The pause that tells us where this rally is headed

07/29/2010 9:30 am EST


Jim Jubak

Founder and Editor,

Now we test this rally.

The upward move in the market stalled yesterday, July 28, at technical resistance for the NASDAQ Composite index, which had led the advance.

Nothing unexpected there. The NASDAQ Composite is up 10% in just 18 days. That’s enough to convince some investors to take profits. A technical analyst would call the market “overbought.”

It’s what happens from here that counts, that determines whether we’ve had a great bounce, a very quick but decent summer rally, or are on the verge of something more.

What makes deciding how this market will break now so hard is that stocks have been so volatile recently.  Arthur Hill of counts six moves in the NASDAQ Composite and NYSE Index of 8% or more since the April high. (That’s three moves of 8% or more up and three down.) That’s an average of one 8% move every 2.66 weeks.

Semiconductor stocks, which have helped lead the most recent upward move, show the same volatility (and then some) with six 10% moves since late April.

On that pattern investors can expect that any pullback here would be quick and substantial. (Like 8% or more, perhaps.)

The NASDAQ Composite hit a closing high of 2296 on July 26. Support from the mid-July low is at 2150. That’s about 6.4% below the July 26 high. If the market doesn’t get down to this level, but instead starts to move up after hitting 2200-2250, according to Hill, the action would argue in favor of a further advance.
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