Saturday, May 12, 2007

A Noticeable Wobble

A big day of so-so selling pressure was followed by a big day of so-so buying pressure.

Because of this week's TOF Ratio spikes, the current wobbly internals and Thursday's rout, the bears sit this weekend with a slight technical advantage (they've certainly had a fundamental one for a while).

To break the backs of the dip-buyers, the bears need heavy, downside follow-through. Lately, this has been a big problem, as selling pressure has been very disorganized for two months. They'll certainly get a crack at it again next week, as the short-term trend is down.

Added to the bear's "IT To Do List" is a take-down of the IBD100. It had a another strong day on Friday, outpacing the markets with a 1.4% gain as 82 of 100 stocks moved higher. Even better, 17 stocks hit record highs, while dozens more are still perched right beneath new highs. One of the earliest signs that the IBD100 gives is failed breakouts: new highs that reverse intraday, leaving tall wicks -- or worse. So far, there's been none of this, and it will be something to watch for next week.

Looking ahead, the chart below shows a new and fast-growing problem for the bears. The Tech Ratio is climbing hard, as investors have acquired a fresh taste for tech stocks. AAPL, MSFT, IBM, HPQ, INTC, AMZN, EBAY, NVDA, DISH, XLNX, JNPR and dozens more have all given strong 2007 guidance and sit near new highs.

The Tech Ratio hasn't seen this type of acceleration since the July bottom. The green dotted line is a 52-week high, and immediately above is a 3-year high (not shown). The broader market has set a gaggle of records without the help of technology stocks. Should tech get rolling...

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No matter how you slice it, the NASDAQ looks shaky short-term. Friday printed an inside day on a 22% volume fade, which doesn't help the bulls much at all. On the other hand, technical indicators are actually flashing a mixed picture. For example, the declining volume spikes aren't my favorite, yet they haven't troubled OBV or MFI much. ADX is a bit of a mess, but stochastics are acting fine, and are actually showing some positive divergence vs. last week.

I put up some Fib targets. Along with the EMAs, this sizes up the pullback possibilities.

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The weekly chart shows a healthy consolidation pattern. The lower volume is a good sign, and helps explain the OBV and MFI strength on the daily chart. The bears have a short-term advantage, but they have a lot of work ahead to alter the IT direction of the market.

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A look through the weekly charts shows consolidation patterns everywhere, and the Banks are a good example. If you look closely, the BKX has developed a 22-week diamond pattern. 60% of the time, diamonds break in the direction of the original trend.

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Dojis are widely assumed to be bullet-proof reversal indicators. In truth, when the trend is strong (see MACD and ADX), they're consolidation patterns. The SOX could move lower without damaging its uptrend.

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The Transports are another example of low-volume consolidation on charts in uptrends. There are many this weekend. The TRAN is a great-looking chart that supports the argument: pullback, yes; selloff, no.

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If you're working on a shopping list, in addition to tech stocks, another area of strength are the energy stocks, particularly the drillers. The chart below graphs the USO against the drillers. Note that while the price of crude has declined over the past year, the drillers have kept climbing! To decouple like this is very bullish, and suggests that, to the drillers, oil needs to be pulled out of the ground regardless of the short-term price.

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Finally, this week wouldn't be complete without a last look at the TOF Ratio. After all of the spiky fuss on Monday and Wednesday, the Ratio has calmed down and once more is in near-perfect position.

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Next week sees less earnings news and more economic data. CPI is the big one, and it wouldn't surprise me if it comes in hot. The market won't like that much, but unless something unexpectedly bad comes along, pullbacks are likely to be shallow and short-lived. That will end soon enough, so always keep your exit strategy handy.

Until then, have a great weekend, and Happy Mother's Day!!!



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