Weekend Annotations and Charts – Apr 21

Apr 21, 2007: 11:55 AM CST

Every day last week, we saw price advances in the Dow Jones Index, and we witnessed new intraday and closing highs in the Dow.  I mentioned last week that if we broke resistance at 12,800 (likely), then we would see a hard rally off this point to the upside.  After “scraping” it last week, we had the hard rally Friday.

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The Dow also made a New Momentum High, as well as a confirmed New Price High, indicating that (from a momentum standpoint) new price highs are yet to come (following retracement swings, of course). In fact, a potential “Impulse Buy” pattern is setting up when we get a corrective wave in place. The Red “trend-line” on the MACD 3/10 Oscillator is clearly pointed higher, and any pullback of the black signal line to the trend-line is likely to set up a trade.

HOWEVER, before you get too excited, realize that the large price thrust on Friday (and strong volume surge) was due mainly to three of the 30 Dow components: Caterpillar (CAT), American Express (AXP), and Honeywell (HON).

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So before you celebrate unbridled bullishness, view the technical pictures of the other Dow 30 components, as well as other leading stocks before rushing out to bet the farm on this market. Earnings season is registering “better than expected” results from major companies, most likely because the sentiment is so fearful/bearish on the Street (low expectations can result in large price moves in stocks that beat estimates, and short-covering exacerbates this process).

AXP and HON are setting up potential “Impulse Buy” Trades when their price corrects to the rising 20 period moving average. We see new price and momentum highs with these components.

To temper your bullishness, observe the charts of the Russell 2000 (small-cap) and Nasdaq (technology):russell-apr-21.png

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Both of these indexes, which compromise many more stocks than the “narrow” Dow, are failing to make new highs and – in fact – appear to be faltering to make new price highs and could be setting up a double-top pattern.

Notice the price divergence with the momentum oscillator – on the most recent swing to higher prices, the oscillators failed to make new highs. This is a red-flag for these indexes, yet the Dow is making new highs. This would be a more complicated divergence, known as an “Index Divergence” where larger (broader) indexes are failing to make new highs while narrower indexes are indeed making new highs.

This doesn’t mean “run out and short the market” but it does temper the bullishness and should cause you to be more cautious, yet still play the bullish side (as that is what the most recent trend has confirmed, and the trend is in tact until price proves otherwise).

In my analysis, odds do favor a slight retracement or lower prices temporarily next week, as it is unlikely price can continue to make new highs unabated. Wait for the retracement before committing new capital into the market, unless your particular stocks (swing trade candidates) are showing irresistible patterns.

Best of luck and skills out there!

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