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10/10/05 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: None issued
Trailing stops: ENER; WFR
Stop alerts: PLAY; WITS
SUMMARY:
- Buyers unable to make any headway as sellers take a breather, and market fades further.
- Is Fed jawboning the markets or Congress?
- Lumber prices continue to fall and other commodities selling on fear of excess Fed hikes: money sully tightening always trumps commodity prices.
- Tuesday FOMC minutes going to get close scrutiny as market continues to grapple with just how far Fed will go.
Mid-day recovery attempt plowed under.
The market tried to bounce again to start the week, but the bounce was all pre-market. The headlines all covered the Delphi bankruptcy, but what hurt the market more than anything was XLNX' lowered Q3 guidance. That sent chip stocks lower pre-market, putting a strain on NASDAQ from the start. Indeed, the futures were fading toward the open and the indices gave up an ever so slight gain in less than 15 minutes. NASDAQ sold to test the 200 day SMA in the first hour and that prompted a rebound into early afternoon that again turned NASDAQ slightly positive. Volume remained low on the bounce, however, and that undermined the rebound attempt. Stocks sold off in the afternoon, moved laterally in the last 1.5 hours in an attempt to rebound, but simply ran in place as the bell rang. In short, stocks gave it a try in continuing the Friday relief bounce, but the shorts saw no need to cover and the longs were not interested in taking chances. With the overall market bias negative, stocks closed lower without any major catalyst to push them.
NASDAQ closed just above the 200 day SMA on lower volume. SP500, SP600 and SOX, however, sold again, the former two on stronger volume. SOX' decline was the most dramatic (3.2%), blowing through some support at 450. SP500 and SP600 were not slackers; SP500 resumed its selling below the 200 day SMA after a modest bump higher Friday. The higher volume on NYSE shows distribution once more on NYSE indices; the sellers were quieter Monday, but they were not gone. Volume is the strongest indication that the sellers remain in control: it was up again as the NYSE indices sold; it was lower on NASDAQ, but with SOX dumping lower that lighter trade does not signal the selling is slowing.
Indeed, the internals were weak again with negative breadth outpacing upside breadth on up sessions (-2.4:1 NYSE, -1.8:1 NASD). These are not extremes similar to last week, just a continuation of the stronger downside action than upside action as the market continues trying to find the bottom of this current down leg. It hasn't given an indication of that yet, though NASDAQ is showing something remotely resembling backbone at the 200 day SMA. That is not likely to hold up as the first October scare continues. September was too mild and there was too much crowing about the best Q3 in years. It wasn't that great a quarter for the market: it spent the last month of the quarter distributing the gains made in the first month. That set up some complacency and the market is paying for that dearly as it is forced to focus on the issues that were out there all along, e.g. the Fed. With SP500 still distributing this first October scare is still underway.
THE ECONOMY
Is Greenspan talking to Congress again?
Last week and over the weekend we discussed the Fed comments regarding its increased inflation concerns in light of hurricane shortages, recovery spending, high oil prices, and just about anything else the Fed could think of. We noted how Fed speak had ratcheted higher, peaking with Fisher's comments regarding how federal spending on the hurricane relief effort was going to spur inflation due to the additional deficit created as well as the actual spending ('pump priming') on the relief effort.
The market took this talk hard, waking up to the fact of a year of rate hikes in the bank and even more, possibly several more, ahead. We discussed how the Fed was trying to jawbone the financial markets (particularly the bond market) into doing its work for it. Another aspect of this talk, however, is what Greenspan would like the Congress to do.
In Greenspan's final years he has turned more socially active in the sense that he delivers speeches and opinions to Congress, world central bankers, and basically anyone else about the need for free trade, limiting entitlements, reducing taxes as an ongoing activity. He has spent a lot of time and effort attacking deficits, both fiscal and trade. It was clear in his November 2004 speech to central bankers where he basically threatened to raise rates in order to help finance trade deficits. We say threatened because that is what it was: if the US doesn't get the trade deficit to Greenspan's liking he was going to take matters into his own hands, i.e. away from Congress and the administration, and get the job done as he saw fit. In countless other appearances before Congress Greenspan has harped on the need for 'pay-go' spending rules, the need to cut entitlements, the lack of savings (as narrowly defined by the government and Greenspan), etc.
