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3/28/07 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Target hit alerts: None issued
Buy alerts: None issued
Trailing stops: None issued
Stop alerts: CL; AMSC
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:
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SUMMARY:
- Stocks fall again as Bernanke fails to provide upside spark.
- Durable goods orders rise less than expected.
- Expansion can survive mid-cycle slowdown if we don't go back down the 1970's road.
- Attempt at next bounce is teetering.
Stocks struggle yet again, unable to pull off a midday reversal.
As a parting thought last night we said we had to 'keep it real,' i.e. remember that the market bounced off a short base in the midst of a correction. That was driven home a bit more on Wednesday as stocks started lower, sold on the Bernanke inflation comments, and could not hold a midday recovery even though volume rose as stocks recovered. If things were pessimistic Tuesday, they were even more so on the Wednesday close.
Stocks started lower as anticipated, and we were looking for Bernanke to act as a catalyst as he has on other occasions. He was a catalyst alright, but to the downside. When Bernanke released his testimony, the market did not receive the Bernanke hug delivered in the past. Something about inflation remaining 'uncomfortably high' and the reference to energy as an inflation catalyst (versus an economic drag) as oil closed at $64.08, +1.15 was on investors' minds. The market tanked to session lows on the release. Yes oil inventories were out at the same time as well, but will crude was lower than expected, gasoline was higher than expected. Oil prices did not budge much having already run up again on the geopolitical tensions with Iran. No, it was more of disappointment regarding the Bernanke comments.
Stocks still recovered to session highs with NASDAQ moving within 3 points of positive. Volume rose as the indices recovered. It could not hold and sold off though the indices held above session lows. Nonetheless, NASDAQ undercut by a few points the 50 day EMA that held the test in check until Wednesday. SP500 torpedoed its 50 day SMA but did manage to hold near the 50 day EMA. Volume rose modestly on the move. Definitely not the recovery from the early selling, at least not all the way to the close. That leaves the indices hanging on after the follow through, trying to find their legs to make a run back up to the session highs. After the failed intraday rally that prospect dimmed by about 50%.
Technically it was not a massive implosion or sell off. Volume was lower on the early selling and it did rally as stocks caught a bid following the Bernanke midmorning selling. Unfortunately the volume held up as the indices peaked out and rolled back down in the last two hours. There was definite distribution on the indices even though volume was below average. It doesn't take much of this type of action to scuttle a new follow through. We have to keep in mind, however, that this is the last week of the quarter, and some of the moves we see are exacerbated by some quarter end shuffling. Breadth was at the -2:1 level again. Leadership cracked in some areas, but for the most part held the line at near support. The size of the price declines were a negative; they typically contract as a pullback nears its completion, kind of piling up on top of support. They showed no sign of slowing Wednesday.
If this rally is going to make it back up to the prior highs it has to find its footing here. There was not a lot of technical change as volume was higher but still below average and the follow through is still in tact; in other words, the foundation the follow through laid is still there. Pessimism remains high as well. In short, if it is going to find legs for another crack at the highs it has to do it here. As noted above, the action lessens the chances of a rebound by about half.
Thus we have to be ready for the eventuality of further downside; it was going to come whether the market made it up to the old highs or not. The action certainly looked good for a test of those highs and that move is still not without some life, but we are still in a correction, follow through or not, and prudence says we protect our upside and be ready with some downside if things break lower and go on for that test of the new low that sparked this current rebound. For what it is worth, the indices made it up to the rebound points we originally established for the rebound move. Thus all the more reason to be ready if this pessimism doesn't work to drive this rally higher toward those prior highs.
THE ECONOMY
Durable goods orders rise but business investment remains weaker.
The 2.5% gain in orders missed expectations of 3.5%; though lower, it was a big gain from January's 9.4% drop that was revised lower from -7.8%. Durables are the poster child for volatility, and thus big swings from negative to positive are more common than in other government economic reports.
One of the main reasons for the month to month volatility is aircraft orders. Transportation jumped back 10% after falling 21% in January. When you strip out transportation you get a better view of the trend. The -0.1% loss for February was the sixth loss in eight months. That is a trend that is crossing into the worrisome level.
The slowing started with the 2006 second half slowdown that was led by a slowdown in business investment in capital goods. In February, non-defense capital goods orders less aircraft, the de facto proxy for business investment, fell 1.2% after -7.4% in Jan (the 5th biggest decline). They are only up 1 month of the last 5 as businesses back off from investment. That is seen in the weaker regional and national manufacturing reports and in the decline in metals orders (-1%) and machinery (-0.4%) in the February durables report. Year over year durables orders fell 0.3%, quite a turn from some impressively strong first half of 2006.
