Tuesday, May 01, 2007

Turnaround Tuesday

The stock market gave investors a fresh twist on Turnaround Tuesday.

The day had all the makings of a heavy distribution day, when stocks suddenly reversed mid-day and climbed up out of their hole. Volume was heavy, and NASDAQ trade accelerated 13% over Monday's selloff. This gives the reversal bullish significance, and it doesn't hurt that the Dow printed yet another all-time record close.

The big boys are clearly back in the game. 3 of the 6 heaviest volume days of 2007 have occurred in the past 5 sessions -- and they've all been up days. While the Dow's string of positive closes grabbed headlines, the NDX has quietly climbed in 12 of the past 14 sessions. Also, NDX trade shot up 22% on Tuesday, as 60 of 100 stocks moved higher. Regardless of what month it is, these aren't the signs of a market that's ready to roll over just yet.

Financial markets are so complex that they rarely give clear, perfect signals, and Tuesday was no exception. Despite the bullish fireworks, market internals didn't recover so cleanly. NYSE internals did better, but the NASDAQ closed with negative breadth and volume, and New Highs and Lows were a tie. Of course, this could be marking a "bottom" for the internals. but it remains an important blemish this evening. Tuesday's recovery attempt will fail unless the internals improve almost immediately.

The IBD100 was equally unimpressive. Not only did ROCM implode 21%, an eye-popping 20 stocks fell more than 2%. As a result, the IBD100 never recovered, sliding 0.4% as only 44 of 100 stocks moved up. Not a great showing from the fundamental leadership.

That said, no amount of doom and gloom can change the fact that the markets remain in a strong IT uptrend. Shorter-term, a big down day on average volume Monday was followed by a bullish reversal on heavy volume Tuesday. In pullback mode, this counts as a tie. Each side needs a follow-through day (or two) to reclaim momentum. Don't assume it will happen tomorrow.

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If you look carefully at the 60-minute chart below, the two hammers this morning show that the reversal took the form of a bullish double bottom. That's a good sign. Even better, MACD is printing monster positive divergence. MACD is back to the Apr 30 level, while price is still 30 points lower. Hourly charts are notoriously fickle, but that's still one heck of a bullish print.

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Stocks and volume are moving in the same direction again -- upward -- which is a very positive sign.

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On a day like today, you've gotta look at the Banks. The BKX has now successfully backtested its 50-day three times in the past 11 sessions. So far so good.

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Of all the commodities, copper has the most successful track record in predicting economic health. In a nutshell, strong copper means strong economics. After vaulting 55% off the Feb bottom(!), copper has been trading sideways for 3 weeks and now looks poised for more gains. Higher commodity prices generally mean higher inflation, but in the middle of an economic slowdown, this type of copper strength is very net-positive.

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On Monday, every sector fell on essentially average volume. The index losses were big, but distribution days were scarce: only 16 on the NDX, and 20 on the OEX. On Tuesday, distribution days fell to just 12 on the NDX and 9 on the OEX. The IBD100 -- despite its poor showing -- saw its distribution day count fall from 35 on Monday to just 16 on Tuesday. The selling simply isn't as intense as price would suggest.

This creates the impression of TOM-related activity -- or even overbought adjustments -- rather than some new sea change. That will happen soon enough, but now may not yet be the time.

Until tomorrow, have a great evening.



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