Stocks Follow-Through & Confirm A New Rally!


Wednesday, July 7, 2010
Market Commentary:

Stocks scored a follow-through day (FTD) on the fourth day of their latest rally attempt as volume, a critical component of institutional sponsorship, topped Tuesday’s levels. Advancers trumped decliners by over a 5-to-1 ratio on the NYSE and over a 3-to-1 ratio on the Nasdaq exchange. However, there were only 7 high-ranked companies from the Leaders List that made a new 52-week high and appeared on the BreakOuts Page, lower than the 8 issues that appeared on the prior session. Meanwhile, new 52-week lows outnumbered new 52-week highs on the Nasdaq and trailed on the NYSE. It will be important for leadership to expand if the new rally effort will prove to be a sustained market advance. If not, Wednesday’s strong move may be the latest in a string of failed follow-through days.

Day Count- A Closer Look:

To further clarify the day count, last Thursday, July 1, all the major averages marked day 1 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 their day count. 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 have yet to undercut Thursday’s lows which means that Wednesday 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 of the major averages must rally at least +1.7% (anytime after day 3 of a new rally attempt), volume must be higher than the prior session, and a new batch of high ranked leaders must trigger fresh technical buy signals. Technically, it was also encouraging to see the benchmark S&P 500 index close above 1040 which has served as formidable support for most of the year.

Dollar Falls; Stocks & Commodities Rally:

Elsewhere, the US dollar continued its three week slide which sent a slew of dollar denominated assets higher (mainly stocks and commodities). In addition,  growth in US retail sales sparked optimism that earnings season will top weak estimates. Investors also believe that most European banks will pass their stress tests which has weighed on the market’s psyche in recent months. The International Council of Shopping Centers released a report which showed that sales were growing at the fastest pace since 2006 which helped allay concerns that the slump in consumer confidence will threaten the economic recovery.

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. Remember to remain very selective because all of the major averages are still trading below their downward sloping 50 and 200 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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