In the most classic senseâto intermediate strategists in search of the elusive follow-through day, at leastâWednesday was a good day. But, as it stands for the broader market, there's still plenty of work to be done. In fact, technicians who follow those rules of engagement to the letter will point out that the broad-based reversal took out the pivot and year-to-date lows in the S&P500 ($SPX), NASDAQ ($COMPQ) and Dow Industrials ($INDU) before staging their respective afternoon rallies. For many traders that doesn't represent a problem, but the "undercut" double-bottom lows does reset the attempted rally with that same action. That means Wednesday's enthusiastic reversal is day one of the count and the earliest traders can expect an official follow-through day [FTD] is next Monday.
Some might say that the analysis presented above takes the fun out of Wednesday's triumph by technical and value-based bargain hunters âsnapping up shares,' which, incidentally, always fails to mention the mystery sellers who allowed for such diamonds in the rough to exist in the first place. I'll have to remember that for another diatribe. With that said, though, concerns remain which shouldn't be discounted or ignored, before making too aggressive a stand in the camp of the Bovinus Optimus. In the following, I'd like to delve a bit further into some of those issues, as well as show a bit of fan appreciation for the sturdier bull now roaming. Personally, this market observer does see some bullish opportunities on the short-term landscape. And while that might be a dirty way of seeing the market when an intermediate correction is still underway, you never know, maybe those intermediate guys will be seeing things a bit different in a couple days, while others take advantage of what already is.
Figure 1: S&P500 ETF (SPY) Daily
While market proxies like the S&P500 undercut their pivot and attempted rally lows and thus âreset' the intermediate count, an interesting development did occur elsewhere. The NASDAQ 100 (QQQQ), Small Caps (IJR) and Mid Caps (IJH) all held their respective pivots. For growth strategists that's interpreted as being a positive development, as those indices sport a larger amount of high beta issues laced with stronger earnings fuel. Interestingly too, while the cash proxies showed a slight drop in volume levels in establishing Wednesday's bullish reversal, most ETFs registered increases in volume and a session that registers as accumulation. With the proliferation and liquidity provided by these basket products, it raises an interesting question about just how important the cash statistic is versus those instruments. I don't have an answer to that, but I am certainly curious.
With this week being of the expiration variety, volume too, might be skewed and difficult to really label one day as less or more significant than the other. That bucks the simplicity of classic rules that espouse distribution and accumulation days. The reality, though, is that with more and more derivatives involved, volume counts are always prone to being something other than black or white. For instance, the observation without definitive proof mind you, is that expiration week price moves such as Tuesday's precipitous drop, quite likely result in higher volumes and wash out the last Deltas in many traders positions. With that being said, to have a volume increase over and beyond that count on a day such as Wednesday, is made all the more difficult. I guess its some food for thought, if nothing else. Personally, in lieu of the âhigh beta' technical holds and fresh nine-month highs in the CBOE Volatility ($VIX) index, the bullish evidence has definitely increased. And if we accept items such as a higher volume undercut rally of 1.60% from the low to closing price in products like the S&P500, there's a lot more reasons to see an intermediate low in place than a week prior.
Figure 2: Goldman Sachs (GS) Daily
One camp that essentially nailed Wednesday's reversal was Birinyi Associates. This corner posted some of their findings in the predawn yesterday morning on my message board at Optionetics. The volatile bounce fit into the idea of history repeating remarkably well. If we look forward into Thursday's session and go with what's working [i.e. statistical precedents], traders can expect a slightly negative return (23 bps) as part of another volatile session and a trading range approaching 1%. I guess that means put your helmets or other protective gear on, as it could be a wild one.
Another Birinyi finding which I happened to pen recent analysis on as well involves the Broker / Dealer (IAI) group. They pinpoint the crown jewel of the lot, Goldman (GS), as the barometer of choice. The theory is, âas goes Goldie, so goes the market.' Looking at the daily chart above, Goldman's technical hold of supports adds an additional layer of confidence to the idea that Wednesday's double bottom rally attempt, will stick. The reason being is that the crown jewel never seriously tested the panic lows set last Monday.
In the analysis of the charting tea leaves, my only real concern is that much like the "V" bottom in the market indices which teased investors this past week with it's version of "you missed it!": Goldman also looks prone to rolling over from a similar position. In fact, considering the reversal day the broader market enjoyed, the stock's 1.12 points of greenie are very negligible. The technical hunch is that Goldman isn't done with its own testing just yet. As it stands, with Thursday setting up as a slight disappointment for bulls storming the gates at the end of Wednesday's session and Expiration Friday being a notorious technical dud: that type of testing, should it occur, would line up nicely with the idea of a broad-based follow-through day sometime next week.
Figure 3: AutoDesk (ADSK) Daily
Last evening at investors.com, I wrote some analysis on the idea of using ITM Bull Call spreads as one way to play âthe bounce' or technical low, without necessarily having to call the absolute bottom. Pulte Homes (PHM) was illustrated as its high implieds and technical situation appeared to make it an interesting candidate for that type of play. Readers might want to check out that commentary for further details.
A similar prospect, in that it's also looking closer to reversing than not and sports above-average implieds is AutoDesk (ADSK). Shown above, the pattern for bottoming is different than Pulte's, but the technical condition appears oversold after traveling down the lower Bollinger Band for the past two-plus weeks. An oversold RSI compliments the somewhat extreme-looking move. My own analysis shows a decent 7% to 8% wide support zone using Fib tools, which ADSK has moved squarely into as of Wednesday's close. In conjunction with a potential Elliott Wave 4 EBOT beginning to set up, ADSK might be one to investigate limited risk strategies such as verticals or non-directional positions, which make good use of the implieds. Other large cap stocks in similar oversold territories and might deserve the token "Buy, Buy, Buy!" decision include Costco (COST), Interactive (IACI), Starbucks (SBUX), Whole Foods (WFMI), Marvell (MRVL) and Dell (DELL).
Figure 4: Itron (ITRI) Weekly Cup with Handle
Speaking of "Buy, Buy, Buy!" (again), the market's number one cheerleader is still being well-represented with his TheStreet.com (TSCM). That stock was outlined in this column last week as a potential bullish candidate and has remained in a consolidation position despite the broader market's own weakness of the last couple sessions. Other stocks mentioned last week and also of the âhandle' family, haven't done as well (HITT, ORB, WCC and MORN) and might represent something like a âladle pattern' off support zones.
With that said, one fresh candidate that's still setting up in classic fashion is Itron (ITRI). Itron is a small cap manufacturer of real-time analytics for energy and water providers. Its financials can't claim the same strength that they did a year ago when the stock was a member of IBD's 100 List, as earnings power has decreased since that time. However, with a PEG Ratio just over 1.00, an industry segment that might conjure up visions of further growth and a sturdy-looking handle on the weekly chart that compliments a daily chart TAPP zone: ITRI looks like an overall decent situation to watch for bullish opportunities. Other fresh stocks in this technical category include Schlumberger (SLB), Superior Energy (SUP) and Discovery Holdings (DISCA).
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