New Rally Confirmed; Stocks Close Above 200 DMA Line

Friday, June 18, 2010
Stock Market Commentary:

Stocks ended higher this week, confirmed their latest rally attempt, and the benchmark S&P 500 index and the Dow Jones Industrial Average both closed above their respective 200 DMA lines which is an encouraging sign. Volume totals were reported higher on both major exchanges due to Friday’s quadruple witching day. Advancers led decliners by a 21-to-16 ratio on the NYSE and by a small margin on the Nasdaq exchange as the major averages continued consolidating Tuesday’s large gains. There were 33 high-ranked companies from the CANSLIM.net Leaders List that made a new 52-week high and appeared on the CANSLIM.net BreakOuts Page, higher than the 22 issues that appeared on the prior session.  New 52-week highs outnumbered new 52-week lows on the NYSE and on the Nasdaq exchange.

Monday-Wednesday’s Action; Stocks March Higher:

On Monday, the major averages ended mixed but near their intra-day lows after Greece’s Debt was downgraded by Moody’s. However, instead of the usual selloff, the bulls promptly showed up on Tuesday and helped the major averages score a proper follow-through day (FTD) which confirmed their latest rally attempt. It was equally impressive to see stocks rally and close above their respective 200 DMA lines which has served as formidable resistance over the past 5 weeks. Stocks caught a bid after a New York manufacturing report suggested the global economy remains solid. The Federal Reserve Bank of New York’s general economic index, which measures economic activity in the NY area, rose for an 11th consecutive month which helped offset European Debt woes. In addition, the US dollar continued its two week sell off which helped a slew of dollar denominated assets rally.

Stocks closed mixed, but near their intraday highs, after retesting the 200 DMA line on Wednesday. Investors digested the latest round of lukewarm economic data and BP said it plans to create a $20 billion fund to pay for damages from the oil spill. Before Wednesday’s opening bell, the Commerce Department said housing starts slid -10%, the largest decline since March 2009, to a 593,000 annual rate. This was lower from a revised 659,000 pace in April and was less than analyst estimates. Meanwhile, building permits, a sign of future construction, unexpectedly fell to a one-year low and single-family starts suffered the largest decline since 1991. The weaker than expected housing data coupled with the sharp two month sell-off in many housing names raises the likelihood of a double dip decline in the ailing housing market. Separately, Fannie Mae (FNM)and Freddie Mac (FRE) plunged after their regulator told the two mortgage-finance companies to delist their stock from the New York Stock Exchange. Finally, the producer price index (PPI) was released on Wednesday, and it did not spook investors.  It is usually an encouraging sign when the market is resilient enough to shrug off disappointing headlines.

Thursday & Friday’s Action: Stocks Edge Higher

Thursday was another relatively quiet day on Wall Street as stocks continued consolidating Tuesday’s robust move. Before Thursday’s opening bell, the Labor Department said US jobless claims rose to 472,000 last week, and the consumer price index (CPI) slid, which helped allay inflation woes. The Federal Reserve Bank of Philadelphia’s general economic index fell to a 10-month low of 8, less than half the median estimate of Wall Street economists and the Conference Board’s index of leading indicators in April edged down -0.1%, following a +1.3% increase in the prior month. Stocks edged higher on Friday as a series of options expired.

Market Action- Confirmed Rally:

Now that the major averages confirmed their latest rally attempt on Tuesday, June 15, 2010, the window is open for disciplined investors to begin carefully buying high-ranked stocks again. Technically, it was encouraging to also see the Dow Jones Industrial Average and the benchmark S&P 500 Index rally above their respective 200-day moving average (DMA) lines. Looking forward, the 200 DMA line should now act as support as this market continues advancing, while any reversal below that key technical level would be a worrisome sign.

Remember to remain very selective because all of the major averages are still trading below their downward sloping 50 DMA lines.  It was somewhat disconcerting to see volume remain light (below average) behind the confirming gains. It is important to note that approximately 75% of FTDs lead to new sustained rallies, while 25% fail. In addition, every major rally in market history has begun with a FTD, but not every FTD leads to a new rally. Trade accordingly.

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