Tuesday, May 08, 2007

Another Bounce

On a day that began with all the markings of a pullback, the NASDAQ bounced again on a 19% surge in volume.

Even though the market is flashing signs that it's ready for a ST rest, investors surprisingly continue to buy the dips. That buying resolve may be put to a sharp test on Wednesday, as the potential for a hawkish Fed statement is high. If the past is any guide, a "no-cuts-in-sight" FOMC statement offers investors a decent chance for lower stock prices.

Should the statement be as dovish as the bond market suggests, all hell could break loose to the upside as well. Recent economic data suggests a dovish Fed is a longshot.

The declining volume spikes over the past two weeks in the chart below are one of several tells that buying interest is waning. However, even if authentic selling pressure shows up, the bears may be lucky just to get the Composite back down to its 50-day -- about 3% lower. The market may look wobbly, but it's definitely NOT telegraphing that the IT uptrend is over.

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Short-term, the biggest internal problem for the NASDAQ is breadth. Since last week's selloff, Advancers have struggled to outnumber Decliners. As a result, the NASI failed to take out its recent high, and today's little rollover may have clinched the deal to the downside.

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Even though the market is wobbly and CSCO got a chilly reaction to their earnings report, there's been a distinct pickup in investor interest for tech stocks. The Apr 24 SOX breakout was an important signal that something new was afoot. Then on Tuesday, the Tech Ratio -- $DJUSTC:$COMPQ -- hit a 5-month high as it followed through on its trendline breakout.

There's no reason to get excited until the dotted line gets taken out, but the Tech Ratio is strengthening. Adding to the mix, on Tuesday the NDX outperformed all of the indexes, and its Top Ten gainers were all tech stocks, something that hasn't happened in quite a while.

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When it comes to market weakness, the belly of the beast definitely includes Retail. The RLX is printing a loose, 6-week H&S formation, and it confirmed below its 50-day on Tuesday. If you're looking for shorts, consumer discretionary is a target-rich environment these days.

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As a follow-up, the TOF Ratio cooled considerably on Tuesday.

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Based on the overbought conditions, the TOF Ratio spike, the elevated VIX, weak breadth and May seasonality, tomorrow's FOMC statement could create a hefty dose of market volatility. The key to avoiding a shakeout is to watch the volume.

Until then, have a great evening.



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