7-Week Rally Ends; Market In A Correction

Friday, August 27, 2010
Stock Market Commentary:

The seven week rally that began on the July 7, 2010 follow-through day (FTD) ended on Tuesday after the latest round of dismal economic data dragged stocks lower. For the week, stocks ended lower but near their highs after a strong advance on Friday. Friday’s volume totals ended higher on the NYSE and the Nasdaq exchange compared to Thursday’s levels which suggested that large institutions were aggressively buying stocks. Advancers trumped decliners by over a 4-to-1 ratio on the NYSE and on the Nasdaq exchange. New 52-week highs outnumbered new 52-week lows on the NYSE but trailed new lows on the Nasdaq exchange. There were 21 high-ranked companies from the CANSLIM.net Leaders List made a new 52-week high and appeared on the CANSLIM.net BreakOuts Page, higher than the 10 issues that appeared on the prior session.

Monday & Tuesday’s Action; Stocks Fall on Dismal Economic Data:

The major averages negatively reversed (opened higher but closed lower) on Monday after encountering resistance near their respective 50-day moving average (DMA) lines. Stocks slid on Tuesday after existing home sales tanked, the 10-year Treasury yield plunged to the lowest level in 17 months, and the yen rose to the highest level versus the dollar since 1995. Overnight, stocks in Asia and Europe fell after the yen jumped to a 15-year high against the dollar and Treasury rates slid to their lowest level since the March 2009 bottom. This put pressure on US futures and set the stage for a weak open. The “big” headline of the day occurred when the National Association of Realtors said existing home sales slid by -27.2% to a 3.83 million annual rate in April. The outsized decline was attributed to a high unemployment rate and slowing economic data. This was also the lowest reading in a decade and lower than the worst estimate on Wall Street.

Wednesday-Friday’s Action; Day Count Reset:

The major averages ended higher on Wednesday which marked Day 1 of a new rally attempt, helping the market snap a four day losing streak. It was somewhat encouraging to see stocks end higher even after new home sales plunged to a record low and durable goods orders fell short of analyst estimates. The Commerce Department said new home sales unexpectedly slid last month to the lowest level on record which suggests the housing market remains very weak. Sales fell -12% from June to an annual pace of 276,000, the lowest level since data began in 1963! The report also showed that the median home price fell to $204,000 which was the lowest reading since late 2003. Meanwhile, durable goods orders, which are goods that are made to last at least three years, rose less than forecast in July. Durable goods orders rose +0.3%, which fell short of the +3% gain analysts had expected. Excluding transportation equipment, demand unexpectedly plunged -3.8% which is the largest monthly decline since January 2009

Before Thursday’s open, the Labor Department said applications for jobless benefits slid by 31,000, more than forecast. The report helped allay concern that American employers are not aggressively cutting jobs as the economy slows. The report showed that jobless claims slid to –473,000 in the week ended August 21, 2010. However, shares came under pressure after a Spanish court voided 5.1 billion euros ($6.48 billion) in value-added tax collected in recent years. The move caught many people off guard and sparked concern that the ruling may reignite the European debt crisis. Stocks ended with solid gains on Friday after the GDP rose +1.6% and Ben Bernanke spoke at the Fed’s annual symposium in Jackson Hole, Wyoming.

Market Action- In A Correction:

The Dow Jones Industrial Average, Nasdaq composite, and the benchmark S&P 500 index all undercut Wednesday’s lows which reset their day count. Which means that Friday marked Day 1 of a new rally attempt and the earliest a possible follow-through day (FTD) could emerge will be Wednesday. However, if at anytime, Friday’s lows (Day 1) are breached then the day count will be reset. The technical action in the major averages and the latest round of economic data bodes poorly for the market and the global recovery. 

Currently, resistance for the the major averages are their 50-day moving average (DMA) lines, then their longer term 200 DMA lines while support remains July’s lows. It is also disconcerting to see weakness in the financial group while action in leading stocks has been questionable as evidenced by the dearth of high-ranked leaders breaking out of sound bases. This emphasizes the importance of remaining cautious until the rally is back in a confirmed uptrend. Put simply, we can expect this sideways/choppy action to continue until the market breaks out above resistance or below support. The first scenario will have bullish ramifications while the second will be clearly bearish. Trade accordingly.

The Market Is In A Correction, Does Your Broker Know?
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