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6/20/06 Technical Traders Report Update
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Technical Traders Report Subscribers:
Full report issues Wednesday.
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: KNOT
Trailing stops: None issued
Stop alerts: None issued
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:
- Stocks fritter away early gains once more, manage to hold near support.
- Housing starts won't give it up, good longer term but keeps Fed on its current track.
- Keys to the market basically unchanged after Monday and Tuesday as market tries to set up another bounce.
Stocks get some decent news, fail to make anything of it.
Stocks started the session upbeat for a second session, bolstered by housing starts that were better than expected and permits that were worse than expected (the classic reaction to mixed data when the Fed is on the warpath), Target hitting the high end of its June sales target (Target on Target airs right after Bonds on Bonds), and an upgrade of INTC and chip equipment (a supposed second half chip demand surge in the works). Bulls plucked up some courage and moved in once more.
As on Monday, the move was over in 10 minutes. After a quick drop, however, stocks rebounded back to positive with NASDAQ posting a 16 point gain midmorning. Then the usual started. NASDAQ and SP500 tapped the 10 day EMA and then faded into lunch and through mid-afternoon. Another last hour bounce attempt held some promise but it failed as well. Stocks closed modestly lower with only DJ30 posting a gain.
Volume was painfully low. As there was no distribution on Monday due to the low trade, there was no accumulation Tuesday though the indices spent most of the session in the green. Very much summertime, blas trade. Breadth was modestly lower, matching the market action. Very slow internals and thus the early upside move found no support.
The failure to hold the early gains after tapping near resistance continues the more bearish tone though the turn back down was not accompanied by a big rise in volume; that would have been s sure indication the sellers were jumping back in. On the other hand NASDAQ and SP500 once more held near support (2100 and the 1240 up trendline, respectively) on this fade. The low volume means no dumping, and the hold at support shows there are some investors willing to hold stocks at that level, trying to provide a floor for stocks. The market is looking for a follow through after last Wednesday's reversal, and maybe stocks are trying to set up for a bounce given this modest fade holding near support.
Could be, but this action is very similar to the late May gyrations that saw NASDAQ and SP500 bounce off the first down leg, stall out, and then rebound for a couple of sessions to the 18 day EMA before the next downside move was set. Thus far in this move, the same action is transpiring. Thus we will likely see another bounce after this pullback. The key on that move is whether it shows any upside strength or just more of the same weak upside action that opens it up to a failure and start of the third downside move.
THE ECONOMY
Housing starts rise, permits fall.
May starts rose 5%, topping expectations while permits fell 2.1%, the lowest since November 2003 and the first time since January that permits tallied less than starts. There is always a lot made of lower permits ('how can starts continue to rise if permits decline?'), but all during this housing peak and even before there were months where permits fell. That did not mark the end of the expansion, it was just an off month. Of course the data is really dissected now that there is a clear peak in the housing market; any weakness is seen as a sign of an imminent collapse.
The more pertinent data is the year over year figures that show housing starts down 3.8% with single-family housing diving 7.6%. Those are substantial declines, and they continue the steady and orderly decline in the market. As we have noted over the past few months, the decline in the market is also finally sinking in on the homebuilders. Even as housing showed it was peaking in 2005, the CEO's were on the financial stations talking about 10 year demand demographics and other nonsense about how the housing market was only going to go higher from here. With nearly all homebuilders coming out and revising forecasts to the downside, harsh reality is sinking in. Indeed, on Monday the NAHB announced the lowest level of sentiment among homebuilders in 11 years.
How does it affect the Fed?
Of course the first commentary to hit the wires was how this would impact the Fed. Bernanke is on record about his research and concerns regarding economic slowing after the housing market turns down. That, of course, was before he was beaten about the head and shoulders for being an inflation patsy and his subsequent transformation into Mr. Tough Guy chairman.
Thus while Bernanke knows housing declines lead to economic slowing, the news is not going to make the Fed take pause (or pause for that matter). There are too many hawks who don't believe in his housing research, and after all, starts rose more than expected; things must be okay and we must fight inflation tooth and nail. I am reminded of a bumper sticker I once saw: I can't be out of money; I still have checks. In other words the hawks see the housing numbers as showing a strong housing market despite all of the data that shows otherwise and the fact that this was a rebound month after three straight declines.
While that interpretation is rather dogmatic (and thus right in line with usual Fed methodology), it was eclipsed by the stupid comment of the day. An economist at a big bank said the May increase in housing starts would not prompt inflationary concerns with the Fed. Question: since when are housing starts an indication of inflation? Housing is typically an early cycle sector. Housing starts are never considered an inflation indicator. Only if you view prosperity as inflationary would you take this view.
