Stuck In A Moment
"And [we] can't get out of it," said my favorite rock-and-roll band, U2. I think the Irish lads' lyrics pretty well sum up the action in the broader markets Monday. The major market averages were stuck in a trading range for the better part of the session as the battle between the underlying fundamentals and technical levels paused.
Volume on both the NYSE and the Nasdaq was light, very light. Roughly 930 million shares traded on the NYSE and a mere 1.7 billion shares exchanged on the Nasdaq. Moreover, the intraday ranges of the Dow Jones Industrial Average (INDU) and the Nasdaq Composite (COMPX) were tight, very tight. The COMPX reached an intraday peak of 2215, but fell only as low as 2170 - a 45 point range! The INDU traded in a 100 point range, which was a far cry from the 300 point swings we've been witnessing recently. Obviously, the light volume and tight trading ranges are very indicative of indecision on the part of market participants and a reluctance to commit.
Now, there are two takeaways from the recent consolidation. The first is that the major market averages, as measured by the INDU, COMPX and S&P 500 (SPX), are merely biding time at current levels before the next leg higher. And the longer the averages base, the stronger the ensuing rally once the catalyst is presented. The second, and less friendly takeaway, is that the averages are growing top-heavy and ready to rollover, as key resistance levels lie just above each of the three indices.
Along with the BIG resistance levels I'll address below, the market is waiting for additional confirmation on the economic and corporate profit fronts. The fast-approaching May 15th FOMC meeting is obviously of concern to the market, and participants are still debating whether or not the Fed will cut by another 50 basis points or only 25. Two key economic releases later this week are likely to impact the Fed's decision, and may strengthen the case for another 50 basis point cut following the terrible jobs report last Friday. The Labor Department is scheduled to release weekly jobless claims Thursday morning, with estimates calling for a number north of 400,000. In addition, retail sales for April are slated for release Friday morning. Consensus estimates call for a mere 0.2 percent rise, dampened by a slump in auto sales. The April producer price index (PPI) will be released Friday morning in conjunction with retail sales, but should prove to be more of a non-event. What we'll want to focus on are the jobless claims and sales numbers and, should they come in worse-than- expected, the Fed would be more inclined to cut by 50 basis points.
On the corporate profit front, all tech eyes will turn to the Cisco Systems (NASDAQ:CSCO) earnings report Tuesday evening. Following the networking giant's earnings warning in early April, consensus estimates were drastically slashed and currently call for the firm to earn 2 cents per share. For the first time I can recall, Wall Street is somewhat confused over Cisco's quarter. The high-end of estimates are calling for the firm to earn 4 cents per share, while the low- end has Cisco pegged to breakeven. In short, there is room for Cisco to surprise in either direction. Along with the actual number reported, we'll want to listen closely to the guidance. Shares of Cisco have rallied from the $13 level up to $20 in the space of a month. And I know that there was a bullish note put out last week from a Morgan Stanley analyst, but I think a lot of Cisco's recent advance was predicated upon an improvement in the networking business. So, we'll want to hear from Chambers & Co. that the telecom business has, indeed, improved or else the stock is at risk for a pullback, which will carry the COMPX lower. However, the bullish analyst note last week and its bullish reception by the market tells me that participants are just waiting to jump all over Cisco and take it along with the COPMX higher.
But if the COMPX is going to move substantially higher, it will need to clear some pretty heavy congestion just above current levels. On the chart below, you'll note the retracement bracket I've placed over the COMPX's move from its relative high in January at 2892 down to its relative low in early April near 1619. The 50% retracement of that move lies at the 2250 level, and shortly thereafter lies 2300. If the COMPX can clear this 50 point range of resistance, I honestly believe it will work its way up to 2600 or 2700. The only question is whether or not the COMPX clears that range on its current push higher (It could do it with help from Cisco). If it doesn't, a rollover at current levels and subsequent break below 2100 will set up some good shorts. In the meantime, I think the most prudent strategy is to wait for a break in either direction and trade accordingly.
For the SPX, I've also laid a retracement bracket over its recent downside forecast, and readers will note a very interesting development similar to that on the COMPX chart. Like the COMPX, the SPX is also running into resistance at the key 61.8% retracement. However, readers will also notice that the SPX has formed an inverse head-and-shoulders (HNS), which is suggesting it wants to work higher, much higher! Interestingly, the shoulders of the SPX H&S are reinforced by the 50% retracement...very interesting. Here again, like the COMPX, I think the most prudent approach is to wait for a break either above or below key levels and trade accordingly in the SPX names. I'd put resistance at roughly 1265 - 1280 range and support around 1230.
As far as the INDU is concerned, we're ALL obviously watching the 11,000 level and waiting, and waiting for the breakout. The thought of another 50 basis point cut by Greenspan, reinforced by this week's economic data, might be the catalyst that finally pushes the INDU over 11,000. But like the COMPX and SPX, if the INDU fails to advance above 11,000, it's likely to rollover, where a breakdown below support might offer traders profits from the short side. Of course, I'm sure that many market participants are shorting the INDU names at current levels, betting that the blue chip index doesn't make it above the elusive 11,000 on this push.
The thought I'd like to reinforce, and the reason for my U2 inspired title, is that the markets are stuck in a trading range and it's awful difficult to find conviction, or an edge for that matter, in the current tape. I think the best bet is to wait for a catalyst to emerge, either bearish or bullish, monitor the technical levels and trade accordingly. As much as I want to be overly bullish, I don't think the major indices will push through the above discussed resistance levels on this leg higher. We recently witnessed a parabolic move higher, especially in the COMPX, and those types of moves are not necessarily conducive to the extension of a rally. Instead, what we need is an extended basing period, where the shorts are slowly suckered in and the weak longs are weeded out. Having said that, the longer the major market averages hold at current levels, and don't break down, the more bullish I will grow.
On a final note, Dell Computer (NASDAQ:DELL) said late Monday evening that it would meet its first-quarter estimates, which are set for release on May 17th. While the box maker said it would cut 3,000 to 4,000 jobs, it also reported that its operating margin will be higher-than-expected. But, company officials also said, "[Dell] remains cautious about the outlook for the balance of the year." The Dell comments, while still cautious, suggest that business conditions are beginning to stabilize. What we need to hear now is that demand is picking up, and maybe Cisco will bring that news Tuesday evening.