Friday, November 04, 2011

Daily Market Commentary: 'Bull Traps' Pressured

Markets enjoyed a second day of gains to take them into the intraday range of last Thursday's thrust higher. Volume climbed to register a day of accumulation which helped build on Wednesday's gain. The question now is whether bulls have sufficient demand for stocks to push a new high for the impressive October rally?

The S&P edged above 1,260 resistance to turn it back into support, but still has to contend with 200-day MA resistance at 1,273. Technicals returned 'net bullish' after a brief bearish switch in ADX. It might be a tall ask for a third straight gain in a row, but to finish above 1,260 would be a handy victory for the week.

The Nasdaq was able to finish Thursday above its 200-day MA, so it only has to consider the most recent swing high at 2,753 as resistance.  Beyond that it has room to rally before it can mount a challenge on July's 'bull traps' starting at 2,836. The Nasdaq and Nasdaq 100 have enjoyed strong runs and are well positioned to lead markets higher.

The Nasdaq 100 has been able to hold the 200-day MA as support for a large part of October and could start challenging the July 'bull trap' (which is also a multi-year high) as early as today. This is a very strong index.

Fueling the tech resurgence is the semiconductor index. Yes, it has recovered from deeply oversold territory, but yesterday's 3% gain has it angling for another attack on the October 'bull trap'.

Smooth sailing in the Nasdaq is confirmed by the steady climb in the Nasdaq Summation Index. Reaction tops in the Nasdaq usually occur when the Summation Index is between 0 and 500; but it's best to wait for the NASI to cross below its 5-day EMA before confirming a top. On Thursday it finished at 122 - leaving it close to a swing high for the October rally - perhaps already in place as of last week at 2,753. This would leave the Nasdaq looking at a substantial decline to wash out the 'weak hands' before a stronger push higher can be mounted. So while the Nasdaq is the index doing the hard work, potential buyers may want to wait for a Summation Index drop to around -650 before taking the plunge. 

Finally, the Russell 2000 made one of the strongest inroads to last Thursday's break. However, the real challenge isn't the October swing high at 769, but the converged resistance at 775 and the 200-day MA currently at 777. Technicals have weakened (albeit to a small degree) but this is an index undergoing a little selling pressure. It's recent outperformance relative to the Nasdaq suggest the selling pressure is because it has got ahead of itself relative to its peers.

Friday should be viewed as a day to consolidate gains. It would appear, based on breadth indicators, that a top is already in place for the October rally. But given the extent of the October rally, the next pullback will offer a good buying opportunity going into a seasonal bullish period.


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Dr. Declan Fallon is the Senior Market Technician and Community Director for I offer a range of stock trading strategies for global markets which can be Previewed for Free with delayed trade signals. You can also view the top-10 best trading strategies for the US, UK, Europe and Rest-of-the-World in the Trading Strategy Marketplace Leaderboard. The Leaderboard also supports advanced search capability so you can tailor your strategies to suit your individual requirements.

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