Common Thread

It was trend up after 10:00 a.m. ET yesterday for the major indices. The SPX ($SPX.X | Quote | Chart | News | PowerRating) ran from the 894.93 intraday low to the 915 intraday high just before 3:00 p.m. Monday's high was 915.96. That ended the move, as the SPX traded down to 907.75, but the programs took it back up to a 913.52 close in the last 15 minutes of trading. NYSE volume picked up to 1.5 billion shares, about 5.0% above average, a volume ratio of 75, and breadth +1260, all of which is positive. The SPX ended +1.9%, the Dow ($INDU | Quote | Chart | News | PowerRating) +1.7%, and the Nasdaq 100 + 4.3%, as techs resurfaced after a day off.

Sectors were all strong as the biotechs, banks and brokers all advanced over 3.0%. The cyclicals and basics clearly underperformed the major indices, while the semis roared back from Tuesday's -2.3% day for a +8.3% gain on the SOX.

With all the short covering in the NDX low-priced stocks, in addition to regular buyers, the NDX 100 is sitting in an inverse head-and-shoulders pattern just below the 1089 September 2001 low, which is now a magnet. The NDX closed at 1070.53, right at the neckline. Both the 200-day EMA and SMA are at about 1130. It won't take much for the aggressive hedge funds that are long to break it out of the neckline to shake up the shorts. In spite of the Merrill Lynch sell recommendation on Intel, now that the major brokerage firms are holier than thou, the stock hasn't lost ground and closed at 19.15 in the same inverse head-and-shoulders pattern as the NDX.

The short in the TLTs remains very positive, as it opened at 88.20 and closed at 86.96. I will continue to short strength against long equity positions. The dollar rose, as did the CRB, which is trading in a 225 - 230 box and looks like it wants to go higher than the fourth-quarter high of 2000. It doesn't look like rates are heading toward Japanese levels to me.

The upper resistance zone, which you are well aware of, is 930 -960, and movement above 926 should get testy, unless we see a move confirmed by slow stochastics and/or RSI indicators which are both now in a negative divergence with the SPX. The 2.0 and 3.0 standard deviation bands fall into that 930 - 960 zone, so I expect a certain pause/decline from that zone. 960 would be a +25% rally for the SPX from 769 in just 29 days. The SPX was 34 days down from 965 to 769. Let the position buyers beware.

The common thread in yesterday's screens regarding percentage gain on an increase in volume was the biotechs. The BBHs are in a six-month ascending triangle right below the 200-day EMA of 92.70. I look for biotech stocks like SCIO and CEPH that have already broken above the 200-day EMA and are now pulling back to either its 20-, 50-, 89- or 200-day EMA. These kinds of stocks provide the best daytrades.

925.66 is the SPX magnet to be taken out for the continuation of this first leg. See the commentary from Nov. 13 titled "Two For Two".

Some other stocks that set up after having broken above their 200-day EMAs and have now pulled back into patterns that set up as good daytrades are (MMM | Quote | Chart | News | PowerRating), (MSFT | Quote | Chart | News | PowerRating), (TARO | Quote | Chart | News | PowerRating), (NBIX | Quote | Chart | News | PowerRating), (CTAS | Quote | Chart | News | PowerRating) and (DD | Quote | Chart | News | PowerRating) if they come for the basics.

Have a good trading day.

Five-minute chart of Wednesday's SPX with 8-, 20-, 60- and 260-period EMAs

Five-minute chart of Wednesday's NYSE TICKS