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day trading, Breakout test
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3/27/06 Investment House Daily
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SUMMARY:
- Stocks noncommittal ahead of Fed, continue in same pattern.
- Fed Funds rate set to surpass all bond yields.
- Fed is one of the keys for the market, but other areas likely to grown in importance as Fed likely not to tell us much at this meeting.
More of the same action, and that is not that bad.
There were no big gains in the major indices, and indeed outside NASDAQ the market showed modest losses. Overall, however, it was more of the same action shown the past week on SP500, DJ30 and NASDAQ as the moved laterally above near support, trying to set up for a continuation of the mid-March run higher.
They started soft, sold down during the morning session, and then rebounded in the afternoon, the same way they closed out last week. DJ30 and SP500 tested the 10 day EMA on the lows once more, found support, and rebounded. NASDAQ was actually up all session, showing relative strength though it posted a gain by a whisker. Commodities were the hot sector with Citigroup finally throwing in with the other analysts and turning bullish. That must mean a top, but those stocks did not seem to notice as they rallied well. Many have been beaten back over the past month, and in decent shape to make the rebound. Good timing by C.
Volume was lower on both NASDAQ and NYSE and breadth was mediocre, basically right in line with the market move. There was simply not much to drive stocks Monday, particularly with the FOMC announcement coming Tuesday afternoon. With that looming and no major catalysts, stocks basically continued their same action. That left SP500, DJ30 and even NASDAQ setting up with nice consolidations, awaiting a catalyst to take them higher. SP600 also continued its action, but that kept it just over the upper channel line in its uptrend, a rather precarious position ahead of a potentially market moving event such as the Fed meeting. SOX is also problematical; it has rebounded off its March sell off, but it is also still mired well below resistance, managing to tap the 18 day EMA Monday, but then fading to close negative.
Thus the market moves into the Fed meeting in split fashion, either looking solid (SP500, DJ30, NASD), a bit overbought (SP600), or crappy (SOX). SOX helped a bit on the upside rally a couple of weeks back, but it has been no mainstay of the market. There are market leading semiconductors, but as a whole they are one of the weaker groups. That could be the anchor chain post-FOMC, particularly if the Fed moves as expected, i.e. a 25BP hike and no substantive change to the statement. After all, the Fed is just part of the problem as the market tries to move forward in the face of rising gasoline prices as well.
THE ECONOMY
Bonds modestly inverted ahead of Fed, but look to head further south.
Bonds closed out the session with a modest inversion (4.73% 2 year, 4.70% 10 year). Given the 20 BP inversion in February, this is not that big an issue. Larger inversions historically precede recessions. If it stays at this level it will likely not mean recession, but a flat curve historically signals economic slowdown with GDP growth in the 1% to 1.5% range. Hardly the kind of growth the economy is capable of and not nearly enough to grow jobs and keep the consumers buying.
So, with that background we have the Fed ready to raise the Fed Funds rate to 4.75% Tuesday, and without a rise in bond rates, the entire curve will be lower than the short term rates the Fed has direct control over. We knew this day would come if the Fed continued hiking, and indeed the curve inverted in anticipation of this move. Thus far it has not impacted the market. Indeed, stocks continue to try for higher and higher ground even as the curve remains flat to inverted. The yield curve is a leading indicator as is the market. It is typically correct, but until the market shows the wear and tear and breaks down there is the chance (the 1 in 12 chance history allows) that the inversion may not lead to economic slowing and indeed if the Fed completes its hiking soon the economy and thus the market could skate on by the thin ice.
What will the Bernanke Fed's first comment be?
The market likely won't get much insight into that tomorrow, however. Some are saying Bernanke will want to put his 'stamp' on the Fed, distinguishing it from the Greenspan Fed. Others say he has to show he is a strong inflation fighter and will thus be on the more hawkish side.
Bernanke will put his stamp on the Fed, but it is not going to happen tomorrow. The statement will likely be a carbon of the prior statement. Bernanke wants a transition, but he wants it to be smooth. He has adopted the Fed's prior statements and he is likely to transition by maintaining the statement and thus not rattling the markets. He also bolsters somewhat the 'inflation fighter' argument with that move as that is what Greenspan was viewed as and his Fed concocted this statement.
