What does the rally off the lows mean?

Gary Kaltbaum is an investment advisor
with over 18 years experience, and a Fox News Channel Business Contributor. Gary
is the author of

The Investors Edge.
Mr. Kaltbaum is
also the host of the nationally syndicated radio show “Investors Edge” on over
50 radio stations. Gary is also editor and publisher of “Gary Kaltbaum’s
Trendwatch”…a weekly and monthly technical analysis research report for the
institutional investor. If you would like a free trial to Gary’s Daily Market

click here.
888-484-8220 ext. 1.

We believe our job is a simple one. It is
to interpret market action based on price and volume adding in a little bit of
sentiment. Sometimes the moves last a short amount of time and then there are
the occasions where the moves last months, if not years. When we see a move is
about to occur, we can never be sure at that time as to duration or
price…but we can put together the weight of the evidence to try and figure
things out. In recent months, despite a softening of the internals, despite
the SEMICONDUCTORS and BIOTECHS getting trashed, despite the BOND MARKET
rolling over and despite the fact this market had not had a 10% correction in
eons, markets held up. In fact, the DOW kept moving to new highs. It was in
this one thing that caused us to take pause. Whenever the DOW leads for a
time, it usually occurs at the end of bull cycles. This is not a guess. This
is what odds favored as it has occurred many times in the past. On May 11, we
interpreted the top for you as support levels broke. Since, the market has
taken a bludgeoning as not only did our market sink, but markets around the
world went along for the ride. EMERGING MARKETS had mini-meltdowns. We were
not surprised at this occurrence as EMERGING MARKETS are much less liquid than
ours and knew they were going to be vulnerable in a big way.


Now, everyone is trying to figure out what this latest rally off the low means.
Eager investors are interested in being told everything is ok and the markets
will right themselves and move higher. So let’s take a technical look.


The DOW…which continues to outperform most major indices, (hmmm!) held short
term support at 11,039 before bouncing up the past few days. It sits just
below the 50-day average.


The S&P 500 held support to the penny at 1245. Amazing how that occurs. You
can draw a line going back to July ’05 and see why this number is so
important…and why it has held so far.

The TRANSPORTS continue to be a port in the storm. In fact, it is the only
major index ABOVE short-term moving averages.


The NASDAQ and especially the NASDAQ 100 continue to lag badly. Both remain
under the 200-day average with the NDX way below. Great move on Thursday but
we will have more to say on that in a second.

Ok…that’s all the reporting. Now what? Thursday’s move was impressive in
price. We also liked the fact that the NASDAQ and NDX finally found a
bid…but…WHERE WAS THE VOLUME? Until volume really kicks in, we consider
the recent action nothing more than a ridiculously oversold bounce up into
resistance. Studies have shown that in order to confirm a lasting rally after
a low has been put in, the market should jump in the 4th through 10th day off
the low on a pick up in volume. Thursday’s volume was not only down, it was
anemic. We are not opposed to one showing up. We just want to wait until one
occurs. We will then need to see bases show up and leadership break out. Let
us be clear. There is a clear lack of leadership right now and very few bases
to consider.


WORLD MARKETS have been in bounce mode but again, their charts are
suspect…and that’s  being nice. One of the characteristics of a bull move is
world markets going along for the ride. Not happening!


Fewer than 5 out of 10 charts are in good technical shape…even after the
recent bounce. There is no better number than this to indicate market health.


Sectors of note:


GOLD headed right to where we thought…the 50-day average. This is normal as
GOLD became too extended and had to correct. We would call this juncture
something of a goal line stand for the near term picture. It would be a
negative if GOLD broke below the 50-day moving average. We suspect it may put
up a fight in here and may need some time to consolidate before attempting to
move up. GOLD stocks continue to underperform the metal.


OIL PRICES remain in a base near the highs. In fact, OIL PRICES have refused
to break down. We can’t say that about many OIL STOCKS as many broke below
moving averages and some are downright gross. There are a few very strong
names that should be watched like OII, KMG, EP and MDR. We just believe it is
going to continue to be tough to play in this group as the volatility has been
amazing. We believe the same of most COMMODITY stocks as they are now trading
with a lot of volatility. These groups have had a big run. This volatility is
actually quite normal after such a move.


The BOND MARKET has finally broke above near-term resistance. We expect more
upside testing in BONDS here. A move above $85.15 on the TLT would be a
bullish sign.

We are less thrilled than most with this market. If volume had shown up on
Thursday, we could at least get a little excited. We cannot say yet whether
the recent plunge and this anemic bounce will lead into something deeper but
we can be clear of one thing. If volume starts to rear its ugly head while the
market starts to turn down off this recent bounce, you best put on your
raincoats and get out your umbrellas. And…if recent lows are taken out,
(which we don’t think will happen imminently) then see ya. 

Gary Kaltbaum