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3/21/06 Technical Traders Report Update
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Technical Traders Report Subscribers:
NOTE: Full report issues Wednesday.
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: AH; FFIV
Trailing stops: CYMI; MER; RNVS
Stop alerts: VTAL
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:
- Market tries to rally too soon, gets slapped back as sellers show up.
- PPI drops sharply but core rises more than expected.
- Bond yields rise on Bernanke 'no yield curve is a bad yield curve' comments, sending interest sensitive stocks lower.
- Indices don't have a lot of maneuvering room as Tuesday pullback already pushing them to next support.
Consolidation morphs into a full-blown pullback on volume.
Stocks started with another nice, modest open as investors digested some potentially unsettling issues. ORCL disappointed on earnings, but that has happened enough the past couple of years to make that more of a non-event. PPI (producer prices) dove lower, but the core was higher than expected, and that was not as easily overlooked. And of course the Bernanke statements that an inverted curve can actually provide stimulus to the economy were really hard to swallow.
Nonetheless it appeared to do just that as stocks found bottom after just a modest decline through mid-morning. Then they actually started to rally off that test, apparently coming to terms with the potential inflation issues and Bernanke leaving the door open for even more rate hikes than anticipated. That was a surprise, but the market did move higher after just three sessions of rest where it basically moved laterally. SOX was leading, rallying up to its 18 day EMA, and NASDAQ was solid as well.
NASDAQ made it to the January high, quite a feat in itself. At that point the trouble started. After just 3 days of lateral movement following the rebound higher, the market tried to take on a bit more key resistance. That was too much for the sellers to resist. After stepping aside and letting stocks rally, the sellers finally came back in and they slapped the market lower. Volume jumped back up on NASDAQ, coming in at last Thursday's gap and tumble levels on NASDAQ. NASDAQ gave up almost 40 points high to close. SP500 gave up 14 points. It was a pretty hard slap down. NASDAQ fell from the top of its range, another failure at that level. The NYSE indices fared better, holding above support and their breakout points, but only because they started higher to begin with. Indeed, SP600 faded, but as noted Monday, it had returned to its upper channel line where it has stalled and tested its up trendline for the past five months.
Volume was up, however, sharply so on NASDAQ. NYSE volume rose as well, but it remained below average and also below the upside volume last week. Once again the harsher action involved techs and semiconductors while the NYSE indices sold as well, but on less virulent volume more akin to a test. Breadth was really weak (-2.6:1 NYSE, -2:1 NASDAQ).
Basically the market tried to rally when it was not ready, and it got spanked. The higher intraday high and then lower close than the Monday highs and lows is an 'outside session,' and that typically indicates some further weakness. With the market ready for a pullback, no surprise there. The question is how weak. Outside day or not, a higher volume reversal at resistance is always an indication of sellers jumping in at resistance, and that usually means further downside. Very similar to March 3 when NASDAQ tried a breakout as well only to reverse and close lower. That led to a test down to the bottom of the range.
That leaves NASDAQ and SOX still groping for some strength. The NYSE indices lost more ground than you would want on a single session, but they are still above near support and in position to hold onto their breakouts. In short, by the afternoon, investors had come full circle and did not like what Bernanke said. Bond yields jumped back up to levels hit 3 weeks back on Fed and inflation worries; stocks suffered then and they suffered Tuesday. Now the question is whether this is a return to that mindset and thus a sell off to the bottom of the range for NASDAQ or just a temporary blip. The higher volume reversal suggests once more NASDAQ is going to struggle to hold the line at the Tuesday close. Still trying to consolidate, but still not able to put together a nice orderly test.
THE ECONOMY
Overall PPI drops 1.4% on energy, food declines.
Gasoline fell 11% and food fell 2.4%, leading the overall February PPI lower. Good news overall, but the core was up 03% versus the 0.1% gain expected. That puts the year/year growth at 1.7%, well ahead of the 1.5% in January.
Once more that raised the fear of 'pass through' costs in the CPI. With the PPI now announced after CPI, however, it is somewhat anticlimactic and the market reaction showed just that. It does provide some confirmation, however, that the continued tame core CPI is fending off higher producer prices similar to other episodes in 1984 and 1994.
