Question: Is the Rally Over?

Member E-mail Question:

Chris -
Is it just because of the recent news stories - auto manufacturers axing jobs at Christmas time - that the market seems to be moving sideways again?

I have been encouraged because of the NH-NL ratio. Also I had some early fortune with my first 2 or 3 attempts at Options trading. So, when I invested more, and things turned south, I'm wondering what's up.

It looks like QSII will need to find support at the 50-MA. Is that what you see? What's going on with WC I bought at the break out above $78 and hasn't done much but flounder. ESRX is also down. Is the rally over? Is it because of all the talking heads that people sat up and thought they'd take profits? Maybe we're getting set up for a fix in 2006?

The only Option I'm doing well in right now is DO.

I try not to get too anxious thinking that the 60-100 route may take 7 - 12 months to complete and I've got until June on my Options, but...

Thanks for your feedback.

MSW Member


My Answer:

The market has been going up for several consecutive weeks so I believe it is taking a well deserved breather. The NH-NL ratio has been increasing when looking at the weekly averages but it has never crossed over the critical 500 new highs per day (a key level for long term rally success). In any event, the rally is still intact and is allowed to pull back from time to time. The ideal time to enter the market was in late October and early November so your gains can cope with a correction similar to what we are seeing. IBD confirmed the rally before I did because I was cautious but I still confirmed the rally in October (weekly screen on 10/22/05). This is when I started to place new positions in MSW Index stocks and when I gave the green light to start buying.
I think you are looking at these stocks from a very short term perspective. Take a look at each stock’s two year chart and you will see that they have all corrected from peak prices from time to time. You need to tell yourself that stocks can’t go up everyday and they must correct when they make a strong move similar to what we have seen in ESRX.

QSII should find support near $74 and then down at the 50-d moving average. The stock corrected in October before the recent run and had a big correction in May and June of this year. Look at the longer term picture and characteristics of the stock.

WC has struggled since breaking above $78 but I have seen this pattern in the past for this stock. The key support level is the 50-d m.a., a support line it has used several times over the past few months. Until it breaks this line, I will not start to turn bearish on this stock. I will admit that yesterday’s action was a bit disturbing for the intraday reversal.

ESRX has moved from $62 to $88 in six weeks so a correction is greatly expected. This stock can’t continue to advance like it has for another six weeks. If you own ESRX, you may want to take the profit if you are worried about the rally ending because the support level is not anywhere near the current price (it’s down in the $60’s). As I said on the daily screen last night, I have placed a physical sell stop in this stock to protect my recent profits.

As far as the rally is concerned, continue to watch the stocks in your portfolio and the MSW Index. If they fall for one or two consecutive weeks, start to lock in profits because the “market” is telling you to do so. Don’t sell after one or two bad days because you could miss the “bigger, more important” profits. Also focus on the NH-NL ratio as you have been doing because this indicator is extremely powerful and can give you a quick glance of the overall trend of the market because it tracks the leaders.

As for your options, give them room to breathe because June still seven months away and a lot can happen (look back seven months for the stocks you own because I am sure they corrected along the way but still managed big advances).

Chris