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Senior al-Qaida leader reported as dead

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Stocks firmed off their lowest levels of the trading session after reports that Mohammed Atef, a senior al-Qaida leader has been killed. The market reacted somewhat bullish after the reports were released.

Market action today as represented by our Dow Hypothetical portfolio (established Sept. 10th) has profit taking in the upper end of stocks that have been the strongest and showing the bulk of the gains, while there appears to be profit taking by bearish traders in the lower end as those weaker stocks make gains today. In essence, the inchworm head is moving lower, while the tail of the inchworm is moving higher. This looks to be a rather normal movement of profit taking from both bulls and bears.

What we now want to be looking for is which part of the inchworm becomes the anchor. For the market to move forward an equity bull would want to see the lower tier stocks either continue to move higher and then have those strong stocks from past weeks turn and head higher. This process won't take place necessarily in a day or two. Like an inchworm, it a relatively slow yet methodical process.

An equity bear wants to see the upper end continue to pull back and at the same time, have the lower end stall out and bearish traders stop locking in gains. Then the bear wants to see the tail end head back lower, and have the upper tier of stocks continue their decent.

For the equity bull, it becomes important to be looking for stocks that have positive relative strength.

Recently, share of Hewlett Packard (NYSE:HWP) surged to the # slot in our Dow portfolio that was benchmarked from September 10th, but the relative strength chart remains "bearish" as we have not seen a 3-box reversal on its chart.

RS Hewlett Packard vs. Dow Industrials

I've added three blue "question marks" on the above relative strength chart of Hewlett Packard (NYSE:HWP) to show subscribers where we might begin to be considering shares of HWP as a more bullish stock. While many may feel they've missed an important move in HWP's share price in recent weeks from the September 16th low of $12.50 to today's trading at $21.88.

Bullish traders remember all too well when shares of HWP gave a relative strength sell signal back in October of 2000 when the stock was trading near the $47 level. Those that bought and held a weak stock that was then "out of favor" have had a rough ride, even at today's trading of $21.88.

I'd rank HWP as "aggressive bulls" only at this point and any bullish positions should be using disciplined stops. Once we get a reversal in RS, the bulls can begin accumulating the shares with a more bullish confidence.

Remember! To calculate RS, simply take the stock's share price and divide by the index you are measuring against.

Jeff Bailey
Senior Market Technician
Option Investor

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