THE BOTTOM LINE -
The last spurt up in stocks appeared to be money managers following the trend, as they always do and have to - that, and some year end money flowing into stocks as real estate has cooled off and stocks got cheaper in non-dollar terms. Moderate fixed- income and low money market rates haven't been a competition either. This backdrop may not mean much to traders anyway. We could get a rebound anytime in here but it now looks like it would be an opportunity to take out or add to put positions.
THE WEEK'S CLOSING NUMBERS -
The Nasdaq Composite Index (COMP) fell slightly on Friday, by 1.39 points, to close at 2,088.6. COMP fell nearly 4% on the week, the weakest of the major indices - but what had led on the way up, led on the way down.
FRIDAY'S TRADING -
U.S. non-farm payrolls grew a seasonally adjusted 157,000 and the unemployment rate remained steady at 5.4%, per the release by the U.S. Labor Department on Friday.
Some talk was for a payroll increase that would come out closer to 200,00. The released report however seemed to bring back many or most market participants that there was no level of weakness showing that would stem the Fed from continuing to ratchet up interest rates and help the weak dollar.
And with upward revisions of 34,000 to prior months, payroll growth was not far off consensus expectations of 178,000. For all of 2004, 2.23 million jobs were added, the best showing since 1999.
EARNINGS SEASON -
It's starting gang!
Alcoa (AA) is due to report on Monday - also, tech biggies Intel (INTC), Apple (AAPL) and Sun (SUNW).
Thomson indicates expected Q4 earnings growth for the S&P 500 stands at 15.3%, below the 15.5 percent estimate at the start of the quarter. This growth rate is weaker than the 16.8% of Q3 and Well under the 28.3% of Q4 of the prior year, 2003.
A dollar rally was set off last week by talk by Treasury Secretary John Snow on his backing a stronger greenback. The euro fell to as low as $1.30 in morning trade, close to its November low. It then finished New York trade at $1.3045, off over a percent from its high on Thursday.
Investors are realizing that:
Factor this in with an expectation that consumer spending will probably slow this year. There will be a point when enough people say, hey I got enough stuff and maybe I should pay off some of my debt.
All in all, the market is adjusting its expectations and you may wonder why it took as long as it did. But, when the market is running, there is not much thought about whether the move is racing ahead of the fundamentals or future fundamentals or what happens next month, next quarter!
MY INDEX OUTLOOKS -
I mentioned the rising wedge pattern before and went into the technical aspects of this pattern and what it tends to predict. No point in highlighting this again - if interested, see my most recent trader's corner.
This article also has an explanation of why bearish divergences between price action and the Relative Strength Index often also predict eventual sharp reversals.
I think that the correction will go on for some time yet - the key area on the downside in the S&P 500 (SPX), assuming it's reached or breached, is the old highs around 1160. If this index is going to remain technically strong, it ought to hold above its prior peak - resistance, once broken, "becomes" new support or should if it's a solid bull trend. The 1160 area becomes a downside target or objective and I would put puts on rallies back to near resistance in the 1200 area.
Even more significant SPX resistance is around 1220, more major support should come into play in the 1140 area, at the old resistance or down trendline and at the 200-day moving average.
SPX is heading toward an oversold reading but can fall some distance still before we can say its at any kind of an extreme.
S&P 100 Index (OEX) - Daily chart:
The S&P 100 (OEX) has turned near-term bearish in its pattern as prices fell under the 21-day moving average and failed to stay above the hold highs. However, OEX has not pierced its minor uptrend line at 562 and the index may find support in this area, at least for a bounce. Near resistance looks like 569-571 currently on up to around 575.
I suggest buying puts on rallies. Downside potential next looks to be to 555. More major support ought to come in at 547-548, at the prior double top - again, (prior) resistance will tend to become support. Key resistance is 579-580, with a close over 580 needed to resume a bullish chart.
The other thing to watch here is whether put activity, relative to calls, continues to grow. Traders got more bearish in the past week. If this continues, it may reach the extremes that tends to precede a rebound.
