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2/22/05 Technical Traders Report Update
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Technical Traders Report Subscribers:
Next full report issues Wednesday.
MARKET ALERTS
Targets hit alerts: PTEN
Buy alerts issued: TSO; PMTI; CVC; STLD
Trailing stops issued: FLSH
Stop alerts issued: UBET; TTEC; PIXR
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:
- Key issues for 2005 give market catalyst to sell off.
- Economic issues converge as oil gets too high and rates set to rise more.
- Consumer confidence ticks higher as expectations fall.
- SP500 breaks through 50 day EMA as indices distribute for second session in three.
- Some follow through selling may lead to an intraday bounce.
Oil, interest rates, inflation issues give reason to sell.
The rally higher was somewhat weaker, showing lower volume on the rally back than on the January sell off. The lack of volume showed that some big money was sitting on the sidelines as the market rallied. Oil has been too high, the Fed is hiking rates, and inflation fears sparking. All of that had a detrimental impact on the dollar as South Korea announced it was starting to diversify into other currencies. Taiwan jumped on that bandwagon, and that fueled speculation as to who was next. Oil is a dollar denominated commodity, and the dollar worries fed oil prices further: more dollars are needed to pay for oil if the dollar is falling.
The Korea decision crystallized some of the issues, and it acted as a catalyst to send a weaker rebound lower. Volume jumped for the second out of three sessions, both downside days. SP500 broke through the 50 day EMA on that rising volume, following an already weak NASDAQ lower. Small caps led the downside, adding to the extremely negative -3:1 breadth on NYSE. It managed to hold its 50 day EMA, but small consolation. Clearly a tough session, something that was set up by that upside move that lacked real volume punch. Again, the news of the day brought all of the problems into focus and acted as a lightning rod. Recent investors have started to dump shares just acquired.
THE ECONOMY
Korea sends shockwaves through currency market.
Korea's announcement and Taiwan's 'me too' sent the dollar to its lowest level in 17 years against . . . take your pick. The dollar's failure was the focus, but it is also a factor of a lot of other issues as noted, all of which tend to come together when the fear level wafts a bit higher.
The fear regarding what Korea did was the inability to fund the trade gap, i.e. other governments unwilling to buy US treasuries and equities. It is not as if everything collapses if foreign investment in dollar denominated instruments drops below the net US imports. The real problem is the divestiture of dollar based assets that sends a lot more dollars home. The dollar really starts a drop then, and that ignites some serious inflation from two ends. First, foreign goods cost even more than before as the dollar falls further and exports cost more simply because of the exchange rate and maybe because foreigners want more to cover the risk of holding a falling dollar. Second, there are more dollars here at home as those dollars in foreign hands head back onshore. More dollars chasing the same amount of goods equals inflation. Even if the supply of goods is rising, if it does not exceed the excess dollars you still get inflation.
In theory these are self-correcting mechanisms: eventually the dollar falls enough where US citizens significantly slow their purchase of foreign goods. In addition, US exports start to look better and better because they get so damn cheap. When the dollar was surging in the late 1990's US citizens were going abroad, buying goods and real estate in addition to all of the foreign goods purchased here at home. The same thing is happening in Europe as they see the dollar at levels not seen in over a decade.
That is the theory. Getting there is the problem. Eventually it gets to a level where the trend reverses, but that entails a US slowdown due to higher inflation and less economic activity as a result. It is not fun getting there. You eventually get over a nasty chest cold, but it takes time to do it.
There are actual signs that this is occurring already. Japan's January export growth slowed to 3.2% as its trade surplus narrowed (Japan is a net exporter). That was the slowest growth in over a year. The trade surplus narrowed by 60%. The fear in Japan is that the US recovery is not strong enough. The recovery is fine. The problem is the falling dollar and price hikes by Japanese manufacturers to cover that decline as well as materials cost increases. From what we are seeing, that is not going to improve a lot down the road, and that puts Japan at risk of further recession. No doubt Japan will be talking with Korea about its decision to diversify into other currencies; Japan wants a stronger dollar.
