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us stock market, understanding the stock market
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8/18/05 Technical Traders Report Update
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Full report issues Saturday.
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: None issued
Trailing stops: THQI
Stop alerts: BTUI; FORD; ENER
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SUMMARY:
- Stocks close flat as NASDAQ, SP500 hold 50 day EMA.
- Philly Fed shows a nice gain, helping offset weaker July industrial production.
- More trouble in retail as more sector leaders lower guidance.
- Enough economic issues for concern, but too many are unconcerned.
- No economic data to end the week as stocks continue to try and set up to rebound in face of energy and Fed.
Up and down but going nowhere on lower volume.
In a continuation of the up and down day to day action of late, stocks started soft on the heels of the modest Wednesday bounce, and that gave buyers the opportunity to move in if so inclined. They were not inclined early on as NASDAQ bounced along the 50 day EMA and SP500 held above its up trendline but neither could find any real footing to move higher. It took the stronger than expected Philly Fed report (17.0 versus 14.0) to get things started, but even that was a delayed effect as it took until early afternoon for stocks to make a solid move upside.
Good surge to start the afternoon session, but there was no volume moving with it. Both NASDAQ and SP500 rallied close to that important resistance at 2151 and 1225 respectively, but both fell shy as volume did not move with it. Indeed, stocks rolled back over and gave away the afternoon rebound by the close. That left NASDAQ, SOX and SP600 leading the downside (-0.4%, -0.6%, -0.4%); modest losses, and on the lower volume it was just another session at the 50 day EMA where stocks are either going to find support for the next leg higher or fold up the rally.
The 50 day EMA acts as a support level that stocks and indices periodically visit during a rally. If the rally continues it will hold and send stocks higher once more. If the move is over the index will be breached, and usually with high volume. Thus far there has been some distribution on the way down but now at the 50 day EMA volume has thus far dried up a bit, at least on the downside. Volume perked up on NYSE Wednesday and Thursday as SP500 held the 50 day EMA both sessions. Rising volume as a stock or index holds the 50 day EMA is not a bad sign as it shows buyers stepping in to support positions. At some point there will be a break to start the next move.
Question is which way it will go and how long it will take. In June and July the test was relatively quick, a 9 day affair that triggered the next leg higher. We could see the same action here, and thus far the action since hitting the 50 day EMA has been similar and somewhat constructive. We could also see the 50 day EMA give way in renewed selling as the three distribution sessions on NASDAQ suggest. Or there could be a more prolonged consolidation or base that is built to get rid of the froth and the bullishness and provide a better foundation for another run higher.
The concern you have to have is the weaker run on the last leg higher, and that is typical of a run that is long in the tooth and needs a more serious consolidation other than just a week or so at the 50 day EMA. Breadth was lower, new highs were scarcer even as the indices plowed new post-bust highs. Many stocks are still holding near support quite well as the market makes this test, and that is a good counterbalance to the weaker internals on the last move. There was some erosion in the leaders Thursday but no major breakdowns as groups other than the continued selling in energy, and even those stocks are trying to find support at their 50 day EMA as well.
What we do is let the market show us if it is going to bounce, i.e. giving us a good high volume move off this level with leaders rebounding as well. That means we have to let this test play out, find the strong stocks that refuse to give in, and be ready to move in when they start back up. We remain concerned about the market's strength at this point given the combination of oil and the Fed and some of the signals the economy is throwing off. Stocks have been resilient, but it is hard to fight the Fed, and even harder to wage a two-front war against the Fed and high, sustained energy prices. If the market shows us the upside move, great. Until then we are ready if it does, but we are also going to have to watch for a breakdown that shows the same type of vigor we are looking for an upside move to show.
THE ECONOMY
Philly Fed surpasses expectations.
The Philly region manufacturing sentiment survey notched a 17.0 reading versus the 14.0 expected, showing strong new orders (19.8 versus 5.0 in July) and solid growth in employment (6.3 versus 3.4). The 6-month outlook recovered to 33.4 from a weak 15.3 in July.
After the weak July industrial production figures that failed to show the manufacturing rebound that was supposed to push GDP growth to 5% in Q3, the Philly reading was welcome. It is a more real time indication of the manufacturing condition than the July report and it helps repair some of the damage to investor psyche left by that July reading.
No one expects a recession.
After a March slowdown that was more cyclical in nature during a continuing uptrend everyone (including us) was much more positive on the economy. Indeed, as noted above, predictions for a 5% Q3 GDP are still holding and we could very well see that though it is off to a slow start based on the July data.
The problem is that most everyone brushes off a suggestion that there could possibly be a recession once more given the dramatic and sustained oil price rise and the Fed raising interest rates. Just today we saw 3 commentators literally laughing off a suggestion that a recession could be in store in 2006. While it seems almost silly and indeed laughable to consider, the seeds of recession are planted well in advance, and we have to watch for signs of trouble.
