The Dow Jones Industrial Average is nearing multi year and all time highs. Regardless of all the background noise, this is an extremely important technical position for the Dow. Its technical position is illustrated on a monthly 10-year chart showing that the 1999 high of 11,750 is being approached as of Wednesday evening’s close at 11,613. In addition, the May of 2006 high of 11,671 is also being challenged, and by the time you read this, these highs may have already been breached. On the other hand, failure to decisively retake these technical levels over the next few weeks would be viewed with important bearish technical significance in the market.

The Dow is nearing its all time highs with some serious divergences; but as with the Nasdaq market in the late 1990’s, it is pure folly to do anything about the divergences except note them in the back of your mind. Here’s some food for thought that should take place in the back of your mind only.

The chart below shows the comparative performance of several US stock market indices from the 2003 market bottom to the present. There has recently been a complete handoff of leadership from the transports and small caps to the larger cap stocks found in the Dow Jones Industrials and S&P 500. Since the May top, and subsequent sharp correction, only the large cap indices have been able to approach their old highs, while the higher powered, higher risk stocks have failed thus far in approaching their May highs. While the emotional leaders now are lagging, the large capitalization stocks that trade on some semblance of reason and not emotion are trading at relatively high valuations. It makes one skeptical whether the market can advance in any meaningful way without more emotional leadership stocks.

Over the last month, an emotional leader has again entered the picture to lend an air of optimism to the market and it is none other than blue chip technology stocks. The chart below depicts the performance of the Nasdaq 100 versus the S&P 500.

It is important that the Nasdaq 100 is now at an important technical level and its near term fate will be resolved soon. As measured by the ETF QQQQ, the Nasdaq 100 is at a 3-year support/resistance level at about 40. The trading today (Thursday) is important, because a Nasdaq daily rally could be a decisive break of the technical resistance level at 40. Similarly, failure at the 40 level (which is likely to be accompanied with a failure of the Dow at multiyear highs), over the next few weeks, would be significantly bearish to the overall market.

Here is a shorter term view. With the Oracle rally and the Fed saying bullish things about short term interest rates, the Nasdaq tried to close above its weekly intraday high but as of Wednesday, failed. It did however; successfully close above its previous highest daily close. More on this in “Today’s Market�, below.

Recalling the beginning of the October of 2002 rally, it began on a rainy evening in after hours trading when Yahoo reported better than expected quarterly results. After leading the stock market and Nasdaq higher, Yahoo traced a multi-year perfect head and shoulders reversal pattern which was completed when support at 30 was broken. Yahoo is now at another relatively important potential technical support level at 25. The character of this market has been for support to hold and therefore, a loss of this support level for Yahoo would tend to suggest a change of overall character in the market.

Google has formed a symmetrical triangle which it seemed to break out of following a recent Cramer upgrade. However, in the face of a sharp Nasdaq rally, Google finished down Wednesday on very high volume. Google now sits near its clustered moving averages and at the apex of a perfectly formed symmetric triangle where things tend to “happen.� The future behavior of Google, another emotional leader, will also shine light on the sustainability of the US stock market rally.

Today’s Market

The battle for 40 on the Nasdaq 100 ETF raged on today with the bears getting the better of the bulls today. It’s the most exciting race next to Baseball’s race for the wild card where the Dodgers, Padres and Phillies are battling it out for the wild card and western division lead.

The chart and story of Google is perhaps one of the most compelling on Wall Street. Score one for the bulls today as those sadistic souls bearish on Google saw it rise over 2% in a down market. Illustrated below is the battle for the triangle.

The triangle is usually a continuation pattern. This suggests that Google should resume its upward trend soon. However, several technical rationales including Elliott wave suggest that bull markets usually occur in three upward waves. Elliott wave would suggest that wave 3 not be the shortest of the 3 up waves. If wave 5 extends much further, then wave 3 would be the shortest, and it would thereby invalidate the wave count. So which is correct? The bullish triangle or bearish EW count? No need to fret, the market will decide.

Today saw the market acting as a microcosm of the comparative performance chart illustrated above. Former market leaders such as the Transportation index, small caps, and mid caps lag, and Dow Stocks and the S&P 500 lead.

Most importantly, precious metals and precious metals stocks may be stabilizing. For example, silver as measured by the silver ETF, may have put in a short term bottom 5 trading days ago when it put down a hammer candlestick. A close below 104.61 invalidates this conclusion; 113 would break some short term resistance. There could be a trade there for the most agile.

Oil and commodities may also be stabilizing, although it is still early. Sentiment seems to be quite negative on oil and commodities. Short term sentiment has been a fairly reliable indicator of late. These days there is little sentiment that is other than short term.
Speaking of sentiment and approval ratings….it's not worth mentioning!
Martin Goldberg