Tuesday, April 22, 2014

US Market Outlook - Indices Surge in Heavier Volume NYSE A/D Line Confirms Rally Attempt

After last Tuesday's (4/15) high volume reversal, after being down almost ten percent for the correction, the Nasdaq had rallied for three straight days, but on anemic, and some of the lowest volume levels of the year. Throwing suspicion on its attempted rally. The DOW and SP 500 on the other hand are just under one percent from fifty two week and all time highs, with volume running right around, or above average, confirming the strength of their rally attempts. The bifurcation in volume and performance is no surprise, the Nasdaq has been lagging significantly for the better part of the past two month as the DOW and SP 500 have continued their rallies. 

Today, all three indices had strong up moves in heavier volume. A slight late day bout of selling kept the Nasdaq from following through and confirming the rally. The NYSE advance/decline is confirming the rally as it had moved into new high ground several days ago while the market was trying to find a bottom.

Value stocks have been the clear leaders over the past two months, while most leading growth stocks are near the bottoms of their corrections attempting to round up or bounce off moving averages. There are a handful of setups among leading growth stocks ready to move higher. The stocks that have started to bounce, did so in heavier, above average volume. Zillow (Z) followed through on its cup and handle breakout from yesterday, Synaptics (SYNA) broke out from a pullback to the fifty day moving average, Baidu (BIDU) continued to follow through on its bounce off the two hundred day moving average and up the right side of a cup shaped based ahead of earnings Thursday, Netflix (NFLX) and Centene Corp. (CNC) gapped up on well received earning's reports, and Rambus (RMBS) reversed higher after initially selling off on it earning's report.

Short setups have been a big disappointment. Even as the Nasdaq corrected just short of ten percent, very few were able to breakdown and follow through. Most just squeezed back into their consolidations after attempting to breakdown, but few have fallen apart and rallied much higher. If they continue to hold consolidations despite a market rally, it could be the first sign of weakness with the current rally.

It is a rare occurrence for the DOW and SP 500 to lead the market, but not unprecedented. Generally when these two indexes lead, rallies last anywhere from a few days/weeks, up to around four months (DOW and SP 500 have been rallying since February 5th, almost 3 months), but can be profitable in a select group of stocks, and it typically occurs as the market approaches an intermediate or major top. Generally growth stocks will lag, except for the strong few that failed to correct the most along with the previous pullback. The rest will usually attempt to bounce off major moving averages, only to fail as they approach fifty two week highs or shorter term moving average above.

Interestingly enough, this period reminds me of February to May of 2006 when the DOW followed through on February 14th and didn't look back until the entire market finally rolled over into the summer correction on May 10, 2006. This was the last rally wave of a major leg of that bull market that started in August of 2004. The Nasdaq at that time struggled to make new highs, and by the time it managed to get to fifty two week highs, the rest of the market was within 9 days of topping. The current DOW and SP followed through around February 11th and barely pulled back while the Nasdaq corrected almost ten percent. Based on this, Sell in May and go away might just be a good strategy unless the Nasdaq and leading growth stocks mange to setup and take over leading the market, but that would most likely require another major shake out period as the Nasdaq approached the fifty day moving average or a major correction as leading growth stocks approach fifty two week highs.

Traders should have been entering a few long trades over the last two days with tight stops. The expectations are for stocks to break out or bounce higher and keep moving higher. If too many start to turn back, the rally attempt could be in trouble very quickly and traders would be prudent to protect their portfolios from even small losses. Short trades have likely stopped most traders out, but short setups have to be monitored closely as most are still holding within their overall consolidations and could re tighten to roll over if the rally attempt runs into trouble over the next few days or weeks. The last 3 months have been tough for traders to make a lot of progress with every pull back threatening to turn into a major correction and every rally attempt failing to follow through.


Air Lease Corporation (AL) has been pulling back to its fifty day moving average while the Nasdaq corrected just under ten percent. The stock has formed a flat base and is in a position to bounce off the fifty day moving average and attempt a breakout above the $38 pivot point. Relative strength rose into new highs for most of the correction. Aggressive traders could begin taking a position as the stock follows through off the fifty day moving average.

Magnum Hunter Resources (MHR) finds itself in one of the hottest sectors in the market, oil and gas. The stock ran up over 100% after breaking out above the two hundred day moving average last August. Earnings estimates are negative, but the company has beaten them handily the past two quarters. Sales growth is expected to accelerate over the next three quarters to 77% and grow 35% over the next three years. The stock is forming a cup and handle base on top of a previous double bottom. A breakout above the handle around $9.10, could launch the stock to all time highs, clearing all remaining resistance.

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