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2/23/06 Technical Traders Report Update
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Technical Traders Report Subscribers:
Full report issues Saturday.
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: None issued
Trailing stops: None issued
Stop alerts: BAC
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 SSR alert service you can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Little change in economic data, little change in the market.
- Jobless claims post sixth week below 300K
- Homebuilders experiencing lower contracts, more supply.
- Market continues to hold its trend and trade near post 2002 highs, but move lacks punch.
Rebound attempt falls short.
This market is certainly not an overachiever. The indices have held onto their overall uptrends during the last couple of months, but despite a solid break higher by DJ30, they remain stuck in molasses. SP500 is still setting up a decent pattern, and SP600 is trying its recent all-time high, but NASDAQ, particularly NASDAQ 100, is struggling as is SOX. The market is talking a good game what with its uptrend, but its actions say its heart is not in it. Maybe it is just taking a rest before resuming the move and SOX will overcome its lower low. That is the nice thing about an uptrend; stocks can struggle, but as long as the trend holds, they tend to rebound. For now the market is hanging in its trend even though it has some serious lack of ambition issues.
Stocks started soft and got softer. NASDAQ undercut its 10 and 18 day EMA early but when SP500 held the late January high and started to rebound, the entire market improved. We say improved because it was never that great. At best the action was mixed heading into the afternoon session as NASDAQ and SP600 turned positive while the other indices toyed with the flat line. Volume was a bit higher early, but that was a bit higher than low. In any event, even that attempt at rising volume faded along with the indices by the close. A late sell program hit the tape and pushed all indices lower; that is the problem with low volume upside attempts: it doesn't take much selling to turn a hard fought gain into a quick loss.
The sellers got the ball last and won the session. There was no distribution, however, so the market simply remained status quo. The economic data did the same: jobless claims were well below 300K again, the sixth sub-300 showing in as many weeks. Oil inventories rose 1.1M bbl while natural gas inventories suffered a very modest drawdown; natural gas is likely heading to $5 from here. Recall that it was near $15 early in Q4 on rampant speculation. Now its back is broken, at least for this heating season.
Those lower energy prices are helping keep the market afloat even in the face of continued concern regarding the Fed's next several steps. The problem is no one knows just how many steps it is going to take. It is widely believed two more are in the hopper, and outgoing Fed governor Santomero sounded quite dovish Thursday, saying he was optimistic that inflation would remain low and the Fed was close to finished. That is helping keep the market hanging in there for now. With the 2 year/10 year inversion now at 19 basis points (up from 15BP earlier this week), the market needs some assurance the Fed is not going to drive it to 50BP or beyond. The notion that the Fed will be done in two along with lower oil and gasoline prices are maintaining stocks at this higher level. If that outlook changes to the worse, the current trends are likely to change as well.
THE ECONOMY
Jobless claims remain on the trend lower, now that the expansion is over three years old.
Jobless claims turned in the sixth consecutive sub-300K week, coming in at 278K versus the 290K expected and 298K the week before. That is a 5 year record for consecutive sub-300K weeks and pushed claims to 6 year lows. The four-week average continued its march lower from 300K as well, dropping 1,500 to 281,750.
This is more of the same economic data that has stirred the Fed and some commentators into believing that inflation is still at hand and that more firming is necessary. We have discussed at length why employment is, based on the historical record, not the inflation boogeyman it is made out to be. It lags the economy, and it is almost amusing how, after whining about weak employment levels years into the recovery, all of the sudden it is accepted without much question that employment is strong.
Of course, now that the economy is finally at employment levels desired in those past years, most everyone seems to agree that employment is too strong for the good of the economy, and they come to that conclusion as the economic expansion works in its fourth year. That is an old expansion. Do you kill a prize bull just because it is past its prime show age and getting a bit ornery? No, you take care of it, pamper it, and keep it going and producing offspring that will carry on the line. Why then do we insist on killing off aging economic expansions, one that is finally getting to where we want it to be, based on lagging data that may ore may not indicate inflation pressures? It is right peculiar. You want something so bad you take drastic steps to get it, and then when you get what you want you purposefully choke the life out of it. Strange indeed.
Housing makes a comeback, or not.
TOL announced its earnings Thursday and in doing so increased its guidance for 2006. At the same time new purchase mortgage applications jumped on the week. Sound like a premature death call on the housing market? Nah.
TOL also noted that contracts for sale were down 21% from last year. It also stated that there was 'more supply than demand' for the first time in years. TOL was up on the news, but it was the only one. Moreover, its pattern is in the dumpster, just coming up for air at the 50 day EMA after a 7 month decline. That pattern is mirrored throughout the homebuilders: downtrends over the latter part of 2005 even as starts and sales continued to climb. Again, as with employment, some indicators lag shifts in the market. The homebuilders were on the decline long before this news came out.
