So here we are. The next big resistance level stares us in the face: the gap at 7500 on the Dow. We tried to take it out on Wednesday after Bernanke said he's throwing another trillion at the mortgage mess in order to open up credit throughout the lands. We cleared, but the move up has been so strong off the bottom it was natural to fail there the first time.
However, the market is truly climbing that wall of worry as it gets some information or hints that the Fed will do whatever is needed to keep the system liquid and thus opening the door to economic expansion. Things aren't good fundamentally, but the market is sensing the worst of things are behind us, for now! We had a nasty open Wednesday morning from overbought conditions with the selling accelerating as the day wore on until about the half way mark when the market started to slowly but surely come back up. As the news from the Fed hit, the market took off and cleared the 7500 level only to close just below it. As the market was selling off, the advance decline line was holding up very well. This gave a hint that the right news from the Fed could get the market moving and that's exactly how it turned out. The rally continues. We can stay overbought, but pullbacks will always be part of the game. Our strategy is to be in the game – and we have with recent successful long swing trades in names like Monsanto (MON), Research in Motion (RIMM), Morgan Stanley (MS) and Apple (AAPL) -- but never so much as to be whipsawed around.
The internals once again tell the tale. They were holding well all day Wednesday with the combined totals at about deadeven when the markets were nicely in the red. At day's end they looked a lot better than that. Volume was gigantic on the Nasdaq at 2.8 billion. No one can say we didn't get the volume in. To make matters even better than that, the advance-decline line was 4 to 1 positive on the NYSE and 2 1/2 to 1 positive on the Nasdaq. Again, confirmation for sure.
You know by now that without confirmation you can't feel good about anything positive or for that matter, negative when you have big days. Wednesday said that whatever took place was for real. There was accumulation from the big money for sure with the majority of stocks participating across the board.
Another positive for the markets was that other indexes joined the party in breakout land over their trend lines of resistance. The NDX, the leader, was the first to make the move (on Tuesday) and Wednesday saw the NYSE Composite Index, S&P 500 and Wilshire all join in. The more that make the move, the stronger the market becomes. Fewer and fewer places for the bears to attack as support gets bought up by the bulls. Also, from a technical perspective, it is best that the NDX took the lead as higher beta stocks, such as those found in that index, need to show that they're being accumulated by the big money and not left out because of the fear of that high beta. When high beta is being bought, you know the market wants to move upward.
As we look at future resistance levels, the S&P 500 has gap right here at 800/805 as does the Dow at 7500 and the Nasdaq at 1495. If those levels get taken out we can see 820 on the SPX where there's gap and then 865 or simple price resistance. The Nasdaq can see 1540 gap and then 1600. The Dow can move up to 7730 or the 50 day simple moving average. Support for the SPX remains at 775 price and then 741.
The charts show a lot of what I've spoken about here. You'll see some of the trend line breakouts. There has been very little belief in this rally. That's the most important ingredient in any sustainable bear market rally. Disbelief is the key and we have it. The action by the Fed can only help things. We are still overbought near term, and thus selling of a decent magnitude can occur at any moment. I do think, however, that this rally in total has a way to go before it ends several weeks from now. You'll have the usual window dressing nonsense at the end of the month and the beginning of the next month. Let's do what we always do and that's to traverse slowly and cautiously. One day at a time.
