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2/09/05 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Wednesday: None issued
Buy alerts issued: BC
Trailing stops issued: None issued
Stop alerts issued: JJZ; FSH
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Techs roll over on CSCO news, threaten to take down SP500 as well.
- Oil inventories less than expected; oil barely moves on the news.
- Bonds rally again while Fed governor talks of changing Fed statement.
- Volume nudges higher as stocks post significant price losses.
- Stocks own there own once more with light economic calendar. NASDAQ has to recover quickly. Maybe Dell will help.
Techs prove to be the weakest link.
The NASDAQ 100 chart looked weak, and the CSCO earnings gave it the push needed to fail at the 50 day EMA. When the large cap techs are selling, overall NASDAQ cannot be far behind because the index is market cap weighted. Thus NASDAQ was heading lower as well, and it sliced through the 50 day EMA it had just taken back last week. SP500 and SP600 sold as well, managing to hold a support level, but all indices suffered significant price losses that were more than what you want to see in a continuing consolidation. SOX actually looked halfway decent on the close even though it gave up the 200 day SMA. It managed to hold the 50 day SMA and has a shot to turn back the tide. A long shot in a high wind through a stand of trees, but a shot.
Volume was also up on NASDAQ and NYSE. No major surge in volume, but clear distribution as stocks dove lower. A weak attempt at a positive stand on the HPQ news tried to counterbalance the CSCO earnings. That took about 10 minutes to resolve itself. There were no bounce attempts either. Stocks tanked in the first hour, moved laterally for 3.5 hours, then fell some more in the last two hours to close right at session lows. That is action reminiscent of the January selling: sell, try to consolidate, fail.
SP500 and SP600 have led the rebound and even after Wednesday are still in shape to hold the line and resume a move higher. NASDAQ will have to pull a hat trick and recover the 50 day EMA. That could happen as it checked up on some support at 2050, but the return of distribution, the drop in NASDAQ and NASDAQ 100, and the larger point losses show the sellers are not out of the market, that there was not going to be a nice, gentle consolidation that Monday and Tuesday hinted at. If there is going to be a NASDAQ recovery, it needs to happen sooner than later.
THE ECONOMY
Oil inventories fall, oil stopped slide at least for the day.
Oil supplies fell 1 million bbl when they were expected to rise 730K. Gasoline dipped below expectations, but the 500K rise was not far off. Distillates were not even close at -3M versus the 1.43M drop expected. Last week when oil inventories fell so did oil. Why? Because OPEC had just threatened to cut production if supplies rose. Thus down was good.
Wednesday oil gained a nickel, hardly a strong reaction to significantly lower oil stocks in the US. The recent slide lower halted on the data, but there was no reversal in the recent weakness. That shows some substance still in the OPEC threat (lower supply still not seen as a reason to run prices higher), but it also shows that Saudi Arabia's promise to keep oil flowing at 9M bbl/day is taking some of the day to day volatility out of oil price moves.
For now this is just daily noise in the price of oil that has found its niche in the mid forties near term. Some believe oil in the forties is proving not to have an impact on the US economy. Oil has been in this range for several months with no real end in sight, and GDP has remained strong as well as other economic indicators. Well, as we often here, past performance does not necessarily guarantee future performance. Higher oil prices, just as higher income taxes, ultimately takes its toll. It may not be at first; when taxes are raised, revenues rise immediately. Those higher rates, however, reduce the investment money in the economy and raise investment risk. Economic activity slows and tax rates fall despite the increased rates. Higher oil prices are a tax, and the longer they stay at these levels, the more damage done to consumers. The bond market has not inverted, but it is flattening and potentially means some economic slowing (see earlier reports this week for more details). Q4 GDP was well below expectations. There is slowing in many economic indicators; not serious weakening, but slowing. Are they oil related? You can never tell regarding this more amorphous connection, but it would be hard to argue that sustained oil prices at these levels are not having a slowing impact on the economy.
Ten year bond falls below 4% even as Fed governors says 'measured' may go away.
Speaking of bonds (again), the Wednesday treasury auction was snapped up by foreign and domestic investors, so much so that the 10 year bond yield fell below 4% (3.98%) Wednesday. Despite concerns about foreign investors turning away from US debt and equities, they continue to line up to buy. The reason is one we have discussed in detail before: their economies are geared to supply the US consumer. Failure to use those excess dollars to buy treasuries could impair the US economy and thus the consumer and cut off their main market. Not going to happen.
With the Fed pushing up the short end and buyers pushing down the long end, the yield curve continues to flatten. As noted earlier this week, however, it is not at the level where it predicts an economic slowdown. What many are interpreting this level as is an indication of little chance of inflation. Well, there is inflation in those items the government likes to leave out and indeed in those it includes. Not a lot, but there is some as a hangover from the demand driven recovery while supply still slept. Inflation has been rising each quarter, not falling. A little inflation is normal; we don't want to see it accelerating from here, however, particularly with the economy showing some slowing.