In short, the statement likely won't satisfy anyone as it won't answer any questions about how much further the Fed will go. It will remain data driven and we will be left pondering the same questions about how Bernanke views the housing market, how he looks at inflation targeting, etc. All of this with an economy in the background that is still fairly solid but in a slowing cycle yet showing no sings of ramping inflation (indeed, the core is trending lower since close to a year).
Bernanke will wait until May to really put his mark on the Fed in the form of the statement, but we will see a lot of interesting Fed-speak in the weeks after this meeting. It is a new Fed with a new chairman and several new voting members. There was jockeying in the press ahead of Bernanke's nomination and there will be something of a power struggle before the next meeting as dissenters try and lay claim to some power. That will be one of the most interesting struggles ahead, i.e. how well Bernanke is able to consolidate his power as chairman and keep the governors talking the party line as opposed to campaigning on the stump.
THE MARKET
MARKET SENTIMENT
VIX: 11.46; +0.27
VXN: 16.11; +0.2
VXO: 10.52; +0.09
Put/Call Ratio (CBOE): 0.87; +0.03
Bulls versus Bears:
Bulls: 46.3%. Bulls are rebounding, up sharply from 42.3% last week after holding steady at that level for two weeks. Down 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% to 42.3% to 43.6%). It has undercut the two prior lows that helped spark rallies in May and October.
Bears: 30.5%. The rally has removed some of the bears from the market, falling sharply from 33% last week. This is a dramatic turn from the steady rise from right at 20% on this leg. The progression: 33% from 31.3% from 30.8% from 29.5% from 27.7% from 25.5%. Again, 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 surpassed the readings from the two prior market bottoms in May and October 2005 (30% and 29.2%, respectively).
NASDAQ
Stats: +2.76 points (+0.12%) to close at 2315.58
Volume: 1.913B (-1.51%). Trade fell further below average as NASDAQ posted its third gain in four sessions. Volume has lagged on this modest move higher, thus showing no accumulation. It is still working on its higher low in its consolidation, however, so lower volume here is not a bad thing.
Up Volume: 1.163B (-99M)
Down Volume: 675M (+16M)
A/D and Hi/Lo: Decliners led 1.02 to 1. Flat breadth just like the market. In these conditions not a bad thing.
Previous Session: Advancers led 1.82 to 1
New Highs: 229 (+48). Decent. If we get the breakout want to see it jump over 400.
New Lows: 23 (-2)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ posted a modest gain, showing relative strength all session and managing a modest gain into the close. No great move as volume was lower and remained below average as NASDAQ climbed for the second straight session. NASDAQ spent the past two weeks basically moving laterally above the 50 day EMA (2281), making a higher low on this round trip versus falling to the bottom of the range near 2250. Like seeing that higher low as that provides the springboard for a breakout move. Indeed NASDAQ is trading right at the early January and early March highs (2315), the last resistance level before the January high (2333). This higher low has turned NASDAQ into a decent pattern, helping bolster SP500s nice 10 day EMA test. May get a bit rattled on the FOMC decision and fade back from this near resistance, but if it can hold the 18 day EMA (2296) on any dip that puts it in great shape to move higher and try that breakout once more.
SOX (-0.20%) remains the weakest link. It rallied up to the 18 day EMA (508) on the session high, but it faded back from there, closing flat after a modest bounce from the bottom of the March sell off. It put together three upside sessions to end last week, but on light trade and that still left it below even near resistance. It helped NASDAQ hold its gains last week. If SOX fails at near resistance, it could act as a drag on the entire market's attempt to hold the line and move higher after the FOMC announcement.
SP500/NYSE
Stats: -1.34 points (-0.1%) to close at 1301.61
NYSE Volume: 1.368B (-7.67%). Very low, below average trade continued Monday, must the kind of volume you like to see on this type of nice, quiet consolidation. Lower prices but lower volume shows very few sellers. It is showing the right action on this end, but it will also need to deliver on any upside breakout as the rally two weeks back was on light, below average volume.
A/D and Hi/Lo: Decliners led 1.3 to 1. Very modest downside breadth, much in the same vein as the market action.
Previous Session: Advancers led 1.51 to 1
New Highs: 136 (-28)
New Lows: 35 (+12)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 posted another quiet, low volume session. Trade is up and down, but in a very narrow range as it holds above the 10 day EMA (1299.71) again on the session low, rebounding into the close. An excellent test of the prior run leaving SP500 ready to make the next move. Nice tight pattern and set up to break higher again. The likely catalyst, the Fed meeting, appears improbable to provide that much of a trigger. The index has set up for the upside move, however, even with this meeting and the likelihood the Fed won't tip any more of its hand. Thus we will watch and be ready for the next break higher.
