Just when you think oil can’t go any higher.. it just goes higher.  60 a barrel anyone?  It’s hard to believe that the price of oil was just $10/barrel in January ’99 and $17/barrel at the beginning of ’02.  Unbelievable.  Since bouncing off support around 45/barrel in early February, oil has traded higher in 21 of the past 27 trading days.  The rapid ascent has without a doubt kept a lid on any major market rally.  Yesterday, another spike in oil along with GM’s poor report sent stocks into a tailspin, sending both the Dow and S&P below critical support levels.

You see the Dow slipping below critical support of its upward trend line as well as the 50 day moving average.  The next likely level of support is the 10,500 range.  If the market can get a bounce from short term oversold conditions, it will be interesting to see how it responds to these new resistance areas.  It will provide more clues to market strength.  Now is certainly not the time to be making big bets on the long side.  Yesterday’s move indicates that opportunities on the short side probably have a much greater chance of success.

The scenario is nearly identical for the S&P.  Next level of support to keep an eye on is around 1175

The Nasdaq continues to stay submerged below resistance and continues to show no signs of life.  Key support to watch in the coming days is the area where the 200 day moving average and psychological support of 2000 converge.

Another choppy week ultimately finished with a surge above three and a half year highs on news of a better than expected employment report. It’s the move we’ve all been waiting for and was an important milestone for both the Dow and the S&P. You would think that a surge in volume would accompany a move like this, but it wasn’t the case. Buy volume remained surprisingly weak on Friday across all indices, adding skepticism to the breakout move. In addition, the Nasdaq continues to struggle below major resistance levels and isn’t showing any many signs of conquering those levels anytime soon. Clearly, the market continues to be led by commodity based stocks… tech, finance and medical just aren’t participating with any significance. In order for this breakout to hold, there has to be participation from other sectors other than commodities. Strength in retail towards the end of the week as well as an improving picture for semiconductors is a start, but until the Nasdaq bursts out of its depressed state, it’s best to remain a bit cautious. All eyes will certainly be on the next big milestone .. Dow 11,000, which is would provide a nice headline for the major news outlet and perhaps prod the bull into a final run.

Here’s a look at the Nasdaq, which has two major resistance levels to contend with in the coming days. The first is at the 50 day moving average , where it was turned away on Wednesday. The second point of resistance is around 2100, an area it has had trouble with in the past. It will be very interesting to see if we get any follow through from the market early next week and if so, how will the Nasdaq handle these resistance levels. Next week should reveal some important clues as to the strength of the market.

You see that the S&P has cleared 3.5 year highs, but there have been no days of accumulation (institutional buying) in the last several days. The market can’t stand up for very long without the support of institutions.

UPDATE

The market has in fact revealed some important clues as to its strength… and it’s indicating the rally is in trouble.  What began as an unconvincing break to all time highs in the Dow and S&P, followed by a break above resistance of the 50 day moving average in the Nasdaq has quickly faded, bringing us once again to a point of uncertainty.  In the last few months the foundation for the market has been commodities, which in the past couple days have shown signs of cracking.  Oil sold off hard at the end of the day today and steel stocks have been hit in the last two.   If the market is going to be able to pick itself up and make charge ahead to new highs, there must be leadership in other areas.  Retail and semis have shown signs of life, but it may not be enough.  We shall see.   With the bull market that began in 2002, nearing the end of a run it will be more important than ever to keep close tabs on price and volume action.  I still think the market has enough gas for one last run.

Here a look at the latest charts of the Naz and S&P:

The Nasdaq showed signs of hope on Monday by surging above the first level of resistance at the 50 day moving average, but was quickly turned away at 2100, which has proved to be a formidable area of resistance since the beginning of the year.

Looks like the S&P will continue to drop and test that support area where the short term term trend line and the 50 day moving average converge.

(The following is a small portion of the free market report sent to members of SelfInvestors.com..  if you’d like to receive the free report via email each weekend, you may use the sign up form on the home page)

The market hasn’t provided many additional clues in the past week as to its future direction, although the distribution day on Thursday adds a bit of skepticism.  Until the Dow and S&P can clear those 3.5 year highs and the Nasdaq can surge above resistance of the 50 day moving average, it’s best to retain a somewhat cautious approach.  Continuing to keep 50% in cash is a wise strategy at this point.  With earnings season winding down, the market will focus its attention on interest rates and inflation concerns.. which all of a sudden became a big issue with the release Friday of an unexpected jump in the core Producer Price Index to a level not seen since 1996!  The market remains resilient though.  Even with the jump in the inflation  number and the continued rise in oil, the market held its own on Friday and halted the downward momentum of Thursday’s sell off.  How the market holds up next week will be interesting.  I still believe that the Nasdaq will retest the lows of this recent consolidation somewhere in the 2000 range.  Combine the retreat from resistance of the 50 day moving average (which was discussed in the last report) with Thursday’s day of distribution (institutional selling) and the scenario looks highly likely.  As for the S&P and Dow, they continue to hold above their support levels of the 50 day moving average (10650 for the Dow, 1195 for the S&P.. it’s close to that now).  Those are key levels to watch.

