THE BOTTOM LINE -
The Nasdaq 100 (NDX) looks vulnerable to falling under key support at 1450 and the Composite (COMPX) under 2000-2010. SPX support around 1120 and Dow 10,400 seem more likely to hold - there is however, a possible double top formed in the S&P 100 (OEX) and 500 (SPX). The potential for further declines looks greater than for a move to new highs.
FRIDAY'S TRADING ACTIVITY -
ImClone Systems was in the spotlight Friday, after the FDA approved its drug for the treatment of colon cancer. Shares of the stock (IMCL) were up sharply, ending at 43.79, a gain of nearly 40%. This after the stock was off sharply on Thursday, as the market reacted to a rumor of an FDA turndown for this drug.
Ironically of course, this is the company that saw a sharp drop in their stock last year after it was known that the Food and Drug Administration indicted inadequate testing of IMCL's Erbitux drug - inside knowledge of this led to selling of a block of stock by the company founder and an alleged tip off to Martha Stewart. I doubt Martha is smiling about the irony of this.
Dell was the even bigger stock story - the corp. of the hour - as their earnings came in better than expected, giving a boost to the market early. Dell's (DELL) Q4 revenues were up 8% and their earnings better than expected because of it. DELL finished at 34.55, up nearly 3%. Since we know that our economic recovery hangs on the consumer and the market fears any possible slow down in the longtime consumer spending strength is running up a lot of consumer debt, the only area that can take up the slack (of a consumer retrenchment) is business spending. And spending on computers and the like is a potential biggie.
When the University of Michigan sentiment numbers showed a softening as reported during the session on Friday it was met by immediate selling. The U of M index fell sharply, to 93.1 from 103.8 in January, reversing most of the prior month's big increase in reported optimism. Consumers indicated that they were much more pessimistic about job growth in the future than the month before.
The backdrop to this period was the DEMS bashing of the Administration's record in this area. Meanwhile, this week, the President was promising that there will be millions of new jobs created this year. Non-farm payroll growth is going to have to really ramp up from the 100,000 - 150,000 range to meet this expectation. This looks to be the number to watch in the future, bar none. So, says Chairman Greenspan too. Not just from my lowly perch on the scene here.
Can Dell Computer and other manufacturers increase their output without taking on new workers? - up to a point they can. This has been the rub, the cleverness shown by business in getting more output without hiring - and, gasp, having to pay those health care benefits and all the rest. There is plenty to give the market pause here for the next few weeks and months, mostly on jobs and including the political - the threat of losing a very business friendly Administration.
Another fly in the ointment is trade and the weakness of the dollar. The Euro is now getting close to $1.30, which would be an all-time high for Euroland. I don't think the market cares that much about this dollar weakness. The Administration doesn't give it much play in what they are staying up nights worrying about. But, there is some awareness that our trade deficits can't be out of sight and also be a good underpinning for stocks and a sustained advance in U.S. Equities. Of course, in Euro terms for example, stocks are pretty cheap.
A major problem with our record spending on imports comes if prices of foreign goods start running up. On Friday the Labor Dept. reported the biggest jump in import prices in nearly a year.
The deficit numbers themselves are staggering - the Commerce Dept. reported that the U.S. Trade deficit widened to $42.5 billion in December, well above the expectation for less than 40 billion.
What's the deficit mean to us, to the market? Probably not much, IF the job growth picks up and we continue to get some pick up in earnings, especially tech. While these trends get clearer in the next few weeks, the trend can get choppy as the indices do some backing and filling - and, the technical picture suggests an overbought market as mentioned.
OTHER MARKETS -
No wonder the stock market is looking attractive, as annual equities appreciation is looking more like it's back for now to at least the long-term historical average of 10%.
There was selling in the Euro in the early going in New York, and it fell a half percent against the dollar to close at 1.2744 - this after getting back to its all-time high around 1.29. Hey, those traders like to take profits too! The greenback was up against the yen, to close at 105.47.
