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trading system, day trading
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9/11/06 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: DRIV; XPRSA
Trailing stops: JBLU
Stop alerts: EXPD
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 fight off early sluggishness, show some patriotism.
- Leaders try to emerge once more from NASDAQ and SOX but volume does not confirm.
- Gold and bonds not suggesting future inflation is the problem, but we typically focus on the last battle and not the one about to be joined.
- Monday rebound was nice but still has to show the September trend.
Soft start brings some leaders to the fore once more.
Oil was struggling again early on (finished at 65.61, -0.64), further weakened by news Iran was willing to put off uranium enrichment for two months (must be at a point where they were going to have to take 2 months off in its program anyway). Despite oil's decline, the market was soft as well. Dell putting off its 10-Q filing given an SEC inquiry into its accounting, some early Fed-speak about how tough the Fed's job is given a slowing economy and higher inflation (hey, that's your job), and the fifth anniversary of 9-11 had the market in a somber mood early. The semiconductors were buzzing over FSL going private, and they were up early and held the moves. That was not enough, however, to get the rest of the market enthused right out of the gates.
Stocks opened lower and sold off from there, led lower by a diving energy sector that is either letting the air out of its geopolitical premium, projecting some economic slowing, or a combination of those and other issues. NASDAQ sold back down to its 90 day MA and SOX tapped its 50 day EMA again. Then the Fed's Poole, considered an inflation hawk, spoke and his comments were taken as rather benign. He bristled that his recent statements were seen as dovish. Inflation is still running above his 1% and 2% personal comfort level (2.4% at the PCE, his favorite indicator), but he feels that though the "economy is not fragile" but "robust," we could get "a weak quarter or two," and that would help lower prices. Seems like more of the same, but the market started higher after those remarks.
Chips were already positive, and they led the rest of the market back to green except for the small and mid-caps; a lot of energy stocks reside on those indices, and they were dragging them down. Even the rebound into early afternoon could not drag them all the way back to positive. Well, at least not into the close. They did turn positive with about two hours of trade left. Then the market lost its nerve. It did not turn and dump lower, it just wandered off into the close with a modest decline off the early afternoon highs.
Technically it was not a bad day and not a banner day. It is September, but despite a soft start the market found leadership and managed to turn a loss into a gain outside of the beleaguered energy sector. Always good to see that more bullish action, particularly in September and when the market is at an important juncture as it is, any bullish action is positive. As noted, there were also leaders. The semiconductors were humming over the FSL privatization, and they were up early and held their gains. Indeed, they eventually turned NASDAQ back from its negative ways for a nice recovery and gain on the close. A market has to have leadership no matter which way it is going, and once more the chips and techs, two key areas in the late summer rally, came to the fore again.
A rally also needs volume, and Monday it finally showed. NYSE posted its best trade level in over a month as it finally shook off its doldrums. NASDAQ volume was higher, but it was not as good as you would want, coming in right at average and lower than the selling volume last week. Thus you have some accumulation ongoing, but in the real leadership index you have lackluster buying. Looking further, a lot of NYSE volume was tied to hard sell offs in energy. Thus the indices rose on rising trade, but it was not a clear 'A-OK' from the trade perspective.
As noted, the leadership was solid and it was key groups involved, e.g. the techs and the chips. Somewhat impressive given Dell and its potential accounting issues. That leadership mostly held up into the late hours that saw the indices, while holding most of the gains, weaken. With a couple of hours left they simply lost their upside push. They did not roll over, but they did not finish strong.
Thus there was decent volume but a bit questionable, and a good reversal that could not quite finish out the session. We like the leadership we are seeing, but it is still not a clear return to the late summer rally. In short the market showed some patriotism on a landmark anniversary, but once more it has to show it can show more strength from here to confirm the renewal of the summer rally.
THE ECONOMY
Where is the (future) inflation?
