Continued worriers over the economy and corporate profits kept the bulls at bay Monday. In fact, the conviction amongst the bears was less than inspiring noting the lackluster volume.
Monday's session marked the third lightest trading day of the year on the Nasdaq market. Trading totaled roughly 1.4 billion shares on the Nasdaq market, while only 856 million shares exchanged on the New York Stock Exchange (NYSE). The 50-day average volume figures for the Nasdaq and NYSE are 1.8 and 1.09 billion, respectively.
The light volume we're observing across the broader market is very indicative of this time of year. And it makes forming a thesis or bias all the more difficult because the ebbs and flows of the market lack conviction. Absent the volume and conviction, we can refer to price action in the major market averages in an attempt to find profitable trades while we wait (Hold our collective breath) for more guidance on the corporate and economic fronts.
Last week, we made several observations concerning the bearish head-and-shoulders (H&S) pattern in the Nasdaq Composite (COMPX). Over the weekend, Jeff Bailey and I spent some time discussing the H&S pattern in the COMPX. Jeff is less convinced about the pattern due to the lack of volume near the right shoulder and due to the height of the right shoulder. While I argued that the pattern is ascending, hence the higher level of the right shoulder.
Either way, Jeff and I both agree that 2100 is an important level for the COMPX to hold. That level is significant because it marks the 61.8 percent retracement of the COMPX's advance in early April and it is also the current site of H&S' ascending neckline. In addition, 2100 is a relatively significant level of demand on the point & figure charts.
If the COMPX does break below that level, the H&S pattern we've been addressing may become a self-fulfilling prophecy, which would leave the COMPX with a bearish price objective in the low 1800s. However, as the chart above illustrates, dip buyers have shown up around the 2100 level on a regular basis in the recent past. So traders predisposed to buying dips might look to get long relatively strong Nasdaq stocks if the COMPX approaches 2100, but doesn't breakdown below that level. Conversely, a break and subsequent settlement below 2100 may embolden the shorts, who are likely to pressure tech shares, so try to keep those stops tight if you buy any further dip. As far as resistance for the COMPX, short-term traders might focus on the 2200 level, while those with a longer view should keep focused on 2250.
Interestingly, the broader market, as measured by the S&P 500 (SPX.X) also exhibits an eerily similar head-and-shoulders (H&S) pattern. As I've illustrated on the chart below, the S&P has traced an ascending H&S, although I concede it is an imperfect pattern. Nonetheless, the S&P did bounce right off its ascending neckline this afternoon, which does give some credence to the pattern. Currently, that neckline lies at roughly 1250. Below that level, the S&P doesn't have much meaningful support until the 1225 level, which is reinforced by the index's 38.2 percent retracement level. Insofar as resistance concerns the S&P, I see congestion in the near-term at the 1270 level.
The Dow Jones Industrial Average (INDU) has a somewhat similar ascending price pattern compared to the S&P and COMPX, but I think the INDU traded high enough last week to reject any suggestion of a head-and-shoulders. On the daily chart below, it looks like the Dow might settle into a trading range between support at 10,800 and resistance at the almighty 11,000 level. However, a breakdown in the Dow below 10,800, in my mind, would be most disconcerting because I don't see any REAL significant support until roughly 10,500.
Along with the price action in the big three (COMPX, S&P and Dow) I think it makes sense to monitor the CBOE Market Volatility Index (VIX.X) as we work through the summer months. The current low level of the VIX is indicative of the lack of commitment in the market - the VIX traced a new yearly low last week at 21.11. To review, the VIX measures the level of fear in the market. The less fear in the market, the lower the level of the VIX.
In 1999, the VIX bottomed on the week ended July 11th, at the 17.70 level, which coincided with a significant relative high in the COMPX. In 2000, the VIX bottomed on the week ended August 27th, at the 18.13 level, which, of course, coincided with the COMPX's post-Labor Day slide. Keep these historical lows in mind if the VIX continues to work lower, as it could spell trouble for the COMPX if the last two year's of history repeat.
Perhaps the weakness in the Nasdaq Monday can be mostly blamed on the carryover of Juniper Network's (NASDAQ:JNPR) big warning last Friday. In fact, the company was the target of many downgrades Monday warning, which adversely impacted those tech stocks levered to the telecom industry. In addition to the Juniper-related weakness, two warnings before the bell Monday morning impacted trading. DuPont Photomasks (NASDAQ:DPMI) and Powerwave Technologies (NASDAQ:PWAV) both issued warnings.
After the bell Monday, there weren't any warnings as big as Juniper's last week. But the warnings are certain to color trading in several sectors Tuesday.
Affymetrix (NASDAQ:AFFX), which provides biotechnology research products and services, warned of a revenue short-fall Monday evening. The broader biotech sector, as measured by the Biotechnology Sector Index (BTK.X), has been a source of strength recently and Affymetrix's warning is likely to pressure shares within this space.
Another recent "hot" sector of the market has been alternative energy stocks. But, after the bell Monday, General Motors (NYSE:GM) pre-announced that it was going to make two separate announcements in the coming days concerning fuel cell technology. It wasn't indicated is the announcements by General Motors were going to be good or bad, but judging by the price action in shares of FuelCell Energy (NASDAQ:FCEL) in the after hours session, the news isn't good. Shares of FuelCell lost about $7 in the after hours session before being halted.
I'd like to thank everyone who attended my online seminar over the weekend and would encourage those who haven't already to check out our line-up this week. Our all-star analyst, and my good friend, Jeff Bailey, is scheduled to present an online seminar on Point & Figure Charts Tuesday evening. In addition, Jim Brown with be presenting on Basic Options Strategies and an excellent technician, Jon Farnlof, will be presenting a seminar on how to read Candlestick Charts. Check out the schedule below and simply follow the link provided to sign up.