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Breakout test, best way to invest money
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5/02/06 Technical Traders Report Update
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Technical Traders Report Subscribers:
NOTE: Full report issues Wednesday
MARKET ALERTS
Targets hit alerts: DXPE
Buy alerts: EGO; ASH
Trailing stops: None issued
Stop alerts: MANT; GFIG
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:
- With NASDAQ unable to lead, market turns back to the energy and commodities to put the liquidity to work.
- Pending home sales decline month over month, year over year
- Potential trend toward nationalization can't be good.
- Market in danger of bifurcating if NASDAQ can't pull an SP500 and recover over the 50 day EMA.
Energy provides leadership in technology's absence.
A week back the energy stocks were losing ground, diving hard as sponsorship pulled out. This week they are back in business as the dip gave rise to a perceived buying opportunity for those chasing performance and looking for a place to put some of the trillions of dollars moving around the globe. There is a river of liquidity flowing around the world thanks to the spike in oil prices, and that money is seeking to follow performance and anticipated gains due to high energy prices. Thus each dip is bought into very reminiscent of the tech run in the late 1990's.
Of course it is not entirely the same. Energy stocks went through a 2.5 month correction starting in February, and over the past two weeks have attempted a breakout. The breakout started, then stalled, and is now trying once more. Some energy stocks are more successful, showing strong volume as they retry the breakout while many are moving higher but on lower volume. The point is, they have set up bases and are thus not simply running higher and higher in an extended run up the short term moving averages. That gives them adequate rest to actually move higher and lead without suddenly diving on you. Well, at least a better chance of not suddenly diving on you. As seen last week many energy stocks, base or no base, turned lower and sold hard through support. Now they are back, whipped along by that flood of liquidity in the world.
The irony is that a lot of that money is available because they are so-called petro dollars, i.e. money spent on purchasing ever more expensive oil from the oil producing countries. That money in turn needs to be invested somewhere, and it finds its way into US Treasuries and also into US equities and other equities from markets around the world. Some of that money goes into energy stocks in those markets. That is the irony: oil profits used to buy into energy stocks making good profits because of the higher oil prices. Talk about a cycle feeding on itself. When it ends the unwinding could be a bit interesting so to say. The action this week, however, indicates it is not over yet as the latest pullback was immediately bought into.
More of the same with energy leadership thrown on top.
It was another somewhat volatile session intraday though the volatility depended more upon what index you were looking at. Futures were higher once more as the market again tried to move higher at the opening gun. It faded back with NASDAQ even turning modestly lower midmorning, but then rebounded in the afternoon. Another pullback mid-afternoon and then a rebound to the close. Again, the volatility differed depending upon the index; SP500 was positive all session and built on its early gain with a series of classic higher intraday lows, closing at session highs. NYSE indices were pretty solid, NASDAQ was shaky.
That was evident in the way the indices closed. SP500 hit a new post-2002 closing high. It did not clear the recent intraday resistance at 1317, but it closed at session highs. NASDAQ could not even break above its 50 day EMA intraday, failing to immediately recover the that key level. It is holding above some support at 2300, but it is not quite the picture of strength it was just two weeks back.
Volume did not rise with the indices though it was still above average on both NYSE and NASDAQ. That suggests there was some serious buying ongoing, but the buyers are still not clearly resuming control of the action. That is easiest to see on NASDAQ as it spun its wheels below the 50 day EMA. Of course, more distribution has occurred on NASDAQ the past month and thus its inability to rise on stronger trade is not so surprising. What you want to see from SP500 as it moves toward yet another post-crash high is stronger trade. It did not happen Tuesday, and that makes the move thus somewhat suspect.
Overall, however, price/volume action on NYSE remains decent as SP500 tries to move through recent resistance and the small and mid-caps come off a test of the 10 day EMA. As with most of this move, you don't feel comfortable with the action, but the market does continue higher. Breadth matched the indices at 1.7:1 on NYSE but just 1.3:1 on NASDAQ. Again, more of the same: so-so internals, choppy moves with some serious whipsaws, but overall still, for the most part, moving higher. NASDAQ will still have to join the party once more, but in its absence at least the NYSE indices are showing some strength.
