Market Comments 6-15-11

The market remains in correction. Yesterday's move in the market constitutes a day-1 of a possible rally attempt on the NASDAQ and day-2 count on the Dow and S&P 500. The general principle is to watch potential rally attempts and pay particular attention to rally attempts on day-4 or later. The reason for this is that at market bottoms short postion covering can mask true institutional buying. Four days is sufficient to reveal the true intentions for a market follow-through. On day-4 or later we look for a significant move up on volume higher than the day before. We watch NYSE volume when looking at the Dow and S&P500 and NASDAQ volume for the NASDAQ. Right now a move up on higher volume in the range of 1.4-1.5% would be considered significant.

Having a follow-through day is a necessary but insufficient condition for a sustained market rally. Leading stocks with great fundamentals breaking out of sound consolidation patterns is the final and most important criteria.

With this in mind, what is happening with the big leaders of the past rally? Lets look at the top ten.

NFLX chart looks good but it is now extended above a 5th stage base and has exceeded a 130% PE extension price target.

LULU is now trading below the 10-week average and also has exeeded its 130% PE extension price target. I don't consider the chart "broken" however.

PCLN is trading below its 10-week moving average and is showing substantial distribution in its 3rdd stage base. It is one of the few stocks that has significant head room (>50%) from a 130% PE expansion standpoint.

BIDU looks to be breaking down from its 5th-stage base. BIDU is the quitessential leader of the prior rally. It broke out in February 2009, in advance of the 2009 bottom and advanced 11-fold making 5 bases on the way up.

APKT recently broke above its 130% PE expanded price target and has broken down from a late stage base after what looks like a climax run to me.

PAY broke down after getting far extended above a 3rd stage base and has corrected down to the 40-week moving average showing significant distribution.

FFIV had a good run and looks to have topped above a 3rd stage base after a climax run and breaking above its 130% PE extended price target. The chart is seriously broken.

RVBD had a climax run and then went up some more. It too busted its 130% PE expansion price target and is now looking like a head and shoulders top pattern.

VMW is trading just below its price target in a 4th stage base on base structure. The chart is not broken but stocks that break price targets usually top. A few leaders can go significantly beyond an expanded PE price target. VMW RS line is lagging however.

AAPL chart looks sick. I compute that it could have room to move up on a price target basis but the chart says head and shoulders top. The current structure is a 4th stage base.

You might conclude from the above that the rally that topped in early May has tired leaders.

So what is holding up or looking constructive?

CEVA, CF, DAR, FOSL, GMCR, HLF, ULTA, CPHD

Mike,

Thank you for the detailed analysis.

One question I have is that once a base count is reset, do you continue to monitor some of these "broken" stocks?

Stocks like DECK, GMCR, PCLN, CMG, AAPL, ISRG, SINA, & SOHU have been institutional favorites over the years in spite of numerous bear phases. Even HANS just tagged an all-time high after numerous bear markets and spectacular rallies. If a company is in a sweet spot of long-term secular growth - like certain stocks and sectors during the 90's and decades prior - will you monitor them going forward?

DECK, AAPL, and CMG, for example, were major leaders of this most recent bull market; however, they were also leaders of the preceding bull market. Is this an historical aberration, where the prior leaders once again take on a significant leadership role after a bear/correction phase?

In addition to some of the constructive patterns you mention, some of the following stocks might be worth monitoring:

AVGO, PLCM, ILMN, SQM, QCOR, and COG (Non-CANSLIM, but from the Natural Gas Sector that you highlighted the other day)

Thank you once again.

Best,

Eric