Stocks Edge Higher Ahead of Q2 Earnings Season

Monday, July 12, 2010
Stock Market Commentary:

The major averages closed higher after spending most of the day trading between positive and negative territory. Volume, a critical component of institutional sponsorship, was mixed: higher on the Nasdaq and lower on the NYSE. There were 21 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 16 issues that appeared on the prior session. Decliners led advancers by nearly a 2-to-1 rato on the NYSE and over a 2-to-1 ratio on the Nasdaq exchange. New 52-week highs outnumbered new 52-week lows on the NYSE but trailed on the Nasdaq exchange. It remains critically important for leadership (new highs) to expand if the new rally effort will prove to be a sustained market advance. If not, Wednesday’s strong move may turn out to be the latest in a string of failed rallies confirmed with follow-through days.

 Q2 Earnings Season Officially Begins:

Earnings season officially began after Monday’s closing bell when Alcoa Inc. (AA), the first dow component, released their Q2 results. The largest US aluminum company was profitable in Q2 and said sales rose +22%. Over the next few weeks, it will be very interesting to see how company’s fared last quarter and, equally important, to see how the market reacts to the numbers. Analysts believe that Q2 earnings for S&P 500 companies rose +34%. This week alone, there will be approximately 23 companies in the S&P 500 that are slated to release their results.

Market Action- Confirmed Rally:

Looking forward, the window is now open for disciplined investors to begin carefully buying high-ranked stocks again. Looking forward, the 200 DMA line should now act as near term support as this market continues advancing, while any reversal would be a worrisome sign. It is important to note that the NYSE composite, benchmark S&P 500 index, and the Dow Jones Industrial Average have now all seen their 50 DMA lines undercut their respective 200 DMA lines which is is known as a “death cross” and has bearish ramifications. In addition, remember to remain very selective because all of the major averages are still trading below their downward sloping 50 and 200 DMA lines and a fresh downward trendline (shown above).  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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