There is inflation. You could see it even before it started showing up in the official government reports each month. We wrote about it as well: computers and big screen television prices were dropping, but you don't need to go out and buy a big screen or a computer each month. You do have to pay your child's tuition, you do have to eat, you do have to buy gasoline, heat/cool your home, etc.
This inflation was the product of poor fiscal and monetary decisions made in the attempts to recover from the market bust, the ensuing recession, 9-11, etc. Greenspan lower interest rates but that did not work. He flooded the economy with money, and that helped, but it needed a catalyst to get it working as businesses, burned with big inventories and capital write-offs after Greenspan dried up the money supply in 2000, did not want to invest. Then came the tax cuts. Bush knew we needed them to unlock capital but the only one he good get through first was the demand-side incentive tax cuts. All that did was stoke up already steady demand that held through the downturn. It wasn't until the supply side tax cuts that businesses started to invest once more and the economy pulled out of the recession.
Unfortunately, Greenspan left rates very low and money supply growth very high even after these tax cuts and after the economy started to recover. He finally started raising rates but he did not start curtailing money supply by enough. Indeed, not until Bernanke took over did money supply get pared back enough to make a difference, the first indication being the end of the rampant commodities speculation that drove copper to $4/lb, a price at which it became cost effective to melt down pennies. Rule of thumb: when you can make more money by expending the energy to melt down coins than the coins are worth, that is a bubble in that commodity price.
Bernanke is having success battling inflation, and he does recognize that it lags the economic cycle. Thus there is the possibility that he will resist the pressure to keep fighting the last battle, i.e. the inflation battle, that peaked in October 2005. Certainly he does not need to re-open the money supply flood gates, but he does not need to hike rates further, restrict loans, etc. that Greenspan employed all at once and thus crushed the economy. The inflation that is in the system is running its course and is being snuffed out. It is a tough job given Greenspan was, as usual, too easy with the money, leaving Bernanke a lap full of inflation to deal with. It looks to be manageable, however, given Bernanke's success thus far with the excess speculation and his willingness to stick to sound theory based on history.
So, what is the issue ahead with inflation?
The government reports out each month (the CPI is out this week) are lagging indicators, just as are most of the government reports. It is an art of taking the data and trying to figure out what is going to happen in the future. Fortunately, history provides some good examples of what typically happens and what indicators are accurate in predicting the future. The really meaningful indicators are saying that inflation is going to head in the right direction. The question after that is the one we discussed over the weekend: where does the economy and thus the market go?
GOLD. Gold peaked at $735 in May in the climax run for all commodities. In 4 weeks it gave back 100% of the 7 week move from late March to mid-May. That is a blow off top. Now it did not go on and crash further from there. It rebounded the next month, peaking at 675. Then is started the current pullback, trying to base between that peak and 600ish on the low. That shows some resilience regarding inflation as it stabilized at a higher level than the pre-climax run range from 535 to 575.
The past week gold has lost its footing, falling back to the 606 level it hit and bounced off of three times in the past there weeks. Monday it went further, crashing through 600 on the close (597.30) as it shed another 20 points. It was the biggest point loss in the past week, topping the 17 lost Thursday. It is still an open question as to whether this starts another leg lower, but with the 200 day SMA (590) just below it seems gold is going to give that a look just as a matter of course.
Again this is not saying that inflation is no longer a factor. Gold is off its highs but at an elevated price from the prior range and well above the 450 level that it broke above a year ago as gold started this run. To say the move was not linked to inflation would be wrong. Now that some reliable data (e.g. ECRI) shows that inflation, for now, peaked in October 2005, gold has started to fade. Indeed it started the fade just about the time the ECRI data indicated inflation had peaked.
The acid test is now whether it breaks lower and makes a lower low. The sharp drop Monday below 600 on the close suggests that may be the case, but it has to test, fail, etc. before we can no more. Right now gold is suggesting inflation is not the worry it was, but it is not letting it off the hook. That is right in line with ECRI: inflation appears to have peaked, but it has not tanked lower and thus we are not out of the woods. A lot depends upon what the Fed does at this point and whether the federal government messes up and implements policies that work to increase demand without implementing supply side increases as well.