The problem is, the Fed once again (as in 2000) has everyone so worried about inflation that ANY sign of economic strength is considered a bad thing. We need to burn those textbooks and stop teaching would-be economists that mere economic strength means inflation. Did we not learn from the 1920's, 1960's, 1980's, 1990's that you can enjoy strong economic growth without inflation? Of course, those historical records are somewhat incomplete. Why? Because the Federal Reserve acted to 'prevent' inflation and choked off those prosperous times. The 1929 Fed gave us the Great Depression. The 1970's Fed gave us inflation in spades that was not broken until the pro-growth policies of the eighties revitalized our economy that stagnated under the most massive increase in social programs and government regulation in the history of the republic. In 2000 the Fed snatched recession from the jaws of prosperity (inflation-less prosperity at that). No, not until you quit nominating anti-prosperity hawks to the FOMC are you going to break the cycle of Fed-induced economic slowdowns, justified by the supposed need to burn the village to save it.
THE MARKET
MARKET SENTIMENT
VIX: 16.69; -1.14
VXN: 21.03; -1.01
VXO: 15.52; -0.24
Put/Call Ratio (CBOE): 0.97; -0.13
Bulls versus Bears:
The two are converging, hitting their lowest ratio since March 2003 when the market followed through on a continued rally after spending three months testing the bottom off of October 2002 that ended the bear market. This is a positive and supports the strong move higher Thursday that started with the Wednesday rebound.
Bulls: 38.7%. This brings the bulls to their lowest level in this cycle, well off the 53.2% at the April peak. It surpassed the 42.3% hit on the last low. The current level puts it below the May and October 2005 readings that saw new upside runs.
Bears: 34.4%. Big spike higher from 31.5% the prior week. That eclipses the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005).
NASDAQ
Stats: -3.35 points (-0.16%) to close at 2107.06
Volume: 1.629B (-7.1%). Volume was summertime slow, falling even below Monday's already ice cold trade. No distribution on the turnover and modest loss, but there was no accumulation on the early upside either.
Up Volume: 851M (+418M)
Down Volume: 751M (-512M)
A/D and Hi/Lo: Decliners led 1.26 to 1. Settled down after a wild week.
Previous Session: Decliners led 2.61 to 1
New Highs: 38 (-13)
New Lows: 163 (+25)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ rallied to the 10 day EMA (2124) intraday, but as soon as it hit that level it rolled over and sold for the rest of the afternoon, giving up a 16 point gain. More bearish intraday action, but bigger picture it did not do any damage to its current position, one that has it testing back to near support (2100) after rebounding last week off that second down leg of selling the first two weeks of June. It has held 2100 for the second session and on very low volume. As in late June on that rebound, it is likely to try one more upside move on this rebound. That will take it to the 18 day EMA (2146) and from there it will show its stripes, i.e. whether it can deliver a follow through to last week's reversal off the lows or go ahead on with the third leg lower that will likely find the bottom and then allow NASDAQ to start rebuilding for a rebound later in the summer.
SOX (-0.70%) was clearly the loss leader Tuesday, posting a much stronger percentage loss as is more typical (Monday it showed relative strength). Even with this larger percentage drop, SOX still did not roll over and dive down ahead of the market as it did in the previous sell off. Nonetheless, it is cheating lower and is below the 10 day EMA and that price support at 450. If it continues lower from here it is like the market is going to follow. We anticipate another test higher by the market, but that does not mean SOX cannot fall from here and take the early downside lead. We do see some chip stocks, mostly the smaller overlooked ones, that are perking up, but we also note that SOX could not make anything of the INTC and AMAT upgrades.
SP500/NYSE
Stats: -0.02 points (0%) to close at 1240.12
NYSE Volume: 1.498B (-1.21%). As with NASDAQ, even lower below average volume on the session, the second summertime low volume of the week. Memorial Day marks the official start of summer, but the market started it a few weeks late with this sudden volume drop. Shows no distribution, and that keeps alive a chance of a follow through session.
A/D and Hi/Lo: Decliners led 1.28 to 1
Previous Session: Decliners led 2.78 to 1
New Highs: 24 (-7)
New Lows: 170 (+14)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 rallied to the 10 day EMA (1247) as well, but it too got the dips and gave back the move to close flat. It managed once more to roughly hold the 2003/2004 up trendline now sliding just past 1241. The candlestick pattern shows a hammer doji, a potentially positive indication for an upside bounce after three days of weakness, particularly with SP500 holding at the up trendline. As with NASDAQ, we still anticipate a bounce back up to test toward the 18 day EMA (1255) in this rebound from the second leg of selling.
SP500 (-0.47%) had a better day than the Monday drubbing, but was still down for the session as the small and mid-caps continue getting roughed up. Energy was down again Tuesday and that of course did not help. Trending steadily lower though likely to rebound with the large caps to a certain extend as they try another bounce in this rebound off the second leg of selling.
DJ30
The blue chips posted a gain on the session on below average volume, the lowest in a week. For the fourth session the Dow tried to clear the 18 day EMA (11,009) but then turned back. At the same time it is holding above the 200 day SMA (10,890) on the downside, working laterally and trying to set up another move higher off of the second down leg that culminated last week. Of all of the indices, DJ30 looks the best for a more immediate move through near resistance. NASDAQ and SP500 will have to provide a supporting role for it to do so, however, and we don't think they are up to it yet.