It is not that we are in disagreement that spending needs to be slashed, it is just these matters are way out of the scope of the Fed's mandate, and interest rates, or the threat of their use as a stick against Congress and the administration, are a very, very clumsy way of controlling them. Clumsy and downright scandalous, though the Fed will always say that is not its intent. For the Fed to even consider using them in order to influence policy or to offset Congressional and administration policy is a gross abuse of power. It is not in its mandate, and it is not within the authority of an unelected regulatory agency to take actions to offset or conflict with policies set by the elected branch. By making up bogus causes of inflation pressures supposedly resulting from the executive and legislative branches, however, that is exactly what the Fed is doing.
Just as the job of the federal courts is to determine whether executive and legislative policy is within the Constitution and not to shape that policy to its own liking, the job of the Fed is to keep prices stable regardless of what policies are in place. Some will argue that the mandate is flexible just as some argue in constitutional interpretation that the Commerce Clause allows the government to use our tax dollars to build state owned museums and hog farms. Let's see. The framers wanted a limited federal government with express powers, reserving all others to the states. Somehow that translates into building hiking trails in Vermont, filling potholes on a county road, funding 100% of the cost of a couple of museums, etc. This twisted use of the federal tax dollar is extremely disturbing (and unconstitutional). Of course the income tax was only going to ever impact just 5% of the US population or so it was argued when the sixteenth amendment was passed. Funny, the same argument is being used now for passing 'emergency' taxes that will only affect the top 2% to 3% of income earners. Yes, just as the Alternative Minimum Tax was only going to impact just a few taxpayers, yet now swallows up almost 40% of taxpayers.
That leaves us with a Fed that is not only trying to get the bond market to rally higher in anticipation of more rate hikes (and not being very successful given fears of Fed induced economic slowing), but it is also using them as a not too veiled threat to the elected branches to get their spending in sync with what the Fed thinks it should be. That is outside its mandate, an unconstitutional usurpation of power, simply wrong economically as discussed last week and over the weekend, and is going to threaten our livelihoods once more.
Commodities pullback, but face a tough road if the Fed gets too aggressive.
Stocks are just now taking the Fed seriously, or at least they are doing it again after believing the Fed was almost done with rate hikes (as we discussed early this year, they did it to start the year after a late 2004 rally based on an 'almost done' belief), but then realizing there is more to come. Commodities took the same cue, selling off hard as well after a long uptrend. The uptrend is hardly broken, but there are some lessons here.
There is an old market maxim: just as good pitching will beat good hitting in baseball, tight money will win over commodity price rises. In other words, if the Fed keeps raising rates and lowers money supply commodities will ultimately break their uptrend. Lumber prices are a good example. They sold off from late 2004 and early 2005 (as discussed above, when stocks realized the Fed was not done raising rates). A modest rebound in February looked decent, but then lumber prices started lower once more. They are now down 32% from that February interim peak.
There is another market maxim: all bull markets are built with a copper roof. Copper has performed very well during the expansion, starting to trend higher before stocks did. If a rally has a copper roof, it also has a wooden frame. Lumber prices were also one of the first indications of an economic recovery, and we reported on them in late 2002 and early 2003, citing how prices were shooting higher and goods manufacturers were hoarding supply to avoid outages that would stall business. This drop in pricing shows the expansion has slowed and it also shows the Fed's money policies are impacting the housing market and other markets as well. Copper is still trending higher, recovering part of the losses from last week's selling, but the wooden frame for the roof is starting to buckle in some areas.
In sum, this means that the drop in lumber prices the past year is signaling a the Fed's tighter money policy is impacting growth. If the Fed continues its tunnel vision exhibited of late as discussed in last week's reports, it could very well tighten rates and money supply to the point where the pitching (and not necessarily good pitching) takes down the economic expansion. Given the Fed's track record, this is not a major leap of logic.
THE MARKET
MARKET SENTIMENT
A fairly rapid shift in general pessimism from the 'rah rah' best Q3 in years has transpired. A 42 point drop on SP500 in a week will do that. October is a good month for jacking up negative sentiment, and last week the bulls and bears moved sharply in the right direction. Talking to floor traders, market makers, and brokers, we are hearing a lot of pessimism about the market. Sentiment turned as fast as the market did when it heard Fed speak suggesting the Fed could go past neutral in its rate hiking. After a hard drop and a spike in negative sentiment the market will be ready for a more significant rebound.
VIX: 15.55; +0.96
VXN: 17.28; +0.66
VXO: 15.65; +0.61
Put/Call Ratio (CBOE): 1.06; +0.11. Another close over 1.0, the second in three sessions. As noted over the weekend, it takes several of these along with other sentiment indications (such as bulls/bears) lining up to indicate a turn.
Bulls versus Bears:
Bulls and bears continued their positive turns for the second week. More work to do, but heading in the right direction again.