On the bright side, computers and electronics orders rose 6.4%, bouncing back from -10% in January. That is about it on the bright side.
More signs of a mid-cycle slowdown, but Congress could still screw things up.
Well, there is more though it is not really bright. It is more evidence and symptomatic of an overall mid-cycle economic slowdown. Sure there are many factors that could cause a meltdown as opposed to just a slowdown before resuming growth. You have your housing market. You have spiking oil and gasoline. You have nonsensical protectionist talk in D.C.
You also have talk of tax hikes that were supposedly a last choice during the election campaign, but it is now clear that the new majority party was talking about different kinds of tax hikes. In other words, if you raise taxes on some but lower taxes on others there is no tax hike because of a claimed net neutral in the tax intake. That is like saying if you kill 10 adult hogs but 10 new ones are born there is no difference. Maybe not to the farmer making money off the hogs, but it is a big difference to the hogs. And, if you kill all of the breeders, then where are the new ones going to come from? In economic terms, if you tax all of the businesses and entrepreneurs who create the businesses and new jobs, where is your tax base going to be down the road when they divert money to tax shelters versus investing it in the economy? I will tell you where: the 1970's.
Indeed, the parallels are shaping up in a frightening way. Oil is shooting higher once more. Iran is flexing its oil-based strength once more, capturing some British sailors under rather murky rationale. Inflation is rising due to poor choices by the prior Fed. The ethanol push is exacerbating inflation thanks to pushing corn prices, the main feedstock for our food animals, through the roof. The sad irony is, ethanol is not going to solve our energy problem even if corn stalks grew from sea to sea. All it will do is push our prices at home higher while we still have to buy millions of barrels of oil per day, still consuming oil at the whim of the major producers. More regulation is threatened whether it be trade barriers or confiscation of profits that are deemed excessive. In the 1970's I wrote a paper on the US' drive toward socialism, and fortunately US citizens finally said 'enough' and elected a conservative, smaller government president and Congress. Now we are swinging back to the failed ideas that the government should be the savior of all, and that bigger government can do that better. Of course, bigger government means the need for more revenue, and the current climate is back to 'tax the rich.' Of course, the 'rich' are those that create the businesses that create the jobs. We have been down this route. It does not work and it almost spelled the end of the great experiment here in the new world.
Those are serious considerations facing the economy as it picks its way forward through 2007. The best long leading indicators still show economic expansion resuming after the summer, but as we have noted several times before and above, we can easily torpedo those chances if we move down the road of tax hikes that are not called tax hikes, protectionist policies designed to keep obsolete industries in the US when they should naturally migrate to lower wage countries (in which case they would free up our resources to invest in newer and better technologies), and practices that disrupt natural market moves such as the mandate for ethanol that simply won't benefit anyone but corn growers and oil producing countries while draining resources from better use such as pursuing real alternatives to oil as powering our vehicle fleet and raising inflation further as our food costs rise.
Those are the main obstacles to a resumption of the economy, not the slowing economic data that has cropped up after nearly 4 years of expansion. As we have seen before, the economy pauses after good runs as it did in the mid-1990's, and then it can resume if we keep the policies that started the run or implement policies that extend the move. In the 1990's Clinton cut the capital gains tax and that spurred the continued expansion after the mid-cycle pause. The talk in Washington, however, is the antithesis, i.e. undoing the economic stimulus that started the run.
THE MARKET
MARKET SENTIMENT
VIX: 14.98; +1.5. After the test of the 12 level (where it started from as the selling got underway), volatility is on the rise once more. If this selling leg continues and the rebound attempt loses out we want to see it near 30 on the drop in the indices.
VXN: 18.56; +1.36
VXO: 14.97; +1.97
Put/Call Ratio (CBOE): 1.37; +0.39. Back over 1.0 on the close after a week's hiatus as the market continued its rally.
Bulls versus Bears:
Bulls: 46.6%, up from 45.5% and back at the same level of two weeks back (46.2%). Well off the 50.5% and 53.3% seven weeks back. When it bottomed last summer it was near 36%. That is the lowest level since September 2006. Still a ways to go, but when it cracks it can tumble quickly. A 4.3 point drop is pretty salty.
Bears: 28.4%. Down a bit from 28.9%, but holding the strong jump higher from 26.9% and 24.2% the week before. Not bad after spending the first two months of 2007 near 20%. The angst is still strong, and as with bulls, it is not all that far from levels that sparked prior rallies. It hit a post-2002 high in that late June 2006 move (hit near 36%), 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). It is not far from those 2005 levels.
