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Three, Two, One, You Are On the Air

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Three, Two, One, You Are On the Air
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Republican Senator defects; Fed Governor Meyer spoke, Fed Chairman Greenspan to speak tonight; initial claims up; new home sales down; retailers report strong earnings; and Memorial Day weekend a-coming. As Molly Evans alluded to last night, are any of these really responsible for today's market move?

Let me think. . .no. Sure, it is fun to speculate on it and to be entertained by television personalities explaining the answer to the titillating questions. But the real answer lies in the charts, as we will see below.

Still, with so much news today, and so little movement in the major indices, it may help to examine each of the above pieces of "music" just so we understand the sentimental concert playing out before us. In the end, it will still be noise, but here goes.

With regard to Senator Jeffords leaving the Republicans for the Independent party, incredulous Republicans ought to remember they still have a majority with the White House and Congressional branch of government. That is two out of three. Jubilant Democrats ought to remember the same thing. Investors and traders ought to remember that legislation will be that much more difficult to pass. In short, contrary to popular belief, gridlock is good because it keeps Washington from exerting major influence on the course of everyday business.

Initial claims and new home sales on the other hand may have had some impact. Jobless claims were higher than expected while new home sales were lower than expected. Apparently layoffs are doing their part to reduce confidence by keeping the formerly wealth-effected from buying new homes, which in turn suggests that the economy may slow further. That could be partially responsible for the dip experienced after the first half hour this morning

As for the Fed President Meyer, and Fed Chairman Greenspan, Meyer merely carried the recent Fed tune of having to calibrate easing in order to avoid inflation while maintaining the on-guard stance against the negative wealth effect and declining consumer confidence. Nothing has changed there. Meyer was merely repeating the Fed's intent to offer its overall market put by increasing the money supply. Call it support.

By the way, having watched and heard many times that Greenspan will deliver a speech that is sure to impact the markets, unless it is a policy meeting or Humphrey Hawkins appearance, he never does. As sure as Wayne Angell will generally be wrong when he predicts a Fed move on rates, Greenspan will say nothing tonight. Why give it coverage? Just understand that the media's job is to keep us glued to the set so they can sell advertising. Simple as that.

While fundamentals play a role in developing sentiment, as traders we must be mindful of the charts to make money. In the end, it does not matter what the news is. It will be aptly reflected in all known information in the charts, which always have and always will run in familiar patterns.

In short, just as J.P. Morgan was fond of noting that "markets fluctuate", we note too that "oscillators oscillate" (and bulls still appear to in control). Maybe not for long. Shall we take a peek?

Dow Industrials chart (INDU):

As noted Tuesday night, the weekly chart is beginning to show some weakness in the candles by approaching and falling back from the Bollinger band as the stochastic shows its first signs of rollover. The daily chart though shows some strength in the form of a doji (indicates indecision) as it approaches the ascending trend line. After the breather over the last two days, and the approach of the long weekend, which historically has the market moving up, perhaps we have experienced just the rainstorm and not the need to build the ark. Oscillators, though pointed down, and displaying weakness have been there before as recently as May 11th when they made a bullish reversal in mid-downstroke. Based on the support found today at 11,050 (well above 11,000 support) and the bullish oscillator move begun on the 60/30 charts today, a decent probability exists that we will see a positive close into the weekend. Careful. Any breakdown below today's low, or worse - a break under 11,000, would signal greater weakness ahead. Likewise, failure to exceed and close above today's high of 11,150 would signal that bulls have lost some of their fight. Bearish divergence exists on the daily chart too.

NASDAQ-100 chart (QQQ):

Weekly still looking strong, but the daily showed no indecision here. The QQQ came off of yesterdays close and today's low for a positive finish. Thank Microsoft for most of the gain. Granted the volume was light, but that is not abnormal for preceding a holiday. Note that the tail today is bad data. Since oscillators oscillate, it is worth noting that the 60/30 charts, while finding support at roughly $48.50, oscillators are in danger topping out tomorrow and running out of steam. If there is not enough strength in the QQQ tomorrow, then the daily/60/30 charts would all be in alignment for a beautiful put entry. I would not be tempted to get long at this point. However, selling a call credit spread might make sense to get time decay on your side instead of buying puts. That way, premium decays on the buyer, not you, over the weekend.

S&P 500 chart (SPX):

As for the SPX, note the indecision doji on the weekly. It will be interesting to see the COT data tomorrow to see if commercial traders increased their short positions. Lending some evidence that they may have done just that since Tuesday is the bearish divergence that has nearly formed on the daily chart. While support came in today at 1282 and formed a nice hammer following a red candle yesterday (generally bullish), the daily oscillator is rolling over, but may have one last gasp as the 60/30 oscillates up to overbought again. Then SPX would then have daily/60/30 min charts all lined up for a nice put entry just like QQQ. If that scenario happens then look for support at 1282 again. If that fails, the ascending trend line and historical support at 1272 may hold up. If not, look out below, as that would create some serious technical damage.

Just a bit more evidence that a longer term top may be near (not without some quick day trading calls though) - the VIX is at a jaw-dropping 22.94, a level not seen since October 6, 2000. By October 10th, it had zoomed up to 34. Not trying to scare you, but I would keep that factoid on the front burner.

What for tomorrow? Probably a light trading volume day with a historical penchant for upside, though mildly so. Longer-term oscillators are growing weak, and the VIX has my neck hairs on end as I mentioned in Tuesday's wrap. Day traders can take advantage of any strength with calls. But I personally will be thinking of going flat before the close tomorrow. Aggressive traders may want to put time decay to work over the long weekend (markets are closed on Monday) and perhaps sell something with a leaning toward call credits spreads or, secondarily, buy put debits.

See you at the bell.

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