Friday, February 08, 2008

Bulls step in....

The McClellan Oscillators held their bullish form as bulls stepped in, with volume, to stall 3-days of declines. At least on a closing basis (ignoring the intraday range) both the Nasdaq and NYSE are on course for a double bottom; confirmation will come on a closing break of 2,400 for the Nasdaq and 9,250 for the NYSE.

Dow Theorists will take comfort in the strength of the Dow Transports. Note how bulls maintained control as other markets reversed from their late January bounce [+DI > -DI; ADX > 20]. Stochastics are overbought which suggests a pullback to test the 50-day MA is needed to shake out the last of the weak hands. Volume in this index has certainly sided with the bulls.

Volatility watchers are unlikely to see another spike into the high 30's on this decline, and those waiting for a second spike before buying are likely to be disappointed. A push back to the 200-day MA would look to be the most likely scenario.

Nasdaq theorists will look for the semiconductors to build on Thursday's doji. There is a need to show bears last Friday's big gains were something more than just short covering. Up to that point the index was well on course to building a meaningful rally (having weathered January declines relatively well), but this week has knocked that idea back a bit. The difference between the 50-day and 200-day MAs has stretched out to 16%. Not since 2004 have we seen this much differential between the two averages.

But even back in 2004, semiconductor prices moved much closer to the averages than they do now. The difference between the 50-day and 200-day MAs is likely to widen before improving as prices work back towards the averages. Bearish trend strength is considerably stronger in 2008 with ADX peaking in the mid-50s compared to low-40s in 2004. This suggests an oversell in the semiconductors. But I won't deny rose-tinted glasses are on because of my SMH position. Buyer beware