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11/02/05 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts: HCC
Buy alerts: FLR
Trailing stops: None issued
Stop alerts: ATK
SUMMARY:
- After a one-day pause NASDAQ surges through down trendline as entire market surges on volume.
- Oil fades slightly but refuses to break down as demand bounces back.
- Despite the headwinds market storming ahead in year end rally; still have to look for opportunities & not chase the bus.
Fed hike, Senate shutdown, bird flu, so-so guidance? Who cares?
Classic action the past week as stocks made a test of the October low, threatened to collapse below key support, rebounded on volume, took a breather, then blasted through resistance. This all comes after the follow through session we discussed just over two weeks back when the market turned up off the early October selling that indicated a bottom ahead of a year end run was forming. The successful test of that follow through last week was extremely positive, and the moves this week have confirmed the run ahead of year end is on.
The classic action continued Wednesday with the soft start and then shot higher through resistance. For most of October stocks reacted poorly to news. Good new or bad news it did not matter. Good economic news fostered fears of the Fed. Bad earnings news fostered fears of an economic slowdown. Stocks sold off on both. That continued even during the bottoming phase, but stocks started to hold ground, hence the bottoming action.
The past four sessions they have taken a different attitude. Bird flu? Investors suddenly remembered the swine flu 'epidemic' of 1976. One person died from it. When 35K+ die from the typical flu strain per year, once the hype died down (at least for investors), it did not take long to relegate this 'pandemic' to its proper place. CIA investigation? It is always a telltale sign of no major crime when charges are brought for purportedly lying to the feds instead of the reason for the investigation. Senate shutdown? See CIA investigation: some senators did not get what they wanted from the special prosecutor so they pitched a hissy fit. Windfall profits tax? This is just a smokescreen to delay action on other tax bills such as extending the dividend tax cuts and to stall ANWR drilling legislation. The Fed? It is talking tough, but the market sees the declining core PCE deflator and figures the Fed will at least by done on January 31. Weaker earnings guidance (e.g. DELL)? Well, this one is harder to swallow. We still feel 2006 will be a challenge for the economy and thus the market, and that is what the guidance is saying.
The market, however, has shifted its mindset. It has its head down, ignoring or rationalizing the news, and is moving higher in a year end run. There is a time when you simply cannot lump any more bad news on the market, at least bad news that makes a difference. You can whip a dog only so much before the dog says 'I am out of here' and just does what it wants to do. We noted two weeks back that the news was just about as bad as it could get, yet the market was still trying to hold the October low and set a bottom. Last week the market had enough and started higher on volume. Wednesday it showed its intent with a strong break higher.
Volume shot higher (2.2B NASD, 1.99B NYSE), breadth soared (2.8:1 NYSE, 2.4:1 NASD), key resistance was broken, and leaders (along with a lot of other stocks) were leading higher. After a day of rest Tuesday, stocks made their case for the year end rally Wednesday. We added some positions but mainly enjoyed the ride on the positions we have been taking all along as the market and strong leaders showed us they were putting in a bottom regardless of the news. Always nice when there is a rush to buy and you are already sitting on some solid positions in solid stocks.
THE ECONOMY
It was a very slow day for economic news. Bush gave some further points on his plans for saving us from the bird flu, including quietly repealing the "posse comitatus" doctrine which basically prevents troops from being domestic police. There is a lot of merit in keeping troops in an aide role domestically. Other than that it was Washington, DC as usual, i.e. our elected leaders never saw a dollar that was not worth taxing and spending. Each attempt at curtailing spending has thus far been shot down in the Senate, and shot down by very lopsided margins. There is no spending discipline on either side no matter how much they like to say that is their intention. Every time there is a tax cut and revenues come pouring in, Congress and the President do all they can to spend every dollar and more. The additional money emboldens them to come up with more ways to spend. Despite all of the talk of budget restraint and cutting spending, they are feeling pretty emboldened still.
Oil inventories rise in line, but demand rebound keeps oil afloat.
Oil continues to threaten a breakdown, but it also continues to hold the trend. Oil supplies grew another 2.7M bbl, gasoline was up 1M bbl, and distillates fell 200K, better than expected. That started oil on a decline of more than $1/bbl, but by the close oil had basically recovered.
What triggered the move was the recovery in demand. There was a lot of talk about demand destruction given the higher prices. $3/gallon gasoline and the President's call to conserve did push usage down. Indeed two weeks back demand had dropped 2.6% year over year. Last week it was down 1.8% year over year. On a 4 week average demand was rising. That helped stop the bleeding in oil again, just as it looked ready to fall again.
