THE BOTTOM LINE -
What kept me bullish on the blue chip stocks at recent lows was that SPX held, or rebounded from, its 200-day average, not the case for the Dow (INDU) or S&P 100 (OEX). Upside potential, assuming SPX closes above down trendline resistance currently at 1126, is to the 1140 area at the upper trading envelope line or to the prior rally highs at 1147-1150.
If the index continues to stall at the down trendline, I'm watching SPX's ability to hold key near support at 1120 as a trend benchmark.
FRIDAY'S TRADING ACTIVITY -
The NUMBERS -
The Nasdaq Composite Index (COMP) gained close to full percent and closed at 1,979, +18.4, but lost 8 points for the week. The Russell 2000 Index of small-cap stocks (RUT), another important bellwether index .9% on the day, closing at 567.75.
THE REPORTS -
The 248,000 non-farm payroll jobs were created by the U.S. economy in May. Also reported was their revision in payroll growth in April and March by being higher by 74,000 jobs, which was a significant increase. Consensus estimates were for a U.S. payroll growth of about 220,000 - so, this was a good number.
There has been a lot of politically related talk about why the recent growth in jobs has not translated into better poll numbers for the Administration - it just seems to take a number of months before these numbers translate into an experience of having people we know and hear about, finding work.
Over the past three months, three quarters of the nearly 300 industries surveyed added workers. The average workweek stayed at 33.8 hours for the fifth month in a row in May. Total hours worked in the economy increased by 0.3 percent. Average hourly pay rose 5 cents or 0.3 percent. Wages are up 2.2% in the past year.
The unemployment rate remained at 5.6%. Jobless claims fell by 6,000 to 339,000 for the week ended May 29 - expectations were for a fall (in jobless claims) to 337,000. The 4-week average of initial claims rose by 4,250 to 341,000 after falling to a 3-year low two weeks ago.
Additional economic data released by the Labor Dept. showed non- farm productivity in the U.S. revised higher to 3.8% from the previously reported 3.5% in the first quarter, slightly above a consensus forecast of around 3.7%.
The only fly in this ointment was that unit labor costs were revised to a 1.7% gain from an earlier estimate of zero percent. However, the productivity numbers are dazzling - you may have suffered in the tech stock implosion but the results of all that technology and computing power is impressive - over the past 4 quarters, the output per hour of American businesses has increased 5.5%. This number is the fastest productivity gain in 31 years.
THE TALK -
In his words to the National Economics Club in Washington: "Inflation pressures can be contained, allowing the Fed to raise interest rates at a 'measured' pace. The best indications are that some economic slack persists and that long-term inflation expectations are stable, which bolsters the inference that the economy has not entered a situation of steadily rising inflation."
Kohn went on to say that the Fed would not allow its hard-won victory over inflation to be lost through complacency. "We must preserve those gains. Experience counsels caution."
If you wonder why the tech heavy Nasdaq is languishing you can check out the Semiconductor index (SOX) chart below. News influencing this key sector came from Intel (INTC), a key Nasdaq and Dow component stock - the stock rallied slightly on the release of their mid-quarter update.
Analysts who follow Intel and the Semiconductors were positive on the report, but remain somewhat subdued on the prospects for Intel and the sector. There were some analysts who raised the target on this key bellwether stock's earnings for Q2 - others also noted that increase in revenue projections was already priced into the stock.
The Semiconductor Index (SOX) is a key bellwether sector and Intel is key bellwether stock - I don't look for too much improvement in the Nasdaq Composite (COMP) and Nas 100 (NDX) while SOX is performing as shown on the chart above relative to its key moving averages, especially its downturn/reversal after the Index got back up to its 200-day moving average.
For more on the bellwether concept, I refer you to a prior Trader's Corner article I wrote on this subject.
OTHER MARKETS -
Crude futures closed down for the day as well as for the week, under pressure from OPEC's recent plan to raise output quotas and a after a reported rise in last week's U.S. petroleum stocks. July crude futures closed at $38.49 per barrel on the New York Merc Exchange(NYMEX). This close was off 79 cents on the day and put the lead Crude contract down 3.5% on the week versus 39.88 the week before.