THE ECONOMY
Housing market still showing a very orderly decline.
It seems illogical with monthly gains the past month on both new and existing home sales, but the housing market continues its peak and decline that started in 2005. Because the move has taken so long some say it is not happening. That is actually good news; the last thing you want is a housing market that suddenly slides off the cliff. The economy would not take that well.
Declining it is, however, regardless of how slowly. The average and median prices have started to fall just recently, typically the last holdout as a sellers' market turns to a buyers' market. Last month saw both month over month and year over year declines in pricing, the latter being a telltale sign of the weakening market. Moreover, housing inventories are up 25% year over year. That is a relative flood of homes for sale that are all competing with each other.
The latest data was the 'pending home sales' for April This data point measures contracts that have been signed but not closed and gives a more timely measurement of the existing home sales market than the traditional existing homes report. The reason is that existing home sales are not counted until closing; thus they tend to significantly lag new home sales that are counted as the contract is signed. Thus in February existing home sales were strong while new home sales showed a dive lower.
Pending sales fell 1.2% February to March and 6% year over year. Pretty significant drop for the year, more evidence that housing is in a steady but orderly decline. A decline was inevitable, and if you are going to have one, orderly is obviously best. Bernanke is aware of how the housing market impacts the economy when it slows, and if the decline remains orderly Bernanke is less likely to fear the Fed is raising rates too high. Thus it is good and bad news for the market, but in the long run if the economy holds up that is good for the market. Of course, when the Fed is active the economy holding up is problematic.
Nationalization spreading in South America.
Cuba, Venezuela and Bolivia have entered a trade pact. While Cuba's hard resources are not that impressive, Venezuela's oil production is sought after by China and the US and Bolivia is home to many valuable metals. Bolivia nationalized its natural gas as part of the pact, and while natural gas is not that big of a deal (the market is limited to adjacent areas), the potential to nationalize other industries is causing concern in most of the industrial world. Most of the underdeveloped countries look to big international concerns to assist in mining the country's resources. Foreign corporations invest many millions in building the infrastructure and getting the industry to a point it can economically produce the resources. If the government steps in and nationalizes the industry, those companies basically have to write off their investments.
Thus at a time when world resource supplies are under stress due to a burgeoning world economy, the move to nationalize builds in more uncertainty premium into the price. It also helps ensure less supply down the road as big corporations cannot justify to their shareholders moving into potentially disputed deals where potentially tens of millions of dollars might be lost even if the exploration proves successful. With most of the few potentially big resource deposits in US territory off limits, that leaves less supply on the market, and as we have seen, that means higher costs for us and every other net resource importer.
What can you do about it? Wait it out. These things come in cycles, and they typically peak when there is high demand as seen now. If the demand wasn't there the world would shrug and say 'so what' over nationalizations. If demand is low, price is low as well, and thus the countries are hurting for foreign investment. Right now with high demand we are in the part of the cycle where it is lucrative to talk of nationalization and thus pressure those countries that want your resources. Let the US and China try to outdo each other in bidding for your resources. Let it out that you might just take over everything to squeeze some more dollars out. It helps you look good at home and if you have any ulterior motives or agendas, the extra dollars don't hurt advancing those either.
THE MARKET
MARKET SENTIMENT
VIX: 11.99; -0.55
VXN: 15.79; -0.54
VXO: 11.13; -0.51
Put/Call Ratio (CBOE): 0.88; -0.03
Bulls versus Bears:
Bulls: 45.4%. Bulls continued their second week of decline, falling from 48% and 53.2% before. After a month climbing close to the 55% level considered bearish, a much needed decline. It rose from 42.3% on the low this cycle, a level below the prior lows in May and October 2005. It is already heading back down to that level.