Many people are talking about $50/bbl oil and of course we are again hearing about $30ish/bbl. That crops up every time oil threatens to break its trend. Then oil holds the line and starts another leg higher. In the near term oil prices will fall if demand is perceived to remain light or at least declining. Longer term it takes something more substantial such as a major shift in mentality about future supplies or a recession in the US.
A drop in big integrated oils such as XOM and CVX in October indicated a drop in oil ahead. Those big names are still at their lows since the sell off, but they are trying to put in a bottom just as oil is trying hold its trend. The next couple of weeks are a key time for these stocks and oil. Many of the smaller companies look solid and the service companies are rebounding (somewhat expected given the rebuild will put money in their coffers even if the production remains shut in).
You have to view the oil situation with mixed emotion. A drop in price would be a real benefit to consumers, businesses, and the economy. If the drop in price is due to a recession, however, there would ultimately be a benefit, but we would not enjoy it anytime soon. That would go to China, India and other big new users with strong economies that would likely not tank just because the US fell into recession; they would benefit from the low prices while we would just struggle to pull out of economic slowdown. A lot rides on how aggressive the Fed gets with money supply and rates. It is worried about the housing market and inflation pressures, but at some point the price of oil overrides those and slows the economy. That is what has us concerned heading into 2006. We were worried about oil in 2005 and it did not tank the market (didn't vault it higher either), and it looks as if it is going to be an issue again in 2006 . . . and maybe along with the Fed as well.
THE MARKET
MARKET SENTIMENT
VIX: 13.48; -1.37
VXN: 15.82; -1.57
VXO: 12.82; -1.25
Put/Call Ratio (CBOE): 0.71; -0.28
Bulls versus Bears:
Last week's numbers:
Bulls: 44.8%. Down from 45.3%. Another solid decline but has slowed dramatically from the 3.7% declines to start October when the selling was strong. Bottomed in May at 43.5%.
Bears: 29.2%. Down from 29.5%, the high water mark on this cycle thus far. Hit a high for the year at 30% in early May.
NASDAQ
Stats: +30.26 points (+1.43%) to close at 2144.31
Volume: 2.235B (+14.49%). Excellent surge in volume, the best in a month and one-half, as NASDAQ broke through the August down trendline. Strong trade accompanying such a move after a bottoming process indicates more than just short covering.
Up Volume: 1.62B (+719M)
Down Volume: 572M (-465M)
A/D and Hi/Lo: Advancers led 2.39 to 1. Solid breadth on the advance. Not stellar, but quite solid.
Previous Session: Decliners led 1.37 to 1
New Highs: 150 (+53)
New Lows: 66 (-7)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ cleared the August down trendline (2125) with some authority, powering through that level on strong volume and strong breadth. It has made a higher low and a higher high in the process. Solid move that had its roots in the bottoming process the past three weeks. We note that NASDAQ overall topped NASDAQ 100 (1.3%). It was a broad move.
SOX (2.96%) blew through the 200 day SMA (435.42), moving into the October lateral range. It looks as if the index is going to make quick work of this range and take on the 50 day EMA (451) as its next key resistance point.
SP500/NYSE
Stats: +12 points (+1%) to close at 1214.76
NYSE Volume: 1.991B (+11.71%). Strong volume on NYSE as well, not as impressive as NASDAQ, but just another strong showing in a series of good price/volume action, particularly since holding the up trendline and vaulting higher.
A/D and Hi/Lo: Advancers led 2.86 to 1. Very solid advance across the board.
Previous Session: Decliners led 1.12 to 1
New Highs: 169 (+76)
New Lows: 95 (-12)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 broke through the September down trendline (1210) on strong volume, clearing the 50 day SMA (1209) in the process. Necessary step in the recovery, but unlike NASDAQ, SP500 still has several resistance levels to move through. The 1220 and 1230 levels are the next important resistance points, but with this kind of move they are more way points where the index will take a breather as it makes its move higher. Showing great strength at this point; it will need it ahead.
SP6500 (2.1%) surged as well, breaking through the 50 day EMA (339) and SMA (341.46) and out of its double bottom pattern off the October lows at 325. This makes a higher low and a higher high, and it pushes SP600 above all of the former highs prior to August that would act as resistance. SP600 and NASDAQ are again showing strong leadership as the market makes an important move. That has been the case for the past three years, i.e. since this recovery began.
DJ30
DJ30 rallied to tap the 200 day SMA (10,498) on the high before fading some into the close. Very lackluster session for the blue chips compared to the rest of the market with lower, lackluster volume. Still deep in the throes of its year long base, letting NASDAQ and SP600 and even SP500 doing the heavy lifting.
