Thursday, April 19, 2007

Chinese Crisis Averted

Like the lone protester holding back the tanks in Tiananmen Square, US investors stared down the aftershocks of a dramatic Chinese selloff on Thursday.

The action was a surprising show of determination by the bulls, and a marked departure from the US reaction to the Shanghai selloff on Feb 27. This time, stocks rallied back from the opening dip, and the Dow even squeaked out a second straight record close. The selloff even closed the gap on the NASDAQ, but j-u-s-t barely. Like Broadway choreography brought to Wall Street, buyers rushed in precisely at 2490.

Volume accelerated yet again, technically marking a third straight distribution day. This is usually the Kiss of Death for any rally (and it may yet prove to be this time as well). However, three days of increasing distribution -- and totally dreadful internals -- has cost the Composite just 13 points (0.51%). This has been no ordinary trio of distribution days.

Besides the accelerating volume, the Composite has actually sustained no real technical damage. MACD continues to diverge positively as the NASDAQ now flies a three-day bull flag. 2500 has held twice, and a little of the overbought conditions have worn off. However, the weak breadth and heavy sell volume are genuine problems that need to be reversed quickly. The bulls need to get busy soon.

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Beat up stocks caught a bid yet again on Thursday, while stocks on the IBD100 underperformed. Held in place by semis and biotech, the NDX closed flat on Thursday. Meanwhile, the IBD100 fell 1%. Just 23 of 100 stocks on the IBD100 closed higher, and 17 stocks printed distribution days, an unusually high number.

It didn't produce the Mona Lisa, but the SOX followed-through on Thursday. Volume was heavy, a good sign. Also, the good news continues in Healthcare, as both the BTK and DRG had solid days. Below are the SOX and the BTK.

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One place the Red Scare did reach on Thursday was the precious metals. Commodities overall have been weak, but gold and silver took the possibility of unsustainable Chinese growth the toughest on Thursday.

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Option investors couldn't take it any longer and moved to puts, which cooled off the TOF Ratio, leaving it in a good position for another run.

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As the charts and market action have been suggesting for weeks, there's a bid holding this market in place. With two weeks of earnings reports behind us, 65% of those companies have beat expectations. Decent earnings are no doubt responsible for a great deal of the current strength.

Three distribution days and a shaky IBD100 have me very cautious. However, the market also is giving off signs that it wants to move higher. Stay on your toes and let volume be your guide.

Until tomorrow, have a great evening.



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