Oil strengthens its grip and shows us lessons about waiting for things to become crises.
On top of that there is oil. It found a home near $45/bbl, and it is making forays higher from there as supply issues and other concerns bounce it up and down. The bottom line is oil broke easily through $50/bbl Tuesday (51.16) on simply some concern over cold weather in the northeast and in Europe.
The thing about oil is that its comfort level near $45/bbl is the price that most pundits say it cannot stay at for a long period if the economy is going to avoid a slowdown. It is not just the US. Europe, Japan, Canada, South America, China; everyone will experience higher oil prices. Long term it will help wean us off and into other areas that are promising venues. Near term it is similar to the dollar and inflation issue: it hurts.
There has never been a time in US history that oil rose to $30/bbl or more and the economy did not slow as a result. Yes we are more fuel efficient now and our economy has shifted from heavy manufacturing to information, healthcare, etc. Still, we use a lot of oil. We have no plan for getting more of it or figuring out how to do more with what we have. Last time it was low back in the 1990's we slumbered. Now we want to do something but no one can agree what to do. The classic line on both sides is that each program won't make a difference. Not individually, but maybe, just maybe as a whole it would. Of course, we are once again waiting until there is a real problem to talk about doing anything. For all of those saying that we should wait on Social Security because it is not a crisis, take heed.
None of this is new.
None of these problems are new ones. They just feed off of each other because oil is tied to the dollar which is tied to the trade gap which is tied to inflation. You know, the ankle bone is connected to the shin bone, the chin bone is connected to the knee bone, etc. When you get to these levels on oil and the potential that the Fed could really ratchet up rate hikes to fend off inflation (of course we have yet to see the CPI and everyone is writing inflation in stone), the economy is walking a thin line.
Thus far economic momentum has carried the economy this far, but everything is going to cost more because oil costs more and the Fed is raising rates more. If there is significant foreign divestment of dollars, costs will rise even more. That is going to have a slowing effect on the economy. No one can say for sure how much, but a drop to 1% GDP by Q4 would not be out of the question if oil holds at $50/bbl. If the Fed gets a wild hair and decides it needs a series of 50 basis point hikes, it will be hiking into a natural slowdown, and that could cause a real problem. That is what the market was worrying about on Tuesday.
Consumer confidence holds up well, shows some potential cracks.
Confidence for February fell to 104 from January's 105.1, but that 105 was an upward revision from the 103.4 originally reported. So, it was a double upside if you want to look at it that way. Moreover, it topped December's 102.7.
So there was much rejoicing, right? Well, at least most were satisfied. Indeed, at these levels there is little to worry about with respect to the consumer significantly curtailing consumption habits. Remember, it takes extreme readings, i.e. in the 50's, for the consumer to cut spending enough to really signal recession.
There were some potential signs of slowing down the road, but it has to be taken with a grain of salt. Sentiment fluctuations rarely make inroads into actual behavior unless they get to extremes. That said, the present situation rose versus future expectations for the second straight month. When present sentiment starts exceeding expectations regularly, that can be read as the consumer thinking things are about as good as they are going to get. That is a sign, just a sign, that there could be some weakening sentiment ahead. It is something to take note of to compare with future economic signals.
THE MARKET
The comeback in the morning session was pretty impressive until it ended. NASDAQ and SP500 had bounced off of some support and were actually positive, sizing up next resistance. Many stocks were moving, and they were doing so on some good volume. Then the constant pressure from rising oil prices took its toll.
The indices rolled over again, but they then held higher support than on the morning open; quite promising. As lunch started they tried a move higher, but that brought in the sellers. They gave up that support, SP500 falling to the 50 day SMA. An hour and a half of lateral work tried to set up another upside try, but that failed as well. SP500 managed to hold at its 50 day EMA, but in the last hour it was grasping at straws and that level slipped away as well. Volume was up, downside breadth mushroomed, and support was broken. Once more the sellers are proving stronger: January volume selling. February rebound on decent action though lower overall volume, and now two distribution sessions in three with some significant point losses. Buyers got cold feet at the prior highs.
