The employment report came out before Friday's open with disappointing results, yet the market did not sell off but held its ground, a sign of inherent strength in the market. Underscoring this strength is the growing list of leading stocks breaking out over the last couple of weeks. With Thursday's breakout to a four-year high for all the major market indexes, the market's bullish uptrend has started to show some "legs."
Both gold and silver continued their aggressive upside moves as European Central Bank head Draghi gave a speech about directly buying bonds of Eurozone nations without limit. The markets cheered the speech as a major step forward in dealing with Eurodebt troubles. This intention, however, must be supported by all parties, most notably the German Bundesbank, and if so, could put the ECB on par with the U.S. Federal Reserve in terms of its ability to manipulate the bond markets. However, the question still remains as to how the ECB will accomplish this bond buying.
Another issue is that since QE2 ended in June 2012, also known as Operation Twist, the question is whether renewed forms of quantitative easing a la QE3 will effect markets as dramatically as QE1 and QE2. With the Fed's ammo almost exhausted, only incremental actions remain. Yet, it is generally unwise to fight the Fed as the Fed remains in control as long as inflation stays under control. That said, the negative move in T-Bonds together with the big moves in precious metals, implies that the markets are expecting more inflation. Market's will be monitoring closely the Fed's upcoming policy announcement on Thursday, and we would not try to "game" the announcement in anticipation of what the Fed might or might not announce with respect to impending QE3, remaining focused on the action of individual stock holdings instead.
Mellanox Technologies (MLNX) was downgraded on Friday for valuation reasons which is normally a good reason to buy a leading stock on weakness. However, MLNX also got hit due to negative news out of INTC. INTC owns just over 10% of MLNX, so for these reasons, MLNX sold off on volume. That said, using the 7-week rule, MLNX obeyed the 10-day moving average for at least 7 weeks so could be sold on a 10-day violation. A violation occurs when the stock closes below the moving average in question then moves below the low of that close in subsequent trading days. MLNX violated its 10-day on Friday as it undercut its low of August 30 of 111.77 so could have been sold there. Alternatively, if one wishes to try to hold onto their position in MLNX a little longer, one could simply use an undercutting of Friday's low as their exit point.