Atlanta Fed president Guynn told the WSJ that the Fed might change its wording in its statements, dropping 'measured' and 'accommodative.' Now some viewed this as the Fed further backing off from its stance of increasing the intensity of rate hikes and using rates to help rectify some of the issues with the trade gap that could (repeat could) develop. Of course, just as inflation never developed in 1999 and 2000, those theorized problems with the trade gap have not developed either as the most recent refunding revealed.
To us that was hardly the case, and indeed, suggested the opposite. Guynn said the Fed still "got a ways to go" with respect to rate hikes. Nothing new there. But when you look at what those two words are in the statement for, you realize that dropping them does not mean that the Fed is going to pause as some were quick to suggest Wednesday. Measured refers to the pace at which the Fed moves. If the Fed has no intention of stopping rate hikes anytime soon and wants to get to 4% or so, then removing 'measured' does not suggest it is going to pause. To us 'measured' always meant moderation; drop the moderating language and you have the Fed we all know and hate. As for accommodation, well, even Guynn said Wednesday that at some point rates get to a level where they are not at an accommodative level. If the Fed still has a long way to go and it is going to move at a not so measured pace in the future, it may not take too long before it hits the point where the rate level is not accommodative.
We may be wrong; the bond market rallied on the news. Still, markets almost always overshoot near term. Reality is no doubt going to return when bond traders ask themselves does anybody really believe the Fed is going to pause? That would defy history.
THE MARKET
Wednesday was not the action you like to see when stocks and indices are trying to consolidate and set up for the next move higher. Monday and Tuesday were nice, quiet sessions with modest point changes and volume. That is what you like to see, kind of like the quiet before the storm. Stocks breakout when the sellers are mostly sold out and buyers are left quietly accumulating stock; at some point demand exceeds supply and they take off to the upside.
Wednesday was anything but quiet as stocks posted substantial point losses and volume moved higher. No modest losses as sellers moved in and pushed stocks lower on volume. It was not just a lack of buyers, but the return of some selling after a solid advance and an attempted consolidation of that move.
The Wednesday action does not spell the end of the rally attempt, but it is severely testing it. NASDAQ was betrayed by the large cap techs that never did clear the 50 day EMA on the rebound. They are again below the 50 day EMA, selling on rising volume. SP500 and SP600 are at support and still in quite good shape as downside breadth was hardly blowout. It was not a banner day for them either as they sold on rising volume as well. Simply put, Wednesday the sellers came back into the market, and the weakest link is threatening to take down a new start in SP500 and SP600.
Market Sentiment
VIX: 12; +0.4
VXN: 18.24; +0.64
VXO: 12.12; +0.9
Put/Call Ratio (CBOE): 0.93; +0.12. Some positive indications in the ratio. Closes above 0.90 have been followed by upside interim rallies all during 2004.
NASDAQ
Looking for NASDAQ to hold the 50 day EMA may have been a pipe dream as it plowed through that level on slightly rising, but still below average volume.
Stats: -34.13 points (-1.64%) to close at 2052.55
Volume: 1.977B (+0.66%). Modest bump in selling shows the drop was not necessarily accompanied by a leap in new selling activity. Given the point drop, however, it is hard to ignore the higher volume on the selling as NASDAQ wiped away most of the modest accumulation sessions achieved on the upside rebound.
Up Volume: 271M (-826M)
Down Volume: 1.695B (+848M)
A/D and Hi/Lo: Decliners led 3.01 to 1. This was a pretty good licking. The large caps sold the most, but NASDAQ stocks were getting hammered across the board.
Previous Session: Advancers led 1.13 to 1
New Highs: 115 (-31)
New Lows: 47 (+23)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
A short peak above the 50 day EMA (2076) failed Wednesday as NASDAQ sold sharply and close near the session low. It failed in mid-January after a quick peak above the 50 day EMA as well. It filled that gap lower on the low volume rebound, and now it appears ready for the next down leg. It never showed a lot of strength to the upside, merely shadowing SP500 and SP600 as they rallied on volume. Weak price action and weak internally; it will have to rely upon SP500 and SP600 to hold the line and drag it back up just as they did in this last rebound.
NASDAQ 100 sold a bit more than overall NASDAQ, dragged down by Cisco's earnings report. The large caps have been in trouble for awhile with stocks such as JNPR, EBAY, QCOM and other large techs hitting the skids along with Cisco long before this earnings report. Indeed, CSCO did not even hit a new low for the month for what that is worth. It held the lows of its bottom dragging trading range of the past 6 months. Some support here at 1500 but the 200 day SMA (1470) looks likely again.
As noted, SOX held up pretty well. It did not hold the 200 day SMA (419.89) but it did hold the 50 day SMA (416.25) and is still right in range where it could hold and continue the solid move on this rebound. The 200 day has been the bugaboo for SOX since early 2004. It has to make a stand here and rebound if NASDAQ is going to hold and reverse the thud lower on Wednesday.