No area was really spared. Energy stocks spurted higher with the market rebound early, but after their moves even they were taken out and sold later. Same with steel and other materials. You can read that as part of the 'inflation and the Fed kills all mentality', meaning if the Fed hikes and inflation is high the economy will slow. Near term, the fact that energy and materials were sold off shows the selling was fear selling. There is not a lot to suggest the profits of energy companies or steel companies are going to fall over the next couple of quarters. Thus the selling was starting to get overdone already.
Gee, just starting but getting a bit overdone. Well, after two sharp downside sessions with high negative breadth selling, just as the opposite in buying, will need to take a rest. It can do that and still continue the move lower. The bounce takes the pressure off and once the modest rebound runs out of gas the selling can continue.
DJ30, SP600, SP400, and even SOX all held support, though they thudded on that level like a stack of bricks. They can put in a bounce from there, and how the respond tells us more about the chances of a recovery. SOX looks the best, actually, with its hammer doji over the 18 day EMA. It will still have to show something more than a nice pullback to earn our money.
Market Sentiment
VIX: 13.14; +1.96
VXN: 19; +1.13
VXO: 12.83; +1.78
NASDAQ
NASDAQ was lagging all along, and its break through near support on higher, above average volume was no surprise given the futures.
Stats: -28.3 points (-1.37%) to close at 2030.32
Volume: 2.078B (+27.88%). Volume jumped back above average as NASDAQ showed its second distribution session in three. Not blowout downside volume, but the strongest since the prior Tuesday.
Up Volume: 580M (-117M)
Down Volume: 1.487B (+580M)
A/D and Hi/Lo: Decliners led 2.68 to 1. Ugly but not as bad as NYSE.
Previous Session: Decliners led 1.27 to 1
New Highs: 76 (+5)
New Lows: 64 (+20)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Gapped lower and then managed to fill the gap when it rallied positive mid-morning. It ran out of gas without challenging the 50 day EMA (2073) and sold back to close at session lows. Volume was back above average for the first time in four sessions. It is heading toward the prior 2005 low at 2008. Maybe it can make a double bottom there: they are at their best with sharp sell offs that make the legs, and that is what this potential pattern is showing. A long way from making book on that one, but it is worth keeping an eye on. Good for a relief bounce at that level if nothing else. NASDAQ actually showed a modicum of relative strength Tuesday.
NASDAQ 100 started through some support near 1500 after failing to hold its break over its 50 day EMA (1536) last week. Heading toward the 200 day SMA (1474) where it bottomed at 1480 in January. Perhaps it too can set up a double bottom pattern, but again, that is a few skips and jumps ahead.
SOX was up 2% at one point but it gave it all back. It was the relative strength leader with its 0.5% loss. It held easily above the 200 day SMA (419) it broke, tested, and rebounded off of earlier this month. It still is in position to move up from here, but if the rest market continues to sell, its best bet is to hold the 200 day SMA for now.
SP500/NYSE
The large caps fell through the 50 day EMA on strong volume after an attempt to hold that level failed in the afternoon.
Stats: -17.37 points (-1.45%) to close at 1184.22
NYSE Volume: 1.743B (+12.8%). Strongest volume since early January as the small caps led the NYSE lower. Not a good resolution to the double top that has formed.
Up Volume: 276M (-463M)
Down Volume: 1.458B (+674M)
A/D and Hi/Lo: Decliners led 3.62 to 1. Very negative breadth as small caps led the way down.
Previous Session: Decliners led 1.76 to 1
New Highs: 214 (+36)
New Lows: 38 (+21)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Broke through the 50 day EMA (1188) on rising volume after trying to hold that level mid-afternoon. It was not a real attempt; it simply stalled the selling and there was not rebound attempt off that level. It is down 25 points in three sessions and likely has some more downside toward some support at 1175. After that it can give a relief bounce after a significant drop for one leg lower. Unlike NASDAQ and its related indices, SP500 does not have that potential double bottom setting up, at least not nearly as cleanly.
