FINANCIALS LEAD DOW HIGHER
John J. Murphy
DOW NEARS JULY PEAK... Led higher by banking shares, the Dow gained 255 points today to end within striking distance of its late July peak. Unfortunately, volume was once again disappointing. Breadth also showed a modest two to one ratio of winners over losers. Even so, the extent of the rally seems to rule out the idea that the Dow is tracing out a sideways consolidation pattern within its downtrend. It now looks more like the Dow (and the market in general) will probably seek higher levels. We still view this, however, as a bear market correction -- as opposed to the start of a new bull trend. If the July peak is exceeded, we'd expect a move up to the 50-day moving average. One of the symptoms of a correction rally is that it takes place in three waves (or an ABC correction). We appear to be in the third wave of that bear market correction.

Chart 1

BANKS JUMP ON BRAZIL... Two of the Dow's biggest gainers were in the bank group -- Citigroup and JP Morgan. Charts 2 and 3 show both bank leaders moving up on expanding volume. Chart 4 shows that the Bank Index has already hit the highest level in a month. A lot of the banking gains appear to have come from the IMF bailout of Brazil which reduces the liabilities of major banks involved in that region.

Chart 2

Chart 3

Chart 4

BRAZIL BAILOUT... The announcement of the Brazil bailout sent the Brazilian Bovespa up 473 points. That aided the bounce in markets all over the world. [Earlier in the week, we showed the German DAX starting to bottom as well]. The next chart shows that the short-term indicators for Brazil have turned positive. That should aid the short-term recovery in progress both in the U.S. and in foreign markets.

Chart 5

BIOTECHS AND DRUGS SURGE... Earlier today we showed the Biotech and Drug Indexes rising over their 50-day moving averages -- as healthcare had a good day. Another medical stock that had an especially good day was Cardinal Health

Chart 6

Chart 7

Chart 8

GOLDS FADE... Gold stocks continue to struggle. A month ago the XAU Index fell under its 200-day moving average -- which was one of the factors suggesting that the stock market had hit an "interim" bottom. As the chart shows, the XAU bounce is meeting with new selling near the 200-day average, which has become a resistance line. With the market on the rebound, it's not too surprising to see gold stocks in retreat.

Chart 9


August 12, 2002

John J. Murphy, CNBC-TV's technical analyst for many years, and Greg Morris offer money managment and market services at MURPHYMORRIS.COM , email address orders@murphymorris.com.