Of course, we see gasoline prices running back to near $2.50/gallon and the wholesale contract is up as well. Thus the drop in February price is not going to last. The key is whether the price increases continue to stall out at the producer level.
Bernanke says inverted yield curve is no problem and market complies.
Monday night Bernanke said an inverted bond curve is not necessarily a bad thing and in fact in this situation can even act as economic stimulus. Naturally the bond curve, after holding flat the past week, immediately inverted. Again it was no major inversion (4.71% versus 4.70% on the 10 year), but it took no time at all to invert once Bernanke green-lighted it.
Bernanke all but assured the market of two rate hikes, one in March and again in April when he proffered the unique spin that an inverted curve could actually stimulate the economy as more foreign funds were invested in the US. That certainly sounds like an excuse to keep rate hikes coming. This rather unique insight is also very reminiscent of the many new and creative inflation 'indicators' the Greenspan Fed created when they were brainstorming in 1999 and 2000 as to reasons they could use to jack rates higher and slow the US economy to give other economies a chance to catch up. After all of the inversions that led to recessions in the past, to proffer the old 'this time it is different' argument rings hollow. Bernanke is a brilliant man and would be the one to divine such differences, but if you play the odds and have studied the Fed, this new theory sounds like more of the same old crap.
Anyway, the talk was enough to push bond yields back up toward levels hit three weeks back when the market was struggling in the throes of one of its periodic inflation scares. As we noted before, that tends to do some of the Fed's work for it, but it also gives investors pause as to what the Fed is really up to. More and more market analysts we talk with are coming around to our view that the Fed is pulling a 2000, i.e. tightening into an economic slowdown. It is the same Who knows, if enough start feeling that way it may work out to be a contrary indicator. Right now, however, there are still too many too bullish on the economy's prospects.
More housing notes.
Housing continues as primary economic barometer for most analysts. Most likely it is because housing remained strong during the recession and it is the one category that could be counted upon all during the expansion. Even Bernanke has voiced concern over a housing market decline presaging an overall economic decline; of course, he took it right back, noting that the commercial real estate market was more than hot enough to cause problems with inflation.
It is very clear to most that the housing market has shifted from a strong sellers market to more of a buyers market. Monday we discussed Phoenix' housing market, one of the hottest, making the turn. Other markets are seeing the same thing. In Texas the market never got that hot statewide, and recently many houses are selling, but the average price is falling.
Homebuilders are coming to terms with reality as well. Tuesday TOL and KBH both indicated their Q1 sales were going to be lower, TOL making its second downward revision in the quarter. KBH sees a 29% decline. Repeated revisions show the market slipping from under them. It is not a sudden tank; the housing market peaked in the first half of 2005. These are just the latest indicia of that continued decline.
It is a reality check for most investors what with the Fed still talking tough on interest rates. Interest sensitive stocks, rattled at the start of March on high rate fears, were rattled again Tuesday. Utilities were rocked along with the homebuilders. Even the brokerages, not really interest rate sensitive, were sold on higher volume. Last week the presumption was maybe just one more hike. Bernanke squelched that one Monday night. The question is once again swinging to whether it will be 2 or 3 as opposed to 1 or 2. Last week that 1 or 2 mentality helped the market rally. With bond yields rising again, those fears are creeping back in just as the market crested on the last rebound.
THE MARKET
MARKET SENTIMENT
VIX: 11.62; -0.17
VXN: 16.04; +0.11
VXO: 10.8; -0.24
Put/Call Ratio (CBOE): 0.96; +0.08. Heading back up toward 1.0 as the market reversed intraday.
Bulls versus Bears:
While individual investor sentiment is getting bullish, investment advisor sentiment continues to turn more bearish. That is a continued positive. They continue to move further past those levels that marked bottoms and presaged market rallies in May and October 2005.
Bulls: 42.3%. Bulls continue to fall after holding steady the prior two weeks. From 60.4% at the start of 2006, the fall was hard in February, and is now leveling off (48.9% to 45.3% to 42.6%). It has undercut the two prior lows that helped spark rallies in May and October.
