Looking out over the horizon last Wednesday, it would have been impossible to see the cliff right in front of you. That’s because the sun was a shinin’ right in your eyes. It all looked rosy just days ago as ingredients for a nice little rally were thrown into the pot. But the recipe was ruined with the addition of earnings warnings, a surprisingly lackluster jobs report, terror warnings and the addition of corporate killer John Edwards to the Kerry ticket.

Nothing is ever certain in the market. Technical analysis using price and volume data of the major indices provides clues and a general probability as to future direction, but it is never absolute. Generally speaking, breaking through resistance and finding support are bullish signals. On the opposite side, retreating from resistance and plummeting below support are bearish signals. More often than not these signals work. When they don’t it’s critical that in order to protect your capital you act quickly and decisively.

Looking at the current state of the market, the Nasdaq is in trouble and will most likely test previous lows (setting the stage for the rare triple bottom?). Yesterday marked the 3rd day of distribution in just a weeks time. That is enough to derail any rally. The DOW and S&P still have the support of their 200 day moving averages, which is critical for the market. I’ll be watching these levels closely. CANSLIM leading stocks are not sustaining breakouts and in many cases completely breaking down (See ESCA, FILE, SNIC, BRCM, HIBB, HLEX.. and on and on). In fact leading stocks have lagged the general market for five days in a row. OUCH!!

Amidst all the doom and gloom, there are bright spots in the market. Opportunities can be found in Oil/Gas & the metal markets (Gold, Silver & Copper). However, you may want to be careful by purchasing half positions and setting tighter stops. Good luck.. it’s a jungle out there!

We got it all today. The price movement, the close at the high, the volume, the break through resistance, the participation of technology and leading stocks leading the way. It all led to a day of accumulation as institutions began to put money to work. It was the kind of day we have been waiting for and it signals that significant upside remains in the market. Today, it was the Nasdaq that led the way and broke through major resistance of the convergence of the downward trend line and 2,000 (a psychological level).

Over the past few weeks the Nasdaq has been getting squeezed between support of the convergence of the 50 & 200 day moving averages and resistance of the convergence of the downward trend line (in blue) and the important psychological level of 2000. It had to give eventually and today it did… to the upside! It signals the OK to become a bit more aggressive in buying leading CANSLIM stocks.

**Note: click on the day to see the report I sent to free members of SelfInvestors.com – if you would like to receive this report, you may sign up here.
It’s been a month or so since my last post regarding the strength of the overall market, so I thought it would be a good time to take a look once again. In the previous post regarding the strength of the market, I mentioned the importance of the high volume reversal at the bottom on May 12th, which often signals the end of a correction. Nearly two weeks later (May 25th) we got a confirmation day when the Nasdaq surged 2% on heavier volume than the day before. Confirmation days don’t necessarily lead to new rallies, but no new rally or bull market has started without one. A confirmation day signals it’s OK to test the waters, but not to dive in with both feet. A slew of successful breakouts from leading companies provides further evidence that the correction is over. That is exactly what we are seeing. Many leading stocks are breaking out of sound bases to big gains.

Here’s a list of the top breakouts and their percentage gain from the breakout since that confirmation day on May 25th (the number in quotes is a ranking system I use which combines a fundamentals and technical score that I come up in order to sort the best [20] from the rest [1] – I generally don’t track any stocks rated less than 13 and rarely will a stock get a 19 or 20 rating):

[17] Sanderson Farms (SAFM) – Up 14% since its May 26th breakout
[17] Gen-Probe (GPRO) – Up 13% from its May 27th breakout
[17] BEI Technologies (BEIQ) – Up 8% since its May 25th breakout
[16] Copart (CPRT) – Up 8% since its May 26th breakout
[16] Mine Safety Appliances (MSA) – Up 10% since its breakout yesterday
[16] Old Dominion Freight Lines (ODFL) – Up 8% since its May 25th breakout
[15] Possis Medical (POSS) – Up 7% since its breakout yesterday
[15] Applied Signal Tech (APSG) – Up 7% since its May 26th breakout
[15] Overseas Shipholding Group (OSG) – Up 11% since its June 1st breakout
[13] Toro (TTC) – Up 8% since its May 27th breakout

More notable breakouts from yesterday and today:
[17] Central Euro Media (CETV) – Up 4% in a breakout today
[17] Drew Industries (DW) – Up 3% from its breakout yesterday
[16] Ceradyne (CRDN) – Up 4% from its breakout yesterday

In addition to the slew of breakouts from leading stocks, the market has managed to power through several layers of resistance in the form of major moving averages, psychological resistance and a downward trend line. The only concern is the absense of vigorous institutional buying. Below is a chart of the Nasdaq from yesterday. You can see how the Nasdaq has little trouble with several resistance levels.