Stats: +65.96 points (+0.63%) to close at 10472.73
Volume: 279M shares Wednesday versus 293M shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Factory orders, ISM services, and more earnings ahead of the Friday jobs report are on the agenda. The strong market move shows the shift in attitude of investors: despite the headwinds that buffeted them over the past month they have rallied and pushed stocks higher on strong volume. What doesn't kill you makes you stronger. Investors survived the deluge of negatives, some real, many simply hype, and they are in the accumulation mode again, pushing the Q4 rally that set its roots over the past three weeks.
We still believe stocks have more to run. NASDAQ did not break its downtrend with such strength on a whim. Lots of upside momentum to keep it going, but we have to keep in mind three strong up sessions in four, and a 60 point move on the last run before this one. The point is that we have been entering positions on the way up and to this breakout, and we don't need to run wildly after the bus. We will continue to take advantage of good entry points in strong stocks as they present themselves, but we will also try to refrain from chasing moves. That means we may have to wait a bit and let stocks test the strong breaks higher. We were doing that the past three weeks when stocks were gapping higher on earnings; after a few days we would get a nice test and then we could pick them off as they resumed the move higher. That is part of the game plan ahead.
Of course there are also stocks that are still setting up to make their moves, i.e. the next wave that will break higher. Despite the breadth, not all stocks rallied Wednesday. Moreover, some that moved higher did not have a lot of trade and we had to let them pass. They could give us a quick test as well (a strong move in the market often gives way to a test before continuing) and then be set up for a strong move.
All in all this is an impressive move. Even when it was setting up and showing signs it was going to make the bottom and the year end run, it was still in doubt (as it always is) and there was a deluge of negatives confronting the market every day. Now that it has made this important technical move we will hear many jumping on board (we already heard one bear over the past two weeks change stripes today). That always has some negative implications, but in a strong move that typically means just an orderly test to catch its breath and get rid of the quick sellers.
Support and Resistance
NASDAQ: Closed at 2144.31
Resistance:
2154 from January 2004 high
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:
2122 is the August downtrend.
The 50 day EMA at 2110
2100 was key resistance and support in the past
The 200 day SMA at 2073
2050-51 from spring and summer 2005 consolidations
2025 is the early October low
2018 is the early April high.
The August 2004/April 2005 up trendline at 2023 that forms the bottom of the big triangle pattern
S&P 500: Closed at 1214.76
Resistance:
1210 held in late September on the close.
December 2004 high at 1219 and June high at 1220
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:
The 50 day SMA at 1209
The 50 day EMA at 1205
1200 was solid price support at one time
The 200 day SMA at 1199.50
1190 from prior prices
1183 - 1184 from November 2004 highs and July 2005 intraday low and a high way back in July 1998
1184 is the August 2003/August 2004 up trendline is in trouble
The October intraday low at 1168 is a key point to watch
1165 - 1155 from late 2001/early 2002 double top
1140 from the April low
Dow: Closed at 10,472.73
Resistance:
The 200 day SMA at 10,497
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:
The 50 day EMA at 10,414
The May high at 10,406 and 10,400, the bottom of the November/December range
The 18 day EMA at 10,369
10,350 turned out to be support in the recent August and September pullbacks
10,250 held in the June and July lows but is blowing out now
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 31
Personal Income, September (08:30): 1.7% actual versus 0.4% expected and -0.9% prior (revised from -0.1%)
Personal Spending, September (08:30): 0.5% actual versus 0.5% expected and -0.5% prior
Chicago PMI, October (10:00): 62.9 actual versus 57.4 expected and 60.5 prior
November 01
Auto Sales, October: 5.4M expected and 5.7M prior
Truck Sales, October: 7.0M expected and 7.3M prior
Construction Spending, September (10:00): 0.5% actual versus 0.5% expected and 0.6% prior (revised from 0.4%)
ISM Index, October (10:00): 59.1 actual versus 57.0 expected and 59.4 prior
FOMC policy announce (2:15): 25BP hike to 4% and no change in the 'measured' or 'accommodation' portions.
November 02
Crude Inventories, 10/28 (10:30): +4.414M prior
November 03
Productivity-Prelim., Q3 (08:30): 2.6% expected and 1.8% prior
Initial Jobless Claims, 10/29 (08:30): 330K expected versus 328K prior
Factory Orders, September (10:00): -1.0% expected and 2.5% prior
ISM Services, October (10:00): 57.0 expected and 53.3 prior
November 04
Non-farm Payrolls, October (08:30): 100K expected and -35K prior
Unemployment Rate, October (08:30): 5.1% expected and 5.1% prior
Hourly Earnings, October (08:30): 0.2% expected and 0.2% prior
Average Workweek, October (08:30): 33.7 expected and 33.7 prior
End part 1 of 3
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