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Index Wrap

More On Bunnies and Snakes, Plus Headfakes

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        05-24-2001        High      Low     Volume Advance/Decline
DJIA    11122.40 + 16.90 11173.40 11045.00 1.11 bln   1585/1461	
NASDAQ   2282.02 + 38.54  2282.19  2226.26 1.84 bln   2133/1667
S&P 100   668.30 +  3.11   668.74   661.01   totals   3718/3128
S&P 500  1293.17 +  4.12  1295.04  1281.22           54.3%/45.7%
RUS 2000  510.40 +  3.04   510.41   503.85 
DJ TRANS 2951.01 - 18.15  2969.99  2928.03 
VIX        22.94 -  1.71    24.65    22.84
Put/Call Ratio      0.59

More On Bunnies and Snakes, Plus Headfakes
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Remember the Market Wrap from Tuesday night where the hapless bunny gets eaten for trusting the snake? The analogy was one of asking why investors continue to put their trust in analysts that are pretending to offer good advice. Now, as then, they do not know where the bottom lies. They have no way of knowing any better than any of us reading or writing these words. When you hear the words from an analyst or corporate brass that we have reached the bottom, do not put your trust in that comment.

How will you know when the bottom is here? Nobody sends you an e-mail, the postman does not deliver a letter and you will not hear or see it on TV. It is a process. That process makes itself known when YOUR business picks up, when YOU see the local shoe shop expand, when YOU get a raise or promotion, or when YOUR company begins to hire again. When it happens for YOU, it happens for all of us on Main Street, and even for those on Wall Street. Only then will the analysts and brass be correct in calling the bottom. They will get their information from YOU.

And once again today, there were dueling analysts. Following SUNW's warning Tuesday night, many were convinced it was only a matter of time before ORCL warned too. In fact, USB Piper Jaffray lowered ORCL's estimate. Furthermore, there was the rumor in the pits today that ORCL would miss estimates, and that they were running into a quiet period deadline if they did not announce a shortfall today. What to do? Rumor mill to the rescue! Trader scuttlebutt later had ORCL winning a large contract that would help them make their numbers. None of this mattered - ORCL was up all day long.

Speaking of rumors, WCOM is again rumored to be in play, this time with BellSouth as the potential buyer. And yet by day's end, WCOM managed only a $0.30 gain.

In other news, Xerox got some positive strokes for a change. It seems their auditing firm absolved them of all accusation that they had constructed phony transaction numbers to trump up sales. Funny accounting, yes; fraud, no.

As for economic news, the new jobless claims came in at 419K, about 10K over consensus, which is nothing to get nervous about. But it does confirm what was feared in that the employment picture is not getting any better and will not likely stimulate a surge in consumer confidence anytime soon. To boot, the Chicago PMI (Purchasing Managers Index) came in at 38.7% vs. the consensus of 40%. That is a fractional decline over last month but nonetheless confirms that the manufacturing recession is not improving. These numbers confirm the weakness in both the consumer and business sides of the economy, but that should have come as no surprise to those witnessing the earnings warnings/downgrades over the past few days. And if you ask the market, it in fact already knew this and shrugged it off.

Even Wal-mart had to acknowledge that traffic had slowed and the buyers were trading down to cheaper priced items - not what bulls want to hear from the heart of America. International operations are helping the cause either. Did we mention yet that Novellus (NVLS) sees no improvement for Q3? UBS Warburg called it earlier today, but ABN AMRO was defending the chip sector saying the worst is over and to look for improved business going forward. Again, the experts do not know.

Perhaps there is a demand for new "Analyst-in-a-can". Just pop one open and watch it dry in the direction of the wind!

As we can see, the economic picture is not all that rosy, but analysts are looking for any shred of evidence or economic tidbit to call a bottom - as though he/she will look like a genius 6 months from now if they are right.

The general business news media too is all too happy to report today's positive results as a return to normalcy as though today marks the beginning of a new leg up, not a breather in the downleg.

The fact is that all of this is just noise. The real story is told to us in the charts, and the charts told us last night that we might expect a day of technical bounce based on short-term oscillators. Shall we take a peek?

Dow Jones Industrials (INDU) chart:

Starting on the left with the weekly chart, notice the bearish stochastic cross in overbought. On the daily, the oscillators are also pointed down while the daily candlestick shows an inverted hammer on an "inside" day (bearish). The candle itself shows an attempt at recovery, but ultimate failure - that is what the long wick is about. Yesterday's 60/30 min charts suggested that we would see an upturn today. Now look at the same charts rolling over again without even hitting overbought. That is another sign of weakness. Look for support at 10,850, which I do not think will hold - too much weakness in every time frame. Call credit spreads anyone?

NASDAQ 100 chart (NDX):

Same for the NASDAQ. In fact, poor NAZ has taken on the stigma of the venerable but old Mercedes 240 diesel - it cannot even get out of its own way. On the other hand, put players have been handed a thing of beauty. The weekly chart is rolling; the daily chart has already rolled with oscillators in descent mode. And just look at that 60/30 min setup. . .freshly rolling oscillators. Put play entries seldom look this good. Look for a test of support at 1750-1775, but ultimate failure. There is still a gap to be filled between 1700 and 1750. Real support is at 1600, and it is not out of the real of possibility to test that soon too.

S&P 500 chart (SPX):

SPX looks just like the NASDAQ. Weekly chart is rolling over. The daily chart oscillators are in steep decline while support of 1245 barely holds. But to be fair, it also the 38% retracement bracket from which we saw NDX bounce. 1240 is the next line of defense. The 60/30 oscillators have just rolled over, and again, this looks like a nice put entry opportunity that rarely shows such a pretty face. All four timeframes are pointed south. It does not get much better than that. It is conceivable that SPX trades again soon under 1200.

The VIX too has reversed course from its lows and is headed north again closing just a shade under 26 today, well up from its low of 22.84 last week. Pessimism is returning but still has a long way to go to reach extremes at 30 and over. 40 is not out of the question either given recent history.

So how about tomorrow? Unemployment rate and the NAPM index could have some effect tomorrow, but the numbers would have to be very skewed to the upside to change the current course of the charts. Inside day on the candles, failure to hold today's highs on all major indexes, oscillators from all time frames pointed down, gaps to be filled, ascending VIX, earnings warnings - all point to lower levels as the high odds trade going forward. While it is not the "perfect storm", many have used fewer negative elements for substantial profit. Many negatives have come together very nicely. As the opportunities present themselves, we intend to take advantage of them.

As Jeff Bailey notes, "trade what you see, not what you believe. See you at the bell.

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