Recovery Bounce or the Beginning of a New Leg Higher?

by Sam Collins | February 11, 2014 2:47 am

Friday’s rally appeared to fade as stocks opened lower Monday and continued down until mid-morning when buyers emerged and turned the tide of selling. By the close, the major indices had not only made up the early losses but closed modestly higher.

Even though stocks made up the early losses, investors were cautious prior to today’s Humphrey Hawkins testimony on monetary policy, which will be Janet Yellen’s first appearance before Congress as the new Federal Reserve chair.

In addition to Yellen’s testimony, jobless claims and retail sales on Thursday, and industrial production and consumer sentiment on Friday will be the most important reports of the week.

At Monday’s close, the Dow Jones Industrial Average gained 8 points at 15,802, the S&P 500 rose 3 points to 1,800, and the Nasdaq was up 22 points at 4,148. The NYSE’s primary market traded 653 million shares with total volume of 3.3 billion shares, and the Nasdaq crossed 1.8 billion shares. Both volume and block trades were lower than on Friday.

Nasdaq Chart
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Chart Key[1]

The Nasdaq broke its bull channel last week but has rallied and reclaimed the important 50-day moving average. MACD is very close to an outright buy signal.

RUT Chart
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Despite the bullish action of the Nasdaq, which represents the mid-cap stocks, the small-cap Russell 2000 has not been able to close above any significant technical barriers. The recent rally must pierce the lower support line of the bull channel, which intersects both the 20-day and 50-day moving averages. And MACD, although showing strength, must issue a buy signal before a proposed turn higher can be taken seriously.

Conclusion: In a mere three days, the stock market has survived a shakeout as the Dow reversed and jumped above its 200-day moving average, the S&P 500 closed on its inflection point at 1,800, and the Nasdaq popped over its 20-day and 50-day moving averages at 4,106, as well as sustaining the bull channel that has been intact since November 2012. 

Only the small caps, as represented by the Russell 2000, have failed to issue a single bullish technical signal. Perhaps that is because the small-cap stocks were more overbought than the mid caps. But currently, this calf appears to be trailing the other bulls.

As noted Monday[2], the bulls appear to have institutional support at the S&P’s support zone of 1,775 to 1,730. Thus, this recovery appears very much like the June 2013 mini-correction and rapid recovery, which culminated in a resumption of the S&P 500’s bull channel. 

But the bears are still with us, and if the current rally fails to hold above the confluence of the 20-day and 50-day moving averages of the S&P 500 at 1,809, then the whole formation could collapse (see Monday’s chart of the S&P 500[3]).

It may only be a minor disturbance that the small-cap stocks have not kept pace with the Nasdaq. But it is often the inability of a major group of stocks to keep pace that eventually has a negative impact on the entire market. Keep an eye on the Russell 2000’s confluence of moving averages and the bullish support line at 1,140. They could be the key to whether the current advance is merely a recovery bounce or the beginning of a new thrust higher.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[4].

For a list of this week’s economic reports due out, click here[5].

  1. [Image]:
  2. As noted Monday:
  3. see Monday’s chart of the S&P 500:
  4. click here:
  5. click here:

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