Market Snaps Recent Losing Streak; is Resumption of Bull Trend Underway?

After experiencing a long losing streak throughout the last part of May and most of June the broad U.S. stock market staged an impressive rally on June 16 in a much-needed show of strength. We had previously described the market as being in a "do or die" position and said a high-volume reversal was desperately needed to keep the major uptrend intact in the major averages. Well today (June 16) saw just such a (relatively) high volume rally and most major stock participated in the upmove. But have things really changed for better? As of this writing the Dow Jones Industrials had closed at 10785—up an impressive 190 points from the previous day's close. The DJI Transportation index was up nearly 60 at 3411 but still a long ways from its recent high of 3800. The Utilities, meanwhile, could only close up a little more than a point to its previous high of 333, where it apparently is running into a lot of supply. NYSE volume for the day was 803 million—higher than it has been for the past couple of weeks, but by no means what one would consider extraordinary or justifiable for such a huge point gain in the Dow. Throughout the better part of the year, 900 million share days or higher have not been too uncommon.

The day's points gain was big enough to push the Dow back (barely) back above its major trendline support. If the bull trend in the stock market is to continue the Dow must hold above this extremely important line. The coming days will tell us much. For now, the burden of proof is on the market's shoulder.

The leader of the U.S. stock market the past few weeks has been the Dow Jones Utilities, which experienced point gains even as the Industrials and the Transportations were falling. However, it is beginning to look as though the Utilities have come to an impasse. An ascending wedge pattern is now evident in the Utilities' chart and this portends at least a retracement of several points. As we mentioned previously, it appears the Utilities are running into heavy supply at these high levels and it remains to be seen if buying power is sufficient to keep the index pushing higher. Since the Utilities are the leading indicator of the large caps, a decline would be bearish for the broad market.

From an Elliott Wave Theory perspective, the Dow Industrials have etched out five minute waves down and a minute degree a-b-c correction. If indeed this is the correct interpretation, we can expect the Dow to continue falling in the days immediately ahead as today's rally would be seen as nothing more than minute wave two of minor wave three of intermediate wave one down. However, if 10,900 is exceeded, this interpretation will have been nullified and a retest of the previous highs will be likely with the possibility that the uptrend will continue higher.

The action in the NASDAQ Composite index today was even more impressive than in the Dow. The index rose an impressive 104 points (4.27%) to close at 2517—a record one-day point rise. Volume was high but not as high as the NASDAQ has seen in the past few months during days of similar point gains. The 2500 level is an important area of support for the NASDAQ and this level must hold in the days immediately ahead; otherwise, the downtrend will almost certainly recommence.

Our Leading Indicators Internet Index is also in a bearish position relative to its high. Similar to the other major indices, Wednesday's rally was strong enough to propel the leading Internet issues to considerably higher levels, thus pushing the Internet index slightly above its 10-day moving average and placing it in a position to rise above the third fan line (see chart, page 2). The fan principal, as we discuss in our book, Technical Analysis Symplified, is extremely important and is one of the most important tools for discerning turning points. If the Internet index cannot hold above the third fan line a much more serious correction lies ahead.

Even more interesting is the fact that our Internet index has, like the Dow Industrials, traced out five waves downward in typical Elliott Wave fashion. This confers a high degree of probability to a continuation of the declining trend in the Internet sector. Prudence dictates, however, that we must wait to see if things clear up as stranger things have happened in the markets. Nevertheless, the Internet sector is now at a critical turning point. It must either propel higher accompanied by increasing volume or it will surely continue falling in the weeks immediately ahead.

Other technical indicators present a mixed picture of the near term market outlook. The Cumulative Volume Index (CVI) is still trending above its trendline support, which is bullish. However, this index, like the Dow Industrials and Transportations, has also traced out five waves down in typical Elliott Wave fashion. This would seem to confirm the bearish chart pattern in the Dow but more time is required before we can fully get a handle on this. For now we consider the CVI to be a neutral value.

NYSE 10-day momentum has been diverging upward and away from the Dow the past few days along with its moving average. Taken at face value this would rate as a bullish divergence but in the face of so many other conflicting signals it is hard to determine how much weight to assign this indicator. Again, we will need to see more action before making a judgment one way or the other.

NYSE advancing volume is technically intermediate-term bearish along with NYSE breadth. As you can see there are many contradictory technical signals being flashed right now. It's enough to drive an analyst loony.

The big rise in the indices on Wednesday was credited to the release of the latest Producer Price Index report, which showed that inflation is largely in check (inflation fears have been blamed for recent point declines in the indices and Wednesday's report did much to calm investor fears). However, the rise must be viewed as suspect unless we witness a powerful follow-through in the days ahead. Remember, the latest rally occurred against a backdrop of rising bond yields (and falling bond prices), and bond prices normally top out ahead of the stock market. The fact that bonds recently topped the 6.1% level sends a strong signal that the bull market's days are numbered unless a reversal of fortunes is seen soon.

Many investors were calmed by the fact that bond yields plunged from 6.1% to 5.951 in a two-day period—a huge drop by both recent and historical standards. To the uninitiated this would seem to be a reversal of fortunes for bond prices and a reprieve for the stock market. But not so fast! What happened was nothing more than the tracing out of the "handle" on a "teacup" chart formation (another chart pattern we discuss in our book, Technical Analysis Simplified). This occurs when prices (or in this case, yields), which have been rising in a steady, bowl-shaped curve experience a sudden, sharp drop, which on the chart takes on the appearance of a teacup. From here, however, bond yields will likely continue rising in continuation of the new trend. This would be bad news for stock investors as a rising bond yield does not bode well for equities prices.

In the market psychology department we note with interest a Wall Street Journal article of June 16 that focused on a growing trend of early retirements from Silicon Valley. The article mentioned several high-paid tech company executives that have opted for early retirement in the past few months, apparently tired of the stress and long hours typical of the red-hot tech sector. "Tired of grueling deadlines, frustrated by the bureaucracy that has accompanied Microsoft's explosive growth or lured away by the boom in high-tech start-ups, dozens of the company's most capable leaders, all around 40, have opted out—at least temporarily—to hunt for fossils, take bike trips, launch new ventures, play with their children, do good or just goof off," the article noted. This betokens a "take thine ease, eat, drink, and be merry" mindset that, if true to the biblical parallel, will only end in sorrow. If this phenomenon of retiring early to "goof off" is part of a larger trend throughout corporate America then surely the bull market is near its end. Productivity is the hallmark of any bull market and the sort of thing the WSJ article describes is typically seen at market turning points.