Notice the formation of the double bottom base in the chart? By undercutting the first bottom, the second bottom flushes the weak holders out of their positions so that a new rally can begin. You can see the first reversal on May 12th and a second reversal that occurs on May 17th to create the low of the second bottom. That’s the key. Look for reversals, preferably on high volume. Looking out from here, it’s important for the market to find support at these resistance levels on decreasing selling volume. At this point, a healthy consolidation would be welcome in preparation for a run at the highs of April. As the market continues to show strength more investors will begin to feel like they are being left out of a nice rally. Maybe then we can get some volume to this rally!

The market continued its downward spiral heading into lunch today with no end to the selling in sight. That is until an impressive and surprising end of the day rally that saw the Dow reverse nearly 200 points with increasing buying volume. In fact, all of the major indices staged major reversals off their lows on greater volume than the day before. Why is this significant? Major reversal days like we saw today can often be seen at the bottom of corrections. However, we are by no means out of the woods. It’s a step in the right direction towards another rally in the market, but what needs to happen from here is a confirmation in the next few days by seeing another big up day with heavy buying volume. A confirmation day would be a signal that institutions are again in the buying mood and an indication to you to watch the action of leading stocks as they break out of sound bases (read more about sound bases in the tutorial at my website for self investors, SelfInvestors.com). A slew of successful breakouts following a confirmation of a new rally would provide further indication that the rally is for real and that the institutions are once again hungry for new purchases. It will be interesting to see how this will play out. Be patient, create those watch lists and stay tuned! (click the chart for a larger image)

If you’d like to receive my daily report which details the health of the overall market and pinpoints where the strength is, you can sign up here. You may also learn about gauging the health of the the market in the tutorial here.

The market has jerked investors around pretty good for the last couple weeks as interest rate, China slowdown and Iraq fears all weigh on investors minds. For months, many have said all we need for another leg to the bull market is a pick up in jobs and continued positive economic numbers. Well, positive reports continued pouring in on the jobs front, the corporate earnings front and the economy. However, they were a bit too good, fueling speculation that interest rates would rise sooner rather than later.

It all leads to an extremely erratic and as some would argue, irrational market. One in which it is difficult to make money in as sustained trends remain nonexistent. One of the most important aspects of the CANSLIM method of investing is to invest long only in a confirmed bull market. 75% percent of stocks move with the market. If you insist on investing long under the current market conditions, your chances of losing increase dramatically. How do you gauge the health of the market? By checking price/volume action of the three major indices and the action of leading stocks. The market is contstantly undergoing “tests” at major support and resistance levels. If you are unfamiliar with support and resistance levels it is critical that you at least have a basic understanding of these important areas on a stock chart because they are “test” areas that reveal to you clues about the health of the market. By looking at the chart of the Nasdaq it is clear that investing right now is not a wise decision. In the coming days, the Nasdaq faces a big test at a major support level (see the chart below).

Notice the first blue arrow points to the 200 day moving average, which is a major level of support. In fact, in March the Nasdaq was able to bounce off this line of support and rallied for several days. Well, here we are once again at this level of support. Will we get a bounce again? Today was a good start, but notice the lack of buying conviction evidenced by the lack of volume today on the nice move up. If a drop below the 200 day moving average should take place, the last line of support is around 1900 (blue line) where previous support and resistance has been found over the last sever months. A drop below signals major trouble ahead and probably an end to any sustained bull market from that point on.

I said above another way to gauge the strength of the market is to watch the action of leading stocks. Are they breaking out successfully from a sound base? Lately, that has not been the case. Many stocks have failed in their breakout attempts. Examples of failed breakouts can be seen in CRDN, LCAV and in my post below regarding ACH.