Bears: 33%. Another nice bump higher from 31.3%. 30.8% from 29.5% from 27.7% from 25.5%. It started this move just above 20%, the threshold level. Above 20% is considered better while below 20% is considered bearish for the market. Bears have surpassed the readings from the two prior market bottoms in May and October 2005 (30% and 29.2%, respectively).
NASDAQ
Stats: -19.88 points (-0.86%) to close at 2294.23
Volume: 2.425B (+21.07%). Volume jumped sharply above average, topping last Thursdays volume on that gap and reversal. Sellers are coming in at the top of the range, and this is the second distribution session in the past four. Sellers are still ready to sell techs as the try to top the range.
Up Volume: 811M (-453M)
Down Volume: 1.552B (+868M)
A/D and Hi/Lo: Decliners led 2.05 to 1. Pretty strong downside breadth on the reversal. The selling was intense enough to send breadth strongly negative even on a day when the index reversed.
Previous Session: Advancers led 1.02 to 1
New Highs: 150 (-43)
New Lows: 44 (+5)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ started soft but held up quite well. Then it made the mistake of rallying, moving sharply, climbing up to the January high (2333). The move died there as sellers came in. NASDAQ shed 40 points after lunch as the Bernanke speech came back up. NASDAQ held the 18 day EMA (2290) on the close, but that was only because the bell rang. Volume surged on the reversal, a pretty clear indication NASDAQ was not ready to make the break higher and that sellers are betting they can push it back down in the range. Pretty sharp start to doing that, leaving NASDAQ in the top half of its range, but suffering its second distribution session in four, the prior being Thursday when it gapped higher and then turned over to close negative. It has the 50 day EMA (2276) that is coincident with the October up trendline; it can still make a higher low at that point, but once more it will be a challenge as NASDAQ shows its buyers are not that ready to commit.
SOX (-0.20%) rallied again, this time showing some strong upside (12 points). It rallied to the 18 day EMA (511.53) but then totally reversed with the afternoon market slide. A reversal very similar to NASDAQ, but SOX is already in a downtrend after its peaks in February. This reversal may cement the downtrend. The sellers were certainly ready to send it lower. It did managed to hold the recent range just below 500. Not holding our breath that is going to hold.
SP500/NYSE
Stats: -7.85 points (-0.6%) to close at 1297.23
NYSE Volume: 1.572B (+11.06%). Volume turned higher as well on NYSE, but it was still below average and below the upside volume last week as SP500 rallied. Thus there was some distribution Tuesday, but it was weaker than the recent upside.
A/D and Hi/Lo: Decliners led 2.61 to 1. Pretty ugly as the large caps and small caps reversed and sold across the board.
Previous Session: Decliners led 1.28 to 1
New Highs: 136 (-74)
New Lows: 47 (+8)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 tested 1311 for the fourth straight session and then rolled over on rising volume. Below average and less than last week's up volume, so it was not too much of a rout. The large caps sold to the 10 day EMA (1296) on the close, holding above the January and February peaks (1295) marking the top of the January and February range. The drop was a bit more than you want on the start of a pullback; a more orderly and smaller decline over a few days is much better action than a breakneck plunge. Okay, so that is a bit overdoing it. SP500 sold to the 10 day EMA and held. It has a little play here (damn little) to hold the breakout, but it has to find some buyers with strength.
SP600 (-0.81%) reached 388 on the high, topping its upside channel line, but then rolled over with the rest of the market. Given its rather clockwork rotation inside its channel, the stall at this level is not that surprising and it is not bad news for the index. It closed above its 10 day EMA (381) and some support at 38 from the January and early March peaks. So far SP600 is acting as it should in its uptrend.
DJ30
DJ30 rallied to a new post-2002 high as well (11,335) and then it too rolled over and sold on rising volume. Trade moved back above average, only the third time in the month. The index gave back 100 points from high to close, but it was not a massive sell off or technical breakdown. DJ30 was overextended after a two week run and it is taking some back here. Plenty of room to test the move with the 10 day EMA (11,179) and the March high at 11,137. Of course, MSFT announced after hours that its new operating system, promised this fall, would not be out until 2007.
