Tuesday, July 13, 2010
Stock Market Commentary:
The major averages rallied for a sixth consecutive day after Alcoa (AA) and CSX (CSX) officially kicked off earnings season and the government said the trade deficit topped $1 trillion. Volume, a critical component of institutional sponsorship, was higher on the Nasdaq and the NYSE. There were 23 high-ranked companies from the CANSLIM.net Leaders List that made a new 52-week high and appeared on the CANSLIM.net BreakOuts Page, higher than the 21 issues that appeared on the prior session. Advancers trumped decliners by over a 5-to-1 ratio on the NYSE and nearly a 5-to-1 ratio on the Nasdaq exchange. Finally, new 52-week highs outnumbered new 52-week lows on the NYSE and the Nasdaq exchange. It remains critically important for leadership (new highs) to expand if the new rally effort will prove to be a sustained market advance. If not, last Wednesday’s strong move may turn out to be the latest in a string of failed rallies confirmed with follow-through days.
Earnings & Economic Data Help Lift Stocks:
It was healthy to see the major averages rally after second quarter earnings season officially began. Only time will tell whether or not this rally will continue as a slew of companies report their results over the next few weeks. Both Alcoa and CSX reported solid results and raised their 2010 forecasts which helped allay concern that the economic recovery was in jeopardy, or that a double-dip recession may occur. Elsewhere, the Treasury Department said the federal deficit topped $1 trillion during the first nine months of this budget year. This was -7.6% lower than last year’s total of $1.09 trillion.
Dow Jones Industrial Average Jumps Above Resistance:
Technically, it was encouraging to see the Dow Jones Industrial Average jump over its 200 DMA line and its well defined downward trendline on Tuesday. However, it backed off to close just below its 200 DMA line but still above its downward trendline (shown above). The other popular indexes all closed below their respective 200 DMA lines and their two month downward trendlines. Since the current rally began on July 1, the major averages have rallied on suspiciously light volume. It is also worrisome to see leadership remain light. Ideally, one would like to see volume expand as the major averages break above resistance and see a new batch of high ranked leaders trigger fresh technical buy signal which will help confirm this this nascent rally.
Market Action- Confirmed Rally:
Looking forward, the window is now open for disciplined investors to begin carefully buying high-ranked stocks again. Remember to remain very selective because most of the major averages are still trading below their downward sloping 50 and 200 DMA lines. 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.