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us stock market, understanding the stock market
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8/24/05 Technical Traders Report
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SUMMARY:
- On the way to a nice rally stocks slipped on an oil slick.
- Sharp durable goods decline suggests economic slowing continues.
- Economic checkpoints: Lumber prices falling, liquor sales up, restaurant sales starting to sag, new home sales jump again.
- Looking for a test of the breach after SP500 starts the break lower.
Solid early rally rolled over by $67/bbl oil.
Stocks started soft and then began to rally in a classic move off of the 50 day EMA. After a week long test, leaders bounced off support on stronger volume and trade was higher as well for the market overall. SP500 retook the 50 day EMA and NASDAQ cleared resistance at 2151 as well as the 18 day EMA. We liked the rally overall, but what we really liked was the solid movement in a large swath of leaders (e.g. AAPL, ADSK, ALXN, MOT, MCHP, SNDK). That is where the backbone of any move starts, and these were moving well.
Oil inventories came out at 10:30ET and they were basically in line. Oil initially fell, but that was a head fake. It turned back up and then moved to a new all-time high in current dollars ($67.32, +1.61 on the close). It was not the oil inventories, but heightened fears on Venezuela breaking into Chevron's offices and the possibility that the most recent storm might track further west than the Weather Channel says it will that sent oil prices higher. Of course those are just temporary influences. There is something underlying the oil market that refuses to let it soften. It broke through key resistance at $67.10, and that opens the door to a move to $70 with little trouble.
That move higher and the prospect of the oil yoke on the consumer growing heavier killed off the rally. Stocks rolled over and sellers moved in. The heavier volume on the upside move did not back off as the sellers moved in. SP500 sold back through the 50 day EMA and its up trendline, making a clean break lower. DJ30 blew out the bottom of its 5 week range as that laggard started to finally lead. Only problem is it was leading lower. After a good hold at the up trendline, the weight of oil prices broke it back down.
NASDAQ and SP600 managed to hold their 50 day EMA and are still in decent shape to hold and rebound. SOX gave up its 18 day EMA by a slight margin, but it too is still in solid shape to move higher. Problem is, this is the second intraday reversal this month where a good upside move was scuttled as the sellers used it to sell into. Thus, even though those indices are holding up, after a week of consolidation at support they were still unable to hold a rally through to the close, and indeed sellers stepped up their activity.
Bigger picture, the SP500 breakdown opens the door to more selling. We discussed over the weekend that a failure at the 50 day EMA would lead to more selling as it is an indication that the rally that used that level as support was losing its momentum. Typically a stock or index will rebound to test a breach of key support, and we will watch for SP500's test. If NASDAQ, SP600 and SOX do not follow, then SP500 has a chance to recover this level. Many leadership stocks, despite the Wednesday reversal, are still in good position to move higher. The SP500 break through its up trendline does not make their job easier, but it did not break them lower as well. Thus the test of the breakdown by SP500 will of course be important for the market. Will it be successful? With oil surging, the Fed still draining money supply, and the economy showing more and more signs of slowing, the odds are stacking up against it.
THE ECONOMY
July durable goods orders tank.
Orders dropped 4.9% versus the 1.9% anticipated decline. June was written down as well to 1.9% from 2.8%. This was the largest drop since January 2004. Take out transportation and the blow was softened to -3.2%, but that is still well outside of expectations. Non-defense capital spending less aircraft (business spending) fell 3.7%. This year business orders have fallen to 5% from 20%. Shipments have dropped the same amount.
These are some pretty sober numbers, but we have to acknowledge that the durable orders report is very volatile month to month, and this spike lower was likely an anomaly. If you look at orders this year they are up 17%. Further, the first month of each quarter is always slower as businesses receive incentives to purchase at the end of each quarter from sellers. Thus we don't want to put too much emphasis on this dip; it is likely to be revised higher by a percentage point or two when August is reported.
We are not going to ignore it, however, given the softening in other areas we have noted of late. Tuesday night we noted you cannot view the economic data in isolation; as with oil prices the impact is cumulative. To us it shows a trend that is evident in the data, i.e. that the oil prices are having a palpable impact on consumption.
Odds and ends from the economy help build a clearer picture.
Everyone likes to talk about the big ticket items such as housing and retail sales in order to glean where the economy is heading. They are definitely a part of the picture, but they are the sound bites similar to what you get on a headline news channel. The substance is in the story and the details that many often overlook.
