Pockets of Solid Action

 | Oct 17, 2012 | 10:30 AM EDT
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Tuesday, which was the second day of a rally attempt for the Nasdaq Composite and S&P 500, had its share of positive qualities. For starters, volume on the New York Stock Exchange and the Nasdaq came in higher than it did Monday, giving the rally some credibility. The "risk-on" trade was clearly in effect as several growth names bounced back after recent weakness.

But don't be too quick to say the selling is over, because it's still very early in the rally attempt. Another sign of strength -- whether later this week or beyond -- would be an indication that the market trend may be ready to turn upward again. From here, I'd like to see indices follow through with conviction, with a percentage gain of least 1.5% in higher volume. Follow-through days like these are best seen on the fourth day or later of a rally attempt.

Apple (AAPL) bulls surely were encouraged by its price action Tuesday: Shares rallied 2.4% to $649.79 in higher volume. The stock isn't out of the woods yet, though. When a growth stock falls below its 50-day moving average, a former support level like this can often turn into resistance. Apple's 50-day line is currently at $661. On Tuesday, Apple scheduled a press event for Oct. 23, at which the company is widely expected to unveil a smaller version of the iPad tablet. Earnings are due two days later, on Oct. 25. Quarterly profit is seen rising 26% from a year earlier to $8.89 a share, with sales seen up 29% to $36.3 billion. Apple has missed the consensus earnings estimate in two of the past four reported quarters.

While recent price action has been a bit unsettling in tech leaders like Apple and Amazon (AMZN) – the latter is also trading underneath its 50-day line -- plenty of other growth names with leadership potential continue to hold up just fine. Salesforce.com (CRM), for example, is working on a handle area in a bullish cup-with-handle base. Shares closed Tuesday at $155.46, just underneath a swing point (buying area) of $161.90. With the market still in a downtrend, it remains to be seen if a technical breakout is in store for Salesforce -- but if indices follow through with conviction in coming days, the chances of a breakout here will increase.


Salesforce.com (CRM) -- Weekly
Source: StockCharts.com


Meanwhile, several other growth names -- including many in my Ultimate Growth Stocks model portfolio -- continue to show solid supporting action with limited sell signals. Michael Kors (KORS) is a good example.


Michael Kors (KORS) -- Weekly
Source: StockCharts.com


Tech stocks were pressured the most during the recent market pullback, mostly due to concerns about the quality of third-quarter earnings. The Nasdaq recently undercut its 50-day moving average, but it reclaimed the line Tuesday. That doesn't mean its trend has changed, but it was a positive technical development. The Dow and S&P 500, meanwhile, recently found support at their respective 50-day lines.

Late Tuesday, earnings from Intel (INTC) and IBM (IBM) didn't do anything to instill confidence that concerns about third-quarter tech earnings are overblown. Both stocks traded lower in after-hours trading, with IBM taking the hardest hit.

Big Blue matched the consensus estimate with profit of $3.62 a share, up 10% from a year earlier. But sales growth disappointed, falling 5% from last year to $24.7 billion. The consensus estimate was for sales of $25.7 billion. Judging by IBM's action in after-hours trading, a trip to its 50-day moving average around $203 seems likely.

Ken Shreve got his start in the financial markets with Investor's Business Daily (IBD). He spent over 10 years as an editor and columnist for IBD and its Web site Investors.com. He also acted as the Investors.com "Market Wrap" anchor and presented IBD investing workshops and seminars nationwide. He continues to provide market commentary on national radio and has appeared on CNBC. He now writes Ultimate Growth Stocks, a weekly newsletter at TFNN and hosts Breakout Investing, Monday through Friday from 3-4 PT. Learn more at http://www.kenshreve.com.

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