SMALL-CAPS AND TECHS GRAB THE LEAD -- NASDAQ BREAKS CONSOLIDATION RESISTANCE -- RUSSELL 2000 COMES TO LIFE -- BIOTECHS SHOW RELATIVE STRENGTH -- MILLENNIUM CHALLENGES RESISTANCE -- US DOLLAR FALLS
RUSSELL 2000 AND NASDAQ LEAD BROAD ADVANCE ...
Editor's Note: John Murphy is travelling this week and will return on Monday. The follow article was written by Arthur Hill of TDTrader.com.
Stocks were broadly higher on Thursday with the Russell 2000 and Nasdaq leading the way. Large-caps from the S&P 500 and Dow were leading the market and now it looks like small-caps and techs are taking over. This is generally bullish for the overall market because it reflects an increased appetite for risk. Small-caps and techs represent high beta stocks that offer higher risk and higher reward. On the flip side, a higher appetite for risk shows increase speculation.
Chart 1
NASDAQ BREAKS PENNANT RESISTANCE ... The Nasdaq has been strong since mid July and shows no signs of letting up. It has been nothing but surges, consolidations and higher highs the last three months. Nothing but net. The index surged the first two weeks of October and then consolidated around 2350. A pennant formed and Thursday's breakout signals yet another continuation higher. This index is already frothy after a 17.9% advance in three months and today's breakout suggests that it is going to get even frothier.
Chart 2
RUSSELL 2000 LEADS IN OCTOBER ... The Russell 2000 was slow out of the gate in August and September, but sprang to life the first two weeks of October. The index surged over 7% from 3-Oct to 16-Oct (10 trading days) and then consolidated. This 10-day surge outpaced the Nasdaq, the S&P 500 and the Dow during the same timeframe. The Russell 2000 then consolidated with a falling flag and broke flag resistance over the last two days. This calls for a continuation of the October surge and the upside target is the May highs. I wonder if CNBC has anything left after their coverage of the new Dow highs.
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HIGH BETA BIOTECHS ARE LEADING TOO ... The Biotech HOLDRS (BBH) lagged the broader market in August and the first half of September, but then caught fire with a breakout at 182.5. This move broke above the trendline extending down from the Nov-05 high and exceeded resistance that extended back to June. The ETF never looked back after the breakout and has been a market leader since mid September. Leaders within this group include: Applera Corp (ABI), Affymetrix (AFFX) and Amgen (AMGN). All three surged this week.
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MILLENNIUM ON THE VERGE ... Also within the Biotech HOLDRS (BBH), Millennium Pharmaceuticals is making an attempt to break a major resistance zone that extends back to July 2005. The stock has traded between 11.5 and 7.5 since January 2005 with four dips below 8 and five failures at 11. The pattern looks like one big consolidation and MLNM is once again pounding on the resistance door with above average volume. A break above 11.5 would forge a 52-week high and show renewed confidence among the Millennium bulls.
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US DOLLAR INDEX FAILS AT RESISTANCE ... While gold and oil moved lower in August and September, the US Dollar Index advanced from 84.5 to 87.25. Gold and oil firmed over the last few weeks and the US Dollar Index is now starting to slip. This is a classic inter-market relationship: gold and oil are inversely correlated to the US Dollar. Back to the price chart, the US Dollar Index met stiff resistance just above 87 and failed to break this level three times. The pullback over the last two weeks is quite sharp and is likely to get sharper if gold and oil rebound. The other chart shows the Euro Currency Trust (FXE) as it bounce off support.
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