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Morning Cup of Jo: Bulls Take the Upper Hand


...the momentum is partially due to the latest round of economic news along with short covering from those who have put on the Southern belt.


"It's easier to see both sides of a question than the answer."
(Arnold Glasow)

Key Points:

  • The market completed the cup and handle base pattern I highlighted last time, broke-out and successfully re-tested three trading days later.
  • The question of soft landing or full blown recession is still at hand. However it would appear that for now the bulls have taken back control.
  • Still, there are reasons for caution: Failure of the DJIA, NDX or RUS to yet confirm; lackluster volume; performance of the financials.
  • The NDX rests at horizontal resistance from the previous attempts to go higher and the re-test of the upward sloping trend it broke on Feb. 27.
  • Given the caution I wouldn't be surprised to see some consolidation/choppy markets. If the markets go top-side the shorts will again be forced to cover adding fuel to the upside.

Market Commentary

New areas require new trends.

The last Jo entitled "The Time is Now!," highlighted a cup and handle base pattern in the SPX with a 1440 neckline. Since then the market completed the pattern, broke-out and successfully re-tested three trading days later. What's followed has left many in the Northeast envious following the recent weather - namely blue skies above. This momentum is partially due to the latest round of economic news along with short covering from those who have put on the Southern belt.

The market continues to grapple with the question of whether we'll manage a soft landing or sink into a full blown recession, but it would appear for now the bulls have taken back the upper hand. Nonetheless, it is my opinion that even though the SPX has moved to new highs there still remains a hint of danger. First of all the other three sisters (DJIA, NDX or RUS Indexes) have yet to confirm the move. Second, the volume has been somewhat lackluster – considering the mass exodus we saw back on February 27th. Third, the financials aren't exactly providing the type of solid backdrop we would expect from a new bull cycle. Considering the group comprises 21% of the S&P 500 Index – it's not a promising sign for the broader market if they fail to pick up some steam soon.

The best two ways to visualize the financials are through the Philadelphia KWB Bank Index (BKX) and the AMEX Securities Broker/Dealer Index (XBD).

As you can see both have held their respective Intermediate-term (IT) horizontal support lines since the 2005 correction breakout. However, it is very evident by looking at the relative strength (RS) line (shown by the black line across the bottom) these names have been, and continue to be, laggards in the market since April of 2006. Also noticeable is the resistance they are going to run into before entering new highs. More than likely this will take some time and consolidation around the current levels.

On a more positive note we can turn our attention to the transports, thanks to Warren Buffett's latest disclosure of his ownership in the rails. Even though the transports still have a touch of resistance to contend with, as is evident below, they are in a much better technical condition than the financials.

While looking around for even better technical strength I identified the Materials sector, which admittedly only makes up about 4% of the SPX, but is doing phenomenally. This sector never even broke the upward sloping trend or its 50 Day Moving Average (DMA) and continues to lead the way higher.

If we break that sector down even further we can see that the Amex Gold Bugs Index (HUI) and the Philadelphia Gold/Silver Index (XAU) are both building a massive base and neckline that doesn't require eyeglasses to visualize. Given the notable deterioration of the U.S. dollar, these two indices could be in store for a move forward.

The next question about the broader markets, which seems to be on the forefront of most traders' minds, is – "What about the technology sector?" The NDX continues to reflect the sentiments from the last Jo; specifically that "The time is now." The NDX stands right at an inflection point corresponding to a horizontal resistance from the previous attempts to go higher and the re-test of the upward sloping trend it broke on Feb. 27. A break above would be the first indication the market is actually ready for a confirmed move to the upside.

Still, the most important factor will be earnings and corporate outlooks regarding the second half of the year. Any specter of concern about corporate spending could toss a wrench into the engine of any meaningful continuation.

With lackluster volume following the recent bottom, it wouldn't be surprising to see further consolidation and choppy markets in the coming weeks. That being said, if the NDX does get above the recent conjoining resistance - be prepared. The shorts would really have to move fast if they want to stop their bleeding.

Stay tuned & good luck!

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No positions in stocks mentioned.

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