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Index Wrap

Giving ground grudgingly

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The market is still in a corrective mode - the indices, especially the S&P related ones are giving ground grudgingly, as the market awaits a clearer earnings picture. The rally on Friday looked like it could have been profit taking ahead of a 3-day trading hiatus, what with Monday being Martin Luther King Day.

While the S&P 500 (SPX) could hold recent, and prior, support in the 1180 area, it's vulnerable to a decline to better technical support around 1160; the S&P 100 (OEX) might hold 558-560, but its best support looks to be 548-550; the Dow 30 (INDU) may not find a lot of buying interest before 10,425 - it's the weakest here.

The Nasdaq presents a clearer chart picture for a continued decline. The Nas 100 (NDX) is finding some minor support in the 1550 area, but has better technical support around 1525.

None of the indexes are fully oversold yet, but INDU is getting closer. Sentiment has yet to have one day of a fully bullish reading, so traders and investors are probably too bullish/optimistic for a rally to be sustained - hey, that's the theory of CONTRARY opinion.

Bottom line, a sideways to lower drift most likely in the Nasdaq, probable in the S&P and Dow indices.

The S&P 500 (SPX) was up 7 points to close at 1,184.5 but off a tenth of percent only for the week. The Dow 30 (INDU) was higher by 52 points to 10,558 and off four tenths of percent for the week.

The Nasdaq Composite (COMP)was up a substantial 17.3 points (+0.8%) to close at 2,087.9.

The bullishness of the biggest monthly drop in U.S. wholesale prices in close to two years was partly offset by a renewed jump in oil prices and the release of a record U.S. trade deficit for November.

Analysts interviewed on my favorite talking heads market channel, seemed to point mostly to good economic and earnings news over the week just ended and wondered why the market was not climbing - they may not understand that the rally into year end was anticipating quite positive news - more than we got actually.

January often sees some weakness if the market was strong toward the year-end. Stocks are also adjusting to a less strong economic and earnings outlook for the first half of the coming year. Could a dose of reality have set in on the Street of Dreams? - I think yes.

For the week, blue chips were a bit "blue" on some earnings disappointments from Alcoa, General Motors and Verizon, while the Nasdaq market was steady, helped by better than anticipated results from Intel and Apple Computer. Not that there was not some earnings disappointments during the week from tech-land also; e.g., AMD, SUNW and CREE. A still very spotty recovery going on in technology companies.

Setting a positive tone for stocks was the Labor Department's report that U.S. wholesale prices (the Producer Price Index, PPI) 0.7% in December. This was the largest monthly decline in wholesale prices since April 2003 and substantially more than expected. Excluding volatile food and energy costs, December's core PPI rose 0.1 percent.

In addition to the bullish PPI report, the Federal Reserve said earlier in Friday's session that the output of U.S. factories, mines and utilities rose a 0.8% in December, which was also better than expected.

The capacity utilization rate rose to 79.2 percent, the highest in four years. Economists had been expecting 0.4 percent growth in December output along with a utilization rate of 78.8 percent, up a bit only from a revised 78.7 percent in November.

Also, the Commerce Department said U.S. business inventories jumped 1% in November, more than double the 0.4 percent gain in sales, a not so good ratio. A build up of inventories is not what investors want to see in the months ahead.

In bond trading, the 10-year Treasury note was off 13/32 to 100 9/32, which raised its yield to 4.22%

Meanwhile, the U.S. dollar was up 0.9% against the euro at $1.3093 and up 0.4% against the Yen, which finished New York trading at 101.99.

February crude contract closed up 26 cents to $48.30 a barrel on the New York Mercantile Exchange - when are we going to see this black gold head down under $40 again!? It seems to go more easily to 50, then to 40. A worrisome trend!!

The U.S. equities markets will be closed Monday, observing the Martin Luther King Jr. birthday holiday.

S&P 500 Index (SPX) - Daily chart:

There were some bearish indicators and divergences prior to this recent decline, but just from the chart alone, the S&P 500 (SPX) as well as other major indices had key (downside) reversals at the recent top - this is when, typically, after a trend is getting far along, there is a higher high (enough to notice), followed by a close under the prior low or prior 2-days low in the case of a 2-day reversal. This pattern often signals at least a good-sized correction. I wrote about this in my last week's Trader's Corner, my most recent attempt to make some sense out of technical analysis.

Anyway, noting the key reversal and more important action on it could have put you into puts above 1200 and like levels in OEX and NDX. Unfortunately, key reversals don't say anything about how low she will go. That's the next attempted task!

SPX broke its minor up trendline, which should now define significant resistance around 1200. A close over 1200 would cause me to exit those puts I mentioned. Although, if the close is just over (1200) I might give it another day, or morning, to see if there is much or any upside follow through.