SP500/NYSE
Large caps thudded to the 50 day SMA on rising, average volume. They are still holding the rebound, but the size of the drop and the rising volume were not good action.
Stats: -10.31 points (-0.86%) to close at 1191.99
NYSE Volume: 1.51B (+6.72%). Solid volume increase but at average it was still well below the above average accumulation volume during this rebound. Thus while the drop was on rising volume it was not a full fledged return to distribution.
Up Volume: 386M (-351M)
Down Volume: 1.101B (+444M). Very lop-sided downside trade. Those in the market were mostly sellers.
A/D and Hi/Lo: Decliners led 1.9 to 1. Strong downside breadth but not very strong and not matching the upside breadth in the rally.
Previous Session: Advancers led 1.25 to 1
New Highs: 206 (-52)
New Lows: 21 (+6)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Sold all session and closed at the session low just above the 50 day SMA (1191). Volume was up to average on the selling but as noted, it was still lower than the upside accumulation volume during the prior rebound. It is still very capable of holding in this range and continuing the move, but it has to stem the selling. The 50 day EMA (1183) is possible, but if it sinks that far it the rebound is getting gutted. A hold at the 18 day EMA (1189) would be a good indication of an attempt to return to the upside.
Small caps were under the gun as well, selling more than NASDAQ (-1.9% versus -1.6%). They got thumped down to the 10 day EMA (324.42) but as noted, NYSE breadth was not anywhere near extreme on the day so the selling appears to be concentrated as opposed to broad. This drop comes after SP600 rallied back to its all-time at 330 in late December, and thus the drop has somewhat more nefarious undertones. It is still holding most of the rebound, is at the 10 day EMA, and many of its stocks are still in good shape.
DJ30
The blue chips turned lower as well on stronger volume, but HPQ accounted for some of that increase and that was considered a positive story. This was the lightest drop of the major indices and DJ30 is still above the important 10,600 level.
Stats: -60.52 points (-0.56%) to close at 10664.11
Volume: 310 million shares Wednesday versus 244 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Initial jobless claims are out Thursday along with a few more earnings reports, Dell being the one most will watch. It may be able to bring the techs back after CSCO shot them down Wednesday.
Before that report the momentum to the downside is strong and some follow through to the Wednesday selling would not be uncommon. We don't want to see much more downside from SP500 and SP600 as they are the leaders and will need to demonstrate such. For that matter, we don't want to see much more downside on NASDAQ either as it is at some support, and if it has a chance to hold it will have to do so soon.
Technically NASDAQ and NASDAQ 100 look bad, and Wednesday they were obviously the tail wagging the dog as the CSCO earnings disappointment dominated the market. NASDAQ followed on the way up, unable to show the strength of SP500 and SP600. Now it is leading downside, trying to torpedo all the other indices. The break lower Wednesday was pretty strong, but it was also on continued so-so volume on NASDAQ. Thus if SP600 and SP500 can hold the line and rebound again on volume, NASDAQ may be obliged to follow along once more. After this selling, however, we want to see NASDAQ start to recover before we step in and try to catch that piano.
Support and Resistance
NASDAQ: Closed at 2052.55
Resistance:
2066 to 2070, the bottom of the January lateral move.
The 50 day EMA at 2076
The 50 day SMA at 2106.66
2110 - 2112, the top of the November consolidation.
January high at 2154 (early 2004 high)
2250 - 2260 from January/February 2001 highs and lows.
2282 from 5-2001 high.
Support:
2050-54, prior resistance and the June high
2047, the June high.
2000
The 200 day SMA at 1978
S&P 500: Closed at 1191.99
Resistance:
1196, the mid-January high and the early December peak in the left shoulder.
1200 acted as resistance and now may hold as support.
Q1 1999 lows at 1215
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
The 50 day SMA at 1191
1185, the top of the November consolidation range.
The 50 day EMA at 1183
1175 second high in that double top that spanned late 2001.
1157 is solid support from January through March consolidation tops.
The 200 day SMA at 1139
Dow: Closed at 10, 664.11
Resistance:
10,754 is the February high
10,975 - 11,000 from Q4 2000, Q1 2001
11,350 from the May 2001 highs
Support:
The 50 day SMA at 10,612
Price consolidation at 10,600 level is a key level.
The 50 day EMA at 10,555
The late April, June peaks at 10,478 to 10,512
10,400, the bottom of the November/December range
10342 the early September peak.
The 200 day SMA at 10,288
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
February 07
Consumer Credit, December (3:00): $3.1B actual versus $8.0B expected and $2.0B prior (revised from -$8.7B)
February 09
Wholesale Inventories, December (10:00): 0.4% actual versus 0.9% expected and 1.2% prior (revised from 1.1%)
February 10
Trade Balance, December (08:30): $57.0B expected and -$60.3 prior
February 10
Initial Jobless Claims, 02/05 (08:30): 325K expected and 316K prior
February 10
Treasury Budget, January (2:00): $8.6B expected and -$1.4B prior
End part 1 of 3
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