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Can We Trust This Rally?

Bounce did not provide volume needed to complete a reversal


Stocks opened higher yesterday, and held the gains throughout the session. This halted the recent string of losses at five as a result of a positive start to first-quarter earnings reports. The Federal Reserve’s Beige Book on economic activity said that the U.S. economy continued to expand through March, though at a modest pace.

At the close, the Dow Jones Industrial Average rose 89 points to 12,805, the S&P 500 gained 10 points at 1,369, and the Nasdaq gained 25 points at 3,016. The Big Board traded 770 million shares and the Nasdaq traded 434 million. Advancers led decliners by about 4-to-1 on both exchanges.

Dow Chart
Click to EnlargeTrade of the Day Chart Key

Yesterday’s rally of 89 Dow points was expected but fell short of any real conviction since volume was only 770 million shares. Breadth at 4-to-1 was a positive, as is the stochastic, which appears to be hooking up. Another plus day could put pressure on the 50-day moving average at just under 13,000. 

But despite yesterday’s bounce, we’re not out of the woods since a breakdown through the support zone at 12,754 to 12,794 would also break the intermediate bullish support line drawn from the October low.

Nasdaq Chart
Click to Enlarge

The leader of the pack has, of course, been the Nasdaq. The overall chart shows the massive breakout in early January, followed by a sharp rally with one minor correction in early March, and then a rally to a new high and a correction on Tuesday to the intermediate support line and the 50-day moving average.

There is just no way to predict whether yesterday’s rally will hold since volume contracted to just 434 million shares. A 50% retracement of the January-to-March high could take the Nasdaq to the March low of 2,900, while on the positive side a follow-through rally might run to the tops at 3,130.

Conclusion: Yesterday’s bounce, though expected, did not provide the volume needed to complete a reversal. Thus, even though the bulls remain in charge, and my short-term target of S&P 1,400 is still achievable, I’d be more encouraged by some high-volume enthusiasm. 

Volume on both up and down days has been declining for over six months, and perhaps that’s because few investors have the courage to take a strong bullish position unless they see a pullback in prices.

One portfolio manager was quite frank when he said that the March rally caught Wall Street by surprise and that his colleagues were counting on a decline so that they could invest their large cash position — and that is why we remain bullish. Any pullback must be regarded as a buying opportunity.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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