When the economy was slowing in 2000 we ran checks on the use of boxboard, the material used to ship packaged goods. We saw orders and shipments declining, and in conjunction with the other indicators we were very concerned with the economy's future. Right now there are some other anecdotal areas that taken together dovetail with the other data we are seeing.
Lumber sales have dropped 32% this year on the basis of board feet. Liquor sales appear to be rising, something typically accompanying economic slowing (drowning your sorrows, driving you to drink, etc.). The owner of Jack Daniels and Bolla wines reports a 14% gain in sales with Jack Daniels up 9%. Worried about your job? Slam a few Black Jacks to calm yourself. Believe it or not, when the economy softens liquor consumption rises. In addition, after the retailers started the lemming run to guide Q3 sales lower, now it appears the restaurants are joining in. Wednesday Applebee's warned on its sales, and we expect there will be others. The lower end family restaurants also feel the pinch as the consumer starts to pull back consumption. Indeed, EAT, YUM, CRBL and DRI all took hard hits Wednesday after APPB's warning.
At the same time new home sales jumped 6.5% (-3.1% was expected) in July even as existing home sales dropped. Housing refuses to give up as buyers continue to lock in at lower rates while speculators continue in a market they have enjoyed success in for several years now. Despite all of the warnings, they are going to ride this horse until it throws them, and that is keeping the market rolling.
These are not definitive in themselves, but there is no such 'this is the answer' report. The Fed tends to get people believing there is with its focus on consumer prices and the employment cost index, but those are lagging indicators. We have seen time and time again where the economy has already started to nose down while the Fed tilted against these 'indicators.' What they are doing is filling in a picture that shows much more clearly that the consumer is being weighed down by gasoline prices long before they hit $3/gallon that we predicted back in early summer. We will likely hit very close to $3/gallon this year, and if it does, that will be another significant choke point for consumers. Right now there is a definite drag on the economy from oil, and the market reacted to that today when it gave up a rally and sold off after oil prices spiked.
THE MARKET
MARKET SENTIMENT
VIX: 14.17; +0.83
VXN: 15.43; -0.14
VXO: 12.95; +0.87
Put/Call Ratio (CBOE): 0.92; -0.12
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: -8.34 points (-0.39%) to close at 2128.91
Volume: 1.772B (+29.17%). Volume rallied as NASDAQ moved higher and cleared the 18 day EMA intraday. It remained strong as NASDAQ rolled back down and closed below the 50 day EMA. Volume moved back above average, posting the strongest session in three weeks. Not the kind of day you like to see a lot of volume: the sellers came in and threw the buyers back down; they used the rally to sell into. That shows the consolidation to this point has been insufficient to shake out all of the sellers.
Up Volume: 700M (+113M)
Down Volume: 1.015B (+262M)
A/D and Hi/Lo: Decliners led 1.2 to 1
Previous Session: Decliners led 1.26 to 1
New Highs: 95 (+26)
New Lows: 43 (-4)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ moved through resistance at 2151 and the 18 day EMA (2152), looking pretty sharp. It held the moves into the early afternoon until that oil spike rattled buyers. They clammed up while sellers emerged, selling with as much force as the early buyers showed. By the close NASDAQ was below the 50 day EMA (2133), showing a big doji on an intraday reversal, the second of the month. That does not necessarily mean sure failure; a hammer doji on volume after a pullback can signal a rebound coming. After the sellers were thrown back Wednesday, however, any rebound is going to have to prove its worth with once again strong volume and holding the move into the close.
SOX was out in the lead as well, but after a solid move above some resistance at 470 it too was tossed back for a loss. It is still well above its 50 day EMA (456) and some support at 460. Needs to hold 460 to keep this consolidation in place.
SP500/NYSE
Stats: -8 points (-0.66%) to close at 1209.59
NYSE Volume: 1.448B (+13.89%). As with NASDAQ, volume moved above average as an early rally was met with selling as the early buyers were overwhelmed as sellers pushed the index through support.
A/D and Hi/Lo: Decliners led 1.24 to 1. Pretty modest negative breadth indicates it was not across the board selling. Indeed the small caps held up much better than the large caps.
Previous Session: Decliners led 1.26 to 1
New Highs: 90 (+19)
New Lows: 28 (-2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 tried to move through the 18 day EMA (1224) but that move foundered and SP500 fell back through the 50 day EMA (1218) and the up trendline (1217). SP500 has now broken through its key near support levels and is looking at 1200 as the next level. Volume was above average for the first time in three weeks, an inopportune time to see volume rise as it shows they moved in on the rally and overran the buyers sufficiently to push the index through key support. 1200 is the next support level followed by the 200 day SMA (1194). Typically you will see a rebound to test the breach of support as covering occurs. We will look for that and see how SP500 responds to the 50 day EMA and trendline when it does. It is likely to fail the test, but if NASDAQ and company holds the line that will help the large cap index.
