Stocks opened sharply higher on Monday and maintained solid gains throughout the day. The Dow ended the day with 229-point gain. We saw some breakouts and some near misses. If there's a problem with the action it is that there was very light trading volume, particularly compared to the volume we saw during the selling.
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Light volume can indicate there there is still a lot of cash of bullish ammunition on the sidelines that can still be put to work, or it could mean that the big money is staying out and this is just a trap for small investors. The charts are so close to making a bullish breakout, but they could also be at the top of a bear market rally and at resistance. Yesterday's action was a good step for the bulls, but it still up in the air.
Oil was a major catalyst as it rallied big yesterday, but it was actually an expiration for the March futures contract and it's possible a lot of the buying came from March contract short covering. We should know today.
The S&P 500 Index / C-Fund ran up to the prior high made on February 1, which coincides with a couple of other resistance level - or old support lines. It close above the 50-day EMA, which is a big plus, but volume was under 2.5 billion shares where we had seen 3 to 4 billion on the way down. The SPY actually traded the lowest number of shares since the week between Christmas and New Year's.
The Dow's weekly chart shows that bearish head and shoulders pattern so while we have seen some strong short-term action, the longer-term may still have some issues.
The Dow Completion Index (small caps / S-Fund) hit the resistance level that we talked about yesterday. This is a big test for the small caps.
The Dow Transportation Index pushed back above it rising trading channel so this is a big plus for the market leader which has been in a bear market for nearly a year now. Four closes above the 50-day EMA is nothing to sneeze at.
The EFA (EAFE Index / I-fund) opened another gap yesterday after filling the prior one on Friday. It's looking better but the 50-day EMA and parallel resistance line are standing in the way right now.
This High Yield Bond Fund, which stocks have had a tendency to follow, rallied up to the 50-day EMA last Thursday but has struggled since. I would think any new bull market would like to see these lead on the upside so this is a bit of a negative for stocks.
The AGG (bonds / F-fund) was relatively flat yesterday and remains in its uptrend. There was not a lot of bond selling during yesterday's stock market rally, which could be a concern for stocks.
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Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
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