Technical talk: Market still has some fight left in it …

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The comments below were provided by Kevin Lane of Fusion IQ.

The markets, which were getting a standing eight count just a few days ago, showed they still have some fight left as internals were generally strong on the heels of UPS’s strong quarter and guidance. Knowing stocks never go straight up for perpetuity and with developing divergences and weakening internals (prior to yesterday’s advance) the highest probability call was for a marginal correction of 5–7%. However as always the markets reminded us once again yesterday that the trend is your friend and until a decisive break occurs it is better to give the predominant trend the benefit of the doubt.

On the session advancers beat decliners by a 3 to 1 ratio on the NASDAQ, with nearly 80% of all volume being up-volume. Similarly, on the NYSE advancers bested decliners by a ratio of 4.5 to 1, while 87% of all volume was up-volume. Given both exchanges experienced similar internals, it appears yesterday was more than just a short covering event.  Below we will examine a few key charts to see where the new lines in the sand reside.

NASDAQ COMPOSITE INDEX (CCMP) – Daily Chart with 40 Day Moving Average

As seen below the NASDAQ Composite has been holding its 40-day moving average (green line) for some time now, including Friday’s low. Until this level (2,675) is violated we have to give the trend in tech the benefit of the doubt. Long bias is still in play; however, we suggest tightening risk parameters.

KBW BANK INDEX (BXK) - Daily Chart

Like the NASDAQ Composite, the Bank Index held support in the 52 area (red line).  This area also represents the short-term uptrend line (green line).

AAII BULLISH SENTIMENT INDEX – Weekly Chart

Last but not least, we see below that bullish sentiment, which was spiking, has moderated over the last few weeks. This is good as a rising market faced with skepticism always does better than a rising market embraced with exuberance.

As we always say, you can never get complacent and your risk management process needs to be reviewed daily because the market is not forgiving to the bulls or bears. For now the trade is still up, until buyers become exhausted and “all in”.

Source: Kevin Lane, Fusion IQ, February 2, 2011.

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