After yesterday’s big move with surprisingly little volume, it appeared that the market would once again turn tail at important resistance.. and that was the case in early trading this morning following a run up in oil and some poor earnings results.  However, by the end of the day, with oil prices retreating, we were looking at a nice little confirmation move in the S&P above key levels.  Today, the S&P became the first major index to clear important resistance of the 200 day moving average AND the downward trend line with volume higher than the day before.  It’s not a blow out bullish move and much work is left in the Dow (which sits right at resistance of the downward trend line) and Nasdaq (not even close to first major resistance of downward trend line), but it’s another step in the right direction.  Keep an eye out for new leaders in emerging industries.  Certainly, those small banks can’t be ignored and oil stocks made a big move today as oil companies begin to report big profits once again this quarter.

Note the formation of the W shaped double bottom bases in the charts below.  I would have liked to see both the Dow and S&P under cutting the first leg down, which would increase the likelihood that we have put in a  bottom.  Also note that with today’s move, the S&P has a new support level at the downward trend line around 1260.  Let’s see if the Dow can follow the S&P lead tomorrow and clear that downward trend line.

On Tuesday, the market appeared to be setting up for a tradeable rally off support levels by reversing sharply off the lows in higher volume.  It didn’t take long for the bears to rush in and spoil the optimism, taking out key support levels in the process.

With geopolitical concerns comes rising oil prices, comes curbing inflation worries, comes slowing economy..  sure, that’s a wall of worry for the market to climb, but the wall may be too big.  Here’s a look at the chart of crude.  I’m still not completely convinced that crude is going to break out of this base successfully and soar to $100/barrel, but anything is possible.  I’d want to see one more big move above $76/barrel and close there to be convinced that out of control crude prices were on the horizon.

It’s easy to fall into the trap of trying to anticipate moves off the bottom, instead of being patient and waiting for the sure thing.  I was guilty of this and put on an additional long trade on Wednesday, in anticipation that the market would follow through higher for at least a couple days.  Hopes for a quick gain quickly turned into cutting and running with a small loss. 

With the rally attempt failed, we now turn our attention to bottom seeking mode and how much room to the downside could be expected.  The bad news is that the Nasdaq is now firmly entrenched below support of its 2 year trend line and will need a 100 point rise just to get back to that resistance level.  If it weren’t for the S&P and Russell 2000 Growth Indexes holding support above their 2 year trend lines, I’d say we’re in for a lengthy bear market.  It’s the last glimmer of hope for the bulls at this point.  Let’s have a look.

Looking at the 2 year trend on the weekly chart, you see the Naz flirting with that support level over the past month or so, but ultimately holding above.. that is until this week.  Will it reverse sharply and hold that line of support again by Friday of this week?  No, the Nasdaq won’t be rising 100 points tomorrow, so the Nasdaq will close significantly below this key support level.

With the Nasdaq taking out the June lows today, look for a retest of the October lows in the next several days at around the 2025 level.

The glimmers of hope shown below.  Both the S&P500 and the Russell 2000 Growth index [represented here by the Ishares ETF (IWO)], continue to hold above their 2 year trend lines.  If I were a betting man I’d say these support levels would be violated in the next couple of days.  It’s important to see how they recover though.  Perhaps, some sort of capitulation move is in order where these support levels are violated with panic selling, only to give way to a massive reversal.  After selling a few small, long positions today, I’ll be watching this unfold from the sidelines.

The market knows all and forecasts the future, pricing in fears and optimism along the way.  Over the past few weeks the market has been pricing in rate hike, slowing economy and inflation fears and today was a clear indication that the bulk of rate hike fears had been priced in, leading to a relief rally. 

About a week ago, once the Dow made the first move above 1st level resistance levels, I began to prepare SelfInvestors members for the possibility of a coming relief rally once the Fed decision was made.  In the Weekend Roundup report to members I mentioned:

"One significant positive move occurred in the Dow on Wednesday as it cleared first level resistance with volume higher than the day before (but below average).  However, both the S&P and Nasdaq remain submerged below first level resistance levels.  The Fed decision on Thursday may provide important clues as to where this market is headed in the coming weeks.  Just how much of the inflation and rate hike fears are priced into this market?  It’s quite possible that most of those fears have been priced in and we get some sort of relief rally following the Fed decision.  At this point I’m dabbling on both sides of the fence with a bias towards the long side.  It’s important to be prepared for a rally at the end of this week by dabbling in long positions or at the very least have your watchlists at the ready and prepared to make a couple moves."

There has been some speculation that traders read too much in to todays Fed statement and that there is no clear indication that the rate hikes are near an end.  At any rate, shorts covered and buyers rushed in for what technically amounted to a confirmation of a new rally as the major indices spiked 2% or more higher on volume higher than the day before.  No doubt, you’d like to see volume more impressive with a move like we got today but it was a significant step in the right direciton.

But, (you knew that was coming).. important resistance levels remain and this market still has much work to do before we begin a new sustained rally.  Lets keep in mind that it is the end of the quarter, a typically volatile move after a Fed announcemnet and a holiday weekend coming up (sort of).  Today’s move without a doubt signals the go ahead to pursue long positions with a bit more aggression, but with resistance looming and earings season fast approaching, jumping in with both feet remains an unwise decision. Once the bulk of earnings begin to roll in around the middle of July, we’ll have a much better idea of just how well the economy is doing or isn’t doing as well as how inflation is faring.

On to the charts….