NASDAQ
Stats: -20.33 points (-0.83%) to close at 2417.1
Volume: 1.922B (+6.61%). Volume rallied back toward average, falling short but 100M shares or so. Volume was definitely higher, however, as NASDAQ sold off. Volume did rally on the intraday rebound, but it also held up and expanded as the index sold back down in the afternoon. Definitely some distribution, and though it was lower than the follow through volume, distribution sessions early in a rally attempt often signal a rally is failing.
Up Volume: 385M (-184M)
Down Volume: 1.467B (+259M)
A/D and Hi/Lo: Decliners led 2.07 to 1. Another -2:1 session. NASDAQ 100 fell 1.08%, so it was selling across the board.
Previous Session: Decliners led 1.99 to 1
New Highs: 95 (+3)
New Lows: 55 (-2)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ gapped lower to the 50 day EMA (2427) and tried to hold the line. It gave it up on the Bernanke testimony only to recover midday on rising trade. Nice. Not that nice. The bottom opened again and it fell to close near the session lows. Still holding the follow through/breakout, but by a thread. That higher volume selling after a nice test of the consolidation indicates the sellers moving back in and putting a continuation of the rebound up toward the prior highs at a much lower probability.
SOX (-1.35%) dumped lower as well, closing at the 50 day SMA. That keeps it in the 5 month range, now sitting smack dab in the middle of that 40 point range. Failed at that higher low and gave up 475, a key level. Has to start back over but not from scratch.
SP500/NYSE
Stats: -12.38 points (-0.87%) to close at 1417.23
NYSE Volume: 1.469B (+6.3%). Volume was up on NYSE as well. Still below average but higher than the prior pullback sessions so there was some distribution. Recall volume was equivocal on the follow through session, unable to reach average and thus not really backing the follow through on SP500 or SP600.
Up Volume: 334.866M (-33.3M)
Down Volume: 1.109B (+109.71M)
A/D and Hi/Lo: Decliners led 1.81 to 1. Not out of hand, indeed improving over Tuesday.
Previous Session: Decliners led 2.23 to 1
New Highs: 113 (-16)
New Lows: 35 (+14)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 didn't perform much better though it more or less held the 50 day EMA (1417.78), closing on the 18 day EMA. Volume moved higher so there was some distribution. The technical indicators for the day look a bit better than NASDAQ, but as noted earlier, the price drop was sharp for putting the finishing touches on a pullback. SP500 has not shown the leadership on this rebound move so we cannot latch onto its modestly better session as an indication the rebound test will hold.
SP600 (-0.43%) sold as well but unlike the large cap indices, the small caps tapped the 50 day SMA on the low and rebounded to cut most of its losses and hold the 10 day EMA. SP600 is still the picture of health, and the Wednesday action showed there is still a nice bid in the small caps. The mid-caps showed the same action, bolstered by the continuing appetite for the energy stocks as oil and gasoline continues.
DJ30
DJ30 struggled with the other large caps, falling to 12,250 on the low where it found some support and rebounded to avoid a triple digit loss. Volume was below average but higher on the session. On the low, DJ30 pretty much gave up the follow through session. Very similar action to the other large caps indices, giving up a lot of ground for it to be just a further test of the follow through breakout session. Recall the move started with some lateral trade and intraday dips lower. Then the losses grew and Wednesday was the biggest decline of the pullback. Again, not the stuff good consolidations are made of.
Stats: -96.93 points (-0.78%) to close at 12300.36
Volume: 224M shares Wednesday versus 209M shares Tuesday. Not huge volume but rising as the blue chips fell the hardest of the move.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
The Wednesday selling put the pullback on the ropes and significantly cut the chances of a continued rally back up toward the prior highs. As noted above, it was no implosion, the large cap indices dug themselves into a hole with the declines. The small and mid-caps still look solid as they are the harbors for many metals, energy, and materials stocks.
The action leaves the indices at a crossroads within a correction. That is an important point to cover again; we are not talking about a resumed rally even if the rebound can continue. It always could, but as we have discussed the past week, the double bottom was too short by historical standards to effectively consolidate the 7 months of gains. We view the odds of a successful break higher from the Wednesday close much lower, and as we discussed pessimism as driving rebounds such as this, the fact that we have lowered our views on the rebound has to be factored in as part of the sentiment. In other words, we have to keep our own emotions and views in check by realizing our feelings or interpretations could be part of the pessimism that drives the rebound higher. That is a long-winded way of saying we just have to keep alert and be honest with our assessments.
