Tuesday, July 03, 2007

The Group W Bench

The stock market is spending July 4th on the Group W Bench.

Four weeks of moving from resistance to support has produced W formations on each of the major indexes. While a W is one of the more bullish consolidation patterns, regular bouts of selling have raised doubts. These W's are more like Arlo Guthrie's military rejects, and further selling could see the W's fade into triple tops or bearish descending triangles.

The problem for the bears is that there has been a plot twist. The NASDAQ and NDX have just sprung to new highs, and their flying W's are particularly promising. However, these breakouts occurred on milquetoast holiday volume, and they need confirmation.

Ironically, as the nation celebrates its independence, investors remain indentured to mixed market signals.

Or are they?

Leading stocks and market internals are anything but conflicted. Both are bullish, especially leading stocks. While the market internals look positive (see charts), the fundamental leadership is in a class by itself.

The IBD100 tacked on another 0.5% on Tuesday as 57 of 100 stocks moved higher. On just a half-day of trading, 10 stocks managed accumulation days and a mind-boggling 40 stocks tagged record highs (this follows 41 new highs on Monday). According to this group, the broader market is on the verge of more gains.

Below is a set of 4 charts that show the various W formations. The top row includes the two exchanges, and both are printing the more bullish versions. The SPX -- with its heavy financial weighting -- lags the others. These charts need follow-through, but if you're going to repair a bearish double top, this is exactly how to do it.

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If the market is genuinely bullish, a heavy volume follow-through is inevitable and the orange arrow will flip green. MACD had a bullish crossover on Monday and is at trendline resistance, and Tuesday saw just enough juice to move OBV positive. Volume or not, this chart has improved, and consecutive 6-year closing highs is nothing to sneeze at.

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The TOF Ratio has taken a bullish turn. After confirming negative, it's unusual for this indicator to heal itself so quickly. However, the inverted H&S on stochastics, the series of higher price lows and the recent EMA crossover all suggest that the TOF Ratio is forming a new Buy signal. Option investors are getting nervous and moving to calls, and the TOF Ratio is reflecting this bullish development

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As the NASDAQ and NDX sit at new highs -- and the others climb out of W's just below -- an estimated 12.5 billion shares are held short on the NYSE. It would take 8 days to cover this open interest, and it's a short ratio unmatched since 1931.

The last thing Wall Street expects is for the stock market to move significantly higher from here. However, whether measured by leading stocks, fear levels, short-interest or earnings expectations, the market itself is saying that higher prices are a real possibility.


I sit on the board of a not-for-profit, and leave Thursday morning for my annual dose of corporate governance. My schedule each day is 8am - 11pm, so posts before Monday, July 9 are possible, but unlikely.

Unemployment and payroll data should provide significant pin action on Thursday and Friday, and volume will likely be higher as well. It should be an exciting two days, and a few participants may be getting off the Group W Bench - one way or the other.

Until then, have a great 4th of July! I'll check in when I can.



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