As noted, the Fed and rising energy are key factors to an economic slowdown. Now we have weathered that combination in years gone by, e.g. 1984 and 1994. Indeed, we have compared the 2003 to present expansion to those back in 2002 when the market was trying to find its footing. This time the energy price rise is on terms with that in 1984, but its duration is becoming a problem. With energy it is not necessarily price but more duration. The economy can survive price spikes that surge and then fade. This has been a long, steady advance higher and higher. This long move is like a long climb into the mountains in Le Tour de France in that it eats away and saps your strength until you pop and cannot go on.
There are signs of trouble as we have noted. After consumers started reallocating dollars to different retailers, they are now starting to cut back on spending. WMT says so and so do the more than one dozen solid, leadership caliber retailers that have lowered guidance the past week. Indeed, today CLE, PLCE and LTD were just a few that joined the list by guiding lower.
There are signs of a 2000-like scenario that could develop and hurt and otherwise strong expansion. Every time a new problem for the economy emerges, the pundits are quick to say 'but the housing sector remains red hot.' That is the answer to everything; no matter the issue the 'red hot' housing market is the response. Back in 2000 it was the 'red' or 'white' hot employment market. Back in 2000 it was business spending that tailed off while the consumer remained strong. Right now the consumer is showing signs of faltering; different side of the equation, but as seen in 2000 and 2001, both parts are important.
Further, as in 2000, the Fed is drying up the money supply. That is the key factor in economic expansion regardless of how high or low rates are: without the money rates can be 0% and provide no stimulation.
Taken alone or even together these may not hurt the economy. With the spiking and sustained high energy prices and the Fed action the package is not good for the economy, and signs that the renewed expansion after the March slowdown are showing up. Too many are overlooking the initial signs of a slowdown in the consumer. We may be overestimating the impact and the consumer may just turn right back up. The merging of all of these factors, however, is hard to overlook. The market is struggling with it right now. If it breaks hard below the 50 day EMA, the market is likely giving us a warning of what is to come.
THE MARKET
MARKET SENTIMENT
VIX: 13.42; +0.12
VXN: 15.29; -0.28
VXO: 12.79; +0.4
Put/Call Ratio (CBOE): 1.04; +0.02. Sixth close above 1.0 in the past two weeks. Getting to the point where it indicates a rebound.
Bulls versus Bears:
Bulls: 57.3%. Down slightly from 59.1% last week. Not a major change in the trend higher since the low was hit in May at 43.5%. Fourth consecutive week above the 55% level that is considered bearish. After the buyers are gone there is no one to keep coming in. Bulls bottomed in early May at 43.5%.
Bears: 22.5%. Recovering back above the 20% level considered bearish after a 19.3% last week. After one week below 20% it rebounded above that threshold. Hit a high for the year at 30% in early May.
NASDAQ
Stats: -9.07 points (-0.42%) to close at 2136.08
Volume: 1.43B (-8.61%). Lower volume on the loss as NASDAQ continues to test the 50 day EMA. No distribution for this session and overall volume has been lower as NASDAQ made this test back to this support. It has made a nice, relatively easy test, and now it needs to show us the volume move higher though NASDAQ may take more time to get ready for that move.
Up Volume: 451M (-568M)
Down Volume: 958M (+449M)
A/D and Hi/Lo: Decliners led 1.62 to 1. Once more decliners outpaced advancers, but given it was a down session the ratio was not skewed too far.
Previous Session: Advancers led 1.06 to 1
New Highs: 48 (-8)
New Lows: 45 (+8)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Tapped the 50 day EMA (2132) on the low and held that level on low volume. An early afternoon test of the 2151 resistance failed, and without any volume NASDAQ simply slipped back toward the 50 day to close. As noted above, overall volume has been low despite three distribution sessions. That distribution keeps us wary of further selling to undercut the 50 day, but the volume has slowed overall on the drop to this key level. Now we may see NASDAQ undercut the 50 day intraday and give us a head fake; that often happens near support as a final shakeout. We have to be patient, watch the volume, and then see if we get a rebound.
SOX held the 460 support level once more, moving laterally the past three sessions with respect to that point. As with NASDAQ, a pretty orderly pullback with, however, that distribution sprinkled in. It has not yet come to the 50 day EMA (454) on this move as have the other indices. Maybe a sign of strength, but also in the same boat as the others having come this far.
SP500/NYSE
Stats: -1.22 points (-0.1%) to close at 1219.02
NYSE Volume: 1.395B (-1.63%). Volume backed off below average on the modest pullback. Not bad action as NYSE indices test the 50 day EMA. Two sessions of distribution on this pullback but a good hold here and showing good volume action the past two sessions right on the 50 day.
A/D and Hi/Lo: Decliners led 1.57 to 1. The small caps were lagging and that dragged the NYSE breadth level lower but well off the -2:1 levels early on.
Previous Session: Decliners led 1.18 to 1
New Highs: 57 (-11)
New Lows: 32 (+3)
The Chart: http://www.investmenthouse.com/cd/^spx.html
A second doji at the 50 day EMA (1218), this one with a low undercutting that level but rebounding to hold support on the close. The low indeed took SP500 down to the up trendline (1216) where it snapped back. Trying to make a higher low at the 50 day EMA once more, though it faces the same challenges as NASDAQ with this decline and the lower quality indicators on the move higher.