Bulls: 49.5%. Big 3.7% drop from 53.2%. Second down week after three up weeks. It never reached the 55% level considered bearish. Bottomed in May at 43.5%.
Bears: 27.8%. Solid rise from 26.6%. Second week up after a week off at 25.5%. Easily held above the 20% level that is considered bearish. Hit a high for the year at 30% in early May.
NASDAQ
Stats: -11.43 points (-0.55%) to close at 2078.92
Volume: 1.434B (-3.53%). Fell off further from Friday's lower volume session. No distribution, but also no upside volume yet either.
Up Volume: 450M (-318M)
Down Volume: 912M (+224M)
A/D and Hi/Lo: Decliners led 1.8 to 1. Declining breadth maintains its decisive lead over upside breadth.
Previous Session: Advancers led 1.34 to 1
New Highs: 44 (-4)
New Lows: 100 (+15)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
A modest early gain faded, and a midday rebound attempt failed at the same point (2093). That led to an afternoon fade back to the 200 day SMA (2076) where NASDAQ closed near the 200 day as well. The Friday bounce was wiped out; at least volume was lower. That lower volume gives NASDAQ at least a chance of holding this important level. With SP500, SOX and SP600 dropping harder, it is going to be a tough chance. Next support is at 2050 that marks the bottom of the spring and summer ranges. It could easily find that level as it continues to form the base that started in early August.
SOX (-3.2%) dove lower Monday, spurred by the XLNX Q3 warning. It gapped lower, and the downdraft took some bigger names with it (NSM, INTC). After three tries to clear 486 it has broke out the bottom of the 11 week lateral range and is heading for some support at 440 and the 200 day SMA (433). Not a healthy development for technology or the market overall.
SP500/NYSE
Stats: -8.57 points (-0.72%) to close at 1187.33
NYSE Volume: 1.632B (+1.67%). Volume rose again, still above average, as the NYSE indices turned lower, unable to add anything to the weak Friday rebound. More distribution that means these indices have not found their bottom. No major deduction there.
A/D and Hi/Lo: Decliners led 2.45 to 1. Strong downside breadth once again as the selling resumes. All the strength is downside right now.
Previous Session: Advancers led 1.54 to 1
New Highs: 34 (-4)
New Lows: 160 (+58)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 turned lower again, once more on rising, above average volume. Not as hard as last week, but still a return to distribution, i.e. higher volume share selling. SP500 is fading again, but it is also approaching old price tops from all the way back to the mid-1998 market peak (1184) and the late 2001/early 2002 double top (1165 to 1155) that formed just prior to the last plunge lower in the downtrend. Do they still hold sway; to some extent. The further out in time the more erosion of strength. The 2001 double top, however, is a still a significant level. Before that is the August 2004/August 2005 up trendline at 1175. SP500 is selling on volume, but it is also running straight into support levels. Of course the breach of 1200 was a key near term breakdown, and this resumed distribution shows it is still seeking bottom. These support levels are very likely going to give rise to a rebound.
SP600 (-1.2%) fell through 335 on that rising volume, fading through the June and March peaks. Not an explosive run lower from last week's low, but it still looks as if SP600 is heading for a test of the 200 day SMA (330). Small caps are weak but they too are approaching a key support level after this recent break lower.
DJ30
DJ30 is diving lower toward support at 10,200, breaking lower through the June and July closing lows. Some support at 10,200, but that is relative weak, and next support is 10,100. DJ30 remains as weak as everl.
Stats: -53.55 points (-0.52%) to close at 10238.76
Volume: 236M shares Monday versus 237M shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
The recent FOMC meeting minutes are out at 2ET, and with all of the recent Fed speak, investors are going to look closely to see just how hawkish the Fed was at the meeting versus the recent 'inflation is a virus,' 'fiscal profligacy,' and '1970's scenario' comments. It will also be a litmus test as to how much of the bad news re the Fed has been absorbed into the market. It is not likely that the Fed said anything worse in its minutes than the comments from last week, so it may not provide any fireworks. If the minutes are pretty benign that would mean this recent talk was approved in recent history, and that in itself is not comforting as it would indicate that specific, short term events can alter Fed decision-making. Of course anything involving the Fed makes us uncomfortable.
There are no other scheduled economic reports, and given the market has been selling based on its fear of Fed, it is kind of poetic justice that the market and the FOMC minutes have it out on Tuesday. There were some upbeat earnings after hours from AA and DNA, but AA is in a nasty downtrend, running contra to most metal producers, and while DNA shot higher after hours, its high trade was still below the 50 day EMA. Just how much drive they provide is dubious; there are still lots of warnings and reports to come, and the market is worried about the future given the Fed's warning about more rate hikes. It is always the future; everything that impacts the market is in the future, no the past.