Bears: 25.8%. Faded slightly from 26%. Just a one-week blip higher thus far after declining for a month as bulls rose simultaneously. Rebounded from 24.5% the prior week but still well off its high at 33% for this cycle, a level that topped the prior two highs that gave way to strong rallies. The 20% level and below is considered bearish. It started this move just above 20%, the threshold level. Bears surpassed the readings from the two prior market bottoms in May and October 2005 (30% and 29.2%, respectively).
NASDAQ
Stats: +5.05 points (+0.22%) to close at 2309.84
Volume: 2.118B (-1.67%). Volume was lower and thus no accumulation and no distribution as NASDAQ ran in place below the 50 day EMA.
Up Volume: 1.139B (+346M)
Down Volume: 936M (-407M)
A/D and Hi/Lo: Advancers led 1.3 to 1. The breadth tells more of the story of NASDAQ's inability to make any headway.
Previous Session: Decliners led 1.65 to 1
New Highs: 170 (-13)
New Lows: 66 (+15)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ could not even crack the 50 day EMA (2314) after falling through that level in the Monday late sell off. Unlike the NYSE indices, its growth stocks found no buyers Tuesday in a market focused once more away from the Fed and on rising energy prices and resource nationalization issues. It did managed to hold above the April lows at 2300 where it tapped on the Monday low, but that is small consolation. NASDAQ remains below its trendline for now, suffering a hangover from the April distribution. Bigger picture, NASDAQ holds its breakout from the two year triangle. It is not, however, trying to lead higher right now, swapping places with SP500 over the past two weeks. NASDAQ is at a level it needs to find some legs and join in with the other indices moving higher.
SOX (+0.33%) went basically nowhere as well, holding right at the 50 day EMA (513.46) and showing a doji on the candlestick chart. Several chips are moving well even as this index of large cap semiconductors struggles, but even the index is showing decent action with this higher low attempt at a key level. As noted Monday, NASDAQ needs its help.
SP500/NYSE
Stats: +8.02 points (+0.61%) to close at 1313.21
NYSE Volume: 1.722B (-0.5%). Though lower, volume remained above average as the NYSE indices moved higher. Volume does not have to surge every session on upside moves to be positive. Sustained high volume on upside moves is good action. There was accumulation ongoing in NYSE stocks Tuesday. Not huge, powerful accumulation, but solid net buying.
A/D and Hi/Lo: Advancers led 1.73 to 1. Decent breadth. As with volume it is not blowout, but solid as the NYSE indices advance.
Previous Session: Decliners led 1.23 to 1
New Highs: 227 (-3)
New Lows: 109 (-13)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 posted a new post-2002 closing high on some solid trade and decent breadth. It was unable to clear the string of recent intraday highs at 1317, so you can badmouth the move if you want. All in all it is quite a good recovery for the large caps that were in the same spot NASDAQ is now in just three weeks back. Rotation from potential growth stocks on NASDAQ back to more defensive areas along with the energy and commodities populating the NYSE.
SP600 (+0.65%) was a beneficiary of the funds flowing back into energy and metals. It held its 18 day EMA (393.85) and bounced on that solid NYSE volume. Looks very solid and ready to make a higher low here and continue its trend higher.
DJ30
DJ30 moved to a new post-2002 closing high as well, moving off the 10 day EMA (11,334) test on lower though still above average volume. Volume has turned in above average performances the past four sessions, helping propel DJ30 on this nice breakout. Another one of the NYSE indices that is very strong and leading the market higher.
