Follow Through Day Moves Market Into "Confirmed Rally"
Wednesday’s rally brought about an Investors Business Daily (IBD) follow through day thereby putting the market in “confirmed rally” mode. IBD’s word on the stock market as of Tuesday evening was, “market in correction.” But with Wednesday’s action, the benefit of the doubt moves from the bears to the bulls all within a single day. In recent years, the IBD method has been as good as any in predicting the intermediate term position of the stock market. Also relevant is the fact that what they consider to be leading stocks are acting well. While a cynic can throw several rationales at the recent action of the stock market, one trades against IBD’s method at their own significant risk. With regard to IBD, when you find a hot guru, it pays to follow his advice. Trading against the methodology of the hot guru can be both demeaning and expensive.
Below you see the daily chart of the Nasdaq composite. Last Wednesday’s mid-day turnaround which put the market up well off of its lows of the day was considered to be the initial rally. It is relevant that when the Nasdaq composite broke below 2,340 mid day last Wednesday, that was an apparent new low. The quick turnaround flashed a signal that the market’s character had not changed and bears were in for a rapid and tradable rally against their position. Once again, it was a losing proposition to sell into apparent weakness and once again, it was a winning proposition to buy an apparent break of technical support. Over the five days ending on Tuesday, it appeared suspect to the bullish case that the market was advancing, but on anemic trading volume. But when 2,410 was broken and then successfully tested this Wednesday morning, and the Fed said what the market wanted it to say, an IBD follow through day was produced. (The trading volume on Wednesday was only average, and would have been less than average except for the relatively high trading volume in the Nasdaq 100 ETF.)
As of Wednesday evening, potential resistance stands at the 27 February market opening gap (at about 2,475). There are some key stocks whose near term charts will either lend credence to the confirmed rally or shed some doubts upon the recent bullish disposition of the market.
As this is being drafted on Wednesday evening, Motorola is trading down almost 5% in after hours trading, after having posted disappointing quarterly earnings, predicted a loss, and announced the resignation of its Chief Financial Officer (CFO). The long-term weekly technical chart illustrates the importance of 18 as a technical line of former resistance and current support. A hold of this support on Thursday would say something very important about the technical position of the US stock market.
A decisive break of this support (still an “if” as of Wednesday evening) suggests a bearish price objective of about 13. But again, a “hold” of support will speak volumes about market sentiment.
Apple, Inc. is in a classically bullish IBD technical pattern – the cup with handle. There are some features of this apparently bullish pattern that may be flaws. One flaw is that there appears to be high volume selling weeks in the “handle” portion of the chart. In addition, although the price action over the last 3 weeks is bullish, the corresponding volume is lackluster. It would say bullish things about the US stock market if this popular stock could make a decisive new high of above 100. Similarly, a failure near its high would be bearish for the overall market.
Finally, relevant to the technical position of the market is household name, Google. A few weeks ago, it was conjectured that the behavior of Google near its neckline would be important to the technical position of the market. Sure enough, after fooling bears with an apparent indecisive break, they were punished to the tune of $20 a share in a couple of days. Now the benefit of the doubt goes to the bulls where the bearish intermediate pattern of lower highs is being challenged from below. The trend of lower highs would be broken if Google moves decisively above 466. The neckline (now at about 440) is still in play and still has significant relevance to both the technical position of both Google and the US stock market.
The market action was fairly constructive to bulls as today was spent digesting yesterday’s gains. Very little of yesterday’s rally was given back. Google continued to approach 466. Apple traded quietly. Motorola appeared to have decisively broken below its support at about 18, finishing at 17.5, but this is far from a decisive break. It hung around the 17.5 level all day and this is a level where a popular big time private investor (example: Carl Icahn or Kirk Kirkorian) could announce a major stake in the company. Other bullish possibilities include a Wall Street analyst upgrade, and expansion of a stock buyback, or rumors of a hedge fund takeover. There were 190,343,829 shares of Motorola sold today; but as we know, there were precisely the same amount of shares bought and the buyers could easily have included those folks mentioned above. Selling into weakness has been a losing proposition and such a trend must be given the full benefit of the doubt. Such a rally in this lackluster company could be sharp and damaging to bears.
While the action of the stock market grabbed the headlines surrounding the Fed inaction and their statement yesterday, it was the bond market producing results to shed light on what was going to occur in the months ahead. Below you see a short term daily chart of the 30 year T-Bond yield. When the candlesticks move higher, interest rates move higher (and bond prices lower). As you can see, the Fed statement produced a knee-jerk reaction toward lower long interest rates. But following the reaction, the long interest rate then made a 19 day high the following day (today, Thursday). So while the action in the stock market was bullish, the bond market was bearish and interest rates headed higher.
Important from a longer term perspective is the fact that in spite a lot of news of economic slowing over the last few weeks which should have been bullish for the bond market, bonds have been selling off. So while the stock market took the Fed statement to mean lower interest rates are likely in the future, the bond market reacted to the possibility that the Fed may fight inflation with higher rates.
So how bad is inflation? This is a tough question to answer. But as a parent of an undergraduate college student, my anecdotal evidence is more creditable to me than any of the inane noise that comes from business TV and radio. I received this letter a few days ago:
“From: Private University
To: University Students and Parents
Date: March 15, 2007
I am writing to let you know of our tuition and fee rates for the upcoming academic year. The Board of Trustees has set the standard tuition rate for the 2007-2008 academic year at $34,930 and the basic room and board rate at $10,950, for a total of $45,880. These rates represent a 4.72 percent increase in the cost of attending the University.”
This comes on practically the same week that Fed Ex issued a statement to its shareholders that their revenue growth was less than expected due to the slowing economy. You can have a slowing economy concurrent with inflation.
While it is unlikely to impact the stock market tomorrow, a slowing economy with inflation is not a good combination for stocks.
Have a great evening.
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