Don’t trust this rally? Stock charts tell a different story

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Wall Street’s bulls say the summer stock rally is a vote of confidence that the economy will turn up sooner than later.

The optimists also are taking heart in some positive forecasts from market technicians -- analysts who watch the price action in stocks, rather than the economic fundamentals, for clues to whether the rally has legs.

Some investors disdain technical analysis as voodoo, but it has its place. Stock technicians don’t forecast earnings or economic data. They focus on what the market action, here and now, is saying about demand for equities -- or what they think it’s saying, anyway.

Here are three chart trends that are encouraging the bulls, even though many of them say the market is overdue for a breather:

--- A near-50% recouping of losses in the ‘QQQQ.’ The QQQQ is the ticker symbol for the PowerShares QQQ exchange-traded fund, which tracks the performance of the Nasdaq 100 index. The Nasdaq 100 are the largest non-bank issues traded on the Nasdaq market. They’re mostly tech giants, including Apple Inc., Google Inc. and Intel Corp.

Tech has led the market rebound this year, a sign that investors are betting on growth. At $39.57 Thursday, the QQQQ fund had recouped almost 50% of its bear-market loss, measured from the October 2007 peak of $55.03 to the low of $25.56 reached last November.

The exact half-way point is $40.30. ‘If we break through that level it would be very bullish,’ said Ryan Detrick, senior technical analyst at Schaeffer’s Investment Research in Cincinnati. Why? Because to some investors and traders, recouping 50% of a peak-to-trough loss is viewed as a sign that a stock is leaving the bear behind.

--- An upturn in the 200-day moving average of the Standard & Poor’s 500 index. A moving average smooths out a stock or index’s price movements over a given period, removing day-to-day fluctuations in favor of showing the general trend, up or down.

The S&P 500 index’s 200-day moving average had been declining, without interruption, since January 2008, for a total of 571 days -- the third-longest such streak on record. On Tuesday, it finally turned up.

Bespoke Investment Group looked at the five longest losing streaks in the moving average prior to this one. It found that, measuring one year after the first upturn, the S&P was higher every time. The average gain: 20.8%. The smallest gain: 7%.

--- A 10% rise in the Dow Jones industrial average above its 200-day moving average. Chart-watchers plot the daily moves of a stock or index against its moving averages to see whether the daily trend is moving with, or against, the averages. Generally, it’s a bullish sign if the day-to-day trend line stays above the moving average.

The Dow index’s rise to 9,154.56 on Thursday left it 10.5% above its 200-day moving average of 8,285 for the day. Mark Dodson, an analyst at Hays Advisory in Nashville, notes a Bloomberg News analysis that looked at each time since 1921 that the Dow had moved from 10% below its 200-day moving average to 10% above the average. There were 21 such occasions, and 85% of the time the Dow was higher a year later, by an average of 18%, Bloomberg found.

None of this offers any guarantees, of course. But recurring stock chart patterns can demonstrate that although market history doesn’t necessarily repeat, it often rhymes.

-- Tom Petruno