How the Near Term’s Looking

by George Leong, B. Comm.

Markets are holding up well, but, at the same time, there is some capping and hesitancy in traders wanting to move stocks higher. The DOW has steadily closed higher in seven straight sessions to August 26, gaining about 326 points or three percent in that time. The trading volume is relatively light, but we expect this to change as September nears and the summer holidays end. The third quarter is expected to yield improved results.

The second-quarter GDP contracted one percent at an annual rate, which was better than the 1.5% contraction expected by economists, and was the smallest decline in three quarters. The reading was the fourth straight monthly decline and clearly shows that the economy is on the mend. Economists are predicting GDP growth of about two percent in the third quarter. If this pans out, we could see a year-end rally in stocks. The problem will continue to be a struggling jobs market, which needs to improve.

For this week, all eyes will be on the private ADP Employment Change report on Wednesday and the key non-farm payrolls report on Friday. Traders will be looking for a decline in job losses, as was the case in July.

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My near-term technical assessment is as follows:

Investor sentiment continues to be bullish. Investor sentiment on the NYSE has been bullish in 92 of the last 95 sessions (97% during this time) back to April 9. The readings have been extremely bullish at over 90% since July 14, when the DOW was trading at 8,359 and NASDAQ at 1,799. In the technology area, the NASDAQ has shown bullish investor sentiment in 73 of the last 95 sessions, or 77%, and in each session since July 14. The positive sentiment will help add support to stocks. The charts show an upward trend intact.

On the NASDAQ, the near-term technical picture is bullish, with above-average Relative Strength.

Market breadth as indicated by the advance-decline line (A/D) is above average, with seven of the last 10 sessions above 1.0. The near-term trend is neutral.

The NASDAQ is back above 2,000 and trending higher on the chart. The index is above its 20-day moving average (MA) of 1,992 and its 50-day MA of 1,904. The index is also above its 200-day MA of 1,656. The near-term target is 2,080. The NASDAQ is overbought, so watch for some selling pressure.

The CBOE NASDAQ Volatility Index (VXN) is a barometer of near-term market volatility based on NASDAQ 100 index option prices. A high VXN indicates maximum fear and a low VXN indicates reduced apprehension.

The VXN has been on a decline. The current trend is down and indicates less volatility.

For the DOW, on the blue-chip side, the near-term technical picture is bullish, with above-average Relative Strength. The recent top was broken on the chart, but there is some topping.

The DOW is holding above 9,000, and it traded as high as 9,620 last Tuesday. The index is just above its 20-day MA of 9,330 and well above its 200-day MA of 8,312. The near-term targets are 9,757 and 10,000. The index is overbought.

The near-term technical signal for the S&P 500 is bullish, with above-average Relative Strength.

The S&P 500 is above 1,000, its 20-day MA of 1,004, and its 50-day MA of 956. The near-term target is 1,058. The index is overbought.

The CBOE S&P 500 Volatility Index (VIX) has been on a decline. The current trend is down and indicates less volatility.

The Russell 2000 is bullish, with above-average Relative Strength. The index is above 500 and its 20-day MA of 567. The near-term targets are 600 and 648. The index is overbought.

Hang tight and ride the gains. Continue to watch stops and positions.