COMMODITIES. In addition to gold, commodities are in a major decline. The CRB has dropped from 355 to 314 in 4 weeks, undercutting the Q1 low and coming to an important level at 310. The pattern set up a bearish broad top and has broken down. As oil rolls over as well the commodities are projecting an economic slowdown. This is similar to 1999 and 2000; the Fed was adamant inflation was around the corner because the economy was 'red hot' and the 'runaway' consumer did not know when to call it quits, yet commodities were taking a beating. This is another big caution flag.
BONDS. Bonds are not suggesting inflation even though yields managed a rebound Monday (4.83% 2 year yield versus 4.80% 10 year yield). Yields are on the decline overall and have been since the spring even with rate hikes. Indeed, Pimco thinks we are in line for a long term bond bull market, and that means even lower yields.
What happened in the spring is that the bond market basically concluded the Fed was going too far and would go too far with its rate hikes. Thus as the Fed hitched up short term rates, the nominal rates in the market turned lower. The yield curve inverted once more, though not aggressively, but clearly indicating a lack of trust in the Fed's ability to handle the situation. After Bernanke was roasted for saying a pause might be warranted even if inflation looked to be rising, he stuck to his guns (after another rate hike) and paused. Hey Mikey, the market liked it. Bond yields rose after the hike and gold fell; the yield curve even reverted. That is not the reaction you would expect if the markets felt a pause was going to lead to runaway inflation. That bond yields rose modestly in response showed confidence. Indeed, that is a statement the markets think the Fed, despite the pause, may have gone too far.
There was backsliding after that initial reaction and bond yields inverted modestly once more. They started to fade as well; they never spurted higher, just showed a positive rise to 5% (on the 2 year) right after the pause. Now they are heading back down, and that is hardly an indication of inflation. As noted, the real fear with these rates is that they are pricing in a Fed that has once again misjudged the economy's strength and ability to absorb rate hikes and a fairly substantial decline in money supply. Remember, money supply growth fell from 6.2% before Bernanke took over to 0.2% after Bernanke took over. He knew the devil was in the liquidity, and he had to undo what Greenspan allowed to happen, but he did not want to go cold turkey a la Greenspan in 2000 and assure an economic dive. Thus his tightrope walk, but with bonds behaving the way they are, you have to wonder if he was given enough rope by Greenspan to finish the walk.
The bond market is concerned he may not have enough, and thus you have the low interest rates as well as the nominal rates set by the bond market well below the 5.25% the Fed has set for the short term rates. In short, at this juncture bond yields are telling you that the Fed will have to cut rates, and we all know that the Fed does not cut until the whites of a slowdown's eyes have already run past. Maybe Bernanke will be more of a pioneer in this respect as well, but thus far none of the more recent Fed-speak indicates this is in the cards. To the contrary, the Fed speakers are still blustering about how they will come back in and raise rates if inflation continues to hold firm. That only inflames the bond market more, however.
THE MARKET
MARKET SENTIMENT
VIX: 12.99; -0.17
VXN: 19.77; -0.05
VXO: 12.55; +0.55
Put/Call Ratio (CBOE): 1.03; +0.01. A third close above 1.0 as the indices posted a gain. There is some short covering of downside positions and there is a lot of play in energy's decline contributing to the rise in put activity.
Bulls versus Bears:
Bulls: 43.2%. Bulls continue to rise, up from 42.1% last week and 40.0% the week before, a post-June high (bulls and bears kissed in June. That is still, however, well below the peaks from January and April, and well below the 55% level considered bearish.
Bears: 33.7%. Bears held steady, stalling the steady decline from the 37.1% hit in July. The 37.1% was the highest level in this entire cycle, easily clearing the 34.4% hit in late June back when bulls and bears kissed, just missing a crossover. Hit a new post-2002 high in that late June move, 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: +7.46 points (+0.34%) to close at 2173.25
Volume: 1.753B (+15.97%). Volume bumped up close to average as NASDAQ gapped lower and recovered, but it was not a high volume turn around, nor did the trade reach the levels of last week's selling volume. It was thus not a rush to buy back into technology. There was accumulation in the leaders, but as a whole not a big chunk of money was committed.
