Stocks Enjoy Best Week of 2010!


Friday, July 9, 2010
Stock Market Commentary:

It was an impressive week on Wall Street: stocks confirmed their latest rally attempt on Wednesday, enjoyed their best weekly gain of the year, snapped a two week losing streak, and bounced from fresh 2010 lows. On Friday, volume, a critical component of institutional sponsorship, fell short of Thursday’s levels on the NYSE and Nasdaq exchange. There were 16 high-ranked companies from the Leaders List that made a new 52-week high and appeared on the BreakOuts Page, higher than the 9 issues that appeared on the prior session. Advancers trumped decliners by more than 3-to-1 on the NYSE and by more than 2-to-1 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.

Monday- Wednesday Action- Stocks Confirm Latest Rally Attempt:

The stock market was closed on Monday in observance of July 4th. Stocks edged higher on Tuesday after strong gains from Asia and Europe sparked optimism that an oversold technical bounce may occur. Economic news was less than stellar, the ISM service index grew at a slower than expected rate in June which led many to question the health of the ongoing global economic recovery. On Wednesday, stocks scored a follow-through day (FTD) on the fourth day of their latest rally attempt. Further clarifying the day count as we see it, last Thursday, July 1, all of the major averages marked Day 1 of a new rally attempt. Although they closed that session with losses, strong finishes in the upper part of their intra-day ranges suggested that support was being found which, arguably, satisfied the essence of a new rally attempt. Since then, the Dow Jones Industrial Average and small-cap Russell 2000 index both undercut Thursday’s lows which reset the day count for each, however, they both rallied on Tuesday which marked Day 1 for those two indexes. Meanwhile, the tech-heavy Nasdaq Composite and the benchmark S&P 500 Index avoided undercutting Thursday’s lows, so Wednesday’s session marked Day 4 and opened the window for a new FTD to emerge. Remember that there are three important characteristics that must occur in order for a sound FTD to emerge: One or more of the major averages must rally at least +1.7% (anytime after Day 3 of a new rally attempt), volume on the exchange(s) must be higher than the prior session, and a new batch of high-ranked leaders must hit new 52-week highs and trigger fresh technical buy signals.  

Thursday & Friday’s Action- Stocks Edge Higher Ahead Of Earnings

On Thursday, stocks rallied after two positive economic data points eased concern that the economic recovery is getting worse: jobless claims fell and same store sales rose at several key retailers. The Labor Department said initial jobless claims fell by -21,000 to 454,000 last week. This was lower than the Street’s forecast for a decline to 460,000 from an initially reported 472,000 during the prior week. The report showed that the number of people receiving unemployment insurance plunged to the lowest point since 2008, while those getting emergency benefits also fell after Congress failed to pass legislation extending the assistance. Elsewhere, a flurry of high profile retailers also reported stronger than expected same store sales for June. Stocks edged higher on Friday as investors await earnings season which is slated to begin next week.

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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