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7/11/06 Investment House Daily
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SUMMARY:
- Market recovers from early adversity, closing positive on rising volume.
- NYSE indices ready to try the upside again, but market still has a lot of issues ahead.
Early follow through selling gives way to oversold rebound.
The market was hit from all sides early Tuesday. Market specific news such as AA missing its revenue mark and a warning from LU with respect to its wireless business set the tone early, and though negative, the pre-market was not a slam session. Then, however, news of the train bombings in India hit, and with the US plots uncovered recently, most major cities worldwide went on alert. That added pressure to the market and started stocks markedly lower.
NASDAQ was weak as it has been of late, but the NYSE indices were waffling as well, undercutting near support in a very important move. While NASDAQ and SOX have sold the NYSE indices have held near support on low volume, consolidating at support after the strong move 10 sessions back. The undercut of support was a key event. During all of this selling, however, SOX was modestly positive with some big names recovering from the fairly steady spanking they have been administered. Definitely a relief move, but as we had said Monday night, SOX was do for some relief. Indeed, this one should be a higher bounce than the prior rebounds though that remains to be seen.
Lots of puts were bought on that early selling given the Indian bombing news, betting the market would go into a freefall, particularly with the NYSE indices breaching their near support. Too many bet the downside, however, and as is often the case, after some more selling following the breach, the shorts started to cover and the market rebounded. So many are betting the downside (recall the high short interest we have discussed the past week) that when the sellers could not really push stocks sharply lower the shorts started to cover and the market recovered.
Technically it was a good shakeout and rebound. The support was broken, and that rattled a lot of investors. Support is important but it is how stocks and indices react around support is really the key. As noted, an undercut after some selling often results in a rebound. This gave the NYSE indices a good flushing out as many upside investors threw in the towel. When they were selling the shorts started to cover and what we got was a good flushing out as the NYSE indices reached lower as the nervous investors sold and then the shorts and upside traders moved in.
Volume was higher and the indices managed to reverse and close positive. Both are good signs. They are not an all clear; the time of year, NASDAQ and SOX' woes, the Fed, potentially slowing tech earnings, etc. are all serious issues facing the market. Breadth was only so-so, indicative of short covering (as was the NASDAQ 100 stronger close than NASDAQ overall), but breadth does lag when the market reverses intraday.
In short, it was a move triggered by short covering after an early blow down, but one that also cleared out some sellers on the NYSE indices and set SP500 up nicely as it cleared the 50 day SMA on the close. Set up to rally and getting some help from SOX. It will need a higher rebound from SOX to put in a good move before another test to end the summer. Tuesday was a good attempt at starting that move, at least for the NYSE indices.
THE MARKET
MARKET SENTIMENT
VIX: 13.14; -0.88
VXN: 20.18; -0.64
VXO: 12.76; -0.48
Put/Call Ratio (CBOE): 1.1; +0.18. Back over 1.0 on the close and there was a real rush to puts early in the session. That helped set up a near term oversold condition and the afternoon rebound.
Bulls versus Bears:
Bulls: 38.7%. With the Thursday advance investment advisors turned more bullish, up from 37.4% and 35.6% the week before. After a decline from 53.2% at the April peak bulls are on the rise once more. On this pullback, however, they hit the lows for this rally, i.e. since 2003. That put it below the 42.3% hit on the last low and the May and October 2005 readings that preceded new upside runs.
Bears: 34.4%. After kissing bulls two weeks back the bears are on the decline this week, down from 36.3% the week before. Just missed crossing over with the bulls, but that in itself is not a bad indication for the upside. That prior week put Bears at a new post-2002 high, eclipsing 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: +11.93 points (+0.56%) to close at 2128.86
Volume: 2.067B (+27.56%). Volume moved above average for the first time since late June when NASDAQ moved up in the follow through.
Up Volume: 1.259B (+905M)
Down Volume: 794M (-460M)
A/D and Hi/Lo: Advancers led 1.31 to 1. Not great, indicating some short covering (NASDAQ 100 gained 0.80%, more than overall NASDAQ), but it was also a reversal day and breadth will lag the actual reversal.
Previous Session: Decliners led 1.23 to 1
New Highs: 48 (+1)
New Lows: 123 (+5)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ undercut 2100 on the low (2095) and then turned to post a decent gain on rising, above average volume. Good to see rising volume, good to see a positive close. As we said Monday, it was just 16 points away and it made the test and found support where it did in late June. Good start to a rebound, but NASDAQ has dug itself a hole and this is the first attempt to start climbing out.
SOX (+3.29%) tested lower as well but held near the Monday low and then turned to post the best gain in the market. The big chip names are just sold out at this point after 4 months of trending lower. Doesn't mean they won't head lower in the future, but after this number of rotations to the downside it will tend to rebound further before starting the next leg lower. Typically that is the 50 day EMA near 460.
SP500/NYSE
Stats: +5.18 points (+0.41%) to close at 1272.52
NYSE Volume: 1.572B (+23.03%). Nice volume surge on the reversal. It did not quite make average, something of a disappointment given the NASDAQ trade, but still a good move higher in volume as the NYSE indices undercut support and then closed positive.
A/D and Hi/Lo: Advancers led 1.68 to 1. Decent, but hardly an affirmation of any return to the upside.
