The pause that tells us where this rally is headed
Now we test this rally.
The upward move in the market stalled yesterday, July 28, at technical resistance for the NASDAQ Composite index, which had led the advance.
Nothing unexpected there. The NASDAQ Composite is up 10% in just 18 days. That’s enough to convince some investors to take profits. A technical analyst would call the market “overbought.”
It’s what happens from here that counts, that determines whether we’ve had a great bounce, a very quick but decent summer rally, or are on the verge of something more.
What makes deciding how this market will break now so hard is that stocks have been so volatile recently. Arthur Hill of Stockcharts.com counts six moves in the NASDAQ Composite and NYSE Index of 8% or more since the April high. (That’s three moves of 8% or more up and three down.) That’s an average of one 8% move every 2.66 weeks.
Semiconductor stocks, which have helped lead the most recent upward move, show the same volatility (and then some) with six 10% moves since late April.
On that pattern investors can expect that any pullback here would be quick and substantial. (Like 8% or more, perhaps.)
Two weeks of summer rally or three days of bounce?
Maybe we’ll get a summer rally after all—but it doesn’t look like a very strong or long one. Still the hope for any rally at all is an improvement over the pessimism that has taken increasingly strong hold of the market since the April high..
Watch the NASDAQ Composite Index this week to see if stocks can build on last week’s strength.
Did the summer rally begin today–and will it be more than just the Return of Son of Bounce II?
The Standard & Poor’s 500 finally broke through the 1108 barrier that had stymied stocks for the last few days. The June intra-day high was at 1105 and the index’s 200-day moving average was at 1108 so today’s close at 1115 is definitely a positive sign.
In another year I’d say today’s advance marks the beginning of the summer rally, that traditionally favorable period for stocks that, in many years, begins near the end of June and stretches into July.
What worries me though is that this year the rally faces massive resistance just a few dozen points ahead.
Stocks won’t give in but they can’t break out to the upside either
Stocks refuse to give in but they have been unable to move out of the danger zone either. The U.S. stock market could still swing either way.
Take a look at the New York Stock Exchange Composite Index, for example. At the beginning of last week the index fell through its February low, threatening to break through that level of support and turn a correction into something worse. But by the end of the week the index had moved back above the February low and looked like it was trying to make a bottom.
You can see the same pattern—with perhaps a little more of a positive tilt—in the NASDAQ Composite Index. The NASDSAQ has held above its February closing low of 2151 but just barely and the index has whipped around between 2150 and 2300. Each sharp drop is followed by a sharp rally.
In the case of both indexes and the stock market as a whole I’d say that this back and forth in a narrow range is a good thing—it’s building a base for a future advance—but only if the market can break out of the top of that range.
Is it real or is it just a bounce? Only your crystal ball knows for sure
So where does the stock market go from here?
U.S. stocks are bouncing off the February 2010 low near 1040 on the Standard & Poor’s 500 Stock Index.
Good news for anyone with money in the stock market. But what does it mean?
