Approaching Key Support Levels...
The major market averages pulled back Wednesday over concerns that the economic recovery in the U.S. will take longer than expected. A handful of earnings warnings, analyst downgrades, gloomy economic data and cautious comments from companies led the market lower into the close of trading.
The Federal Reserve released its Beige Book Wednesday morning, which is a periodic report on the health of the U.S. economy. The Fed's findings were gloomy indeed, and not necessarily conducive to the extension of Tuesday's rebound. Without going into too much detail, I'll give my readers the first sentence of the Fed's report, which pretty well sums up the entire tone of their findings: "Most districts report that economic activity was little changed or decelerating in April and May." The report almost solidifies another cut in rates when the Fed next conveys the 26th and 27th of this month, and strengthens the possibility of the Fed taking its key rates to 3.5 percent - currently at 4 percent.
Another bit of interesting news that adversely impacted the tech/telecom sectors of the market Wednesday was the downgrade of Lucent Technologies' (NYSE:LU) debt. Late Tuesday evening, Standard & Poor's reduced its rating on Lucent's debt to a "junk" rating. Credit rating downgrades are much more reliable and indicative than ratings by sell-side equity analysts. As such, the downgrade should be a cause for concern for Lucent shareholders. The downgrade will make it more expensive for Lucent to raise funds, which comes at an inopportune time for the beleaguered telecom equipment maker. But what's bad for Lucent is good for its competitors, such as Nortel Networks (NYSE:NT), JDS Uniphase (NASDAQ:JDSU) and Cisco Systems (NASDAQ:CSCO) over the longer term.
In the short-term, however, Cisco Systems' shares may remain under continued pressure. That's because its officials spoke at a CIBC World Markets conference Wednesday morning, who remained cautious in the near-term. CIBC analysts reduced their estimates following Cisco's remarks, which may have sparked some of the sell-off in the Nasdaq during midday trading.
Nevertheless, the Nasdaq Composite (COMPX) fell into the close of trading, nearly retracing all of the gains achieved Tuesday following the rebound off of the 2104 level. The Composite closed just 20 points away from our critical 2100 support level Wednesday, and judging by its closing price action, will most likely test that level Thursday. (On a side note, the ascending neckline of the COMPX's head-and-shoulders (H&S) now rests right around 2110. But that's all I'm going to write concerning the COMPX's H&S. One of my biggest critics informed me that I have beaten the COMPX's H&S to death, so I'll let it rest for the time being.)
From where I sit, there are two ways to trade the Nasdaq going into Thursday's session. The first strategy is to buy any dip down to the 2100 level. We've discussed in great length the importance of this level recently and it continues to attract buyers (Read: Tuesday's Rebound). Of course, in order to manage risk, dip buyers can set a relatively tight mental stop just below the 2100 level in case the BIG buyers don't show up this time around.
The second approach going into Thursday's session is go short or buy puts if the COMPX breaks down below the 2100 level, in a momentum-based fashion. Of interest, I noticed several big-cap stocks breakdown below key support levels Wednesday, which may be an indication of a breakdown in the COMPX, but that's only speculation on my part. Nonetheless, I'd suggest perusing the charts of CIENA (NASDAQ:CIEN) and Qualcomm (NASDAQ:QCOM) to examine a few of the breakdowns I saw today. If the COMPX does, in fact, breakdown below 2100 Thursday, a feasible downside target may be the psychologically significant 2000 level.
The Dow Jones Industrial Average (INDU) was weighed down by the Fed's Beige Book report and may test the 10,800 support level yet again Thursday, if we don't get a positive catalyst to reverse the selling. Keep in mind that support levels become increasingly weak with each successive test.
To game the Dow, I think a similar strategy to what I suggested concerning the Nasdaq may be applicable. Those with bullish tendencies might look to buy any dip in the Dow down to the 10,800 level with a relatively tight mental stop, while those who are bearish may look to get short weak Dow stocks on a convincing breakdown below 10,800. To reiterate my stance from Monday, it's difficult to discern a trading thesis in the Dow currently, while it waffles between key support and resistance levels, but a break one way or the other may offer trading opportunities.
Perhaps the most disconcerting development Wednesday, from a price perspective, was the S&P 500's (SPX.X) break and subsequent close below its ascending support line at roughly the 1250 level. Of the BIG three market averages we address, the S&P is the only to close below its key support level Wednesday. However, as the measure for the broader market, its bearish settlement Wednesday may be indicative of continued weakness in the INDU and COMPX.
There were a handful of minor earnings warnings after the bell Wednesday. So absent a major blow-up, it's difficult to form a bias going into Thursday's session. The variables include economic releases in the morning and the potential for additional warnings overnight. The economic data scheduled for release include the producer price index (PPI), Jobless Claims and Inventories figures. The market's reaction to economic data recently has been somewhat muted, so guidance on the corporate profit front is likely to remain the key driver, which could give some credence to the inventory figures.
Keep in mind that this Friday is triple witching for June contracts. This event can oftentimes have a wild impact on the market so be aware of the crosscurrents on that front.
Finally, we've been receiving a lot of compliments on our new online seminars from attendees. If you haven't attended an online seminar already, I'd suggest perusing the choices below and signing up for one that piques your interest. Jon Farnloff, who appeared in a long-running commercial on CNBC, will be presenting a seminar on candlestick charting Thursday evening, June 14th at 9:00 p.m. EST. And I will be presenting this Sunday, June 17th at 8:00 p.m. EST on a subject that I'm excited about. If you have any questions concerning the online seminar series, please feel free to e-mail me at the following address:
Good luck Sixers and Lakers!