Last week, using a simple popular measure of short-term momentum, the 50-day moving average, I judged 15 Dow stocks as having further upside potential, 8 as being 'neutral', but having potential to follow
the bullish group higher and 7 as bearish. (Based on that assessment the market looked like it could re-test the prior top.) Needless to say there are a few more of Dow stocks, based on today's close, that have shifted from one column to another, mostly to the bearish side.
Let me back up and start with a key recent technical consideration that does not involve short-term momentum models, which can shift quickly on bearish news. That subject is:
Index or individual stock retracements of a prior drop that stop at a 1/2 to 2/3rds retracement (of the decline), followed by further weakness, bring to the forefront longer-term influences. In this case bearish influences.
I couldn't give a good explanation as to why rallies tend to fade or struggle after retracing a Fibonacci 62% or a 'bit more' (namely, 66%) of a prior price swing. They just do. A weak rally may not be able to retrace more than 25 to 38% of a prior decline. A so-so recovery will recover half (50%) of a prior downswing. Stronger rebounds will manage a recovery rally in the 62 to 66% area, but may either stop there or struggle to regain more than this amount.
INDEX AND STOCK EXAMPLES:
The S&P 500 (SPX) has gotten hit with waves of selling over the past few sessions after the Index retraced an amount equal to between 62 and 66%. It has held up relatively well on the sell off as enough big cap stocks continue to find support on significant such dips; there hasn't been a waterfall type decline so far.
SPX is well below its prior rate of ascent, as seen with its up trendline however and this may spell a more choppy sideways trend ahead in the next few weeks; and reflects many fundamental cross-currents with earnings and the economic outlook.
Johnson and Johnson's (JNJ) recent rally struggled at resistance implied BOTH by having made a 66% retracement and by a return to its previously broken up trendline; prior support once penetrated, tends to 'become' resistance on subsequent rallies.
The Nasdaq Composite (COMP) retraced exactly 2/3rds of its previous decline and then has struggled to mount a rally. That said COMP has come back from two heavy selling bouts this week and managed to close at or near its 50-day moving average.
Still, the Index reflects the struggle to sustain a rally once it retraces 66%. One third, no problem, one-half can be easy, but a 2/3rds recovery has this tendency to reflect a period that brings in ever more selling and nervousness about how far a recovery rally can carry. Those long stocks and call options find this is a opportune area to grab some profits.
Nasdaq bellwether stock Intel Corp/INTC (also part of the Dow 30 average) has run into significant resistance/selling pressure on its rebound back to its previously broken up trendline. However, the fact that INTC has retraced more than 66% of its prior decline and keeps popping back ABOVE this resistance zone, suggests that the stock has decent potential to re-test its prior high; and to 'regain' (get back above) its previous long-term up trendline.
Looking at the 30 Dow stocks and drawing the up trendlines that defined the upward progress or rate-of-change from the March '09 low, only 8 remain in uptrends as defined by prices holding above their up trendlines.
Those are: Boeing (BA), Home Depot (HD), Kraft (KFT), McDonalds (MCD), Merck (MRK), Procter & Gamble (PG), Travelers (TRV) and Waste Management (WMT). MRK was right down to its multimonth up trendline today. As a group, these 8 stocks tend to 'define' basic must have services and products or ways to save money in a tough economy.
Home Depot (HD) is on a barnburner rally and rebounded strongly from its last pullback to its up trendline dating from the market bottom made almost (now) a year ago. A one-year anniversary coming up and this time span can mark a difficult period, sustaining wise, for the trend.
All the other 22 Dow stocks from Alcoa (AA) to ExxonMobil (XOM) have pierced their long-term daily chart up trendlines during the January sell off or before; none after. This technical reality is a primary reason pointing to why technically the overall market may struggle to mount a sustained rally ahead. This reality reflects a loss of overall upside market momentum on an intermediate to long-term basis.
Of the 22 Dow stocks that have broken under long-term up trendlines, bellwether market stock General Electric (GE) provides an example of the loss of longer term upside momentum with a subsequent sideways trend and trading range after that.
GOOD TRADING SUCCESS!!