Intermediate-term bias remains bearish, unless…

The Feds raised interest rates by a
quarter-point Thursday, but comments that implied a potential end of
the rate hikes sparked a monstrous rally across the board. Stocks trended higher
throughout the morning, in anticipation of the announcement, then surged much
higher in the final ninety minutes of trading. A reversal in the Semiconductor
Index helped the Nasdaq Composite
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PowerRating) zoom to a 3.0% gain. Small caps
fared even better, as the Russell 2000 rocketed 3.8%. The other indices kept
pace with the gains as well. The S&P 500
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PowerRating) advanced 2.2%, the Dow Jones
Industrials
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PowerRating) 2.0%, and the S&P Midcap 400 2.9%. Each of the major
indices finished at their intraday highs, indicating the return of institutional
buying.

The most important thing about yesterday’s rally is that
volume finally came into the markets as well. Total volume in the NYSE spiked
26% higher, while volume in the Nasdaq was 36% higher than the previous day’s
level. It was positive that turnover in both exchanges also rose above 50-day
average levels for the first time in nine sessions. Market internals were
extremely bullish, no doubt aided by broad-based short covering. In the NYSE,
advancing volume trounced declining volume by nearly 13 to 1. The Nasdaq
internals were equally impressive with a ratio of 10 to 1.

As we warned about a few days ago, the positive reaction to
the FOMC meeting invalidated the bearish technical chart patterns in the major
indices. This is the reason we have avoided entering new short positions over
the past week, despite generally bearish action. Yesterday’s rally resulted in
both the S&P 500 and Nasdaq Composite firmly busting out above their seven-week
downtrend lines, which forced short covering that generated further upside
momentum. Those prior downtrend lines should now act as new support levels, so
all bets on the short side of the market are now off, at least in the
short-term. The major indices remain well off their 52-week highs and have a lot
of overhead supply, but momentum from yesterday’s breakouts should enable both
the S&P and Nasdaq to at least test the next resistance of their prior highs
from June 2. The red dashed horizontal lines on the daily charts below mark
those resistance levels:

Historically, the initial knee-jerk reactions from Fed days
have often proven to be false and the following days often result in a move in
the opposite direction. However, yesterday’s rally was so powerful that the move
is unlikely to quickly come undone. Still, it is something to keep in the back
of your mind.

Our intermediate-term bias still remains bearish unless
the indices confirm their strength by rallying back above their prior highs from
June 2. However, we are now bullish on the short-term. Momentum should enable
many sectors to achieve at least another week or two of gains. We are focusing
on the ETFs that were showing the most relative strength before
yesterday’s rally. Stocks and ETFs that don’t drop when the market does are
usually the first to surge higher when the market eventually rallies. A good
example of this is the iShares Xinhua China 25 Index (FXI), which we pointed as
having relative strength a few days ago. It rallied 4.3% on strong volume
yesterday, nearly double the percentage gain of the S&P 500. Presently, we
remain long both the Telecom HOLDR (TTH) and the StreetTRACKS Gold Trust (GLD),
both of which registered solid gains yesterday. Regular subscribers will see the
trigger, stop, and target price for another sector ETF we are stalking for
potential long entry today.

NOTE REGARDING HOLIDAY HOURS: In
celebration of Independence Day on July 4, the U.S. equities markets will close
at 1:00 pm EDT on Monday, July 3. The markets will be closed all day on Tuesday,
July 4. The Wagner Daily will be published as usual on Monday, but will
not be published on Tuesday. Regular publication will resume on
Wednesday, July 5. Enjoy the holiday!

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