Strength of the Junior Indices is Encouraging, But…

Stocks opened higher on Monday, but faded in the afternoon after Ukraine refused Russia permission to participate in a Red Cross-led humanitarian mission. The early gains were also attributed to a U.S.-led attack on ISIS troops in Iraq.

The health care sector, with support from the biotech group, ended on the plus side. The iShares Nasdaq Biotechnology (IBB) gained 0.7, which also contributed to a 0.7% gain for the Nasdaq.

No major economic reports were due, and traders exhibited caution with high-risk assets due to their uncertainty over the Federal Reserve’s next move.

The sole high-visibility news came from Kinder Morgan (KMI). It announced it would consolidate its four publicly traded units into one corporation, and the parent company’s stock rose 9%.

Gold fell slightly to $1,308.50, and the yield on the 10-year Treasury note closed at 2.42%, unchanged from Friday.

The Dow Jones Industrial Average rose 16 points to 16,570, the S&P 500 gained 5 points at 1,937, the Nasdaq was up 30 points to 4,401, and the Russell 2000 added 11 points at 1,142. The NYSE’s primary market traded only 585 million shares with total volume of 2.7 billion shares. The Nasdaq crossed 1.5 billion shares. Advancers outpaced decliners on both exchanges by about 3-to-1.

On Monday, I charted the Nasdaq and concluded that the index was in a very narrow trading range, saying, “A pop above the Nasdaq’s 50-day moving average could put the index on more firm bullish footing.”

The Nasdaq closed above its 50-day moving average Monday, and by doing so, broke the narrow pattern of trading that had existed for six sessions.

Russell 2000 Chart
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Chart Key

A bearish flag pattern on the Russell 2000 was also broken with an 11-point gain and an intraday high that pierced its 200-day moving average. The index flashed a MACD buy signal, its first since April 22.


On Monday, I said, “Traditionally a major move begins and is sustained by the ‘troops’ — the Nasdaq.” And we should also add the Russell 2000 as a major important initiator of trend changes. Thus far, the upside strength of the junior indices is encouraging. But volume and breadth are at typical summer lows and, therefore, fail to confirm a bottom.

Volatility is still very news dependent, and so it is difficult to take a strong bullish stance. Speculators and traders might venture a toe into the pool of undervalued stocks. But stop-loss orders should accompany all purchases at this level. One misstep anywhere in the world could shift momentum down.

I noted Monday that our readers have discussed the length of trends, and questions arose as to the length of short-, intermediate- and long-term trends. This subject comes up several times a year, and so a few years ago, I summarized the thoughts of Charles Dow, the creator of the Dow Theory:

Major (primary) trends are like the oceans’ tides — a primary bull market is like an incoming or flood tide that runs farther and farther up the beach until it finally reaches a high-water mark before it begins to recede. While the tide is coming in, there are waves breaking on the beach, some incoming and some outgoing. While the tide is rising, each succeeding wave pushes a little farther up onto the shore, and when the tide has reached its maximum height, the waves recede, never quite reaching as far as their predecessors. The waves are the intermediate trends.

Meanwhile, the surface of the water is in constant agitation as wavelets and ripples move along with and against the major trend. The wavelets and ripples are analogous to the market’s minor trends and are unimportant day-to-day fluctuations to long-term investors but followed closely by traders.

The tide, waves and ripples represent the primary (major), secondary (intermediate) and minor (short-term) trends of the market. Primary trends usually last for more than a year and may run for several years. Intermediate trends, “corrections” in a bull market or “recoveries” in a bear market, typically last for three weeks to three months and normally retrace one-third to two-thirds of the gain or loss. Minor, or short-term trends (wavelets), normally last less than six days but can run as long as three weeks.

The length of these trends is dependent upon the overall volatility of the current market, so these are generalizations. For example a calm, summer day at the beach will produce shorter waves and wavelets, while a fall hurricane will be accompanied by very different wave characteristics.

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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