Monday, May 05, 2008

Yin and Yang

On a day that Yang and Ballmer (not pictured) are unlikely to forget anytime soon, stocks pulled back on quiet trade yet again.

Except for YHOO, institutional investors showed little interest in unravelling positions built up over the past seven weeks. Monday's action was another example of the stock market's improving behavior, and careful observers of market internals saw these improvements begin weeks ago.

The chart below shows that important positive divergences began developing during the series of lower lows between Jan-Mar. As the NASDAQ continued falling, the number of stocks actually hitting New Lows decreased. At the same time, the number of stocks printing bullish P&F formations steadily increased.

This divergence means that the index declines were being caused by a smaller and smaller number of stocks (mostly financial and consumer). However, this small group of stocks was falling so hard that it was masking improvements in other sectors. Once the toxic selling was exhausted, the majority of stocks assumed control and drove the indexes higher. The climbing New Highs and Bullish Percentage Index are two things giving the rally legs.

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Adding to the mix, the indexes now remain parked above important resistance. Despite the well-known fundamental headwinds, the odds favor stocks eventually continuing their climb. It will likely include at least one 3-5%+ pullback, but a variety of internal indicators suggest that this rally could continue for a while.

Until tomorrow, have a great evening.



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