Critical Support

The Dow rebounded from its critical 7500 support level today by over 150 points. This is an extremely important rebound as I have mentioned in my last post due to a better than expected ISM index today.

The ISM index, or Institute for Supply Management Manufacturing Index, is the first heavy weight economic data to be released each month and it measures the sentiments of purchasing managers in the manufacturing sector. All manufacturing activities start from these guys as they purchase raw materials for processing, which makes it some kind of leading indicator on the economy. What really gives the ISM index its importance isn't the fact that the Fed actually want to see it first before releasing it to the public, but its uncanny correlation with real GDP. A reading of 50 is thought to be consistent with a real GDP of 2.5% and every full point above 50 is thought of to add 0.3% to real GDP. Of course, a reading of above 50 would indicate economic expansion and a reading of below 50 would indicate economic contraction. Today's reading definitely still says economic contraction but it is important as it continue to suggest that the worst is over. Like I mentioned on Sunday, ISM index has been recovering gradually over the past quarter and that is extremely important at this stage of the recession.

However, I doubt we will see an explosive breakout to upside as investors are obviously still worried about how this Friday's unemployment rate would turn out (see stock market calendar). In fact, the Dow still closed within the trading range of the big down candle of 30 March, making today's "rally" more of a sideways day. Short term bearish momentum is still evident from my indicators and I won't call a support at 7500 unless I see that momentum turn around and the Dow holding above 7500. Interestingly, this is also the longest time the Dow has remained above its 50MA since May 2008, which also reinforce the fact that all technicians should be watching out for and expecting a change in character in the charts. There isn't any obvious strength or leadership from any of the sector charts yet so don't get too optimistic too early. Heroes die young.