Thursday, June 21, 2007

Complex Oscillations

Although pendulum motion appears simple at first glance, there's actually a lot going on behind the scenes.

Stocks marked the 2007 summer solstice by swinging from Wednesday's slide to a higher close on Thursday. This type of volatility is confusing to investors and tortures technical indicators. However, a closer look at Thursday's action shows that the IT bullish tone persists.

As the NASDAQ traveled 32 points intraday, volume ticked 2% higher, breadth was positive and 3 of every 4 shares traded was a buy. Institutional investors were accumulating shares, and price closed near the highs of the day.

Leading stocks confirm this. The IBD100 rallied 1.3%, twice the NASDAQ and SPX gains and three times the Dow's move. Also, IBD100 breadth was excellent as 78 of 100 stocks moved higher. After a selloff, accumulation in the market leadership is an important tell, and on Thursday, the IBD100 saw 30 stocks move up on higher volume. This is a very solid number, especially in a volatile environment.

For over two months, the bears have been absolutely terrible at follow-through. The chart below shows five tall, red candles during the past nine weeks answered each time by a positive reversal to a higher high. Despite repeated chances, follow-through selling has been nonexistent each time.

As a result, the IT uptrend remains intact, and on Thursday the NASDAQ closed 0.6% below a new, 6-year high. If this high is taken out, that would mark the 5th red candle in nine weeks negated by a higher high.

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Short-period charts are notoriously fickle, but an interesting positive divergence has materialized on the 60-minute chart. MACD (3, 7, 4) has a reliable history of identifying short-term price divergences -- up and down. The signals are infrequent -- and occasionally duds -- but the current one is a clean, two-day spread which points to higher prices ahead. It will be interesting to see whether or not MACD (3, 7, 4) produces a dud tomorrow.

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By last Friday, the widespread sentiment that stocks were reacting to rising yields was no longer fully supported by market behavior. Today, the 10-year Treasury yield gapped and ran with no negative effect on equity prices. When yields are less than 6% and the market is healthy, yields and stocks generally move in rough parallel.

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For the past 4 weeks, the NASDAQ has been outperforming the blue chips, and tech stocks surged again today. While the Dow added 0.4%, the NASDAQ gained 0.7%, the NDX rallied 1% and the Tech Index tacked on 1.2%. In fact, the DJUSTC came 4/100 of a point from recovering completely from Wednesday's selloff and printing a new, 6-year high.

Leading the way for technology were the beleaguered Semiconductors. The SOX gets very little respect, even though today it added 3% to close at a new, 13-month high. There is evidence of an emerging sea change in technology stocks that is receiving almost no mainstream media attention whatsoever. The iPhone novelty has everyone distracted, and the bigger tech picture is going largely unnoticed.

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Finally, the TOF Ratio is walking a tightrope, as the 21-day and 50-day stay positive by just a few points. Call buying tomorrow would be a very helpful development.

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Pendulum or not, don't let the back-and-forth hypnotize you into not following the ball. As much caution and leeway as the bears deserve, they continue to disappoint with their puzzling lack of downside follow-through.

Despite the eroded technical indicators, leading stocks and the broader market both suggest that higher stock prices lay ahead.

Until tomorrow, have a great evening.



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