Given this juncture and the fact that we still see many good stocks in excellent position, we are going to have to look both ways as the market crosses this street. We have many good upside plays already on the report and we see other upside that looks good. Given it is at a crossroads, there are also downside plays that we are going to look at as well.
In the bigger picture we still see this as an ongoing correction, and given it is a correction many stocks will sell off, but there will be leaders that survive any further selling, using it to base more and set up their moves as the market correction finds bottom and reverses. Indeed some will continue higher in sectors driven by other factors, e.g. energy. We will let those plays run as long as they hold up and avoid distribution. We will use any selling to bird dog strong stocks that are setting up to recover when the market finds bottom and get them on the report for buys when they break higher. At the same time we are going to look downside. As seen in the prior selling bouts, when the selling starts it occurs quickly and we get in, let the drop occur, then get out.
Again, the market is in a correction, but thus far, despite all of the gloom about the economy, it is just a correction of a good rally as the economic expansion undergoes a correction or slow down of its own. Thus we are looking at another sell off, either from here or after another rally attempt from these levels, to test the prior lows and try to set the bottom, and then the start of the next leg higher. It will come back up near the recent high hit last week, form a handle of sorts, and then make the break higher.
The fly in the ointment is the time of year. This is the end of the quarter so some of the volume and movement we saw Wednesday was part of some quarter end shuffling. Further, earnings season is approaching as well as the prelude to the slow summer season. Kind of a tough time to make a new breakout and sustained run higher. The break form the correction will likely not lead to a rip roaring surge, but more of a series of moves and tests that look like mostly lateral movement.
That remains to be seen. For now the action is whether the market continues lower to test now or puts in some more upside time to give the base more time to form.
Support and Resistance
NASDAQ: Closed at 2417.10
Resistance:
The 50 day EMA at 2428
The July/August trendline at 2461
2468.42 is the November 2006 high
2471 is the December 2006 high
2509 is the January 2007 high
2512 is the December/January up trendline
2523 is price resistance November 2000
2531 is the February high (post-2002 high)
Support:
2405 is the 'hump' high
2400ish from the late November and late December 2006 lows.
2379 is the October high.
2376 is the April high, the former post-2002 high.
2368 is the early October handle high.
2340 is the March low
2339 - 2334
2333 is the top of the Q1 2006 trading range (the January and mid-March 2006 highs)
2316 from interim tops in January and March 2006 trading range
S&P 500: Closed at 1417.23
Resistance:
The 90 day MA at 1419
1425 is an interim high from November 1999
The 50 day SMA at 1425
1432 is the December 2006 high
1440 is the mid-January high
1444 from February 2000
1458 is the late November to February up trendline
1461.57 is the February 2007 high.
1475 from peaks in December 1999 and January 2000
Support:
The 50 day EMA at 1418
1410 is the 'hump' high
1408 is the November high
1389 is the October peak.
1374 is the early March low
1371 to 1373 is the December 2000 peak and the January 2001 peak
1369 from early October 2006
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February
Dow: Closed at 12,300.36
Resistance:
12,350 is the March 'hump' high
12,361 is the November 2006 high
The 50 day EMA at 12,383
The 50 day SMA at 12,463
12,499 is the December intraday high.
12,796 is the February 2007 and all-time high
Support:
12,039 is the early March low.
October high is 12,167
11,986 is price support from mid-October and the early November low.
11,940 is the March low
11,865 from the early October consolidation
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
March 26
New home sales, February (10:00): 848K actual versus 995K expected, 882K prior (revised from 973K)
March 27
Consumer confidence, March (10:00): 107.2 actual versus 109.0 expected, 111.2 prior (revised from 112.5)
March 28
Durable goods orders, February (8:30): 2.5% actual versus 3.5% expected, -9.4% prior (revised from -7.8%)
Crude oil inventories (10:30): -0.9M actual versus +1.7M expected, 3.9M prior
March 29
Initial jobless claims (8:30): 320K expected, 316K prior
Q4 GDP final (8:30): 2.2% expected, 2.2% prior
Chain Deflator (8:30): 1.7% expected, 1.7% prior
March 30
Personal income, February (8:30): 0.3% expected, 1.0% prior
Personal spending, February (8:30): 0.3% expected, 0.5% prior
Chicago PMI, March (9:45): 49.5 expected, 47.9 prior
Construction spending, February (10:00): -0.6% expected, -0.8% prior
Michigan sentiment final, March (10:00): 88.8 expected, 88.8 prior
End part 1 of 3
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