Stocks broke lower on the opening yesterday in response to resistance to a new Greek austerity program. But the 60-point decline was erased by mid-morning, and the Dow went on to close at a new four-year high. A lack of further news and testimony by Fed Chairman Ben Bernanke that “there has been a modest increase in the long-term normal rate of U.S. employment” resulted in a flat market once the early losses were overcome.
At the close, the DJIA was up 33 points to 12,878, the S&P 500 rose 3 points closing at 1,347 and Nasdaq gained 2 at 2,904. The NYSE traded 728 million shares, and Nasdaq crossed 445 million. Advancers outnumbered decliners on the Big Board by 1.3-to-1, but on Nasdaq decliners were slightly ahead.
Yesterday turned into a milestone for the DJIA: It closed at its highest price since May 2008 and like the S&P 500, which we studied yesterday, it broke from a huge reverse head and shoulders pattern. The pattern on the Dow is even more pronounced than the S&P’s with a more defined double bottom (head) and a neck line that is just about as visual as it can get. The neck-line break at 12,800 minus the double head at 10,650 = 2,150 + 12,800 = 14,950 our new technical target for the Dow. Like the S&P 500, this new target is more than 16% above Tuesday’s close at 12,878.
The bottom line of these new breakouts, which follow the spectacular pop and break-away-gap on Nasdaq, is that the broad market has confirmed that stock prices are still relatively cheap and that we have begun a new bull market.
Now a word of caution: We’ll still see volatile days in which investors will be shaken in their view that stocks are headed higher. But the confirmation of the new trend is technically solid, and pullbacks of 3% or more should be used as fresh buying opportunities.
The warning of a pullback is especially pertinent to Nasdaq, which had a huge break but whose internal indicators, especially the relative strength index at 78.72, are very overbought, while the Dow’s RSI is at just 70.02, and the S&P 500’s is at 73.94.
Conclusion: The major indices have confirmed that a strong uptrend is in force. All corrections should be viewed as buying opportunities. But the near-term indicators tell us a consolidation is more likely than an immediate follow-through. And so, with the exception of commodities-oriented stocks — funds and ETFs (gold, oil, etc.) and higher-yielding blue chips — we should patiently wait for a consolidation before making significant commitments.
