MARKET SHUGS OFF THURSDAY'S ASIAN SELLING TO REACH NEW HIGHS -- CATERPILLAR AND HONEYWELL POWER DOW INDUSTRIALS TO NEW RECORD -- GOOGLE LIFTS THE NASDAQ INTO A TEST OF ITS 2007 HIGH
ASIA RECOVERS ... Thursday's 4.5% drop in Chinese stocks caused nervous selling in other Asian markets. By the time the U.S. market opened, however, Europe had already started to recover and initial U.S. losses were modest. By day's end, the Dow had closed at a new record high. A strong Friday open in Asian markets set the stage for a strong day in global stock markets. Chart 1 is an hourly bar chart of the last ten days. It shows the Pacific Ex-Japan iShares (EPP) gapping down on Thursday (red arrow). The good news is that the EPP then gapped back up on Friday (green arrow). Thursday's isolated price bars (see circle) created an "island" bottom which is a short-term bullish pattern. [An ""island"" bottom occurs when a "down gap" is immediately followed by an "up gap"]. The U.S. market also got a big boost from large industrials like Caterpillar and Honeywell which led the Dow Industrials to a new record high. A big jump in Google pushed the Nasdaq up against its 2007 highs. Commodity markets like gold and oil that pulled back on Thursday (owing to concerns about higher Chinese interest rates) recovered strongly on Friday. Commodity-related stocks -- like basic materials, energy, and precious metals -- were among Friday's strongest groups. A weaker dollar is continuing to feed the commodity rally.
Chart 1
GOLD NEARS BULLISH BREAKOUT ... Gold rose over $7.00 on Friday. Chart 2 shows the Gold Trust Shares (GLD) attempting to close over its 2007 high at 68.33. An upside breakout would put the yellow metal in position to challenge last spring's high near 72. That would be bullish for precious metal shares. A lot of the gold buying is based on continuing dollar weakness. That makes Chart 3 especially important to watch. The US Dollar Index has fallen to within a couple of points of its historic low near 80, which has acted as major support several times in the past (most recently at the start of 2005). That will be a major test for the dollar and a lot of other markets, including gold. One bright note is that dollar weakness is also boosting American multi-national stocks that do a lot of export business. Like Caterpillar.
Chart 2
Chart 3
BIG CAT REGAINS LEADERSHIP ROLE ... A strong earnings report from Caterpillar sent the stock up more than 4% today, which made it the day's strongest stock in the Dow. After leading the market higher for the past several years, the maker of big earth-moving equipment lost 25% of its value from last May to this January. The stock broke its downtrend line in late January, however, and then successfully retested it in March. (A broken resistance line should become a new support line). Friday's three-point gain capped a strong week and left the stock trading at a new eight-month high. Its relative strength line bottomed in January as well. A big chunk of Caterpillar's profits came from overseas. Part of that can probably be attributed to a falling dollar which makes U.S. exports more attractive to foreign buyers. The falling dollar may also explain recent strong buying of multi-national companies in the consumer staple and healthcare sectors.
Chart 4
GOOGLE HAS STRONG FRIDAY ... A blowout earnings report after the close of trading on Thursday made Google one of the Nasdaq's strongest stocks on Friday. Its 2.8% gain made it a Nasdaq leader. Its large size also gives the stock a lot of influence. The only potential negative is the fact that the stock gave back some of its early gains. Even so, it's safely above its moving average lines and is trading at a two-month high. The rising relative strength ratio (below chart) is starting to rise for the first time since February. New signs of leadership from Google helped push the Nasdaq market right up against its 2007 highs.
Chart 5
DOW HITS NEW RECORD -- NASDAQ NEARS UPSIDE BREAKOUT ... The Dow Industrials surged 154 points (+1.20%) to a new record high today. The Dow was in fact the day's strongest stock index. That leaves only the Nasdaq market to exceed its 2007 high. It's not far away. Chart 7 shows the Nasdaq Composite trading up 21 points (+0.84%) and closing just shy of its 2007 high at 2531. A pickup up in trading volume on Friday was another positive sign. Although the Nasdaq continues to lag behind other stock indexes, an upside breakout (which appears likely) would be the final confirmation that the bull market is back on track.
Chart 6
Chart 7
