MARKET SUFFERS SHORT-TERM SETBACK WITHIN INTERMEDIATE UPTREND
DOWNSIDE REVERSAL ON HEAVY VOLUME... After climbing to the highest level in a year, the Nasdaq Composite Index suffered an apparent "key reversal day" on Friday. That's usually described as a higher open followed by a lower close -- and on heavy volume. That pretty much describes Friday's action. This type of downside reversal also coincides with a short-term overbought market condition. That's demonstrated by the 14-day RSI line which has climbed over 70 for the first time in more than year. With weekly and monthly indicators still in a positive mode, we're inclined to view Friday's setback as the possible start of a short-term correction within an intermediate uptrend. Assuming this is a short-term top, the Nasdaq might be expected to decline down to its 20-day moving average, currently near 1560. If that's broken, a further decline toward more substantial support near 1500 could be expected. Chart 2 shows why that's an important support line.
Chart 1
POSSIBLE RETEST OF PRIOR PEAK... The Nasdaq advance from the October bottom to the early December peak carried about 400 points. It then retraced 62% of that advance before stabilizing near 1250 in early March. A "measured move" from that March low called for an advance of at least 400 points (to match the first upleg) -- which carried near the 1650 level. We hit that today. That suggests that the Nasdaq has fulfilled an upside objective and is due for a pullback or a period of consolidation. The horizontal line on the chart is drawn over the December 2 intra-day peak near 1520. One of the rules of charting is that a price pullback shouldn't violate the top of a prior peak. That's another reason why the area around 1500-1520 should act as a floor under the Nasdaq.
Chart 2
GOOD NEWS, BAD NEWS... The proposed takeover of PeopleSoft by Oracle made money for some and lost money for others. PeopleSoft gapped up on heavy volume. Unfortunately, it also closed near its low for the day, indicating that the early bounce was overdone. On the downside, Oracle had a bad chart day. The big software stock reversed to the downside on heavy volume. That puts it back below its January peak and appears to have negated the upside breakout achieved earlier in the week. The downside reversal in Oracle -- which was being so closely watched today -- no doubt contributed to the afternoon Nasdaq slide.
Chart 3
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FRIDAY WINNERS... There were some notable stock winners in Friday's action. In a strong healthcare group, Cardinal Health surged through its 200-day average on very heavy volume. MacDonalds rose to a nine-month high -- also on strong volume. In a strong brokerage group, Charles Schwab jumped to a five-month high in heavy trading.
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MUTUAL FUND LEADERS... We're big believers in following relative strength. If you're going to put your money somewhere, it may as well be in the market leaders. Three of the top Fidelity sector mutual funds for the week were in the air transport, biotech, and brokerage groups. The three charts show all three funds trending higher. Of equal importance is the fact that their relative strength lines are rising as well. Speaking of leadership, we also like the fact that the current market rally is being led by technology, small cap stocks, and the financials. Those are groups that usually lead in important market upturns. All of these groups have had nice runups and may be in need of a breather. Friday's late selloff may be hinting at that. In our view, any selloff from here would provide even better buying opportunities at lower levels.
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JOHN'S LATEST PERFORMANCE CHART... I update this chart at least once a week to show an important market relationship at work. Today's performance chart compares the price of gold to three foreign currencies --the British pound, the Euro, and the Japanese yen. Gold is shown as the flat horizontal line on the chart. You can see that all three currencies have been falling relative to gold since 1999. That means that gold is rising in terms of all currencies and not just the dollar. That's the first time we've seen that since the 1970s and is another bullish sign that the rally in gold has staying power. Take a look.
AUDIO UPDATES... I also do an audio update a couple of times a week in which I review the highlights of the week's market activity. I just did one tonight which reviews today's activity and explains some of the charts in tonight's update. Take a listen.
