With Handles Move Leading Indices Higher
In the last few days, several of the major indices have broken out of a technical pattern known as the cup with handle. Accordingly, this generally portends more bullish action for stocks, provided that the indices maintain their former break out levels as support. Also important to the short term future of the stock market is the behavior of these indices as they now try to move into new higher ground. If the indices reverse and move below these breakout levels, what now appears to be bullish, will likely to turn quickly bearish. But for now, the breakouts deserve the bullish benefit of the doubt.
Most clear in this behavior is the action of the S&P 600 small cap index. The uptrend which proceeded from 2004 to May of 2006, has since corrected until last summer. A somewhat “V” shaped recovery proceeded until late October. Since that time the small cap index has corrected in the form of a high handle, until it has broken into new high ground this week with the formation of a long white candlestick. There is little for the bearish to hold on to in the S&P small cap’s technical chart.
Looking at the short term daily chart, one can see how this market has been one that has tempted the bearish, only to break their heart and inflict pain on those that are the most aggressive. Note the series of lower highs followed by an engulfing bearish candlestick. Bearish traders were punished over the following 5 days. This type of market behavior is also one that deserves the benefit of the doubt.
This has also been a market where it has been premature to find weakness and then sell into it. It was foolhardy to make too much of the Dow Transportation Index’ market laggardship and technical deficiencies in recent months. The “trend” is that when they are “down,” they are far from “ou.” And if an index or stock looks ready to technically roll over, that has generally been a good point to enter from the long side.
Now the Nasdaq 100 is in a similar lagging technical predicament. Still, it would not be a good decision to “play” this weakness as such an approach has been a consistently failing venture. As illustrated in the chart below, the Nasdaq sits near mid-field coming into Super Bowl Sunday. A decisive break of 1750 on the downside is the level where it appears that a new downtrend would be confirmed. It appears that 1850 is but a few Nasdaq 100 CEOs resignations away.
All major indices were in the green today, except for bonds, the Nasdaq 100 and the Dow Computer index. The bearish action of the bond market is worrisome, but not today; not in this market. Google reported quarterly results that reminded investors that it is just a company. It sold off in after hours trading, only to recover at the open when some daily suckers were lured into buying into this stock market phenomenon. This from a Reuters article.
“At least eight analysts raised their price targets for Google shares on Thursday, including analysts at Goldman Sachs, Merrill Lynch, UBS, RBC Capital Markets and Prudential. Some of the price increases brought their view of Google shares closer to, or above, a $600 milestone mark.”
Although it is too early to sell, it is not too early to take some names - Goldman Sachs, Merrill Lynch, UBS, RBC Capital Markets and Prudential! Write ‘em down, I say; and don’t lose the piece of paper! GOOG shares didn’t perform well today (down over 3%) in spite of all of this apparent Wall Street support.
Finally, the chart below depicts the long term trend of Weekly Jobless Claims versus the 10-year Treasury note yield (100 week moving averages are plotted for both parameters). Although these two parameters seemed to have tracked each other from the late 1960’s onward, the most recent recession in the early ‘00s produced a significant rise in unemployment claims that occurred concurrent with interest rates cuts. This looks like a serious long term divergence.
A rise in interest rates may be imminent though, as the 10-year Treasury note is approaching the long term trendline with a multi-year series of higher lows and higher highs. If this trendline is broken (still a big “if”), one would have to consider what the impact would be upon the US job market and the economy. Given the dependence the US economy has on leverage and interest rates, it seems that the result of a trend break would not be good. If it is possible, it is logical to think that “every effort” will be made to defend the black downward sloping trendline. Can this be done without perceived inflation and a tremendous rise in the price of gold? I suppose a showdown is going to occur soon that will answer that question.
There is a good chance that the answer to this question will be told relatively soon by the initiation of Wave 3 of Wave III up in the Gold Bugs Index.
Have a great evening.
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