The Fed denied targeting the housing market in Greenspan's talks before Congress, though he did start using the term 'bubble' to describe some of the housing market before Congress in 2005. In its minutes, however, it was clear the Fed was targeting housing. It was simply one of those 'deny the obvious' games Greenspan played with the markets as in the late 1990's when he denied targeting the stock market with his rate hikes, but then all but said the Fed was doing just that in speeches and Fed minutes. You don't continually dwell on 'irrational exuberance' in the stock market and a 'wealth effect' due to stock market gains while raising interest rates in a disinflationary economic environment unless you are targeting the market.
Greenspeak as many called it was simply a misinformation campaign, one Greenspan was proud of. He once said that if you did not know what he was talking about he was doing his job. Given the glaring contradictions in his actions and spoken word, you could get away with calling it lying to Congress. Many were so blinded by the economic advance that they attributed to Greenspan (an expansion that he rode and did not create), however, that they could not or would not make the obvious conclusion.
Back to housing. The housing market is on its way down. The Fed has done its stated job, maybe a bit too well. Now the Fed is worried about other forms of inflation pressure and is getting off track with this worry about employment and energy. Employment is not going lower anytime soon. That leaves energy as the next shoe that has to drop. It is trying to do just that, but it has been as sticky as gum on the bottom of your shoe, refusing to really crack. That is the big issue for the Fed and thus the market over the next two weeks.
THE MARKET
MARKET SENTIMENT
VIX: 11.87; -0.01
VXN: 15.59; +0.25
VXO: 11.07; +0.28
Put/Call Ratio (CBOE): 0.84; +0.11
Bulls versus Bears:
Bulls: 45.3%. A strong drop from 48.9% the week before. A fairly precipitous decline the past few weeks from 60.4% hit in January on the high for this cycle. 35% is considered an extreme level that can indicate a reversal, but readings of 44.8% on the low on the last leg and 43.5% in May triggered solid market rebounds. Getting close, and with NASDAQ at support and trying to make a higher low, the timing is good.
Bears: 29.5%. Strong climb from 27.7% and 25.3% before that. The market never turned overly positive as measured by this indicator as it never reached below 20% on this move. It is at a level that can help the market turn. It hit 29.2% on the high this cycle, just below the 30% level hit in May when the market bottomed at that time as well.
NASDAQ
Stats: -3.85 points (-0.17%) to close at 2279.32
Volume: 1.812B (-4.1%). Volume fell from already below average levels. NASDAQ spent much of the session in positive territory, but volume was lower after an attempt to climb early on. No accumulation, but no distribution. Basically a push as NASDAQ continues trying to form up a higher low. Volume has been anemic all along, however; something will have to change to bring in more upside volume to push NASDAQ higher.
Up Volume: 854M (-317M)
Down Volume: 915M (+222M)
A/D and Hi/Lo: Decliners led 1.2 to 1. Modest breadth basically matching the session.
Previous Session: Advancers led 1.61 to 1
New Highs: 150 (-1)
New Lows: 18 (-8)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ started lower, undercut the 18 day EMA (2274), and then staged a nice rebound into the early afternoon. It reached just below the recent high at 2294 and stalled. A sell program hit late and drove it back down to close right at the December high (2278). NASDAQ is still holding above the 50 day EMA (2262), trying to make that higher low after two lower highs so it can break the short downtrend for 2006. The jury is out; it has not shown a lot of strength since early January on the celebration of the Fed minutes.
SOX (-1.19%) bounced off the 50 day EMA (519.75) Wednesday but it turned right back down Thursday. It managed to hold above the 50 day EMA, closing at the October/December up trendline. It broke out of the bottom of its lateral range this week, but it is holding where it has to for now. Chips remain in their uptrend but they are showing their wear and tear as well, very similar to the market overall. Key, key test here.
SP500/NYSE
Stats: -4.88 points (-0.38%) to close at 1287.79
NYSE Volume: 1.574B (-2.57%). More lower and below average volume Thursday as the NYSE indices could not find any firm bids to drive them higher past the January highs. Not bad action, continuing the positive price/volume action of this advance. That keeps the NYSE indices on the table and still ready to try a move higher if they get the right catalyst.
A/D and Hi/Lo: Decliners led 1.31 to 1
Previous Session: Advancers led 2.1 to 1
New Highs: 239 (-33)
New Lows: 21 (+8)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 continues working on the handle to its short but classic 6 week double bottom with handle base. Lower volume on a down session continues the solid price/volume action that helps set up a breakout move. It is taking its time to set up, and we have no problem with that. A good lateral move will get even more investors bearish and better set the stage for a breakout move over the January high (1295). It tapped at that level Thursday, but it did not have the trade to push through.
SP600 (-0.17%) tapped at the January high as well (380.83) but never really challenged the breakout. Indeed, it tapped the upper channel line (380) on the high, and that contained it. Without any volume it was not going to make the move. It ended up showing a loose doji below that resistance. After a run higher that can mean a pullback is coming before any further advance. With SP500 still forming the handle SP600 could pull back to 375 or 374 (10 and 18 day EMA) and make a higher low and set up the breakout.