The weakest of the major indices, the Nasdaq cleared first level resistance areas today with volume above average and above yesterday’s level indicating accumulation. Volume was good but not outstanding. Institutions may have begun putting money to work today, but they aren’t jumping in with full force and you shouldn’t be either. Today’s move most likely gives the Naz the momentum it needs to test the next level of resistance where the 50 and 200 day moving averages converge. Note: the 50 DMA has crossed below the 200 day moving average which is a bearish indication. It’s a reminder that MUCH work remains as the market works through significant technical damage.

With today’s move, the S&P managed to clear both 1^st level resistance of the downward trend line AND resistance of the 50 day moving average. Again, resistance looms at the 50 day moving average. Also, notice the unspectacular move in volume today. With a move of over 2% you’d expect volume to be significantly higher than it was.

 

The Dow is the strongest of the major indices and is already testing 2^nd level resistance levels. It cleared first levels resistance back on June 21^st and has since been finding support along the downward trend line, ultimately bouncing off of the 200 day moving average.

 

I’d like to share a couple premium reports I sent out to members last week. A few are well extended past a proper buy point, but there remains some great opportunities you may want to consider in the coming weeks.

The Longs

Remains one of the best looking charts around and has held remarkably during the downturn, holding above key support and still in position for a solid breakout above the consolidation.  Look for a high volume break above the highs of the consolidation with volume heavier than it was today as a signal to initiate a small position.

Another great looking chart.  Tight price action, trending along support of the 50 day moving average, good surge in buy volume at the breakout and now digesting those gains to return to the pivot.  Looks like a good entry is shaping up soon at this level with good support around 8.30 and at 8.  Sell volume was a bit heavy today… I’d want to see sell volume dry up to around half or more of the average before getting in.

I like this chart because it represents a scenario where you could play off support or play above resistance (or what could be called a ‘handle’).  Those following strict IBD rules would only buy on a break above 49, but if I see a stock changing momentum, surging above resistance, then consolidating quietly to return to the support level (as GPN) has done here, I can get in with more reward potential and lower risk.  Why?  Because my support levels are much closer to my buy point.  If I buy near support around 46.50, I have very strong support between 46 and 46.50 (where the 50 and 200 day moving averages converge).  I have the safety of support but the underlying momentum to provide significant potential reward.  Remember, as much as investing systems like to package everything into a nice tidy little package, it’s not always so cut and dry.  Master price/volume movements and know where support and resistance levels are and you can come up with your own system for success.

The Shorts

For those that have been premium members here for awhile, may recognize that I always look for a similar pattern when trolling for short positions.  It’s the high volume plunge followed by a weak return to what is now resistance.  It’s a short pattern that often works well with very little risk.  China Life (LFC) and Zoltek (ZOLT) below both offer outstanding short opportunities.  Both stocks are making their way back to resistance of the 50 day moving average so you’ll want to see how it does when it meets that level before initiating a position.  Does the stock continue to run up with weak buy volume only to retreat with increasingly heavy sell volume?  Time to short.

Quick Strike Profits Report (Sent to members June 26th)

Last week I told you about a few high quality long plays as well as plays on the short side.  In current market conditions there are opportunities on both sides, but it’s important to lock in profits (and cut losses) a bit sooner than you normally would.

A couple months ago I launched a new feature for premium members called Quick Strike Profits, which highlights stocks that are pure technical/momentum plays and offer great potential reward in the short term.  These stocks exhibit great looking charts with lots of momentum.  I personally like to supplement my core portfolio holdings with a couple of these plays to give the portfolio a little extra juice.  With market conditions slowly improving, I feel its time to at least begin to take a look at some of these plays again.  Here are a few of my favorites right now:

1.  Vaalco Energy (EGY):  breaking out of long base as buying demand has surged in the last few weeks.  Just cleared an all time high on Friday.  I’d wait for it to come in a bit, but it may not do so.

2.  Celgene (CELG):  broke out of a base on Thursday and cleared an all time high with decent volume.  Remains in buyable range.

3.  Advanced Medical Optics (EYE):  broke out on Friday with decent volume.  Big demand over the past couple weeks and the stock remains in buyable range.

4.  Open TV Corp (OPTV): forming bullish triangle pattern – breakout point is around 3.85 (look for heavy volume on any move above this price)

5.  Quest Communications (Q):  Can you believe it? These guys are still in business and expected to become profitable again in ’06.  Last quarter was the first profitable quarter in several years and that’s been reflected in the stock price which has more than doubled over the last year.  The stock broke out of a decent looking base on June 2nd and has been consolidating in a healthy manner since.  I’d be looking for a breakout from this consolidation as an opportunity to make a small purchase.

On a day like today it’s very easy to see all that green and want to jump in with both feet and forget about where we are coming from.  Granted, if you’re swing or day trading today’s move created opportunity.  But for those not interested in the short term thrills this market has been offering recently, it’s important to keep the bigger picture in mind.  Despite today’s thrilling move to the upside (or so it seemed thrilling to CNBC), the market is still seeking a bottom and today’s move only gets us to first levles of resistance.  Nothing more than that for now.  Let’s not get too excited yet longs.. there is much work to do.

There is room to run yet before that resistance level is met, so we’ll probably get some more green tomorrow at the open.  With options expiration it should be an interesting day.  That was a big time move today, but where is the volume to accompany it?  Sure it was higher than yesterday, but not well above average.  Institutions aren’t yet putting money to work but the picture for longs is continuing to improve. 

Same story with the S&P.  Some room to run before resistance comes into play.  There is probably enough momentum from oversold conditions to clear that first level of resistance at the 200 day moving average around 1260 and touch the downward trend line at 1270.  I’ll be looking for a couple short term short plays there should it happen.