MY INDEX OUTLOOKS -
S&P 500 Index (SPX) - Daily & Weekly charts:
THE BIGGER PICTURE -
(By the way, e-mail to me with questions related to such technical stuff - technical analysis - are used for possible answer in my Trader's Corner article)
200-day moving average
Oscillator type (technical) Indicators -
Some other technical patterns suggesting we may not get much higher soon is the possible double top and that the last high was on less "relative strength" - that is, the daily Relative Strength Index (RSI - upper chart) was at a lower level then it's prior peak, contrary to what was happening with prices.
S&P 100 Index (OEX) - Daily charts:
The double top that has formed so far, was what I anticipated for this Index based on the bearish/price RSI divergence that had developed, the aforementioned overbought situation and my sentiment indicator - equities calls to puts daily volume ratio that got pretty extreme at the first price peak. See this on the left hand side.
I look would for further weakness now if there is one or, better, a couple of consecutive closes below the 21-day moving average as seen on the right hand chart. The OEX's 21-day average is at 565 currently. The Indexes tend to trade within envelope lines or percentages above or below a moving average.
When there is second drive to a top that lacks follow through AND the index then retreats to below the average (center line), there is usually a further drop - sometimes back to the lower envelope line. However, I always also look at the trend - in a strong uptrend, the surprises, and extreme moves, tend to come on the upside.
OEX support looks to be in the 557 area. Given the double top, and the line of resistance above, I expect a retreat to lower support. If so, a drop to 560 or below, would break the steep up trendline. If in puts at 570 and above per my last commentary, I suggest staying put - no PUN intended. However, a new closing high would be my stop out/exit/liquidation/get-me-out trigger.
OEX - Hourly:
ON THE OTHER HAND -
Taking a closer view of things, as in the hourly chart below, I've noted before the good tendency for reversals when both the 5 and 21-hour stochastics BOTH get to extremes - as noted by use of the arrows on the lower portion of the chart.
There is also a bit different support (up) trendline that comes by use of the hourly chart - suggesting support just above 560.
After the long weekend, based on the two stochastic models and especially if there is a further dip to the trendline but now below it, look for a 1-2 day rebound.
The key factor will be if there is a new high made above 573. If there is a new daily closing high, a double top is no longer suggested. Stay tuned. If I wanted to hold positions, I would be in some puts, but looking to buy calls a bit lower (e.g., to 562) looking for a bounce in the short-term and trading the 1-3 day price swings.
Nasdaq Composite Index (COMPX) - Daily & Hourly:
The Composite (COMPX) turned lower even below the resistance I was anticipating in the 2100 area. Showing less strength than the S&P Indexes, it turned after forming an hourly down trendline drawn from the recent top.
The small rebound that was then traced out off the Friday low, has the appearance of a bear flag or a pause, maybe about midway, in a downswing. A second downswing should carry back to around 2010.
As with the S&P, the hourly oversold, suggests there may be some rally attempt first. Key resistance comes into play at the hourly down trendline currently intersecting around 2080. Absent a close above this level, the short-term trend is down.
Nasdaq 100 (NDX) - Hourly:
The hourly NDX chart is another way of looking at the same pattern as described above. Downside potential is to 1460 next.
QQQ - Daily & Hourly:
The Q's are in danger of breaking down below its uptrend channel that it has traced out since the August low - see the daily chart below. Meanwhile the shorter-term trend as shown in the hourly chart at on the upper chart is down. Downside potential is the lower trend channel boundary, currently intersecting around 37.7 at the green up arrow shown.
If the lower trendline on the daily chart is not penetrated, especially on a closing basis, the up trend remains intact. The volume trend is still bullish - QQQ is not at an overbought extreme. More market action is needed to resolve this pattern.
This resolution should be soon based on last week's minor reversal pattern of the move to a new (weekly) high followed by a new low for the week - but the lower trendline break has yet to come. Stay tuned.
Good Trading Success!