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3-2-1...BLASTOFF? Rally Launch Has Strong Potential U.S. stocks delivered a strong trend reversal on Wednesday, March 21, 2007, backed by strong volume and several important technical characteristics that suggest that more gains are likely. For the last few days, although we have remained cautious we have been noting that the charts of the major indexes had been displaying double bottoms, and our stock lists had been building cautious long positions in stocks showing relative strength. On Wednesday in our technical summary we wrote: "It is possible that we may be getting close to a nice move to the upside. And such a made for TV moment might come as early as 2:15 Eastern time today, if the Fed says something that the markets interprets as a good reason to rally." Indeed, that's exactly what happened, as the Fed left interest rates unchanged and Wall Street interpreted the Fed's statement as possibly saying that the central bank may be finished with the potential for higher rates in the near future. Of course no one knows what lurks in the heart of Mr. Bernanke and his crew of Fed governors. So, it's better to look at the market for clues as to what's next. And the clues are fairly encouraging. First, the major indexes rose above key resistance levels, with the Nasdaq and the S & P 500 (see charts below in technical summary) rallying back above their 50 day moving averages. That means that the intermediate term trend has turned back to the up side.
Second, as the chart of the NYSE advance decline line (above) shows, momentum is back, at least as measured by market breadth, as the NYSE advance decline line made a new high. This is a big positive, since none of the major indexes made new highs, and it shows that the underlying market is stronger than the indexes. We like to see a strong underlying market as the basis for a rally. Third, volume rose on the rally, especially on the Nasdaq, where there were over two billion shares traded. Even more important, in some ways, was the fact that the ratio of up volume to down volume on the NYSE was 10 to 1. That is an indication of significant strength in the market, and when combined with a new high on the NYSE advance decline line, it suggests even stronger momentum. Ideally, we'd like to see another 9 to 1 up volume to down volume day within the next 90 days. If that happens, we would have what is called a double barrel buy signal, similar to what happened last June before the market took off on a huge rally. The last time we had two 9 to 1 up volume to down volume days on the NYSE was on June 15 and and June 21, 2006. A third 9 to 1 up volume to down volume day came on 6-29, delivering three such days within very close proximity. By December 30, the S & P 500 was up 11.5%, while the Dow was up some 15.9% and the S & P 500 was up some 13.3%. On June 30, 2006, in this space, we noted that a new bull market might have been launched on 6-29. We wrote: "Indeed, a new bull market may have been launched on June 29, putting the burden of proof on the bears, as the U.S. stock market has delivered a major momentum thrust. What makes the action on 6-29 most dramatic is that the up volume to down volume ratio has exceeded 9 to 1 on the NYSE for the second time since June 15th and the third time for the Nasdaq. This is what Martin Zweig described as a momentum thrust. Usually, two days of 9 to 1 up volume to down volume are good enough to launch a bull market. To be sure, the first two days of this unusual occurrence, June 15, and June 21, came on light volume, which as we mentioned made them suspect." There are other similarities in yesterday's rally as well, as the rally came in response to a statement by the Federal Reserve. Conclusion The market bottom is almost certainly in place now. We have had one good momentum day, and ideally would like to see another one within the next 90 days, or sooner. There are no guarantees that the rally will last. But history does show that rallies that are launched with overwhelming up volume to down volume days have the ability to last.
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