Free Newsletter: Stalking Stocks with the Shark - Market Finally Breaks Past Short-term Resistance - 8/10/08

Free Newsletter: Stalking Stocks with the Shark - Market Finally Breaks Past Short-term Resistance - 8/10/08

Greetings Shark Investors:

The major indices surged higher as another big drop in crude and a remarkable gain for the U.S. dollar triggered heavy buying in stocks during Friday’s trading session. Early indications were for a somewhat higher open to the day as both oil and the euro weakened once again and investors looked for a rebound following the previous day’s barrage of bad news and dismal sell-off into the close.

As we mentioned in our last Stalking Stocks evening review, both the Dow and the S&P 500 were able to close at support levels while the Nasdaq was able to remain above it’s 50 day moving average, so it wasn’t too surprising to see investors looking for a bit of a rebound early in the morning. However, index futures moved quickly back towards the unchanged mark after FNM reported a much larger than expected loss for the second quarter, announced that they were cutting their dividend, said that they were increasing their credit loss ratio, and commented that “significant” credit losses would continue well into 2009.

As such, the market opened the day just north of the flat line, but investors quickly forgot the FNM news and turned their attention to the selling in the euro and crude which was quickly accelerating. After bids absolutely disappeared on Thursday late in the day, it’s not too much of a stretch to assume that few were positioned properly to take advantage of any strength, so once the market began to move sharply higher right after the bell and didn’t show any signs of slowing down, underinvested bulls started to scramble for exposure while shorts began to look for cover.

The initial wave of buying continued uninterrupted for almost a full hour before the market began to level off and spend the next 90 minutes basing at highs. But as we entered the New York lunch hour and worked our way into the afternoon, stocks saw progressive waves of buying that kept pushing the averages to fresh highs without any hint of profit taking for the remainder of the day.

By the close, the indices posted average gains of 2.5% on breadth that was a bullish 5:2 to the positive. Only materials and energy finished the day in the red, while consumer discretionary posted a remarkable gain of 4.9%, industrials surged 3.5%, and financials advanced by 3.1%. Just about the only thing negative anyone could say was that volume could have been heavier.

Meanwhile, probably the most encouraging aspect to Friday’s trading was that both the Dow and the S&P 500 were able to move past short-term resistance levels and join the Nasdaq in adding a higher high to the handful of higher lows they’ve seen over the past month. Nonetheless, we need to watch carefully to see if they start to develop the same kind of ascending wedges that we saw back in the March/May intermediate uptrend.

The other thing we need to consider is that, in addition to the numerous hurdles the economy continues to face, lower oil and a stronger dollar may not turn out to be the panacea many are hoping it will be. While higher oil does created inflationary pressures and squeeze consumers’ pocket book, it is also an indication of strong growth and demand. Instead, the bouncing dollar and drop in crude seem to have been triggered by concerns over a more substantial global slow-down.

The big question, however, that we face in the near-term is whether or not the bulls will be able to follow through on Friday’s strength. It’s been quite some time since we’ve seen any sort of continuity from day to day, and as we’ve pointed out on numerous occasions, one of the hallmarks of a bear market is for investors to sell strength and buy weakness. That’s been the winning trade lately, and is the primary reason why we’ve had a paucity of leadership. As such, we need to be watching to see if the breakouts we saw today can hold as an indication that this market may be ready for a more sustainable counter-trend move.