Date:  Mar. 15, 2009

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MARKET HEALTH:

MARKET CONFIRMS NEW RALLY! 

Two of the major indexes have confirmed a new rally with a follow through day.  On Thursday, March 12 both the DOW and the S&P confirmed a new rally attempt. 

The DOW and S&P actually began their first day at a rally attempt last Friday.  On this day, both the DOW and S&P made courageous reversals, climbing from the lows of the day to finish almost exactly at their opening price.  This is considered our first reversal day in these two indexes because although the S&P finished a little down for the day, and the DOW finished a fraction up for the day, both indexes closed above the price of the previous days close.  When prices close above the previous days close, we consider this move our first day of a new rally attempt. 

The key factors to monitor once the first rally day has been complete is for one of the major indexes to close up 1.75% or higher in price on strong volume within the next 4-11 days after the first day's rally.  If this happens we consider it a confirmation of a new rally attempt.  In this case a new rally attempt in a bear market or bear market rally. 

This past Thursday marked day 5 of the new rally attempt and both the S&P and the DOW confirmed with a follow through day.  On Thursday prices were up in both indexes by over 2%, meeting the 1.75% requirement, in addition volume came in strong for the day adding conviction to the upwards move.

The question now becomes what do we do now that we have a new rally confirmation?  We must first be patient.  It is good news that we have a new rally confirmation, but the last 3 rally attempts have not worked out so well.  Remember this new market rally is within a bear market.  Next, there are very few stocks showing great leadership at this point as many of the stocks have been beaten up from the last big drop down.  Finally, we must always be aware of any bad news headlines that come out in regards to the finance industry and its effect it has had on the markets.  Most of the time sending the indexes spiraling down. 

We also have support and resistance lines that need to be monitored.  Both the S&P and the DOW broke through multi year support lines.  The good news is that the S&P has battled back from these multi year lows and regained a very important support level at 740.  Hopefully this 740 level will once again act as a floor of support for prices to bounce off of.  The DOW has also closed back above a major support line at 7197.  Many times when a support line becomes broken it then acts as a resistance line.  In both the case of the S&P and the DOW this did not happen, creating what technical analysis call a false break out. 

Some signs of health for the major indexes will be for the S&P and the DOW to hold these support levels of 740 and 7197 respectively.  Next we need to see how the market will react to any bad news that may arise in the financial industry.  Finally, we need to see a healthy stash of leading stocks begin to build solid bases and new industries to emerge and lead us into this new market rally.

Once again be patient and let the market lead the way.  If the major indexes start to show healthy signs of life we can look to start accumulating small positions of F.I.T. Stocks to test the market waters.  If we see that the market and leading F.I.T. Stocks are holding their ground we can start to add to our positions.  Be very disciplined in your approach and always have your exit or sell strategy planned ahead of time so that no emotion becomes involved in your investment decisions.  A strong investment plan, a patient attitude, and a disciplined approach will leave you well on your way to building healthy investment habits.

Index Charts

S&P 500 : 6 Month Chart with Daily Price Bars.

 

 

Let us take a look at the follow through confirmation that occurred on Thursday.  The lower white arrow indicates the markets first day of a rally attempt.  Notice on this day that although the S&P closed down for the day, it did close above the previous days close marking this the first day of a new rally attempt.  On the third day of this rally attempt, we have a big green bar; however, the follow through confirmation must come between days 4-11.  The second white arrow represents the follow through day for the S&P.  If you count from the first arrow it marks day 5 of the follow through attempt.  On this day prices shot up over 2.3% from the previous day's prices.  This is well above the 1.75% rule.  In addition volume increased from the previous day's volume suggesting that there was strong conviction behind the upwards price movement.  Finally, if you notice the white horizontal bar, this was the big support level that had held up for over 12 years.  Two weeks ago we had crashed through this major support level at 740.  Next we needed to see if this old support level would now hold as a new resistance level.  Thankfully for us, prices spent a week below the 740 level and bounced back above with some conviction. 

Now although we have confirmed a new rally, it does not mean to go full steam back into buying stocks.  It merely means to keep a keen eye on the market and leading stocks to see how they react.  The 740 level is still a very important level to watch for support once again.  Also, keep a close eye on the major headlines, in our previous three market rallies any bad news has sent the markets back into a tail spin.

So don't be afraid to stay on the sidelines a bit longer.  It appears as though some F.I.T. Stocks that we have been monitoring are building some strong technical chart bases.  If the markets hold up, these leaders will rise to the top.  It can sometimes take up to 13 weeks for a new rally to get the engines revving, so be patient and stay disciplined.  The new rally confirmation is just to wake us up and get us ready for the big game.

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NASDAQ: 6 Month chart, daily price bars.

  

The NASDAQ had held up stronger than the other 2 indexes mainly because it is tech rich with stocks and not financial rich.  The NASDAQ was able to hold onto its support level 1297 and did not actually have its first new rally attempt until last Tuesday.  So Monday, tomorrow, will begin day 5 of its journey to confirm a new rally.  However, please remember that only one of the major indexes needs to confirm a new rally for the attempt to be valid.  In our case it was both the S&P and the DOW.  Still we like to see all three of the major indexes move in rhythm in a healthy market.  What is nice to see in the above NASDAQ chart is the volume that came into this market all last week.  This volume shows evidence of big institutional buyers stepping back into the market.  Continue to watch the price and volume movements everyday in the major indexes as they are the best indicators of health in the market.

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Top 10 Industries:

1. Metal Ores-Gold/Silver
2. Food Flour and Grain
3. Medical Genetics
4. Commercial Services Schools
5. Retail Wholesale Autoparts
6. Computer Software Medical
7. Retail Discount Variety
8. Oil/Gas Trans/pipeline
9. Finacepbl Inv Fdbnd
10. Medical Biomed/Bth

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