The small caps sold as well but quite modestly (-0.2%), one of the best performers Wednesday. The index closed right at the 50 day EMA (341.44), showing a big hammer doji. It remains in its consolidation pattern, trying to ward off a breakdown from the 6 week head and shoulders pattern that has formed. Tenuous, but held up very well given SP500's break lower through its trendline.
DJ30
DJ30 was in a leadership role Wednesday, but it was to the downside. It broke through the 200 day SMA (10,538) Tuesday and put an exclamation point on it Wednesday with an above average volume dump through 10,500. Unlike the other indices, DJ30 never really tried a decent move higher early in the session and was only too quick to fold up like a cheap tent once the selling got underway.
Stats: -84.71 points (-0.81%) to close at 10434.87
Volume: 256 million shares Wednesday versus 210 million shares Tuesday. Volume surging as the blue chips are sold off.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
The consolidation is hanging on by a thread with NASDAQ, SP600 and SOX trying to keep the ship righted while the large caps tumble. With SP500 failing its attempt to hold support, those indices will be under a lot of pressure to fail as well. Oil, the Fed, lower guidance from consumer-oriented companies are proving to be a dogged adversary to any further upside move. Indeed, with the Wednesday reversal (showing the sellers are not gone) and SP500 breaking support, the combination of those factors on the market suggests further weakness.
What we are watching for Thursday is some type of test of the support breach by SP500. Often an index will rebound immediately after a breach of support as shorts cover some positions. That drives the index back up toward the old support, and if the long-side buyers don't come in the bounce will fail and more selling will get underway. The points to watch for are whether the bounce occurs rather quickly and if NASDAQ, SOX, and SP600 can exert enough upside force to drag SP500 back into the fold. This market continues to show great resilience, but in the face of this most recent action and the continued pressure from energy, it is less likely. Thus we are going to watch for the rebound's apex, and if we see it failing below former support it will be time to close those positions that are struggling to hang on and those positions that were solid early Wednesday but then sold and are going to be near support. The market can always just drop further, but given the other indices' relatively better action at support we anticipate the test attempt. If it fails that opens the door to deeper downside and more downside plays.
The economic data slows a bit Thursday with initial jobless claims and the help wanted index; neither likely to be market movers in light of the SP500's break lower and the rally in oil prices. No, the market will be on its own as it struggles to get a handle on rising oil prices, and it is likely to be a real struggle with a lot of pressure on the upside.
Support and Resistance
NASDAQ: Closed at 2128.91
Resistance:
The 50 day EMA at 2133
2151, the early December closing high and highs from January 2004
The 18 day EMA at 2152
2163, the mid-December closing high
The May/July uptrend at 2182
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:
2100 was key resistance on the way up.
2090 is the February and March interim highs
1998 is the 200 day SMA.
2050 to 2045 from May and June
S&P 500: Closed at 1209.59
Resistance:
The April/July up trendline at 1217.50
December high at 1219
The 50 day EMA at 1218
The June high at 1220
March 2005 closing high at 1225
The 18 day EMA at 1224
The March 2005 high at 1229.11
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:
1200 is some support
1196, the mid-January high and the early December peak in the left shoulder.
The 200 day SMA at 1194
1183 - 1184 from November 2004 highs and July 2005 intraday low.
Dow: Closed at 10,434.87
Resistance:
Some support at 10,500
The 200 day SMA at 10,538
The 50 day EMA at 10,546
The April high at 10,557
The 18 day EMA at 10,563
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 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 23
Existing Home Sales, July (10:00): 7.16M actual versus 7.25M expected and 7.35M prior (revised from 7.33M)
August 24
Durable Goods Orders, July (08:30): -4.9 actual versus -1.5% expected and 1.9% prior (revised from 2.0%)
New Home Sales, July (10:00): +6.5% (1410K) actual versus 1328K expected and 1324K prior (revised from 1374K)
FOMC: Moskow speech.
August 25
Initial Jobless Claims, 08/20 (08:30): 315K expected and 316K prior
Help-Wanted Index, July (10:00): 38 expected and 38 prior
August 26
Michigan Sentiment-Rev., August (9:45): 92.5 expected and 92.7 prior
FOMC: Greenspan speech
End part 1 of 3
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us stock market
understanding the stock market
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