Use of the hourly chart highlights an uptrend channel that OEX has been in for some time - stay tuned on whether it stays in it. The S&P 100 is at the low end of its channel. The index is either building a small base ahead of a rebound or this recent sideways hourly trend is a pause before another downswing.
Hard to tell which direction for the next short-term move right now, but OEX is at a key near-term test at the low end of its hourly uptrend channel.
S&P 100 Index (OEX) - Hourly chart:
Dow 30 Average (INDU) - Daily:
The rally failure and reversal to below the prior high in the Dow 30 (INDU) is significant. Before this it looked like the market was on to something not apparent in the current known fundamentals - like maybe job creation was really going to finally accelerate or some such development.
10600 at the top of the last consolidation or trading range is near support, with more significant support around 10425, at the 38% retracement mark and the low end of the cluster of previous lows. The 10,300 area, if seen, would represent a 50% retracement of the October-December advance. A technically strong rally will tend not to give back more than 38% of its prior advance - a very strong trend may see only a 25% retracement. Stay tuned on that!
10,700 is near resistance, on up to the old high around 10,750. As with the S&P, I favor buying puts and other bearish option strategies, particularly as INDU was lagging the S&P - it may now be the weaker in a correction phase.
As I said last week, the 21-day stochastic doesn't often "hang" up in an overbought area for as long as it did. I would just repeat that the long period in an extreme will be unlikely to have happened ahead of short correction. I will be reluctant to call the end of a correction before we see this indicator in oversold territory again.
Nasdaq Composite (COMP) Index - Daily chart:
The Nasdaq Composite (COMP) is falling toward a key area, representing its longer range up trend. So, my green support arrow is at 2080, the intersection of this trendline on the line (close only) chart below -
A close under 2080 would suggest further downside potential to as low as back to the 2000 area eventually. I peg COMP's key resistance at around 2145 at its 21-day moving average, although I think selling interest will start or pick up first around 2130. The 21-day average is a good one for traders to use - piercing it suggests a loss of upside momentum and a subsequent rebound to it, will likely act as resistance.
The shorter 14-day RSI is getting nearer to a typical oversold reading. I suspect we'll see a rally from at or near the up trendline, then a further fall later - and, which would then put COMP in a more oversold extreme and for a longer period than a day or two.
Nasdaq 100 (NDX) Index - Daily and Hourly:
As usual the Nasdaq 100 (NDX) present a telling chart picture. This index, a favorite of traders of course, tends to often be quite predictable from its technicals. NDX made an exact double top and then fell below its 21-day average - the next day's rebound to that same average was the predictable place to go long puts.
That is, if puts were not bought when the rally failed in the same top area as before. I like this kind of speculation - to "assume" a double top may be forming, because the risk can be kept low. If prices go even a very little distance above the first top, then exit. Downside potential is often very large, relative to this risk. Especially when the other signs are there; e.g., an overbought market, a long run up, a declining RSI, etc.
By the end of the week past, the index reached its prior (12- month) high where some buying interest was coming in. If support in the 1550 area gives way, a more key support around 1510 is suggested by a well-defined up trendline highlighted on the chart below and also represents a Fibonacci 38% retracement of the August-December rally.
If there was rebound to the 1600 area, this is an area to buy NDX puts in my estimation, looking for an eventual decline to the 1500 area - if this area is reached first I suggest taking profits on at least half of any puts held already. A couple of closes over 1600 would turn the chart potentially bullish again and would be a put stop or exit point for me.
Nasdaq 100 tracking Stock (QQQ) Daily chart:
As with the Nasdaq Index itself, we're at a key near-term point to determine a rebound potential. Unlike the NDX, QQQ is already at its up trendline. If support implied by this trendline is penetrated, especially on a closing basis, an objective to around 36.50 is established. A close over 39.00 is needed to regain its bullish footing, but this would not be surprising and may be short-lived.
I favor selling shorting rallies back up the 40-40.25 area, figuring the stock has made at least a minor top and the Q's will have lower to go, at least to around 36.50-36.75.
Good Trading Success!