Waiting To Retest

August 1, 2002
Dan Chesler

The
rally from last Wednesdayâ€™s low goes down in history
for its sheer magnitude (vs. duration) as well as the enormous volume on the
reversal day (2.8 billion shares). Last
weekâ€™s action has all the earmarks of an important low.
However, as with other similarly large rallies following climax lows,
the expectation is for an eventual re-test. The
re-test, which normally occurs on lower volume and lower momentum than the
climax low, serves to validate the climax low.

To put last
weekâ€™s rally into perspective, Iâ€™ve included three charts of the Dow
Jones Industrial Average
(
$INDU |
Quote |
Chart |
News |
PowerRating) at the bottom of this page,
along with the following table. The
message here is that important cyclical lows begin from deeply oversold
conditions, and are followed by outsized rallies.
In addition, the market normally goes through a re-testing phase in the
days and weeks following the rally.

LOW

DOW

HIGH

DOW

DAYS

PCT

5/26/70

627

6/4/70

723

13%

10/4/74

573

10/14/74

689

17%

7/24/02

7532

7/30/02

8761

14%

Given the
strength of the rally so far, I expect any re-test to be well contained.
Basis broad index ETFs, support levels include the Monday, July-29 gap
area of 86.00-87.30 in the SPY, and 22.84-23.08 in the QQQ.
Resistance is a less important subject for now, however I expect
overhead supply will likely be found near the 50-day average, currently 97.50
in the SPY and 26.50 in the QQQ.

Daytraders are
currently faced with excellent two-way trading due to increased volatility.
Coming into todayâ€™s session we had numerous stoch-trap
short signals; selling a break below the first hourâ€™s low in the SPY and DIA
for a scalp has worked very nicely so far. Position
traders still want to be on the look out for low-risk entries from the long
side. The sectors with the best
potential going forward will be the ones that have performed best so far, such
as Biotech
(
BBH |
Quote |
Chart |
News |
PowerRating), Financial

(
XLF |
Quote |
Chart |
News |
PowerRating), Pharmaceutical
(
PPH |
Quote |
Chart |
News |
PowerRating).
Avoid Semiconductors
(
SMH |
Quote |
Chart |
News |
PowerRating)
which have been the laggard sector.

Update on the Japan iShares
(
EWJ |
Quote |
Chart |
News |
PowerRating):
I had my eye on the long side of this market due to the longer-term
weekly pattern (higher lows). The
pattern is still intact however EWJ has slipped about 50 cents since I
last covered it. I still like the
chart but would limit purchases until EWJ shows signs of reversing.