Tuesday, May 27, 2014

Market Rally Resumes Poor Price Volume Action Dominates

After shuffling sideways over the last few weeks, the market finally managed to confirm the rally that started on April 15th. The Nasdaq rose 1.2% and the SP 500 and NYSE closed at new fifty two week and all time highs, in higher volume. Overall, volume remained well below average throwing suspicion on the strength of the rally.

Leading growth stocks lagged the market except for handful of the more speculative names making new fifty two week highs, but on below average volume. Higher quality growth stocks continued to consolidate at or around their fifty day moving averages with a few starting to climb up the right side of their consolidations, but also in below average volume. Jazz Pharmaceuticals (JAZZ), Priceline (PCLN), Eagle Materials (EXP), and Lannett (LCI), joined Netflix moving up the right side of their consolidation in above average volume. Suspiciously, Netflix (NFLX) failed to participate in today's strong action and Applied Materials  (AMAT) broke out of a cup and handle base, but failed to clear fifty two week highs.

The NYSE advance decline line is about the only indicator that is confirming the rally. It has continuously made new highs and led, even as the Nasdaq corrected near ten percent. Otherwise, the VIX is at rally lows and levels not seen since 2007, the fifty two week high low ratio has been in a downtrend since the end of the third quarter of 2013, and the bull bear ration is near the widest spread of the entire bull market. Indicating continued complacency despite the extensive run without a major correction for all the indices over the last year and a half.

It's not unusual for a rally to start in low volume and with a lack of quality growth stocks breaking out, but rare. In many cases it can take a few weeks and shakeouts for other quality growth stocks to setup and break out. It is important that volume begins to pick up and distribution is avoided as more quality growth stocks setup and start to breakout in above average volume. Otherwise, the rally could be short lived and turn out to be nothing more then a bull trap. In the meantime, it is important for investors and traders to stay patient and wait for their stocks and setups to start breaking out, or risk getting whipsawed around.
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