You can believe that stock traders are keeping a close eye on the NYMEX front-month futures contract and especially that prices back off from $40 a barrel, a key benchmark and psychological number.
MY INDEX OUTLOOKS -
S&P 500 Index (SPX) - Hourly chart:
What the chart and price recent price patterns are showing here is that the Index has gone into a sideways consolidation or rectangle pattern after breaking out to the upside above the hourly down trendline late last month.
Such a sideways consolidation most often gets "resolved" in the direction of the trend that preceded it - the trend was up, so the odds are more in favor of another up leg.
However, the overarching thing is to watch for a decisive upside or downside penetration of the lines drawn across the various highs and lows in the sideways trend.
S&P 100 Index (OEX) - Hourly chart:
The S&P 100 or OEX has been trading in what has become a well- defined channel since mid-May. Key near resistance implied by the top end of this channel comes in around 552 currently and key trendline support is down in the 540 area.
Based on top and low end of the hourly channel, I favor put purchases at 550-551 (exit on an hourly/close above 552) and buying OEX calls in the 540 area (exit on a close below 539).
The most striking thing to me about any of the technical indicators is that, while prices have trended higher, the RSI (length = 21) has made two lower highs. This type of bearish price/RSI divergence is pretty common where an Index (or stock) is susceptible to a reversal or, in this case, a pullback. Stay tuned on this!
Dow Industrials (INDU) Daily:
The Dow 30 (INDU) is approaching key resistance at its down trendline which intersects around 10,360 currently. I peg resistance at 10,360-10,400. Given that INDU is approaching an overbought condition, it seems doubtful to me that the Dow is going to achieve an upside penetration of this resistance and manage, certainly on a closing basis, to get above 10,400.
Support can be anticipated at the 200-day moving average, currently at 10,257 and rising slowly. 10,060 was where the Dow had some support, then this same area later defining resistance for a time - now, it may offer technical support again.
[NOTE the prior instance where resistance (red down arrow) became support (green up arrow) or an area of buying interest, quite a bit later on at 9850.]
Nasdaq Composite (COMP) Index - Daily:
I made mention in my beginning commentary that the Nasdaq Composite (COMP) remains in a downtrend technically until there is higher (up) swing high, thereby breaking the pattern of lower rally peaks. A close above 2000 is needed to achieve a bullish upside penetration of the downtrend channel as outlined below.
Support is apparent in the 1875-1900 area. While the COMP is now trading back above its 200-day moving average, a minor bullish positive, I place more weight on the aforementioned downtrend pattern to give the dominant view.
Only a close over 2000 and the ability to hold this area on subsequent pullbacks would change the chart picture to a bullish one in my estimation. Then we would have to see if the Index could rally above its prior highs in the 2050 and 2075 areas.
Nasdaq 100 (NDX) Index - Daily & Hourly:
I made a measurement or target for the recent rally based on the one side ("A") of the first outlined triangle on the hourly chart below, as being equal to itself or to the height of "B". A nifty measuring trick that works sometimes quite well.
Not that the index can't/won't go still higher after this kind of "measured move" objective is achieved, but the fact that it has been going sideways since achieving this objective, while the RSI is trending down, is of interest - and, suggests that the next move will most likely be a downswing for the Composite and the Nas 100 (NDX).
My most recent Trader's Corner article covered in some more detail "Triangles" and price objectives implied by triangle breakouts - see
Nasdaq 100 tracking Stock Daily chart (AMEX:QQQ:)
I would rather be short the stock than long as it comes again up to its down trendline, which intersects in the 36.50 area currently. Above the trendline, the next resistance has to be assumed to be at the prior highs in the 37.50 area.
Support is apparent down in the 34 - 34.25 area. I don't see anything ahead that will take QQQ either below 34 or above 37.50- 38 for this month.
Good Trading Success!