Sunday, June 26, 2011

Failed Rally Attempt?

Click on Chart to Enlarge

The chart above is the Nasdaq composite. I am showing this because of the chart pattern and because tech has been in a leading position since the beginning of the bull market, but it is now leading to the downside for the first time since late in 2008.

Notice the March low was exceeded slightly on the downside on this correction. That hasn't happened in the Dow or S&P. Also, the breakout at the April/May high was weaker in the Nasdaq than in those averages. This suggests weakness in the leading stocks and index. It is very common for a rally to occur after the break of a significant low like this. Basically there is a lot of pressure for short covering. As long as the reversal above this low holds it should be respected, but a break back below it will likely accelerate the decline to the next chart support.

This past week there was a follow-through type day on Tuesday (for those that are familiar with IBD methods). However, the Dow and S&P were well off the % gains expected on a follow through, AND there have been 2 high volume declines since then (distribution days) suggesting the rally attempt may not have staying power.

The CRB and CCI commodity averages have both broken the May lows which I noted in a recent post. This now suggests that commodities are likely to be in a weak position. We are likely to see the US Dollar advance and stocks decline if commodities do breakaway to the downside.

For growth stock buyers, I would suggest waiting for another follow-through type day to appear before looking for new buys. I have seen a lot of faulty basing structures too in many charts.

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