Wednesday, February 05, 2014

Daily Market Commentary: Bullish Recovery

It was looking a little worrisome for the Russell 2000 after sellers pushed the index below Monday's lows in early action.  The index gave back some of the recovered gains by the close, but not enough to reverse what amounted to a bullish hammer. Intermediate and short term stochastics are oversold, but there is no reason to suggest these will contribute to an immediate bounce. The 'bullish hammer' will offer a long side opportunity on a close above the high, risk based on a loss of its lows.


The S&P finished with a harami cross, a bullish candlestick combo which is strengthened by oversold stochastics. There has been a sharp advance in relative strength in favour of the S&P over more speculative Small Cap stocks. This should also help it going forward.


The Nasdaq was the one index to start the day at a support level. Today's action violated the support intraday, but the index closed the day above this level. Today's low wasn't too far away from former channel support, thereby offering today's low as a place to define stops.


The Semiconductor index has also found itself in support after coming back from a 'bull trap'. Tomorrow is likely to be a good opportunity for a bounce, although it's not technically oversold.


The early afternoon recovery gives reason to suggest a tradable bounce is in the making.  The indices best placed to bounce are the Semiconductor Index and the Nasdaq, although the Russell 2000 may be the best day trade tomorrow.

I'm reading lots about a 10% correction is due, and its possible buyers won't appear until a 10% correction has played out. The worry bulls will have is if a 10% correction turns into a 15% correction, will buyers still want to participate? The market is in need of a correction, and I suspect traders won't be too alarmed with another few days of declines. There is almost a sense of palpable relief the rally is selling off.  However, these are dangerous times because it suggests there is a large degree of complacency despite the losses.  Where's the fear?

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Dr. Declan Fallon is the Senior Market Technician and Community Director for Zignals.com.
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