SP600 (-0.05%) traded basically flat, tapping the upper channel line on the low (388) and then rebounding to close flat. Uninspired after breaking through this level Wednesday. The low volume move to this level leaves it in a precarious position and likely to fade back following the FOMC result. There is the 18 day EMA (382.58) and then 380 (early February high) that can provide some support though SM600 has faded back to the lower channel line (the up trendline at 376) during the past five months.
DJ30
DJ30 tapped the 10 day EMA (11,231) on the low a la SP500 and then bounced modestly to recoup some of the losses. This continues its two week lateral move above that level, moving sideways as the 10 day EMA moved up to meet it. That often acts as a catalyst for the next move higher, and everything is coming together here for such a move. The FOMC meeting seems to be the unlikely catalyst, however, and the indices may be setting themselves up for disappointment if they are banking on some new statement from the Fed.
Stats: -29.86 points (-0.26%) to close at 11250.11
Volume: 226M shares Monday versus 242M shares Friday. Another very low, below average volume day.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
Tuesday is the culmination of the of the two-day Fed meeting and the much awaited statement from new chairman Bernanke. As noted, SP500, DJ30 and NASDAQ have set up for the next move higher, but if they are banking on any new, meaningful insight they are likely to be set up for disappointment. The market is typically pretty good at sniffing out events to come, but it has also jumped the gun on the cessation of rate hikes on a few occasions dating back to late 2004.
If the Fed fails to provide a catalyst the market will look to the May meeting as the rubber match, the one to tell the story as to the number of further rate hikes that are coming, if any. In the interim the market doesn't have a lot of positive catalysts. Oil is still too high (64.16, -0.10), gasoline is still rising, and earnings confessions are going to start coming over the next few weeks.
Plenty of issues outside the Fed are ready to step up and keep investors' occupied as they wait for the May FOMC meeting. Following the Tuesday announcement, we will simply see how much investors built into prices the hope of a definitive or at least more indicative Fed statement on rates. The market tends to overreact near term, and with the lower volume rally two weeks back on the belief the Fed was almost done and SOX' poor technical position along with SP600 at the top of its channel we could see some pullback following the announcement.
What we will be looking for in that event, however, is for SP500 to still hold near support and NASDAQ to do the same and then provide the next upside move. The market remains mixed in its strength, though the only real laggard is SOX. SP600 may be in a precarious position but it is also still in a strong uptrend. After any giveback in disappointment as to the FOMC, if these market leaders are going to continue upside they should resume the move higher. The reaction and action after the FOMC result will tell us just how much strength the low volume move higher has left.
Support and Resistance
NASDAQ: Closed at 2315.58
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 2302
The 18 day EMA at 2296
2288 from December 2000 low.
The 50 day EMA at 2281
2278 is December 2005 intraday high.
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 1301.61
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:
The 10 day EMA at 1299.71
1297.57 is the recent February high.
The January high at 1295
The 18 day EMA at 1295
The late January peak at 1285
The 50 day EMA at 1284
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 11,250.11
Resistance:
11,350 from the May 2001 peak.
11,401 from the September 2000 peak.
11,425 from April 2000 peak
Support:
The 10 day EMA at 11,232
11,176 - 11,186 from April 2000
The 18 day EMA at 11,179
11,159 is the February high.
11,044 is the January high.
The 50 day EMA at 11,042
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.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
March 28
Consumer confidence, March (10:00): 102.0 expected, 101.7 prior
FOMC policy decision: Expecting 25BP hike to 4.75% on Fed Funds rate and no change in statement
March 29
Crude oil inventories: -1.31M prior
March 30
GDP, Q4 final (8:30): 1.7% expected, 1.6% prior
Chain deflator (8:30): 3.3% expected, 3.3% prior
Initial jobless claims (8:30): 305K expected, 302K prior
March 31
Personal Income, February (8:30): 0.4% expected, 0.7% prior
Personal Spending, February (8:30): 0.0% expected, 0.9% prior
Michigan sentiment final, March (9:45): 86.9 expected, 86.7 prior
Chicago PMI, March (10:00): 57.0 expected, 54.9 prior
Factory orders, February (10:00): 1.3% expected, -4.5% prior
End part 1 of 3
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day trading
Breakout test
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