Despite some rough sledding early in Friday's session, stocks rallied and by
noon had hit their highs. Early in the session, the Dow Jones Industrial Average
was off over 2% due to disappointment over the Federal Reserve Chairman's
remarks, a failure of GDP data to live up to expectations, and a flat consumer
confidence number. But the negatives didn't stop bargain hunters from stepping
into technology stocks, which started a run of short-covering that spread to
many other depressed groups. The pop higher was led by Apple (NASDAQ: AAPL ),
which had been lower earlier in the week due to the resignation of founder Steve
Jobs. And even though volume was fairly light at 1.1 billion shares on the NYSE,
breadth was strong with advancers ahead by over 4-to-1 on both the Big Board and
Nasdaq. In other words, the market acted relatively strong in the face of bad
news. This, plus a neutral Relative Strength Index (RSI) on the S&P 500, could
result in a continuation of Friday's rally even though the chart pattern
argues against this conclusion. Symmetrical triangles, like the one seen on the
S&P 500 chart, are continuation patterns that indicate indecision in this case
a three-week period of indecision due to a withdrawal of the public from a
market that is in the hands of high frequency traders. Normally, a pattern like
this breaks in the direction of the major trend (down). But due to the currently
unnatural source of trading (computer to computer), it could break on the upside
and run the broad market back to the breakdown point at 1,260. Even in more
normal circumstances, rallies back to the neckline break point are common in a
bear market. If a rally occurs and breaks through resistance at about 1,190, be
prepared to sell stocks that you have avoided selling until now or take
defensive action like selling calls or buying puts. Traders should aggressively
short such a move.
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