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APPLE REPORTED AFTER the bell Monday that it sold "only" 4.2 million iPads, a disappointment on Wall Street after its shares had been bid up by one-third since just late August. The tech darling's shares—and indeed the overall global equity markets—took one on the chin Tuesday, especially after China surprised by raising key short-term interest-rate targets.
But the bears did not have much time to celebrate. Apple (ticker: AAPL) came roaring back Wednesday and the Dow Jones Industrial Average erased its entire Tuesday loss by midday.
U.S.-traded Chinese stocks did the same. For example, one stock covered in Monday's column (see Getting Technical, "No Chinese Wall of Worry," Oct. 18, 2010), China Petroleum & Chemical (SNP), set a fresh 52-week high Wednesday.
Such resilience suggests Tuesday's fireworks was a much needed dose of reality in an otherwise rising short-term trend.
To be sure, the path to higher prices is still fraught with obstacles. For example, the Dow is a little more than 1% from its April intraday peak of 11258 (see Chart 1).
Chart 1
Investors are very much aware that a rather steep correction, punctuated by the May 6 "flash crash," started there, so selling pressure can be expected to build. To chartists, this overhead supply of shares for sale, called resistance, is an important feature.
In the leading technology sector, itself paced by Apple, the Select Sector SPDR-Technology (XLK) exchange traded fund is already at its own April resistance level (see Chart 2). Based on the behavior of some of the major components of the ETF, this is more likely to be a speed bump than a definite top.
Chart 2
For example, Intel (INTC) has been lagging the sector and the market since July. Readers will recall that the market began a powerful move higher in July and an even better move in September -- but Intel was left in the dust. In current trading, even this "old tech" name in a world of "new tech" is showing some signs of life (see Chart 3).
Chart 3
After the bell on Oct. 12, Intel issued a good earnings report but with a toned-down outlook. The next day, its stock scored what chart watchers call a "key reversal to the downside" by jumping up at the open and closing below the previous day's low. It is a sign that something turned dramatically in investors' heads that day.
But it survived Tuesday's market rout, and Wednesday it challenged the declining trendline drawn from April's high. The implications are that it is preparing for an upside breakout. Given Intel's weight in the technology ETF, such a move will add more fuel to the tech engine in the market.
While chart resistance and trendlines are factors that must be overcome, one danger continues to lurk. In Wednesday's trading, the yield on the key two-year Treasury note fell to yet another all-time low of 0.33%. Having money flow into the safety of what is essentially a cash equivalent on the day the stock market is rallying nicely is a vote of no-confidence.
The stock market's setback served to cleanse out some of the exuberance that built up during a rally that defied history and crushed the bears. It gave the bulls some religion, too, in that it reminded them that sooner or later Wall Street and Main Street will get back into sync.
But to paraphrase John Maynard Keynes, "Markets can remain irrational a lot longer than you can remain solvent." For now, the short-term trend remains higher.
Getting Technical Mailbag:Send your questions on technical analysis to us at online.editors@barrons.com. We'll cover as many as we can, but please remember that we cannot give investment advice.
Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.
Comments? E-mail us at online.editors@barrons.com
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