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Tomi Kilgore
Sept. 9, 2010, 12:01 a.m. EDT · Recommend · Post:
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By Tomi Kilgore
NEW YORK (MarketWatch) -- Pullbacks are inevitable, but unlike death and taxes, bulls should actually welcome one this time.
Last week's stock market rally, backed by stronger-than-expected manufacturing and labor market data, appeared to take the double-dip scenario off the table. But how far a market rises, and whether or not the key market indexes can surpass some important resistance levels, doesn't tell the full story. How the market deals with adversity is what defines the trend.
At a breakfast meeting in honor of the newest season of "America's Next Top Model," Tyra Banks gives tips on how to take a good photo.
Investors should be dealing with a lot of adversity in the short term. With concerns over the health of European banks resurfacing, and with no significant economic data points on the calendar to back the source of last week's rally, Tuesday's triple-digit pullback in the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 10,387, +46.32, +0.45%) is likely just the start of further selling pressure this week.
But that's exactly what bulls need. The only way to know for sure if last week's rapid market run-up signaled the beginning of a new trend or the final blow-off before seasonal weakness sets in is for the Dow to face, and then pass, some downside tests.
The Dow passed its first test, as Tuesday's drop stopped just before support at the gap in the charts between the Sept. 3 low of 10,322 and the Sept. 2 high of 10,320. The Dow fell 107 points to 10,341 on Tuesday, and hit an intraday low of 10332. Dow futures were up 34 points recently.
The next key support area is the 50-day simple moving average, which currently comes in around 10,274. While it would be very encouraging for bulls if the Dow held above that level, recent history suggests it isn't necessary for the rally to continue.
After peaking right at the 200-day in mid-July, just like the Dow did on Friday, the index then fell as much as 177 points below its 50-day within a week before starting its next rally.
If the 50-day eventually gives way, there should be buying interest at the 10,150 to 10,175 area, which is defined by a few intraday highs between Aug. 24 and Aug. 30.
Rather than view a pullback to that level as a threat to last week's rally, bulls should consider it a chance to prove the downside is now limited. And considering that technical and fundamental backdrop seems a little more supportive, any weakness to that level can be viewed as a chance for bulls to buy more.
TrimTabs Investment Research said it turned "cautiously bullish" from neutral (zero equity exposure) this week because equity supply shrank, sentiment remains in the dumps and because its Demand Index, which relates market returns to money flow and sentiment variables, was well into bullish territory.
In addition, Deutsche Bank chief U.S. economist Joseph LaVorgna said a survey of households, rather than the government's survey of establishments, and a rise in income tax receipts suggests private household job creation is "booming."
But even if the Dow dips slightly below 10,150, as long as it stays above the Aug. 27 low of 9,937 the pattern of higher lows would remain intact, and bulls will have proven they can deal with adversity.
BP PLC rolled out its internal investigation of the Gulf of Mexico oil well blowout Wednesday, and to no one's surprise, the company found plenty of blame to spread around, writes Jim Jelter.
3:21 p.m. Sept. 8, 2010 | Comments: 4
- Tycoon | 12:05 a.m. Today12:05 a.m. Sept. 9, 2010
"Behind the tech drama, signs of a consolidating industry http://bit.ly/cz7Use" 4:50 p.m. EDT, Sept. 8, 2010 from MarketWatch
"After Cadbury deal, what's next for food giants in Europe? http://bit.ly/aJmmSp" 4:16 p.m. EDT, Sept. 8, 2010 from MarketWatch
"@mktwhulbert It's an ill wind that blows no good http://bit.ly/bWzQqX" 1:21 p.m. EDT, Sept. 8, 2010 from MarketWatch
"#Obama planning infrastructure and R&D #tax push http://bit.ly/dc0HZf" 11:44 a.m. EDT, Sept. 8, 2010 from MarketWatch
"Dollar rebounds vs. yen on heels of Tuesday's 15-year low http://on.mktw.net/bA8Qve" 7:39 a.m. EDT, Sept. 8, 2010 from MarketWatch
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