Massive Capitulation: Morningstar Revisited

I mentioned yesterday "the Dow has hit major support here at the 200 day moving average and the upward trend line around 12800 but as we've seen with major support levels in both the Nasdaq and S&P, the momentum to the downside puts this major support level at risk". Many times areas of big support such as this support area in the Dow don't provide support right at the line, particularly when emotions are high and fear based selling kicks in. Rather, you often get some kind of capitulation - a large flush of weak hands, people scrambling to get sell orders in. Essentially throwing in the towel. An exhaustion of weak hand selling, bargain hunting and some big time short covering can fuel unbelievable rallies as we saw today. After all that, the Dow still has support of its 200 day moving average and upward trend line. The lows of today will act as a line in the sand, an area of significant support. The move at the end of the day yesterday was forceful and it is enough of a springboard for a dead cat bounce. However, let's keep in mind that most of the move today was in the worst hit industries such as financial, homebuilers and REIT's. Has anything changed really? No. The market was way oversold and just needs to retrace some of the downward move. As I've said before the big money will be made on the short side and any bounces, particularly weak volume bounces provide areas for short entries. You have to believe that there are lots of people out there that have been piling up significant losses are just itching to get out with a wash or much smaller losses. We have room to run a bit here, but this is NOT the time to be getting aggressive on the long side. Patience. I'll have a full run down of the charts in the Weekly Report on Sunday night.

Major Indices Performance - The Numbers

(Note: volume averages are based on the average over the past 50 days)
Data as of 4:00EST - End of Day August 16th 2007

Nasdaq: DOWN .32% today with volume 38% BELOW average
Nasdaq ETF (QQQQ) DOWN .98%, volume 146% ABOVE average
Dow: DOWN .12%, with volume 64% ABOVE the average
Dow ETF (DIA): UP .23%, volume 162% ABOVE the average
S&P ETF (SPY): UP .75%, volume 154% ABOVE the average
Russell Small Cap ETF (IWM): 2.06%, volume 199% ABOVE the average

Self Investors Leading Stocks

The Self Investors Leading Stocks Index is comprised of stocks in the Breakout Tracker, which is a database of the fastest growing companies near a breakout or having already broken out of a base. Leading stocks did not do well today despite the big market reversal.

Summary:

Decliners led Advancers 213 to 129

Advancers were up an average of 2.34% today, with volume 43% ABOVE average

Decliners were down an average of 3.06% with volume 83% ABOVE average

The total SI Leading Stocks Index was DOWN 1.02% today with volume 68% ABOVE average

Where's the Money Flowing

Many investing websites provide leading industries based on price performance alone. However, without accompanying volume levels, this can sometimes be misleading. The only way that I know of to gauge industry/sector strength WITH volume levels is through the analysis of ETF's. A couple years ago this was not possible, but as more traders/investors use ETF's they become a much better tool for gauging the health of the market and seeing where the money is flowing (or not flowing). Using the proprietary SelfInvestors Demand Indicator score which measures price and volume movements, I'm able to quickly see which sectors/industries are seeing the greatest inflows of cash. For a detailed look at how I go about gauging sector/industry strength please see here.

Current Leading Sectors/Industries (over last 30 trading days): Still Just Bonds!

Current Lagging Sectors/Industries (over last 30 trading days): Broker/Dealers, Gold Miners, Utilities, Materials, Retail

Today's Market Moving Industries/Sectors (UP): Regional Banks, REITs, Homebuilders, Financial

Today's Market Moving Industries/Sectors (DOWN): Gold, Gold Miners, International Real Estate

Stocks

I highlight one stock selected from a group of stocks moving up with volume well above average and most likely breaking out of a base or consolidation. Today's stock is a stock I covered back in February when it first broke out of a base - Morningstar (MORN). Most of the leading stocks that I track that moved with volume today were stocks that had beaten down and were recovering from oversold conditions. Morningstar (MORN) was one of the few near all time highs that moved with volume. See my previous commentary on Morningstar (MORN). Here's an updated look at the current technical action:

I first highlighted the stock when it broke out above 47 back in February. It quickly spiked 20% higher before settling into another base. It wasn't until the company reported outstanding earnings that the stock gapped up with record volume out of a cup with no handle base to a new all time high. Very bullish action. The stock is now digesting some of those gains and nearing another entry point. I'm going to be looking to get in between 55 - 57.

Full Disclosure/Disclaimer: The stock of the day is by no means a buy recommendation. Please do your own research and make a personal decision based on your own tolerance for risk. I currently do not own a position in Morningstar (MORN)

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