DJ30
Low volume fade as DJ30 has traded back and forth the past week after that break above the January high (11,048). Modest volume is good to see on the fade, indicating DJ30 is still going to hold the breakout move. Similar to SP500, it is working laterally; the difference being that DJ30 broke out already while SP500 is still setting up for that move. A hold at the near support (January high or the 10 day EMA at 11,034) would consolidate the move and set up the next leg. The rest of the market needs it, particularly NASDAQ. Note that INTC has faded the entirety of January and February and yet DJ30 still made the breakout.
Stats: -67.95 points (-0.61%) to close at 11069.22
Volume: 270M shares Thursday versus 337M shares Wednesday. Back below average on the fade, continuing some solid price/volume action.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Durable goods orders are out before the market and expected to fall from December's strong 1.8% advance. The key for the market will still be energy; it needs to break down here to give the market short term life in the face of a Fed that is still staying the course despite removing its 'measured pace' language. It is month to month based on the data; more water torture for a market that has seen 14 rate hikes and housing, one of the major leaders in the expansion, already on the decline. Many are again wondering on the airwaves just when the Fed will pull the plug on this rate hiking. The ever increasing yield curve inversion is only adding to the concern.
That leaves the market is holding the uptrend, but in limbo at the same time. The early January FOMC minutes release kept the rally alive; now the rally is looking for another sign the Fed is almost through or that the handwriting is on the wall. One Fed governor Thursday (Santomero) could not lift the market through its recent highs. An oil breakdown would be a huge shot in the arm; that would keep the consumer happy and it would also relieve the Fed from some worry about energy cost pass through. Of course, oil crashing lower seems about as likely as winning the powerball lottery; you hate to bet on that to save the market.
Thus the market is killing time, trying to gather enough information to conclude the Fed is truly done in May. With Fed funds futures still holding out a chance for a third hike, it is clear the market is still not sure. SP500 looks rather healthy in its lateral move. DJ30 broke out and is testing, also showing some good price/volume action. NASDAQ is still in the game for a higher low and a springboard to break this year's string of lower highs. SOX is struggling hard to simply hang on. As noted Wednesday, that could be the swing point for the overall market, i.e. whether it can hold support or breaks lower.
The action is in spurts. Wednesday was decent, Thursday was very quiet. Quiet action can be very good, particularly when patterns are building as on SP500. Overall the market has lacked power this month, at least to the upside. With the inverting yield curve, lack of strong trade, struggling NASDAQ and SOX, and uncertainty regarding the Fed, even with the quiet market, you have to watch for a market with the foundation eroding out from under it. You get the sense that a loud fart would send it lower even with the DJ30 breakout.
We cannot deny the continuing uptrend, and thus we are continuing to look for opportunity in leading stocks and in leading sectors. The market has the final say, and with it holding this trend we are going to be ready for more upside. We are going to pick our shots carefully, however. This is time to be patient because the market is in its uptrend and is setting up to try to move higher, but it has lacked power and has a lot of historically serious issues it is trying to overcome. If we see a great pattern making a great move, we won't turn away. We will, however, move in piecemeal, not betting the farm on a first buy.
Support and Resistance
NASDAQ: Closed at 2279.32
Resistance:
2288 from December 2000 low.
The late January high at 2314.36
2316 is the October/December up trendline.
2328 from the May 2001 peak
The January high at 2333
3015 is the December 2000 peak and the October 2000 low
Support:
2278 is December 2005 intraday high.
2273 is December 2005 closing high.
The 18 day EMA at 2274
The 10 day EMA at 2274
The 50 day EMA at 2261.80
The October 2005 up trendline at 2246
S&P 500: Closed at 1287.89
Resistance:
The January high at 1295
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
Support:
The late January peak at 1285.
The 10 day EMA at 1281.69
The 18 day EMA at 1278
The December highs at 1275 (intraday) and 1273 (closing)
The 50 day EMA at 1269.55
1264 from the December 2000 lows
The bottom of the November/December 2005 range at 1248
Dow: Closed at 11,069.22
Resistance:
11,176 - 11,186 from April 2000
11,350 from the May 2001 peak.
11,401 from the September 2000 peak.
11,425 from April 2000 peak
Support:
11044 is the January high.
The 10 day EMA at 11,034
10,985 is the March 2005 intraday high
The 18 day EMA at 10,980
10,965 from Q4 2000 and November/December 2005
The 50 day EMA at 10,882
10,868 is the December 2004 high
10,754 is the February high
10,720 is the high in the recent lateral move
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
February 21
Leading Economic indicators, January (10:00): 1.1% actual versus 0.5% expected and 0.3% prior (revised from 0.1%).
FOMC January 31 minutes (2:00)
February 22
CPI, January (8:30): 0.7% actual versus 0.5% expected and -0.1% prior
Core CPI (8:30): 0.2% actual versus 0.2% expected and 0.1% prior (revised from 0.2%).
February 23
Initial jobless claims (8:30): 278K actual versus 300K expected and 298K prior
Crude oil inventories (10:30): +1.121M actual versus +4.85M prior.
Help wanted index, January (10:00): 37 actual 40 expected and 38 prior.
February 24
Durable goods orders, January (8:30): -2.0% expected and +1.8% prior.
End part 1 of 2
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