Stats: -39.06 points (-0.35%) to close at 11235.47
Volume: 332M shares Tuesday versus 247M shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
The economic data flow slows Wednesday with just crude oil and gasoline inventories. The gasoline will start to get critical as several refineries are shutting down production for maintenance delayed after the Gulf storms hit and they were playing the catch-up game. As we have noted the past couple of weeks, gasoline prices are just an incident away from reaching toward $3/gallon, having risen to near $2.50/gallon without any major incident to set them off.
Though the data flow slows, the pendulum has started to swing back after last week's rally on a tamer Fed. Bernanke's speech threw out several questions and provided few answers. It was a speech to an economic club so it was more theory than fact. Still, despite the theory and Bernanke's admonition that the comments were his and not the Fed's, there is some insight there that the Fed will likely want to see tangible proof of a slowing economy before it finishes. That is what it usually takes to stop the Fed. Bernanke stated the Fed had to look down the road and forecast, but the Fed has rarely put words into practice. It takes little imagination to see the risks of slowing ahead are many while inflation remains on the whole rather tame.
Wednesday the market is going to continue the pullback effort, and it needs to slow the pace a bit. MSFT announced its 'Vista' operating system (hate that name) will not make it to market in 2006 as promised. It was getting beat about the head and shoulders after hours on that announcement. That, however, will likely be just a MSFT issue and won't have any impact on the market pullback that started this week. It won't help, but it likely won't add any fuel to the fire either.
We want to see the leaders on the reports hold their uptrends at near support on this test. Each iteration in this cycle, particularly on NASDAQ as it has not broken from its range, has taken out some of the leaders. If this recent move by the NYSE indices is for real they should hold their near support on improving, i.e. lower, volume. We are going to use the pullback to look for tests of strong moves to see if we can pick up some more shares of strong stocks at support. That will positions us well when they bounce, that is, if the market can shake off this distribution and resume the move higher.
Support and Resistance
NASDAQ: Closed at 2294.23
Resistance:
The recent high at 2325
2328 from the May 2001 peak
The January high at 2333
2477 is the January 1999 peak
2523 from the December 2000 low
3015 is the December 2000 peak and the October 2000 low
Support:
The 10 day EMA at 2294 is trying to hold
The 18 day EMA at 2290
2288 from December 2000 low.
2278 is December 2005 intraday high.
The 50 day EMA at 2276
2273 is December 2005 closing high.
A minor peak at 2249 is still holding.
2240 is closing low in recent range.
2218 from August 2005 peak
S&P 500: Closed at 1297.23
Resistance:
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February 2002 low at 1360.
1371 to 1373 is the December 2000 peak and the January 2001 peak
Support:
1297.57 is the recent February high.
The 10 day EMA at 1296
The January high at 1295
The 18 day EMA at 1291
The late January peak at 1285
The 50 day EMA at 1280
The December highs at 1275 (intraday) and 1273 (closing)
1264 from the December 2000 lows
1254 is the February low
1248 to 1250 is the bottom of the November/December 2005 range
Dow: Closed at 11,234.47
Resistance:
11,350 from the May 2001 peak.
11,401 from the September 2000 peak.
11,425 from April 2000 peak
Support:
11,176 - 11,186 from April 2000
The 10 day EMA at 11,178
11,159 is the February high.
The 18 day EMA at 11,124
11,044 is the January high.
The 50 day EMA at 11,001
10,985 is the March 2005 intraday high
10,965 from Q4 2000 and November/December 2005
10,931 is the November 2005 high
10,890 is the December 2005 closing high.
10,868 is the December 2004 high
10,705 from the July/August 2005 peaks to 10,682 that is the September 2005 high
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
March 20
Leading Economic Indicators, February (10:00): -0.2% actual versus -0.3% expected, 0.5% prior (revised from 1.1%).
March 21
PPI, February (8:30): -1.4% actual versus -0.2% expected, 0.3% prior.
Core PPI (8:30): 0.3% actual versus 0.1% expected, 0.4% prior
March 22
Crude oil inventories (10:30): +4.836M prior
March 23
Initial jobless claims (8:30): 305K expected, 309K prior
Existing home sales, February (10:00): 6.5M expected, 6.56M prior
Durable goods orders, February (8:30): 1.3% expected, -9.9% prior
New home sales, February (10:00): 1.21M expected, 1.233M prior
End part 1 of 2
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