Stats: +32.73 points (+0.3%) to close at 10974.84
Volume: 274M shares Tuesday versus 332M shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Crude Wednesday as all that is on tap is the energy inventories. With energy struggling thus far this week the data could provide a catalyst for a recovery and thus help the market with its next bounce higher in this rebound. The market is still fishing for a follow through to last week's rebound; it has yet to show anything, but the moves have been modest pullbacks this week, very much in line with a set up for another attempt higher. Again, we anticipate another try higher, just don't think the market has it in it to really make a strong move just yet.
As for the market keys this week, SOX was down more than the other indices, but it did not completely sell out to the downside. It too is in a more or less modest pullback after last week's rebound. The bond curve remained inverted at 5.20% on the 2 year and 5.15% on the 10 year. The curve again moved higher as rates rose; that is a positive move after undercutting the Fed Funds rate just a week back. The lingering inversion is the downside. So, improving but still not out of the woods. Price/volume action remained positive given the pullback. There was no upside volume, but volume did not jump as the indices turned over and gave back the gains.
Leadership remains the biggest question mark for a sustained rebound. Energy is still struggling, metals are a bit better as they work on their bases, and some techs are working on bottoms as well. Some smaller chips are getting quite perky. There is still a bias toward defensive sectors such as medical instruments and healthcare, but utilities that were looking pretty good when the inflation angst was running hot have backed off. The big problem we see if the market bounces sharply here is sustainability. Most stocks were sold hard and have not started returning to accumulation yet. Without accumulation a rebound is still just a rebound and prone to gyrating back down as part of the base building process.
We are going to hear more of the upside earnings stories as the week progresses; this is the time for companies to gloat a bit. Moving in toward the end of the month and the start of July we are going to hear the confessions, i.e. those that aren't going to make it. We are hearing rumblings that earnings won't be as good as even some reduced expectations. Not widespread, however.
That leaves stocks still looking for another upside move from here, and unless they show a lot more strength it is likely to be just eh second bounce in the rebound move before another leg lower. That means it is still time to be patient and let the plays set up for us. We keep finding upside plays that have set up their patterns for a move higher, potential leaders in the move higher or as in the case of defensive sectors, as the rest of the market sells back to try and find the bottom this time, moving up while the market fades. An overall move higher that cannot provide the breakout over near resistance will provide the set up for some more downside plays if that bounce cannot generate the strength it needs.
Support and Resistance
NASDAQ: Closed at 2107.06
Resistance:
The 10 day EMA at 2124
The 18 day EMA at 2146
2154 is the August 2004/April 2005 up trendline.
2162 to 2155 from December 2005 and September 2006
2185 to 2182 is the September 2005 peak and interim high from November 2005.
2205 is the December 2005 closing low
The 50 day EMA at 2209
2218 is the August 2005 peak before the sell off through October 2005.
The 200 day SMA at 2229
2234 is the early June high
2240 is closing low in February range.
Support:
2100 from the early and mid-2005 peaks
2063 is modest, soft support
2050 from the summer 2005 lateral range lows.
2045-47 from June and October 2005 lows and June 2004 highs
S&P 500: Closed at 1240.12
Resistance:
1250 to 1248 from the November and December 2005 lows.
The 10 day EMA at 1247
The 18 day EMA at 1255
The 200 day EMA at 1261
1272 to 1268 is the November and December 2005 closing highs and March 2006 closing low
The 50 day EMA at 1273
The late January peak at 1285
The early June high at 1288
1297.57 is the recent February high.
1315 is the May and May 2001 peaks
1317, the recent intraday highs from April.
1324 to 1329 from the October 2000 lows.
Support:
1245 from the August 2005 high & May intraday low; 1241 from the September 2005 high
1242 is an old trendline from the August 2003/August 2004/October 2005 lows.
1225 from the March 2005 high
1213 from December 2004 high to 1215
1205 from the August lows
Dow: Closed at 10,974.84
Resistance:
The 18 day EMA at 11,009
11,044 is the January high.
11,097 to 11,137 is the last peak from the February top.
The 50 day EMA at 11,121
11,159 is the February high.
The March 2006 highs at 11,329 to 11,335
11,279 is the late May high
11,350 from the May 2001 peak
11,401 from the September 2000 peak and April 2001 highs
Support:
10,965 from Q4 2000
10,931 is the November 2005 high
10,890 is the December 2005 closing high.
The 200 day SMA at 10,890
10, 737 to 10,730 from December and February lows
10,705 - 10,965 from July/August 2005 range top to bottom
10,678 to 10,665
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
June 20
Housing starts, May (8:30): 1.957M actual versus 1.870M expected, 1.863M prior
Building permits, May (8:30): 1.932 actual versus 1.950M expected, 1.973M prior
June 21
Crude oil inventories (10:30): -980K prior
June 22
Initial jobless claims (8:30): 305K expected, 295K prior
Leading economic indicators, May (10:00): -0.5% expected, -0.1% prior
Durable goods orders, May (8:30): 0.4% expected, -4.4% prior.
End part 1 of 2
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