SP600 sold down to its 50 day EMA (320) on that rising NYSE volume, and the small caps were the downside leaders (-2%). It was trying to set up a cup with handle or double bottom with handle similar to SP500 (before this selling), but it is breaking down hard. How it handles the 50 day EMA will give us a better insight as to how much more selling is ahead for this leading index.
DJ30
Thudded down to the 50 day EMA (10,613) similar to SP600, managing to hold that level on the close as volume jumped higher. Its pattern looks a lot like SP500, i.e. a double top; not surprising as it was trying to set up a cup with handle as well. It is holding at some support at the 50 day EMA bolstered by price support at 10,600. Hardly a banner day for the blue chips either, and they will be hard pressed to hold this support versus at least tapping at 10,500. A nice looking base was wrecked pretty quickly when the economic problems surfaced.
Stats: -174.02 points (-1.61%) to close at 10611.2
Volume: 341 million shares Tuesday versus 335 million shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Stocks closed at the low and that often continues the momentum lower for the next session. SP500 broke and closed below the 50 day EMA while DJ30 and SP600 are trying to hold that level. Most likely there will be more downside follow through to test toward the next support. As fast as the selling started the market is getting near oversold; that is how aggressive the selling has been. How SP600 and DJ30 handle the 50 day EMA and SP500 and NASDAQ react at next support. Most likely those next support levels will hold and produce a rebound from what will be a pretty oversold condition at those levels.
Tuesday we were closing plays that were struggling with support or breaking support. The stronger stocks are still in decent shape even after the two distribution sessions, but if the market is intent on significantly more selling even a good percentage of these stocks will start breaking down.
Depending upon the news that hits overnight (anymore countries ready to go on a dollar diet?) we anticipate some further downside selling toward next support. That could produce a rebound move in relief after some pretty significant selling over a short period. That also represents the chance to get whipsawed as stocks further sell and then rebound. We are going to have to still play defense and be more willing to close positions than play against the volume action shown the past two months.
Support and Resistance
NASDAQ: Closed at 2030.32
Resistance:
2047, the June high.
2050-54, prior resistance and the June high
2066 to 2070, the bottom of the January lateral move.
The 50 day EMA at 2073
The 50 day SMA at 2096
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:
2023, an early October 2004 peak.
2000
The 200 day SMA at 1982
S&P 500: Closed at 184.16
Resistance:
The 50 day EMA at 1188.45
The 50 day SMA at 1193.71
1196, the mid-January high and the early December peak in the left shoulder.
1200 acted as resistance before.
Q1 1999 lows at 1215
December high at 1218.
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
1185, the top of the November consolidation range.
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 1140
Dow: Closed at 10, 611.20
Resistance:
The 50 day SMA at 10,650
10,754 is the February high
10,868 from the December 2004 high.
10,975 - 11,000 from Q4 2000, Q1 2001
11,350 from the May 2001 highs
Support:
The 50 day EMA at 10,613
Price consolidation at 10,600 level is a key level.
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 10,306
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
February 22
Consumer Confidence, February (10:00): 104.0 actual versus 103.0 expected and 105.1 prior (revised from 103.4)
February 23
CPI, January (08:30): 0.2% expected and -0.1% prior
Core CPI, January (08:30): 0.2% expected and 0.2% prior
FOMC Minutes, February 2 (14:00): These are taking on more importance as they are released closer to the fact.
February 24
Durable Goods Orders, January (08:30): 0.0% expected and 1.1% prior
February 24
Initial Jobless Claims, 02/19 (08:30): 306K expected and 302K prior
February 24
Help-Wanted Index, January (10:00): 38 expected and 38 prior
February 25
GDP-Prel., Q4 (08:30): 3.5% expected and 3.1% prior
Chain Deflator-Prel., Q4 (08:30): 2.0% expected and 2.0% prior
Existing Home Sales, January (10:00): 6.75M expected and 6.69M prior
End part 1 of 2
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