This market has shown itself to follow a very technical path over the course of this rally. The market started the September run with a perfect gap and go scenario that ignited from a descending channel. Since then, the move higher was calculated with a lot of participation from the strong leading stocks we list on the morning rundown often. All these leading stocks, many in tech, made new move highs before the indices. And that’s way it’s supposed to be in a healthy market.
The S&P peaked in the 1226-1227 area and gave us some clues that we were going to have our first “pull-back” The question was, how deep would it be? The S&P put a reactionary low in at the 1173 area around the 50-day moving average, which also happened to be the 25% retracement level of the move from 1040 to 1227 high. The confluence of factors gave us confidence this area would hold. We then had a nice oversold bounce back to the 1200 area!
As we hit the reactionary low it was time to measure the action of the leaders. Most leaders pulled in less or the same percentage as the market, giving us further signs that the market would not “fall apart”. In a more perilous correction, leading stocks typically fall 1.5x to 2.5x faster than the index, but we didn’t see that type of action.
Netflix, Inc. (Nasdaq:NFLX), salesforce.com, inc. (NYSE:CRM), Amazon.com, Inc. (Nasdaq:AMZN), Apple, Inc. (Nasdaq:AAPL), Baidu.com, Inc. (Nasdaq:BIDU), Riverbed Technology, Inc. (Nasdaq:RVBD), Chipotle Mexican Grill, Inc. (NYSE:CMG), Las Vegas Sands Corp (NYSE:LVS), and F5 Networks, Inc. (Nasdaq:FFIV) held in strong, and even somewhat forgotten stocks like SanDisk Corporation (Nasdaq:SNDK), Cree, Inc. (Nasdaq:CREE), and VMWare, Inc. (NYSE:VMW) started to perk up on that oversold bounce. With today’s bounce some are already making new highs again.
So if you take a look at the headlines we’ve seen over the last several weeks, from Elections to QE2 to Europe to Korea, there have been plenty of reason for the markets to show indecision and possibly pull-in more strongly. But instead we have seen signs that the headlines are no longer the most important piece of the puzzle for the markets. The correlation between stocks and bonds has lessened, and investors are choosing to focus more on the valuation and growth prospects of individual companies than macro risks. As traders, we have been able to focus on the actions of individual stocks and place less emphasis on the macro, a fact that is conducive to better trading if you can take advantage. It’s never easy as the action unfolds, and we all continue to learn every day, but the charts are once again pointing the way. Right now, they are telling us there are some very exciting stocks out there that we should be looking to buy on pullbacks.
Have a Great Thanksgiving! Enjoy your family and friends. This is a great holiday to be thankful for what you have, take a deep breath and be happy you’re alive!
*Disclosure: Long AAPL, SPY
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