problem is, it's quite possible to stay overbought for a while.
That's why we warned to wait for confirmation that a pullback had started. Since the
two stochastic lines never crossed back under 80, we never got the official signal.
In fact, not only did stochastics not signal weakness, the DMI analysis is showing
that the bull trend is strengthening. As long as the ADX line (gray) is rising, the
trend is upward.
At this point stocks are headed higher, and as it's been said, 'don't fight the
tape'. Go with the trend until we see closes under the 10 and 20 day EMA, or until
stochastics gives the official sell signal.
Another important note: we are above the 200 day moving average line (in green), but
it's a pretty safe bet that that line will be tested as support. Although when that
may occur is still in question, the composite will most likely be touching it again
sometime in the next several weeks. Don't fear that though, since successful retests
prove the strength of the trend (or prove the trend isn't as strong as originally
thought).
Support is at 1460, with resistance at 1520.
Daily Chart of the Nasdaq Composite (COMPX)
S&P 100 (OEX) Commentary
All of the commentary that applies to the nasdaq Composite applies to the S&P 100 as
well, so we won't repeat it here.
Instead we'll look at the unique factors we're seeing with the OEX; there are two
important ones.
First is the ascending triangle we have been studying over the last week. Each time
the price bar touches the edge of the without going through it, the wedge becomes
that much more meaningful. So far we haven't, but came close Friday. This rising
wedge is indicative of a market that wants to go higher, since it's making higher
highs and higher lows. The lower edge of the triangle (the dashed support line) is
only further strengthened as support by the fact that the 10 and 10 day EMA lines are
framing it as they too push higher.
Second, as we've said, the tip of the triangle will intersect with the horizontal
resistance line set by January's high of 475. That is going to be a key pivotal
moment. Even is it does breakthrough 475 to go higher, it may find resistance again
at December's high of 488.
Because the S&P 100 has a little more resistance in front of it, we can't be as
enthusiastic about it as we can the Nasdaq. But as of now, the trend is definitely
higher as we move closer to the tip of the triangle.
Daily Chart of the S&P 100 (OEX)
The Bottom Line
Rallying on good economic news is understandable. Falling on poor economic news is
also understandable. Rallying on bad economic news is just plain bullish. The key
economic indicators were not positive: GDP was lower, unemployment was up, and
factory purchases were still at 'contraction' levels. Yet people are buying stocks.
Whether it makes sense or not, it's happening, so enjoy the uptrend while it lasts.
The question at this point is when do stocks begin to reflect the bad economic news?
This type of growth in the indexes is not likely sustainable if earnings start to
come in well under our elevated expectations. We have about three months before the
next round of earnings announcements. Perhaps by then the economy will have
strengthened, and these higher stock prices will be justified. But keep an eye on
consumer sentiment and spending (and GDP and unemployment) between now and then.
Have a Great Trading Week Ahead!
Price Headley, CFA, President
With, James Brumley, Research Analyst
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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