Earnings season in full swing

A late morning rally attempt fizzled
out yesterday morning, but stocks showed
resiliency in the afternoon and closed within their previous day’s trading
ranges. The mixed session resulted in the Nasdaq
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but the S&P 500
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Jones Industrials
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gain, but the small-cap Russell 2000 took a breather and gave back 0.5%. The S&P
Midcap 400 was unchanged.

Total volume in the both the NYSE and Nasdaq declined by 2%
yesterday, preventing the Nasdaq from registering a bearish "distribution day."
Nevertheless, it was still nice to see that NYSE volume came in above its 50-day
average level for the third consecutive day. It was the first time in six weeks
that this has occurred. Market internals matched the performance of the major
indices. In the NYSE, advancing volume marginally exceeded declining, but the
opposite happened in the Nasdaq. This, of course, confirms the price action of
the S&P closing higher, but the Nasdaq closing lower. Occasionally, market
internals are contrary to the price action in the major indices. When this
occurs, it tells us there is "more than meets the eye" under the surface.

Like the broad market, industry sector performance was quite
mixed as well. Internet, Biotech, and Computer Networking stocks all weighed on
the Nasdaq, while Pharmaceutical, Healthcare, and Utilities sectors helped to
prop up the S&P. The real mover yesterday was the Gold Index
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time to the downside. As anticipated, traders and investors swiftly took profits
from recent strength in the $GOX, causing the index to plummet 6.6%! Although
the long-term charts of the $GOX and GLD remain extremely bullish, we hope that
subscribers who were long followed our advice in yesterday morning’s newsletter
to tighten their stops on gold-related shares. Those who did should have been
able to exit near the top of the run because most of the losses occurred
intraday as opposed to gapping sharply lower on the open.

Taking an updated look at the broad market, we are pleased
that stocks have, so far, retained their gains from Tuesday’s breakout. This is
a welcome change from the numerous failed breakouts and failed breakdowns
the major indices have experienced over the past two months. Given the barrage
of earnings on tap, there is obviously no guarantee that stocks won’t fall right
back down to where they were before the big rally, but it’s just nice to see the
market consolidate after a big move instead of immediately reversing the next
day. The only thing that remains a bit of a concern is resistance of the prior
highs in the S&P, Nasdaq, and Dow. All three indices broke out above those prior
highs and briefly traded at new five-year highs yesterday morning, but traders
quickly moved in and sold into strength. This caused both the S&P and Nasdaq to
finish just below their prior intraday highs, while the Dow managed to close
just above its prior high. Beginning with the Nasdaq Composite, notice how it
stalled and reversed right at the 2,375 level yesterday. As the chart below
illustrates, 2,375 was the exact intraday high from April 7 as well. This level,
of course, should be closely watched in the coming days because it provides a
convenient excuse for sellers to enter the market:

The S&P 500 probed above its April 6 high of 1,314 on an
intraday basis, but fell back into the upper end of its previous trading range.
1,310 is the magic number we have been discussing over the past week and the S&P
closed just one point above that yesterday. If it holds above 1,310, then we
will most likely see a close above the April 6 high within the next day or two,
but it would be negative if the index falls back below horizontal price
resistance at 1,310:

Finally, the Dow finished just above its prior intraday high
from March 21, but near the middle of yesterday’s trading range:

As for the small and mid-cap indices, they remain the place to
be if you’re long the broad-based ETFs. Both the Russell 2000 and S&P 400 are
consolidating at their all-time highs and are holding above their prior highs
from March. Because these indices have the least amount of overhead supply
(virtually none), we can expect them to continue leading the broad market on the
"up" days. The ETFs we trade that track these two indices are IWM (iShares
Russell 2000) and MDY (S&P Midcap SPDR).

The largest factor that has the power to move the market right
now is quarterly earnings season, which is presently in full swing. So far, the
reaction to the major earnings reports has been pretty positive. IBM, Motorola,
and eBay were among the few companies whose stocks sold off after their earnings
announcements, but most of the big names who have reported so far have rallied
post-earnings. Google, who reported a strong quarter after yesterday’s close,
was last seen trading more than 7% higher in the after-hours session. Like we
said yesterday, our overall bias right now is one of keeping your right hand
pressed lightly on the buy button, while simultaneously having your left hand
lightly resting on the "emergency brakes." Above all, remember to
trade what you see, not what you think!

Today’s Watchlist:

Notes = EWW has been consolidating in a sideways range, at multi-year highs, for
nearly four months and is now poised to finally break out of the range. Notice
that we will be "scaling in" to this position. We will buy half of the position
above 39.62 and the remaining shares over 39.77. This reduces our risk exposure
by forcing the trade to confirm its breakout before getting too large of a
position. This trade may not trigger for a few days or longer, but we will begin
stalking it, just in case it goes.