There's minor support in the 1180 - I don't think this would be a "final" bottom of this current correction as this would consist of only the shallowest of corrections. A re-test of prior highs, in the 1160 to see if significant buying interest shows up - resistance, once broken, tends to "become" support. Long time followers of this column probably would like to have a quarter or so for every time they've heard that from me!

Of course, just because 1160 is probably best support doesn't mean it will get all the way there. More major support I pet at 1140.

In the broken record department - SPX is nearing an oversold extreme but it may take some time yet to get there, if it does. Note the tendency for second oversold readings in the RSI, after the first one. The market wouldn't want to make it easy for you. Anyway the trendline is developing whereby another decline to the 1140 area would be at this potential bullish intersection.

S&P 100 Index (OEX) - Daily chart:

The 570 area is key resistance - this was the "breakdown" point so to speak. A close above 570, at the 21-day moving average, would be bullish. Look for this key trading average to act as resistance however.

The 558-560 area, at the low end of the consolidation trading range of November, is the key near technical support. More major support begins in the 550 area, extending to around 548, at two prior tops. 557 is the Fibonacci 38% retracement and 550 is a 50% retracement of the Oct - Dec advance. When a retracement is only 38%, or less, this is a still-strong uptrend.

You can see that my "sentiment" indicator went up last week in the face of a sideways to lower trend - hey, hooray for the bulls. They see this recent decline as a buying opportunity. I don't trust this view overly much, rather will be anticipating a market that socks it to the bulls another time and turns enough traders bearish and into puts to pull my indicator down closer to a bullish reading.

At a minimum, this kind of pattern on my Call to Put indicator, suggests that the correction has more to go. It may not be real deep, but the length or time spent chopping around, could stretch out.

Dow 30 Average (INDU) - Daily:

The 10600 area in the Dow 30 (INDU) average is immediate overhead resistance, represented by the down trendline and around the 50- day moving average. Next resistance begins at 10650, extending to 10680.

10425 is support implied by the low end of the consolidation prior to the last sky shoot and also by the 38% retracement. 10300 is a more major support - again, as suggested by a retracement - 50% in this case - and by the 200-day moving average.

The 200-day average is a benchmark mostly. Trading under the 200-day puts money managers into a bit more nervous mode and holding above it is something they will tend to find encouraging - unless they're short! But, most of course are only ever long stock.

I think INDU is headed still lower - I don't see real support, only temporary support, at 10500.

The Dow is getting down toward an oversold reading on the longer range stochastic (length = 21, measuring 21-days), but the first time there is not necessarily the last.

Nasdaq Composite (COMP) Index - Daily chart:

The chart pattern continues bearish as the Nasdaq Composite (COMP) closed this past week under its up trendline. This same trendline suggests resistance if the index rebounds back to the 2100 area. More major resistance begins in the area of the prior highs before this most recent one, at 2150. Absent a bullish close back above 2100-2105 resistance, I think the Composite is headed lower. Targets are tough, but mine are to the 2015-2025 area; then, if exceeded, eventually to around 1965.

The Composite often seems to resist getting fully oversold, which was common last year. The overbought/oversold studies are the least useful in the Composite I suppose, but I think COMP will get more "oversold" or lower still on the Relative Strength Index (RSI), before this current correction is over.

Nasdaq 100 (NDX) Index - Daily and Hourly:

I said last week that the Nasdaq 100 (NDX) tends to offer some clearer chart patterns than the Composite and would note that prices are coming down towards a well-defined up trendline, implying potential support in the 1575 area. It may well get pierced but it presents the pattern to watch if it does not. I also peg support at 1510, representing a 38% retracement of the August to December advance.

With another index, I might be tempted to think that we could see a lengthily period where NDX trades in a 1500-1600 range, but, being a more volatile and speculative group of stocks, I wouldn't bet on the length of time that this index gets stuck in a trading range. I would say that 1500 is my maximum downside objective currently and 1600 is the max on the upside for a while.

Holding above the prior high is a bullish sign that is worth commenting on. The longer it does it the more chance for a shallow correction only. Stay tuned - it's a short week ahead but it could resolve this chart.

Nasdaq 100 tracking Stock (QQQ) Daily chart:

The Nasdaq tracking stock presents another slightly different pattern in that here, the trendline was broken and should offer resistance on a rebound to the 39 area. The Q's chart here gets me a little more bearish on the Nasdaq index itself - unless, the stock can get back above 39 and stay there. Absent that, 37 looks a possible downside objective.

Volume jumped on the decline indicating heavy liquidation and shorting. If volume was a confirming bullish indicator, volume should have fallen off on the break below 39. Volume tipped it's hand in the very low volume on the last phase of the rally - bearish, big time - at least predicting a break of some degree.

Good Trading Success!

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