SP600 matched NASDAQ on the downside (-0.4%), but SP600 was unable to rebound to hold the 50 day EMA (341.40). This is not a sigh that the small caps are ready to plummet to their end; as noted in the NASDAQ discussion, an index will undercut this type of support level and then rebound. Indeed, as SP600 was an upside leader and now a downside leader, if we are going to see a move that continues along the lines of that since the May low, then the small caps will need to be there.
DJ30
DJ30 rebounded to recover the 50 day EMA (10,550) though it gave back a good chunk of the move that saw it rise to the 18 day EMA (10,590) on the intraday high. Still trying to hold onto the 10,500 to 10,700 range with volume fading back below average. Still no strength, but it is still consolidating so we don't expect it to show any just yet. This is a decent consolidation, and though DJ30 has lagged the entire year, it is setting up to try a better move.
Stats: +4.22 points (+0.04%) to close at 10554.93
Volume: 214 million shares Thursday versus 235 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
No economic reports due Friday but a few solid earnings reports may help (e.g., MRVL, ADSK) though given the late stage of the earnings season the results tend to help or hurt the specific stock as opposed to the market in general. Basically investors know the story of earnings for the past quarter, and they are weighing the guidance given with the prospects of further Fed action (higher rates and lower money supply) in conjunction with higher energy prices.
That is what has brought stocks back to the 50 day EMA, an important decision level for the big money as to whether it will step back in and start buying stocks once more or if it will really start to sell in earnings. The pullback was spattered with some distribution, enough on NASDAQ to open the door to further selling. That makes this test of the 50 day EMA so important to the further move.
At this juncture many strong stocks are still holding support and as noted, they will provide us with insight as to what the market is going to do if they start back up on some volume or roll over on volume. Of course NASDAQ and SP500 will follow. Thus we have a pullback that shows some dumping but not rampant and with stocks holding support. If the economy is as great as most feel it is (at least those on the financial stations) then it should start right back up. Lots of headwinds are facing it, and if it does rebound on volume then the market is endorsing the economy and minimizing the impact of oil and the Fed. That is a very fanciful outcome, but we will let the market decide for us and as always, take what the market gives.
Support and Resistance
NASDAQ: Closed at 2136.08
Resistance:
2151, the early December closing high and highs from January 2004
The 18 day EMA at 2161
2163, the mid-December closing high
The May/July uptrend at 2166
2178 is the January closing high and is trying to hold
2191.60, the January intraday high.
2215 is the June 2001 closing high.
2264 is the June 2001 intraday peak.
2313 is the 5-22-01 closing high.
2328 is the May 2001 intraday high.
Support:
The 50 day EMA at 2132
2100 was key resistance on the way up.
S&P 500: Closed at 1219.02
Resistance:
March 2005 closing high at 1225
The March 2005 high at 1229.11
The 18 day EMA at 1228
The recent July highs at 1245.15
Price tops at 1265 from 1-28-99 and 2-99 & price bottoms from 12-20-00
Price top at 1272 from 1-6-99
Price tops at 1290 from 5-23-00
Price tops at 1364 from 1-29-01
Support:
The June high at 1220
The 50 day EMA at 1218.65
December high at 1217
The April/July up trendline at 1216.
February intraday high at 1212.
1200 is some support
1196, the mid-January high and the early December peak in the left shoulder.
Dow: Closed at 10,555
Resistance:
The 50 day EMA at 10,550
The April high at 10,557
The 18 day EMA at 10,590
Price consolidation at 10,600
The June highs at 10,646 to 10,656
10,720 is the high in the recent lateral move.
10,754 is the February high
10,868 is the December 2005 high.
10,985 is the March high
Support:
The 200 day SMA at 10,534
The May high at 10,406
10,400, the bottom of the November/December range
10,250 held in the June and July lows.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
August 15
NY Empire State Index, August (08:30): 23.0 actual versus 20.0 expected and 23.9 prior
August 16
CPI, July (08:30): 0.5% actual versus 0.4% expected and 0.0% prior
Core CPI, July (08:30): 0.1% actual versus 0.2% expected and 0.1% prior
Housing Starts, July (08:30): 2042K actual versus 2025K expected and 2045K prior (revised from 2004K)
Building Permits, July (08:30): 2167K actual versus 2104K expected and 2132K prior (revised from 2111K)
Industrial Production, July (09:15): 0.1% actual versus 0.5% expected and 0.8% prior (revised from 0.9%)
Capacity Utilization, July (09:15): 79.7% actual versus 80.3% expected and 79.8% prior (revised from 80.0%)
August 17
PPI, July (08:30): 1.0% actual versus 0.5% expected and 0.0% prior
Core PPI, July (08:30): 0.4% actual versus 0.1% expected and -0.1% prior
August 18
Initial Jobless Claims, 08/13 (08:30): 316K actual versus 310K expected and 310K prior (revised from 308K)
Leading Economic Indicators, July (10:00): 0.1% actual versus 0.2% expected and 1.2% prior (revised from 0.9%)
Philadelphia Fed, August (12:00): 17.5 actual versus 14.0 expected and 9.6 prior
End part 1 of 2
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us stock market
understanding the stock market
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