Sunday, July 09, 2006 Weekend commentary

Newsletter, Members Click HereA came across another article in favor of the bearish view on Tim Knight's blog (, adding to the opinion of Trader Mike (form whom I sourced Tim's article), Bill Cara and Martin Pring. Tim's charts look more compelling and if his thesis is true then there should be no break of late May/early June highs and markets should head south fast; for the NASDAQ this high is around 2,233, for the Dow it's 11,285, for the NASDAQ 100 it's 1,627, for the Russell 2000 it's 740 and for the S&P it's 1,290 - give a take a point or two. Friday's action played into this weakness as selling volume increased on a continuation of Wednesday's selling.

A number of indices have reached an important juncture. The NASDAQ closed right on combined support of the 20-day MA and former resistance from early January. A further 5 point loss below 2,125 would likely bring a test of 2,065. Look to the semiconductor index for leads as it fast approaches its 52-week low of 413 from October 2005. This index closed at new lows for 2006 and looks certain to take the NASDAQ 100 down to new 2006 lows too - only the NASDAQ has some chance of escaping this fate. The Dow again switched back, this time in favor of the bears. If what Tim Knight says is true then Thursday's high should be the peak for the rally and it should be down all the way from here. The index did close on 11,100 support - the last reaction high from mid-June. The S&P has the 200-day MA at 1,263 to look too, then the apex of the June pennant at 1,245, before looking at the prior reaction low of 1,219. The Russell 2000 also has the 200-day MA at 705 and potentially a bullish reversal head-and-shoulder formation of its own if it can bounce from 698 (to get the latter support level draw a line connecting the two reaction highs from June and July: 742 and 731 - then draw a parallel line anchored from May lows of 710).

For bulls, similar bullish head-and-shoulder patterns could play out not only in the Russell 2000, but in the NASDAQ 100 (watch for the bottom of the right-hand-shoulder (RHS) at 1,516), Dow (RHS at 11,029), NASDAQ (RHS at 2,095) and S&P (RHS at 1,240). Also working in the bulls favor are new reaction highs in the MACD trigger line and a decrease in -DI (bearish) strength on the ADX for the NASDAQ, Dow, NASDAQ 100, Russell 2000 and S&P - strengthening the case for new reaction highs in the actual indices (i.e. a higher close than late May/early June highs detailed in the first paragraph).

Also working in bulls favor are tech market internals [$NASI, $NAA50 and $BPCOMPQ] which are climbing from oversold conditions and have not reached a net neutral condition. The $NAA50 remains the most oversold of the tech market internals.

Individual stocks have struggled in this environment and it has been the longest 'dry' period for breakout stocks. Let stocks come to you - don't chase the ones which don't fit your risk thresholds. I still think there is more juice to this rally than the "rollover and die" some are predicting - but that doesn't mean I can't be wrong. Unfortunately, the real state of the cyclical bull/secular bear market won't be known until market internals [$NASI, $NAA50 and $BPCOMPQ] are back at their highs (i.e. overbought) and market indices are corresponding at new highs (= continuation of cyclical bull) or at lower highs (= return of secular bear). Time will tell.

Newsletter stock update:

OPNT was a breakout from June 16th. The stock eased into its stop for an 11% loss. AMD failed in its bid to carry the semiconductors out of its slump. The June 28th Subscriber play hit its stop for a 4% loss. DIO was a Subscriber pick from June 16th which never looked like it was going to go far after it failed to build on its retest of April lows. The stock closed for a 10% loss.