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Stocks rebound on economic data and end of month adjustments

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Stocks are trading at their session highs as the halfway point of the session is completed. After closing just above a rounding 200-day moving average yesterday, the Dow Industrials (INDU) 10,022 +1.11% are back above the psychological 10,000 level. Shares of building products retailer Home Depot (NYSE:HD) $42.00 +4.6% and semiconductor bellwether Intel (NASDAQ:INTC) $28.35 +3.39% are bolstering the Dow's gains, while fractional losses in EK, HPW, IBM and T have just 4 of the 30 components currently in the red.

Shares of Home Depot (HD) may be finding some bullish rotation as key rival Lowes (NYSE:LOW) $46.85 -2.25% sees some selling after LOW announced at a shareholder meeting that the company predicted Q2 earnings of $0.53-$0.54 a share, which was in line with consensus estimates of $0.54. The company also provided FY02 earnings of $1.66-$1.69, slightly below consensus of $1.70.

Home Depot Chart - $1 box

In our May 21st market wrap at premierinvestor.net, we thought a break below the May 6th low of $44.56 might have the stock falling vulnerable to the $40.66 level of retracement from the bar chart, as the bearish vertical count from the point and figure chart hinted at $39. Yesterday's low came pretty close to that bearish count of $39, when the stock traded a low of $39.85. Today, the stock may well be benefiting from some portfolio rotation as risk has been reduced in HD over the past couple of weeks. With competitor Lowe's (LOW) offering little upside guidance, it might make sense from some bulls to rotate some cash away from LOW and back into HD at the lower price level.

Transports trying to get above 50-day MA

The economically sensitive Dow Transportation Average (TRAN) 2,770 +1.9% is currently testing its rounding lower 50-day moving average. A break above this intermediate-term moving average could spark further gains in the broader market averages. A move much above the 2,800 level could then see further bullishness present itself in the averages. As discussed in the past, many technicians look for Transports to lead in an economic recovery.

Dow Transportation Average (TRAN) - Daily Interval

Today's factory orders number that showed a 1.2% gain was much stronger than the forecasted 0.3% gain and that has some of the more economically sensitive sectors like the deeper cyclicals and transports showing gains. Key technicals in play right now are the Dow Transports (TRAN) at their 50-day MA. If the market likes the numbers enough to outweigh tensions overseas, then traders might look for a break above the 50-day, to perhaps then lead to a test of 2,810 in the TRAN. A break above that level could see some shorts come in and cover, giving a pop to the 2,884 level. MACD is rather "neutral" right now and pressure could be building.

The July Light, Sweet Crude Oil futures contract (cl02n) is up 2.47% today at $25.98. In mid-May, this contract jumped to a high of $28.00 and that weighed on the transports. With oil back lower, this too could provide a catalyst for bullishness in the transports should oil prices continue their decline.

Jeff Bailey
Senior Market Technician
Option Investor

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