Wednesday, August 08, 2007


The rumor mill may have disrupted trading on Wednesday, but stocks managed to put in a solid day nonetheless.

By some counts, it was the best session of the current, six-day rally. The NASDAQ traded 3.55 billion shares, logging its highest volume total of 2007. Also, the Composite gapped at the open -- and then kept going. Just three days after testing 200-day support, the NASDAQ is back above its 50-day.

However, building bottoms is messy business. Markets misbehave and often fail in this zone, and this one is no exception. Stocks may be in a "confirmed rally", but the action is fickle and rumor-prone.

In the end, stocks recovered from Wednesday's gossipy selloff, but this is clearly a "shoot first, questions later" market. While this may sound wise, the final 100 minutes of trading on both Tuesday and Wednesday didn't exactly bear the stamp of wisdom. The action seemed frantic and confused.

Adding to the overall messiness was that a lot of Wednesday's action was bargain hunting. The best-of-breed had another so-so day, marking the third time in four sessions that the IBD100 has trailed the broader market. The IBD100 added just 1.4%, while the NASDAQ tacked on 2%.

That said, leading stocks brightened in an important way on Wednesday. The gains may have been sub-par, but the internals on the IBD100 showed a big improvement. An impressive 35 stocks saw accumulation vs. just 18 seeing selling. Also, 23 stocks jumped to record highs, up from only 11 the day before, and 5 the day before that. This is a tone shift for the market elite, and it's a welcome sign in an emerging rally.

The NASDAQ held at both its 13- and 50-day today, a good sign. Also, various technical indicators are improving, and stochastics still has room to run. However, it doesn't take a master technician to see the near-term prospects for MACD divergence, as well as for H&S.

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Mark Hulbert published an article on Wednesday that discusses how the NYSE High-Low Index is on the cusp of signaling a bottom. This is a favorite bottom finder of mine, and the article mentions how the indicator's creator, Gerald Appel, noticed a very oversold 9% reading on Tuesday. Appel was talking about the blue 10-day on the chart below, and crossing back above 20 is the Buy signal.

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The relationship of price to the 50-day offers important insight into the relative strength of four of the main indexes. The NDX, Dow, NASDAQ and SPX are included below, arranged by price strength. It's something to think about when building watchlists.

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One chart looking suspicious of the equity rally is the VIX. For such a powerful up day, the VIX slipped just 0.5%. Option-based protection continues to be a prized possession.

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The market hasn't been very generous or stable, and great setups in leading stocks are still few and far between. This suggests that equities have more work to do, and it's a worthy time to be patient.

I'm out all day tomorrow, so I'll see you after the close.




Anonymous said...

On 8/8/07 your NYSE High-Low Index chart has a 10-day simple moving average; on 7/28/07 it has a 10-day exponential moving average. Is one of these an error, or is there a reason for the difference?

dk said...

Anon...very good eye, and I'm impressed that you noticed. The July 28 chart is a weekly chart, and for those I use the EMA (my preferred). To keep the daily synchronized with Appel, I use the SMA.