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Outside Reversal Day Deserves Attention; Dow Advances Versus Nasdaq

David Becker
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The Dow Jones Industrial Average ($INDU) broke out to new highs on Thursday morning. At the close on Wednesday, the Dow had pushed and closed above 17100. On Thursday, the Dow Industrial Average made an intraday high of 17151 before selling off to be down .94%. This outside reversal day (Higher high and lower low) can be indicative of a short-term trend change. One day does not make a trend so we will watch to see if the major average can recover.

The SP500 ($SPX) had a relatively high volume day on Wednesday and again on Thursday, although the direction were opposite. Wednesday was the highest volume in almost 3 months with the exception of the Quarterly Options Expiration day in June. Friday is the options expiration day for July and as part of earnings season, it is likely to be a heavy volume day. The back-to-back high volume may just be repositioning for the next month ahead of OE or it could be adding to the clues for an intermediate trend change. Prior to the recent high volume days on Wednesday and Thursday the trend had been low volume with price moving higher.

The ratio between the Dow Industrials and the Nasdaq Composite is generally considered a growth index. The $COMPQ has outperformed the $INDU by more than 50% since the 2009 low. A change in investor behavior towards this growth trend may be occurring as we near the end of US based stimulus. The Federal Reserve anticipates ending the stimulus in October. The ratio might be bottoming, and investors could purchase the Dow and Short the Nasdaq as a market neutral trading opportunity.

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