BASIC MATERIAL STOCKS LEAD FRIDAY BOUNCE ---QQQs BOUNCE OFF 20-DAY SUPPORT LINE
BASIC MATERIAL LEADERSHIP... Basic material stocks led a Friday stock market bounce. Chart 1 shows the Materials Select Sector SPDR scoring a nice uptick on Friday. Its relative strength has shown continuing leadership since mid-July. While the daily chart pattern still has a positive look to it, the weekly bars in Chart 2 show major overhead resistance near 24, which represents the highs hit in the spring of 2001 and 2002. Assuming the XLB is headed in that direction, the 24 barrier will represent a major test of the staying power of this leadership group. Today's standout performers in the group were US Steel, Phelps Dodge, and Alcoa.
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MATERIAL LEADERS... Alcoa rose to a new 52-week high on the heaviest trading activity since May. Phelps Dodge did almost as well. Both stocks have been benefiting from rising aluminum and copper prices. US Steel also jumped to a new yearly high on very strong volume. Although all market sectors also gained ground on Friday, the financial group gained the least. We recently did a story showing that money had been flowing into basic material stocks at the expense of the financials. That trend continued on Friday.
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ORACLE FALLS HARD... Oracle plunged on Friday on massive volume. About the only positive sign was its ability to bounce of its 200-day moving average. The big drop in the morning was one of the main reasons why the Nasdaq and other major averages got off to a bad start today.
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QUALCOMM NEARS BULLISH BREAKOUT... While Oracle pulled the Nasdaq lower today, Qualcomm had the opposite effect. The daily chart shows QCOM hitting a new recovery high on rising volume. The big story, however, is told by the weekly bars in Chart 8. They show that Qualcomm is pressing right up against the intra-day high reached last December. Today's close was the highest in eighteen months. Qualcomm appears to be on the verge of achieving an impressive bullish breakout.
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QQQS LOSE ON THE WEEK... Despite Friday's bounce, the Nasdaq 100 Shares (QQQ) lost ground on the week. What's a little more disturning is that the weekly downturn took place on the heaviest weekly volume in three months. That may inject a little more caution into the week's acitivity. Even if a setback were to occur, however, we suspect the August low at 30 would provide support beneath the market. The daily bars in Chart 10 give a better view of the week's action. It shows that most of the volume damage took place on Wednesday. Friday's bounce was on higher volume than Thursday (expect that downside volume was bigger than upside volume). We're keeping a close eye on the (dashed) 20-day moving average which sits near 33. That's usually the first line of defense in a market pullback. So far, that support line has held. The two lines surrounding the price action are Bollinger bands. The upper band is at 34.82 and offers a potential upside target. In an uptrend, prices usually fluctuate between the upper band and the 20-day line. If the 20-day line is broken to the downside, the lower band (which is at 31.42) becomes the new target. We'll be watching next week to see if the 20-day average continues to hold.
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IT'S ONLY HALFWAY THROUGH SEPTEMBER... With two weeks in September behind it, the market has held up pretty well. By now, I'm sure everyone is aware that September and October can be an especially dangerous time for the market. Historically, September is the weakest month of the year. And a lot of Octobers have been pretty cruel. That's why we're being especially cautious at this point. Our indicators still point up. However, we're watching our support lines very closely.