A key test tomorrow will be NASDAQ at the 200 day SMA and SP500 approaching its up trendline. We have to keep in mind, however, that SP500 has already broken key support and the other NYSE indices are not pretty pictures. NASDAQ is holding the belay rope with the rest of the market hanging on as dead weight. The market is trying to find bottom on this leg lower and these coming support levels, given the selling to this point, are likely to provide a near term bottom to bounce from. The market may not be done selling; the Fed may have already killed off the expansion. The market, however, will bounce after this meltdown, and as always, its strength will give an idea if the last leg lower is part of a forming bottom. As stated earlier, right now there is no bottom yet to this downdraft.
There are still stocks that are holding up well, but they are not moving much right now. The pressure is downside and some leaders are continuing to simply drift higher in the lack of selling while others are still making nice tests of prior moves. If the market continues to sell hard, we will see more of these giving up support. On a rebound we will see the strong move up off their near support held on the test, and that can provide some opportunity, but we want to see the move solid on all fours (basically solid volume in a continued uptrend).
Still would like to see more rebound to better set up downside. As noted above, the pessimism has ratcheted higher quickly in the wake of the Fed's tough love statements and the sharp distribution. That leads to rebounds, but we will likely see the internals get more extreme once more before it is ready to bounce. Friday's relief move let off some of the downside steam that had build up that would propel a rebound, and it has to pressure back up to drive some short covering and bargain hunting.
Support and Resistance
NASDAQ: Closed at 2078.92
Resistance:
2100 was key resistance and support in the past
The 10 day EMA at 2120
The 50 day EMA at 2131
2151, the early December closing high and highs from January 2004
The 50 day SMA at 2146
2178 is the January closing high
2187 is the September high.
2191.60, the January intraday high.
2192 is the mid-July high.
2220 is the August high
Support:
The 200 day SMA at 2076.42
2050 is price support from spring and summer 2005 consolidations
2018 is the early April high.
The August 2004/April 2005 up trendline at 2010
S&P 500: Closed at 1187.33
Resistance:
The 200 day SMA at 1200
1200 was solid price support
The 10 day EMA at 1205
1210 held in late September on the close.
December 2004 high at 1219 and June high at 1220
The 50 day EMA at 1217
The 50 day SMA at 1222
March 2005 closing high at 1225 and intraday high at 1229.11
The September high at 1243 and the recent August high at 1246
Support:
1183 - 1184 from November 2004 highs and July 2005 intraday low and way back in July 1998
1176 is the August 2003/August 2004 up trendline.
1165 - 1155 from late 2001/early 2002 double top
Dow: Closed at 10,238.76
Resistance:
10,350 turned out to be support in the recent pullback August and September pullbacks
The May high at 10,406 and 10,400, the bottom of the November/December range
The 10 day EMA at 10,377
The 50 day EMA at 10,487
The 200 day SMA at 10,525
Price consolidation at 10,600
The June highs at 10,646 to 10,656
10,720 is the high in the recent lateral move. This is the key resistance.
10,754 is the February high
10,868 is the December 2005 high.
10,985 is the March high
Support:
10,250 held in the June and July lows is cracking
10,200 from April.
10,175 from the July intraday low.
10,000 from the April low.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
October 11
FOMC Minutes, September 20 (2:00)
October 12
Crude Inventories, 10/7 (10:30): -246K prior
October 13
Export Prices ex-agr., September (08:30): -0.1% prior
Import Prices ex-oil, September (08:30): 0.0% prior
Trade Balance, August (08:30): -$59.3B expected and -$57.9 prior
Initial Jobless Claims, 10/08 (08:30): 390K prior
Treasury Budget, September (14:00): $37.0B expected and $24.6B prior
October 14
Retail Sales, September (08:30): 0.2% expected and -2.1% prior
Retail Sales ex-auto, September (08:30): 0.6% expected and 1.0% prior
CPI, September (08:30): 0.9% expected and 0.5% prior
Core CPI, September (08:30): 0.2% expected and 0.1% prior
Industrial Production, September (09:15): -0.5% expected and 0.1% prior
Capacity Utilization, September (09:15): 79.4% expected and 79.8% prior
Michigan Sentiment-Prelim., October (09:45): 80.0 expected and 76.9 prior
Business Inventories, August (10:00): 0.1% expected and -0.5% prior
End part 1 of 3
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