- Anaylitcal Commentary -

March 24, 2010 (FinancialWire) (By Dr. Joe Duarte) — The Dow Jones Diamonds (NYSE: DIA), the S & P SPDR (NYSE: SPY) and the Russell 2000 Trust Small Cap ETF (NYSE: IWM) all made new highs from the March 2009 bottom, setting up the bears for some potential disappointment barring a sudden reversal of fortune.

The stock market is clearly on a significant momentum run, as the market shrugged off two less than rosy days to end last week. Both days delivered what technical analysts call divergences.  A divergence is what happens when one part of the market doesn’t keep up with those parts of the market that are leading a rally.

Last week, we had two days in which the small stocks failed to keep up with the larger stocks in the S & P 500 and the Dow Jones Industrial average. This led to a bit of a rolling over of the New York Stock Exchange advance decline line, a measure of the number of stocks advancing versus the number of stocks declining. When the advance decline line is sloping upward, as it has been for the last several weeks, it means that more stocks are advancing than declining over a period of time. This is what you want to see, as it confirms that a significant portion of the market is in a rising trend.  When indexes such as the Dow Industrials make new highs but the advance decline line weakens, it’s a pretty good bet that the market could be setting up for a correction.

So, when the NYSE advance decline line made a new high on Tuesday, along with the Dow Industrials, the S & P 500, and the Russell 2000 Index of small stocks, it took a great deal of the wind from the sail of the bears who were wondering if we were getting close to a top in the market.

There are several things to note with regard to technical analysis.  One is that it’s much better at looking backward than forward. The advance decline line could start diverging from the major indexes at any time, and we would have the same questions come up.

Another is that the market has been going up steadily for almost six weeks now, and is due for some kind of consolidation.  That could come at any moment.

The third, and perhaps most important thing is that this rally could still go on for some time. If that’s the way things work out, when the correction or consolidation comes it could be much deeper and could last longer than anyone can predict.  For now, though, it’s very difficult to stand aside and not participate in what is clearly a fairly significant momentum run.

[Go to http://www.financialwire.net/?s=joe+duarte to see more commentaries by Dr. Joe Duarte. Additional insight and commentary from Dr. Joe Duarte (http://www.joe-duarte.com/), can be found by visiting Dr. Joe Duarte’s “Market I.Q.’ (at http://www.joe-duarte.com/free/order_choices.asp), Duarte’s “Intelligent Forecasts” (at http://www.intelligentforecasts.com), as well as by reading Duarte’s books (available via http://www.amazon.com/), which include “Market Timing For Dummies”, Successful Energy Sector Investing," "Successful Biotech Investing", "Successful Energy Sector Investing” and "After-Hours Trading Made Easy" (co-authored by Duarte). In addition to regularly contributing to Investrend Weblogs (http://www.investrendweblogs.net/jduarte/), has logged many appearances on CNBC and is a frequent radio guest.  One of CNBC's original Market Mavens, Dr. Duarte has been writing about the financial markets since 1990.  He is a featured columnist on Stockwatch.com. His articles and commentary have been featured on Marketwatch.com, Barron's, Smart Money, Medical Economics, and in Technical Analysis of Stocks and Commodities magazines.  In 2003, Doctor Duarte received second place, in the professional section, of the Medical Economics Investment Challenge with a 12-month return of 42%.]

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