Monday, July 31, 2006 Weekend commentary

Newsletter, Members Click HereFriday's focus was all on the large caps with a channel breakout in the S&P and a nudge over resistance in the Dow. Sympathy gains in the remaining markets kept the bulls interested without the powerful buying (i.e. heavier volume) associated with a follow through day. Moving average resistance remains limiting with the 20-day MAs in the NASDAQ, NASDAQ 100 and converged 20-day and 50-day MAs resistance in the Russell 2000. The semiconductor index is similarly curtailed by the 20-day MA and channel resistance. These moving averages have halted every attempt at rallies since the breakdowns in May. Challenges on resistance will be backed by MACD bullish crosses in the NASDAQ, NASDAQ 100, semiconductor index, Dow, S&P and Russell 2000. For all indices the last crossover occurred in early June and kept markets in a sideways (to modest bullish) pattern for 3-weeks. Should this repeat it will help keep the indices primed for the all important follow through day.

The one indicator which has failed to confirm any attempt by an index to rally has been on-balance-volume. This also includes Friday's breakouts in the Dow and S&P. Distribution trends remain firmly entrenched across the board. Adding to the mix is the current test of support in volatility. Should markets give up Friday's gains it could see a return of the big one-day losses experienced mid-May, early-June and early July as volatility makes another attempt at the measured move target of 32. However, stochastics [39,1] of NASDAQ, NASDAQ 100, semiconductor index and Russell 2000 have climbed out of oversold levels and have room for further gains (favoring bulls)

Market internals [$NASI, $NAA50 and $BPCOMPQ] advanced sufficiently for all indicators to complete bullish crosses of their 5-day EMAs. The $NAA50 also pushed new near term highs in intermediate term [39,1] stochastics, favoring a break of 870 (it closed Friday at 762). This would be bullish for the tech indices [NASDAQ and NASDAQ 100] and would help support the rally in large cap stocks [Dow and S&P].

The immediate focus on Monday should be the moving averages (20-day and 50-day MA). If these averages switches from resistance to support it will be then be important to see new accumulation trends develop in on-balance-volume. From there demand should drive new demand. A more sustainable rally remains favored as sell offs quickly push the market internals [$NASI, $NAA50 and $BPCOMPQ] to oversold levels, levels unsuited for prolonged declines (but ideal environments for short, sharp 'crashes' and recoveries - a perfect time to buy) and more in common with bottoms.