A funny thing happened on the way to the PPI report...
A rally broke out! The markets tried to rally on the open but the selling was not over. We quickly slid back into the red and dropped below the critical 10200 level. Next support is at 10100 and traders everywhere started holding their breath. The main catalyst for the morning drop was yet another economic report showing a larger increase than expected. The retail sales, core rate, came in at a whopping +.6% and the bond markets went into shock at the open.
As you can see by the chart we had a mini-capitulation event as many leaders quickly dropped to new lows propelling the Dow back to levels not seen since the September lows. We did not make it to the 10087 again but came within 50 points to 10133. That brought several technical events into play. At 10133 we were right at the magic -10% correction off the years highs. This is a normal rally point as bargain hunters jump in on the assumption that the "correction" is over. At the sound of the 10% gun the buyers started coming back into the market. The rally however, was short lived. We quickly climbed back to the magic 10300 level which we have had trouble penetrating in the past. After several attempts to move higher, fear of the dark (and Greenspan) gave new life to the sellers and we eased off again.
The second less technical buy signal was the expected relief rally syndrome. After a -600 point intraday decline since Monday's high, the overbought conditions had quickly reverted to oversold. Itchy mouse fingers can only stand so much of a drop in their favorite stocks before greed overcomes caution and speculators trying to catch a falling knife jump into action.
The following chart shows the third technical which was the retest of previous support/lows. In the last month we have bounced off the 10200 level five times with only one major intraday penetration. Therefore anything under 10200 becomes buyable for the aggressive investor. Same song, second verse with the Nasdaq and 2775. That level served as both support and resistance several times over the last month. Absent any external influences the markets would probably have traded up from here. The key word here was "absent." Sorry!
After the close we had some very good earnings announced by SUNW which would have helped the markets tomorrow but they will be overshadowed by two things. The PPI report tomorrow will be the key economic report for the week but after the Greenspan speech tonight it may be a non-event. Estimates are for an increase in the core rate of inflation by +.05% but rumors surfaced all day that it may be much stronger. A strong PPI on top of the speech will simply grease the skids to a sub 10,000 Dow.
Lets get to it. After the close tonight Alan Greenspan did what he is famous for and Greenspammed us again. Speaking to a group on Measuring Financial Risks in the 21st Century Mr G. warned that financial institutions about an over reliance on stock values. He also said banks and financial institutions need to do more to prepare for a sharp decline in stock prices. Now, he never said "a decline is imminent" but he kept using terms like "speculative bubble", "eventual selling panic", etc, etc, etc. He did what he does best. Speak in $2 words and imply impending doom without actually forecasting it. Was anybody listening? As evidenced by the S&P futures the entire world was sitting with their finger on the Globex trigger. Futures went from -.80 at the release of the report to -18.00 and dropping fast 30min later. Turn out the lights, the party is over!
I could go on and on about the earnings events of the day and the mergers and buyouts but at this point it is immaterial. Short of a negative PPI in the morning the die appear cast. It is totally possible that the spin doctors will convince many traders by morning that this is the same old tired speech with just a few more adjectives and the carnage might not be as bad as expected. Just remember that the Intel missed earnings only tanked the futures less than 10.00 points. Only the master of disaster can knock off almost -20 points with complex sentence structure.
Here is the next challenge. The Dow is in a negative formation with little or no chance of breaking out. The down trending line on the top is projected to provide upward resistance ending around 9900 by mid November. The bottom support line, depending on where you count the bottom on Sept 28th, puts lower resistance at 9500 to 9700 in the same time frame. We all know that a break under 10000, which could happen in the morning, or worse a close under 10000, which could also happen tomorrow, would accelerate the decline. It would take a major rally to break out of this channel on the upside and I can't think of any positive event in the near future that would spark such a rally.
Now before you start digging for the sleeping pills and Maalox I would remind you that it is always darkest before the dawn. There are many hours of darkness before morning and you know how we traders are. The optimists are already burning up the modem lines looking at chart after chart and preparing for another "buying opportunity."
They might get a real buying opportunity if the PPI is stronger than expected. The bond yields today touched 6.33% and some analysts are now calling for a 6.5% yield soon. After hovering around 6% for six months and causing much aggravation in the stock market the bonds have hit lows not seen since Oct-97. If bonds continue to rocket to over 6.5% then the bull market as we know it could be hamburger.
Even though the major indexes are only down 9% from their highs the broader markets are in a full bear correction. The Dow is down -9.8% from its high, Transports -22.8%, S&P -9.3%, Nasdaq -3.7% (since Monday), and the Russell-2000 -9.8%. These numbers are masking the fact that 59% of the S&P stocks are below their Jan 1st levels. 70% of the NYSE are below their 200DMA and 30% of the Dow are below the January levels. The advance/decline line hit a three year low this week and even today, with the Dow and Nasdaq finishing positive, was negative with only four advancers for every six decliners. Did you realize the S&P closed negative for the day? This is a very negative environment and we may find every relief rally harder to maintain as the year draws to a close.
The game plan for tomorrow? Sleep in. Be skeptical of any rally that does not close above 10300 on good volume until the climate changes. Hopefully you did not buy into the relief rally today and you are still in puts or cash. Did you know there are no stop losses to worry about on cash?
I just checked. The futures have rebounded to only -13.00. See, it is not as bad as you thought. Only -13! What was I worried about anyway?
New tag line tonight, not the usual "sell too soon". Tonight's admonition is "don't buy too soon!"