Up Volume: 976M (+57M)
Down Volume: 705M (+137M)
A/D and Hi/Lo: Decliners led 1.17 to 1. Decliners hung on into the close even as NASDAQ managed a rebound. It had time to reversed to positive but that afternoon sag kept it low and underscores the recovery was rather limited.
Previous Session: Advancers led 1.22 to 1
New Highs: 65 (+7)
New Lows: 63 (+16)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ gapped lower and tested the 90 day MA (2144) on the low and rebounded to close positive, recovering the mid-August peak. A good answer to last weeks selling, rallying when it had to. We would have preferred a bit more lateral work and then a move back up, giving it time to set up a bit of a floor to push from. Nonetheless it was a very solid move in price, leadership, and to a lesser extent volume. It has to again take on the July high again (2191) and then the August high at 2208 before it even gets close to the 200 day SMA (2223) and the June high (2234). Good start, but with breadth modest and volume still a question mark, NASDAQ still has much to prove if it is going to indeed continue the late summer rally.
SOX (+2.36%) was the market leader early and into the close as well. It held the 50 day EMA (434.70) on the lows last week and jumped higher Monday, spurred by FSL going private and some generally good leadership and the potential from TXN's mid-quarter update. It moved back through the mid-August high (446 closing) and now has the late August high (454.50) to deal with. Great leadership, and if it can blow past that late August high as NASDAQ volume rises, that would be a very good sign for a continuation of the last summer move.
SP500/NYSE
Stats: +0.62 points (+0.05%) to close at 1299.54
NYSE Volume: 1.64B (+24.74%). A strong return to volume, the best in over a month as the indices reached lower and then rebounded to close basically flat. Volume reversals are good indications as it shows buyers coming back in after a test lower.
A/D and Hi/Lo: Decliners led 1.21 to 1. With SP600 and SP400 lagging due to their energy issues, breadth could not recover by the close.
Previous Session: Advancers led 1.59 to 1
New Highs: 90 (+21)
New Lows: 60 (+15)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 reached lower again, managing to hold the late August low near 1290 and then rebounding back to close near the mid-August high at 1302. That leaves SP500 in the middle of its March and April trading range, trying to shake off last weeks dump lower on rising but still below average volume. Good shakeout and reversal on trade. Now it needs to break higher from here to show it means to keep the move going. It has yet to convince us it can move higher from here.
SP600 (-0.25%) took it on the chin all session, testing some support at 360 on the low and then rebounding to close at the 50 day SMA (363). Nice intraday recovery as SP600 continues to work on its base that started with the May sell off. It has made some higher lows and higher highs since the late July low, showing some accumulation and positive work in the base, but it hit the 200 day SMA (372) and buckled. It still has a higher low going here to build off of for another run at the 200 day, but it is going to have to prove it is ready. Again, still building its base but at a critical point where it has to show something more here or keep on working on the pattern.
DJ30
DJ30 tested the 18 day EMA (11,345) on the low and then rebounded to hold the 10 day EMA on rising though still below average volume. As noted over the weekend, with the Friday recovery and the selling that never took it below the 18 day. Good volume as it tested near support and recovered. As with NASDAQ and SOX, it is positioned to move well after this test; the pattern does not suggest it is about to roll over, but then again, volume was low all during the August climb after the rally got started with some good upside trade in July as it climbed up off of those lows.
Stats: +4.73 points (+0.04%) to close at 11396.84
Volume: 216M shares Monday versus 161M shares Friday. Finally getting some volume to kick in and it did it on a test and rebound.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
The market has had a chance to work through 9-11, and now can start with the rest of the second week of September. The trade balance is out before the open. TXN gave its mid-quarter update after the close and it raised the bottom end and lowered the top end of revenue guidance while raising its earnings guidance range ($0.44 to $0.46 from $0.42 to $0.44). Not great, not bad, but it also warned of a glut of cell phone chips that would impact its earnings. Chips were off modestly after hours.