Previous Session: Advancers led 1.57 to 1
New Highs: 67 (-3)
New Lows: 104 (+28)
The Chart: http://investmenthouse.com/cd/^gspc.html
Big reach lower that undercut the 200 day SMA (1264) on the low (1259) and then a nice rebound to close solidly positive. You like to see a positive close on a reversal, and the fact that SP500 undercut some support at the 200 day SMA (and held some support at 1260) and rebounded is an affirmation of that support. On the close it moved above the 50 day SMA (1271.59), a key level that has held it in check since the start of the month. A key move if it can extend here. Excellent action given all of the factors confronting the large caps, but the pattern has held a critical test. Now it needs to deliver upside.
SP600 (0.60%) reached lower as well, undercutting the 200 day SMA (367.41), hitting 365.65 on the low and then rebounding to close positive. It could not recover the 50 day EMA (373.28) and thus not in the same positive position as SP500. Nice flush out and recovery, however, and we are looking for SP600 to follow SP500 higher.
DJ30
Big dip below support at the 18 day EMA (11,091), down to 11,028 on the low and then a big recovery to hold the 50 day EMA (11,112) and looking to take on the 50 day SMA (11,165) and the July closing highs at 11,225 to 11,228. Good recovery on rising, average trade. Not as strong as SP500 but likely to rise with the large cap index. DJ30 was leading until hit by MMM and AA. With those out of the way DJ30 is set to make its move.
Stats: +31.22 points (+0.28%) to close at 11134.77
Volume: 298M shares Tuesday versus 207M shares Monday. Good increase in volume as DJ30 reached lower and then rebounded to close positive. That is what you like to see. Does not mean it is a lock, but it is what you want.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Some economic data returns with the trade balance and crude oil inventories. The latter is our main focus as we want to see what demand is doing with $3/gallon gas on as the national average. Oil has returned to levels that stalled demand before, and gasoline inventories are expected to fall as well as the summer drive and vacation season swings into full strength with consumers supposedly feeling 'what the hell, let's go down holiday road' regardless of the price. We will see if that is true with the demand figures released Wednesday.
We like the action Tuesday, particularly on SP500. It was the move we wanted: a test and then a recovery on volume. It is likely just a relief move for NASDAQ and SOX, but as noted above, a relief move can be strong, particularly after such a strong downtrend that has held the chips down for a long period. The longer and harder it is pushed lower, the stronger the rebound. SOX has been held in check by the 18 day EMA, a strong downtrend; thus the rebound tends to shoot higher as well.
Market rebounds are born in the midst of turmoil, and there is a lot of turmoil right now with the India bombings the latest issue. Chicago light rail experienced a fire on the Tuesday commute home, but early indications are a brake fire being the cause. Everyone was ready to fall on the sword if it was terrorism, but if it was, it was a weak attempt. Another thing. If all they can do is put some bombs on trains, though a horrible and incredibly cowardly act, their ability to promote terrorism has been severely curtailed.
The market seemed to sense that Tuesday and recovered. Now the key is what lies ahead, i.e. earnings guidance and what the market interprets as the economic future. The bond yield curve remained inverted (5.16% 2 year versus 5.10% 10 year) and worsened Tuesday; at present it is forecasting a slower economy. Thus the rebound here will be pressured eventually. We are not saying a rebound here ends the selling. The time of the year suggests another leg lower before a fall bottom. We are simply taking advantage of what the market is giving.
Support and Resistance
NASDAQ: Closed at 2128.86
Resistance:
The 18 day EMA at 2142
2162 to 2155 from December 2005 and September 2006
2166 is the August 2004/April 2005 up trendline.
2177 is the December 2004 high.
The 50 day EMA at 2180
2185 to 2182 is the September 2005 peak and interim high from November 2005.
2205 is the December 2005 closing low
2218 is the August 2005 peak before the sell off through October 2005.
The 200 day SMA at 2228
2234 is the early June high
2240 is closing low in February range.
Support:
2100 from the early and mid-2005 peaks
2072 is the June closing low
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 1272.52
Resistance:
1272 to 1268 is the November and December 2005 closing highs and March 2006 closing low
1280 is the recent July peak.
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:
The 50 day SMA at 1271.59
The 200 day EMA at 1264
The 18 day EMA at 1261.63
1248 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 11,134.77
Resistance:
11,097 to 11,137 is the last peak from the February top.
The 50 day SMA at 11,165
11,279 is the late May high
The March 2006 highs at 11,329 to 11,335
11,350 from the May 2001 peak
11,401 from the September 2000 peak and April 2001 highs
Support:
The 50 day EMA at 11,112
The 18 day EMA at 11,091
11,044 is the January high.
10,965 from Q4 2000
10,931 is the November 2005 high
The 200 day SMA at 10,928
10,890 is the December 2005 closing high.
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.
July 10
Wholesale inventories, May (8:30): 0.8% actual versus 0.5% expected, 1.3% prior (revised from 0.9%).
Consumer Credit, May (3:00): $4.4B actual versus $3.2B expected, $9.3B prior (revised from $10.6B)
July 12
Trade balance, May (8:30): -$65B expected, -$63.4B prior
Crude oil inventories (10:30)
July 13
Initial jobless claims (8:30): 320K expected, 313K prior
Treasury Budget, June (2:00): $20.0B expected, $22.9B prior
July 14
Retail sales, June (8:30): 0.4% expected, 0.1% prior
Retail sales ex-auto, June (8:30): 0.5% expected, 0.5% prior
Michigan sentiment, preliminary, July (9:45): 85.5 expected, 84.9 prior
Business inventories, May (10:00): 0.4% expected, 0.4% prior
End part 1 of 3
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