The market capped off another solid week, with an impressive advance Friday as weak jobs data temporarily alleviated fears that interest rates will rise rapidly.  On the surface, it looks like the market will shoot to the moon.  But the bulls better keep the champagne on ice for now.  While the S&P500 and DOW have cleared resistance of their 50 day moving averages, the Nasdaq continues to lag.  In addition, buy volume remains tepid.. at least for larger cap names.  Over the last several days there has been a clear divergence in buy interest between small caps and large caps.  Wasn’t this the year that large caps were supposed to lead?  So much for the opinions of highly paid market pundits.. they’ve been predicting the outperformance of large caps for quite some time.  The strength in small caps has been impressive, but buy volume will have to pick up in the major indices in order to declare an all out buy signal.  While it’s OK to initiate long positions at this time, do so with some caution.  Looking ahead to next week, the earnings report from Cisco on Tuesday will provide important insight into the strength of the tech sector and should be a catalyst for market movement. 

Best Strategy: consider being 50% long at this point and adding additional long positions if the Nasdaq confirms a buy signal (by clearing resistance of the 50 day moving average with heavy volume – see chart below)

Here’s a look at the charts of the major indices.. notice the increase in buy volume as you go from the Dow (big, blue chips) to the S&P600 (small caps).

Semis: Is Fourth Time a Charm?

The chart above is of the Semiconductors Holders Trust (SMH) which I prefer to the SOX index because it provides volume levels.  Notice the dramatic shift to buyers over the past 10 trading days, evidenced by the spike in buy volume and the decrease in sell volume.  On Friday, a spike above resistance of the 50 day moving average provided further confirmation of strength.  But the key will be the all important resistance level of the 200 day moving average, which it has failed to move above on 3 previous occasions.  Keep an eye on the semis this week.. a decisive move above that resistance level could provide a real boost for the Nasdaq and the tech sector.  Should that occur, keep an eye on Tessera Technologies (TSRA) which is currently the highest rated semiconductor stock in the Breakout Tracker (with a score of 55/60).  It looks poised to break out from recent consolidation.

Breakout Tracker Highlights

It was an outstanding week for breakouts last week both in terms of the number of breakouts (25) and the success of those breakouts (not one ended the week with a loss!)

• The highest ranked breakout for the week (with a score of 53/60) was Cal Dive International (CDIS), which you may remember was highlighted in the oil sector report in last weeks Market Report (seen at SelfInvestors.com).  It ended the week with a 4% gain.
• Top gainers include CTI Molecular Imaging (CTMI) – up 14% and Terra Nitrogen (TNH) up 10%.

Note: For more information on the ranking system used by SelfInvestors.com and the proprietary database of CANSLIM style stocks, please see this page: Breakout Tracker

First off, hats off to our troops and the brave people of Iraq who are providing inspiration to others in the Middle East.  Our troops must be proud.  Whether the news results in another forceful market rally is anyone’s guess at this point, although there is little doubt the market will open strong Monday morning.  While a sustained rally into the close on Monday would provide a signal to begin pursuing long positions, it should be met with caution.  Rarely do market corrections bounce back in a V like formation.  Corrections take time to sort out, often retesting the lows a second or third time before a rally can resume. 

Let’s take a look at the charts to get a look at where we’ve been and where we might be going.  Taking a look at the long term view of the Nasdaq, it’s clear that the area around 1980 – 2000 provides a critical level of support.  It’s an area of convergence of 3 major support levels: the psychological support level of 2000, the 200 day moving average around 1980 and the long term trend line which is also near 2000.  I believe we will hold above these levels, but if not, it could signal the end of the bull run.

A closer look at the Nasdaq.  In this view you get a better look at the short term downward trend line of this recent correction which has acted as a source of resistance.  For the rally to continue the Nasdaq will need to fight through this resistance level as well as resistance of the 50 day moving average.   Also notice that critical support area which was highlighted above in the longer term chart.

What the market did last week is what the market does best – make a move when you least expect it.  While the market was certainly in overbought conditions and due for a retreat to major support levels, not many could have predicted the swift and decisive move downward right out of the gates to start 2005, crushing the majority of leading growth stocks in its path.  However, despite the damage, the market has managed to remain above major support levels, keeping the currently rally intact.. just barely.  At this point, given the number of distribution days just in the last week (Monday and Tuesday) and the technical damage done to many leading stocks (46 out of the top 100 ranked stocks in the Breakout Tracker have fallen below major support of the 50 day moving average, which is a telling statistic), there is certainly a bias towards further price erosion.  In order to avert a much larger correction, the markets will need to bounce back in a hurry next week with heavy buy volume.  Another high volume drop below major support levels and you can kiss the current rally goodbye (however, the longer term bull market trend would still be in place – see chart below).  Sure, and end to the rally so soon would not be what many expected, including myself.  But the market doesn’t care what you or I think.  You have to trust what the market is telling you in the language of price and volume.  Next week it should reveal more telling clues.

