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In the past week a nascent intermediate bull previously bound by things like symmetrical triangles have gone on to the moniker of “Confirmed Rally Under Pressure,” according to the growth tacticians at Investors Business Daily. One or two days of distribution and pressured prices have helped promote that cautionary shift in bias. Also likely weighing in, although I’m not 100% on this, is how IBD’s cadre of growth stocks is and has been faring during the time since the confirmed rally began.

Taken in isolation the points mentioned likely offer a somewhat ominous-sounding backdrop for the market. And to at least a certain extent, those factors should be respected. However, there are other truths as well. Factors such as bottoms typically being difficult and drawn out affairs meant to harass, gnaw and ultimately rid themselves of early birds, umm, bulls, is one such consideration that seems to ring true and define the current environment. Further and statistically speaking, the intermediate evidence still weighs in favor of higher prices. That type of evidence, for those interested, can be found in this writer’s other pieces and pulled from the archives at Optionetics.

That said, combining those two ideas and this market observer still likes the odds for a sizable percentage rally. It certainly doesn’t have to happen that way of course. And in fact, looking at Thursday’s premarket, Wall & Main is in for yet another weak start to the session. More important, well to this corner, if we also factor in things like the market’s purported disappointment over Ambac’s “No Deal” verdict (ABK) yesterday, but the ability for the major averages to still rally, the case for the bulls is solidified.

An additional bit of “not as nice” potential worry, short-term extremes in negative sentiment haven’t matched January’s levels as evidenced by the VIX. That type of behavior could very well make the case for Art Cashin’s well-televised thoughts on the market needing a full-fledged retest a reality. But and as I’ll show below, there are at least a couple of ways to “handle” a bull, should it decide to show its face for more than just an afternoon.

Figure 1: Alcoa (AA) Weekly

“All Aboard?” Last week this column wrote about Burlington Northern’s (BNI) weekly double bottom, complete with a solid-looking handle. Over the past five days not much has changed, except for the fact the handle has continued to etch out decent volume “tells” within the consolidation. As such, the chart remains one reason for this corner to remain cautiously optimistic of an intermediate bottom still being in place.

Another similar weekly double bottom and one of the reasons behind the strength in transport stocks like Burlington, comes to us courtesy of aluminum giant and Dow component Alcoa (AA). Shown above, we can see a series of lower highs and lower lows and representative of a potential downtrend. What! Well, that’s one truth embedded in our charting tea leaves. Another and as annotated by this corner is the same pattern setting up an undercut double bottom with the most recent action forging a handle slightly below its mid pivot.

So, which pattern is correct or holds the higher odds of success? Somebody will need to backtest that for this corner and send me the results. However, the interpretation is to side with the bulls in this instance. If traders pull up an even larger view, such as the monthly or an expanded weekly, it’s quickly realized that Alcoa has gone nowhere for just more than four years. In fact, the February highs from 2004 are at 39.44 and smack dab sitting within the current consolidation. For that reason and in appreciating a tiny bit of the current hype surrounding the commodity boom, as well as the existing confirmed rally, this particular “downtrend” is labeled by its more affectionate and bullish-sounding title.

Figure 2: Imclone (IMCL) Weekly Consolidating

While the only bull these days seems to be coming out of anything commodity related, many names within the biotech space have carved out patterns of relative strength, albeit a bit more quietly. A couple of those stocks providing leadership include Genentech (DNA), Gilead (GILD), Celgene (CELG) and the lesser-known Netherlands-based Qiagen (QGEN).

Another well-known name and one previously associated with past scandalous and intoxicating times of market behavior is Imclone (IMCL). The weekly chart has been carving out a mostly lateral consolidation pattern for the past five months. The technical hemming and hawing also has the characteristics of an undercut double bottom as annotated on the chart. Either way, the work being performed can act as a platform or springboard for higher prices. In truth, a breakdown could also occur, as could additional time spent foiling bulls and bears alike. That said, to forgive and forget is sometimes a very important key to finding future or sometimes re-emerging leaders. And with an overall “Attractiveness Rank” of “Best In Group” at IBD, this corner is willing to think that some of the incarcerated have duly served their time.   

Chris Tyler
Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.

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