Stats: +73.16 points (+0.64%) to close at 11416.45
Volume: 335M shares Tuesday versus 365M shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Factory orders, ISM Services, and of course oil inventories are out on Wednesday. NYSE indices are in solid shape. NASDAQ is in trouble. It is where SP500 was three weeks back, so you cannot write it off. Indeed, the story of this market is comebacks even if it leaves a lot of whipsaws along the way. NASDAQ will need to do it and as noted above, SOX may be able to help it out. If not, and if NASDAQ breaks lower from here, we can get that bifurcated market with the growth sectors lagging at best or selling at worst. The latter would be an indication that the economic boom is not booming so well. Remember, the market, particularly growth sectors, heads lower before the economy does. There has been a bit more defensive flavor in the market the past week, something worth keeping an eye on as NASDAQ works to try and recover from the break below the 50 day EMA. We are also going to watch what SOX does as that will give some insight into NASDAQ as well. As noted, SOX is in decent shape to break higher, and if it does that is an indication that growth is not dead yet. Same with SP600, but it has a lot of energy in its makeup, and that helps buoy it as well as energy prices rise.
That pretty much leaves us in the same position given the market's overall uptrend. NASDAQ stocks may give us some good entry points if that index recovers from this pullback below the 50 day EMA. This market has been buoyed by the seemingly unending stream of money flowing to equity markets around the world, rotating through the market of late as evidenced by the SP500 recovery and the energy stocks' recovery after a pretty nasty fall in April. Thus NASDAQ could very well find buyers once more after this dip as more money comes through the market. We caught some energy stocks as they rebounded and are enjoying their moves, and we will look for some technology stocks if they can give us a good rebound off of support after this pullback.
Support and Resistance
NASDAQ: Closed at 2309.84
Resistance:
The 50 day EMA at 2315
The late January highs at 2325
2328 from the May 2001 peak
2329 is the October/March up trendline.
The 18 day EMA at 2329
The January high at 2333
The February closing high at 2361
2477 is the January 1999 peak
2493 is the February 1999 peak
2523 from the December 2000 low
3015 is the December 2000 peak and the October 2000 low
Support:
2288 from December 2000 low.
2278 is December 2005 intraday high.
2273 is December 2005 closing high.
A minor peak at 2249
2240 is closing low in recent range.
S&P 500: Closed at 1313.21
Resistance:
1315 is the May and May 2001 peaks
1317, the recent intraday highs from April.
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 October/March up trendline at 1311
1311 is the March intraday resistance on this move.
The January high at 1303
The 18 day EMA at 1304.62
1297.57 is the recent February high.
The 50 day EMA at 1296
The late January peak at 1285
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 11,416.45
Resistance:
11,417 from the recent April highs.
11,425 from April 2000 peak
11,452 from December 1999 peak
11561 is the DJ30 closing high
Support:
11,401 from the September 2000 peak and the recent intraday highs
11,350 from the May 2001 peak is giving way.
The recent March highs at 11,329 to 11,335
The 10 day EMA at 11,334
The 18 day EMA at 11,291
11,179 is the October/January/February up trendline.
The 50 day EMA at 11,178
11,159 is the February high.
11,137 is the last peak from the February top.
11,044 is the January high.
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.
May 1
Personal Income, March (8:30): 0.8% actual versus 0.4% expected, 0.3% prior
Personal Spending, March (8:30): 0.6% actual versus 0.4% expected 0.2% prior (revised from 0.1%).
Construction spending, March (10:00): 0.9% actual versus 0.4% expected, 1.0% prior (revised from 0.8%)
ISM Index, April (10:00): 57.3 actual versus 55.1 expected, 55.2 prior.
May 3
Factory Orders, March (10:00): 3.7% expected, 0.2% prior
ISM Services, April (10:00): 59.4 expected, 60.5 prior
Crude oil inventories (10:30): -0.226M prior
May 4
Initial jobless claims (8:30): 310K expected and 315K prior
Productivity, preliminary, Q1 (8:30): 2.8% expected, -0.5% prior
May 5
Non-farm payrolls, April (8:30): 200K expected, 211K prior
Unemployment rate, April (8:30): 4.7% expected, 4.7% prior
Average workweek (8:30): 33.8 expected, 33.8 prior
Average hourly earnings (8:30): 0.3% expected, 0.2% prior
Consumer credit, March (3:00): $4.1B expected, $3.3B prior
End part 1 of 2
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Breakout test
best way to invest money
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