The rally continues to defy the odds as markets recovered Friday after a decent-sized
sell-off on Thursday. The close at the high for the day is an indication that
investors really want to be buyers here. But we still haven't gotten above December's
(or January's, depending on the index) highs yet, despite a couple of tries this last
week.
Nasdaq Commentary
If the Nasdaq Composite being at 1520 is familiar, it's because it should be. We've
been floating around there all week, but never really able to stay above December's
high of 1521.44. We knew this was going to be an important level, but this is
obviously shaping up to be a big line in the sand.
One of the finer points of technical analysis is looking at where an index closed in
relation to its price bar. On Friday we closed at the high for the day. The
interpretation is that investors wanted to buy (at all costs) before the beginning of
next week. They bided their time well, until 2 pm EST Friday. Then the flood-gates
opened, which pushed stocks up. This is a bullish sign in the short term, but don't
start counting chickens yet. We didn't close at the high for the week, and we still
have yet to get (and stay) above December's high. As we mentioned in the Mid-Week
Update, this is no coincidence, as many people saw this as a resistance level and
planned on selling here anyway. The question now is whether or not there are more
buyers than sellers left. The close at the high makes it seem as if buyers are in
control, but the declining volume doesn't necessarily concur. In other words, today's
gains may not really indicate the majority opinion. Beyond that, we finally got our
sell signal today from the stochastic chart, as both lines fell back under 80.
Unfortunately, something's just not right about shorting on a day the index is up two
percent, so we're not acting just yet on that signal.
So now that we've made a case for both bearishness and bullishness, which are we? As
always, you have to go with the trend rather than against it, even when it doesn't
make sense. This market is known for defying logic, so the short-term trend must be
graded as bullish until proven otherwise. Knowing though that we're getting sell
signals in this weak economy, and that investors are WAY too optimistic, that's still
a cautious bullishness. Keep an eye on the 10-day moving averages as your early
warning for the intermediate bearishness we see brewing. Til then, the trend is up.
Support is at 1500 and 1490. Resistance is at 1520 and 1550.
Daily Chart of the Nasdaq Composite (COMPX)
S&P 100 (OEX) Commentary
The OEX chart is not much different than the Nasdaq Composite chart, but the triangle
continues play a role in the progress of the current trend. Of the most interest here
is the convergence of the triangle tip and the resistance set by the S&P 100's
January high. January's high was 475, and the wedge should be coming to a point at
480 or lower. In other words, look for something significant when we get to that
level. The effect of the chart pattern should start to become evident late this
coming week and early the following week. As we've mentioned, this ascending triangle
suggests that we're more apt to go higher than lower. But, there's nothing wrong with
waiting for conformation of that - remember, the resistance at 475 is still in front
of us as well.
And what about the sell signal for the S&P 100? We got it here too, as the stochastic
lines fell under the 80 line today despite the market moving higher. Had markets
dropped, the sell signal would have been confirmed. But the failure of the sell
signal (at least judging from Friday) is a testament to the strength of the uptrend.
The one key concern we have about the OEX is visible in the Directional Movement
Indicator (DMI) chart. We've stated that an Average Directional Movement (ADX) line
(in gray) crossing above the bullish DMI+ line (in blue) is often an indication that
a bull rally is coming to an end. That still remains a concern. But as long as the
trend remains intact, we can tolerate mild blips like Thursday's as long as we get
reversals like Friday's. We are still 'on watch' for more sell signals, but we're
bullish on the OEX for a rise to 475/480. Once there, we'll reassess.
Support for the OEX is at 465 and 460. Resistance is at 475 and 480. This is
obviously a very tight zone for the OEX, as the index is approaching a critical pivot
point.
Daily Chart of the S&P 100 (OEX)
The Bottom Line
More of the same is good if you're a bull. For a few weeks we've been cautioning that
this bullishness was ripe for a decline. Ripe or not, an uptrend is an uptrend, so go
with it 'til it turns.
The reasons we're still cautious include lowered retail sales in April, excessively
high unemployment, disinflation, the Fed's 'uncertain' outlook, the excessively low
VIX which indicates an alarming lack of investor fear, falling GDP, and falling
factory orders, etc?. These things will eventually catch up with stocks, but until
they do, there's not much point in fighting the trend. This coming week has plenty of
economic data coming out, so take special note of the calendar above.
The one immediate concern we have is the resistance we're seeing for all of the
indices at December's and January's high levels. If we don't break through them early
next week, that may be enough to send frustrated investors to the sidelines. On the
other hand, if we do break above those resistance levels, our expectation is a
continuation of the upturn for several days after that.
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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