Let’s take another look at the chart of the Nasdaq:

The chart above shows the intermediate upward trend line, which is more or less the so called "mendoza" line (had to throw the baseball reference in there) for the current rally.  On Friday, this key support level was tested and is holding for now.  But notice also the difficulty the Nasdaq has had in getting back above support of the 50 day moving average (which now acts as resistance) around 2100.  That is an area that the Nasdaq will need to surge above with heavy volume if it hopes to avert a larger sell off.  The most telling sign of this correction is the amount of sell volume over the course of the week.  You have to go all the way back to the correction in 2000 to find a week with more selling volume!

The chart above illustrates the magnitude of last weeks decline, but it also shows that a drop below the intermediate upward trend line (shown in the first chart) wouldn’t necessarily mean the end to the bull market that began in October of 2002.  Most likely it would mean more of the sideways action we saw through most of 2004.  The "mendoza" line for the current bull market can be seen in the longer term trend line above, making the area around 2000 a very important support level should we get to that point. 

Another early rally attempt gives way to institutional selling late in the day.  That is the theme we have seen in the last three days, but the indices are still holding major support levels. If they don’t hold, it could open the floodgates for more selling pressure.  Let’s take a look at the charts:

The Nasdaq currently sits right at support of the convergence of its short term channel and the 50 day moving average.  It is highly likely that it will eventually drop and test that intermediate trend line around 2080, but if it should drop below that last line of support with heavy volume, a drop all the way to 2000 becomes probable.

The Dow has some room to drop before testing its major level of support around 10500.  If it can’t hold that level, a drop to 10250 becomes much more likely.

The S&P edges closer to its major support level around the covergence of the short term channel and the 50 day moving average.

The following is a portion of the free report I send out to subsribers of SelfInvestors.com. What I’ll do is post portions of the report during critical moments for the market, but eventually would like to post the entire report here once I get the technical kinks worked out – stay tuned! If you’d like to receive the entire report every evening you may sign up here

I mentioned in last night’s report that some good news could really send this market.. and good news we got! The big drop in crude on an unexpected rise in inventories as well as some decent economic data put traders in a buying mood ahead of elections. For the second straight day, volume surged higher than the day before creating an unprecedented two straight days of accumulation! The last time that happened was exactly one month ago. Today’s action was a major boost to a tired market in danger of rolling over, but key resistance remains before an all out rally can be declared. The end of the elections could just be the final catalyst to send the bears into hibernation for good!

Let’s take another look at the major indices to get an idea of where we’ve been and where we need to be. We’ll start with the Nasdaq which is comprised of the majority of CANSLIM style stocks. Clearly, today was a big step in the right direction as the Nasdaq surged above resistance of the 200 day moving average. However, another large hurdle remains in the form of the downward trend line. If the Nasdaq can get above this line and find support there once it does, that would be a MAJOR accomplishment.

The S&P battled two major areas of resistance today (the 50 and 200 day moving averages) and came out on top… of both resistance levels. While this is impressive action, it too has yet to overcome the downward trend line.

The Dow, a conglomerate of large, blue chip, slow growers has clearly lagged the rest of the market this year and remains submerged below all major resistance levels. These levels include "psychological" resistance of Dow 10,000, the 50 day moving average, the 200 day moving average and the downward trend line.

SECTOR REPORT: The Quiet Ascension of the Brokers & Dealers

Much of the attention lately has focused on technology (especially Google!), but behind the scenes, Brokers and Dealers are staging a nice advance as well. As the index works its way up the right side of its base, notice the good support at the 50 day moving average and then the surge above resistance of the 200 day moving average today.

Taking a look at the Breakout Tracker (a premium service I provide at SelfInvestors.com), there are currently 7 stocks listed in this sector (that make up the Asset Management and Investment Brokerage industries). Six out of 7 have broken out to gains with an average gain of 10% (two are still in a buyable range).

Industry Spotlight: Security Software
In today’s world, combining security and technology means big business and the Software Security industry is beginning to catch fire. Take a look at companies like Symantec (SYMC), Aladdin Knowledge Systems (ALDN), RSAS Security (RSAS), Blue Coat Systems – insider buying (BCSI), Safenet (SFNT), Internet Security Solutions (ISSX) & Tumbleweed Communication (TMWD). These are the leaders in the software security arena.

Obviously, July has been ugly for the market, especially for the Nasdaq. Fear is building as negative events/outlooks continue to get priced in. But I don’t think we’ve seen the end of the selling just yet. Bottoms usually occur at major reversals (or capitulation) where panic selling becomes overdone and buyers step in. This should occur with high volume. Let’s take a step back and look at the long term chart of the Nasdaq to get an idea of where this capitulation may occur. First of all where would panic selling most likely take place? The obvious choice is when/if the Nasdaq takes out the low of this most recent correction at 1865. Where might buyers step in to put in a bottom? Again, the obvious choice would be major support of the long term trend line in green at around 1850. This long term trend line is a very important support level that will be crucial in maintaining the long term uptrend experienced over the last year and a half. In my humble opinion, I believe this scenario plays out to some degree and the uptrend continues.