That will be a main ingredient to the Tuesday trade as chips have been a leader off the July low. The 9-11 memorial is over and now we get down to September. NASDAQ, SOX, and DJ30 are in position to move and put in a decent showing Monday. They will need to carry on if the rally is going to continue. We will continue looking at the leadership, those stocks that helped lead the summer rally, and we will also be looking at others that are stepping up to help out. Those along with some upside volume will speak well for a continued rally attempt.
The jury is still out on the ability to rally from here. There are some positives for sure, but the buyers have not taken over. Volume was up on NYSE, but it was not the leader of the day. NASDAQ and SOX were the leaders but the volume was modest. Breadth had time to recover but did not. Leaders looked good but as breadth indicates, the leadership was narrow. In sum, we still view the market as capable of going either way from this point, and we are going to remain ready to move in whichever way it breaks. Monday there were some positive upside moves worthy of moving into. We will see how that develops as the week develops.
Support and Resistance
NASDAQ: Closed at 2173.25
Resistance:
2177 is the December 2004 high.
2185 to 2182 is the September 2005 peak and interim high from November 2005.
2190 is the July 2006 high
2202 is the August 2004/April 2005 up trendline
The 200 day SMA at 2223
2230 is the June 2006 peak (2234 intraday)
2250 is the March 2006 closing low.
Support:
2168 is the August intraday high.
2158 from the May 2005 low.
The 18 day EMA at 2156
The 50 day EMA at 2138
2100 from the early and mid-2005 peaks
2072 is the June closing low
2050 from the summer 2005 lateral range lows
S&P 500: Closed at 1299.54
Resistance:
The 10 day EMA at 1300.36
1302 the recent August highs
1311 is the April closing high.
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
1326.70 is the May 2006 high
1334 is an October 1999 peak
Support:
The 18 day EMA at 1297
1294 is the January 2006 high and 1297.57 is the February 2006 high.
The early June high at 1288
The late January peak at 1285
1280.37 is the recent July peak.
The 50 day EMA at 1284
The 200 day EMA at 1278
1264 is an old trendline from the August 2003/August 2004/October 2005 lows.
Dow: Closed at 11,396.84
Resistance:
11,401 from the September 2000 peak and April 2001 highs
11,642 is the May 2006 closing high
11,670 is the May intraday high
Support:
11,384 is the August intraday high.
11,350 from the May 2001 peak
The 18 day EMA at 11,345
The March 2006 highs at 11,329 to 11,335
11,279 is the late May closing high
11,243 is the early August peak closing high.
The 50 day EMA at 11,238
11,228 is the July closing high.
11,097 to 11,137 is the last peak from the February top.
The 200 day SMA at 11,084
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
September 12
Trade balance, July (8:30): -$65.5B expected, -$64.8B prior
September 13
Crude oil inventories (10:30)
Treasury budget, August (2:00): -$67.0B expected, -$51.3B prior
September 14
Initial jobless claims (8:30): 315K expected, 310K prior
Retail sales, August (8:30): -0.2% expected, 1.4% prior
Retail sales ex-autos (8:30): 0.3% expected, 1.0% prior
Business inventories, July (10:00): 0.5% expected, 0.8% prior
September 15
CPI, August (8:30): 0.2% expected, 0.4% prior
Core CPI, August (8:30): 0.2% expected, 0.2% prior
New York Empire Index, September (8:30): 14.0 expected, 10.3 prior
Capacity utilization, August (9:15): 82.5% expected, 82.4% prior
Industrial production, August (9:15): 0.2% expected, 0.4% prior
Michigan sentiment, preliminary for September (9:45): 83.5 expected, 82.0 prior
End part 1 of 3
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