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Nice rebound for bulls, but there's work to be done

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Stocks are holding their best levels of the session as we approach the half-way point as the Dow Industrials (INDU) 9,640 +1.75%, S&P 500 (SPX.X) 1,030 +2.3%, NASDAQ Composite (COMPX) 1,550 +3% and Russell 2000 (RUT.X) 468 +1.96% hold their best levels of the session.

Overall, there's been little change to the underpinning bullishness from earlier this morning. Sector gainers have the Biotech Index (BTK.X) 373 +5% leading gains as Amgen (NASDAQ:AMGN) $42.53 +5.82% benefits from an upgrade at AG Edwards to "buy" from "hold" on valuation. While AG Edwards admits that Abbot Laboratories (NYSE:ABT) $37.70 +2.58% D2E7 may be strong competition for AMGN's Enbrel, the firm believes that AMGN shares are down low enough to provide the best risk/reward profile seen in more than two years. AG Edwards started their "buy" recommendation with a $46 price target on Amgen (AMGN).

The Fiber Optic Index (FOP.X) 54.55 +5% is also vying for sector gainer today as this group benefits greatly from short-covering. Compenents CIENA (NASDAQ:CIEN) $4.89 +15.6%, JDS Uniphase (NASDAQ:JDSU) $2.95 +7.2% and Juniper Networks (NASDAQ:JNPR) $7.65 +7% are trying to recover from recent 52-week lows.

Key levels that traders will be monitoring will be the 9,800 level in the widely quoted and followed Dow Industrials. After achieving its bearish vertical count of 9,300 on Friday, the Industrials rebounded Friday and are getting some follow through today. I'm expecting the 9,800 level to provide some formidable near-term resistance, which is where this major market average triggered a spread-triple-bottom sell signal on June 3rd.

Dow Industrials Chart - $50 box

I think current bullishness in the Dow Industrials is a combination of various factors. This week is triple-witching and there will undoubtedly be volatility in this major market average over the next week. That combined with the Dow Industrials recently achieving a bearish vertical count from its point and figure charts will have some hedge funds as well as other major institutional funds making some adjustments as we near the end of the second quarter. Today's trade at 9,650 does have the vertical count now turning back to bullish, but as noted in the chart above, the Dow Industrials, as well as other market averages and even many stocks have had difficult times achieving bullish counts before being negated by a new sell signal.

S&P 500 Index Chart - $10 box

The S&P 500 Index (SPX.X) is still working against a bearish vertical count of 960. As noted in previous commentary, the Dow Industrials (INDU) have shown greater technical strength and current action perhaps "makes sense" as to the Dow showing first sign of recovery near-term. Good correlation may be made should the Dow Industrials rally to the 9,800, should we see the SPX.X achieve the 1,040/1,050 levels. On the above chart of the SPX.X, we've seen the SPX manage to rally about "1-box" up into previously generated sell signal, only to then lose some steam and once again reverse lower.

I'd continue to place more "bullish" thought in the Dow Industrials at this point that I would in the SPX, should the Dow Industrials start making any headway above 9,900 level, then further signs of bullishness in the SPX above 1,050 would be expected.

Should the Dow Industrials begin to stall out, expect some bears to come in and begin putting pressure on the S&P 500 once again, with a longer-term target at its bearish vertical count of 950.

Jeff Bailey
Senior Market Technician
Option Investor

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