Tedium is the Worst Pain
It was John Gardner's monstrous character who uttered the preceding pontification in his book titled Grendel. I think the monster's opinion aptly applies to the current psychology among market participants.
We need look no further than Monday's tepid volume across the major market averages to discover the lack of commitment among participants. Trading on the New York Stock Exchange (NYSE) barely topped 1 billion shares. And a mere 1.5 billion shares exchanged on the Nasdaq. Not only was trading volume light, but the Nasdaq Composite (COMPX) bounced within an extremely narrow range of 34 points. In a word: tedious. The Dow Jones Industrial Average (INDU), on the other hand, saw a bit more volatility, but more on that later.
The narrow range in the Nasdaq Composite Monday was a product of several factors. For starters, our all-too-familiar 2060 resistance level capped the COMPX's early morning rally attempt. Further, sellers did not possess the conviction to take the COMPX any lower than its intraday low last Friday around the 2025 level. And finally, there's the Fed factor.
Over the last three trading days, the COMPX has been capped by the 2060 level, while finding support around 2025. Its tight trading range has made it very difficult to discern an edge on the COMPX, let alone a trend to trade. Perhaps the best strategy to cope with the recent narrowness of the COMPX is to buy near strong support levels and sell near strong resistance levels. But that strategy does require quite a bit of nimbleness and will lose its efficacy if the COMPX breaks one way or the other this week.
For momentum or trend traders who prefer breakouts, I'm once again going to turn to the 2060 resistance level as the area to key off. If the COMPX can trade and subsequently CLOSE above the 2060 level, I think it will have a good shot at working its way up to at least 2100, possibly between 2120 to 2150. (2120 is significant because that is the site where the COMPX broke down below the neckline of its head-and-shoulders and 2150 is the current site of that neckline.)
For traders leaning bearish, in the very short-term, I think the 2025 support area in the COMPX, which has held for the last three days of trading, is worth monitoring. But, keep in mind, just below that general area lies the psychological support level of 2000, reinforced by the technical support of 1975. As I alluded to earlier, until the COMPX definitively breaks in one direction, the recent price action lends to patience, however painful.
While the COMPX spent Monday meandering between technical levels, the sellers ran rampant in the Dow. The INDU broke below the 10,560 area - an area that had attracted buyers in recent sessions - early Monday morning and subsequently traded below the critical 10,500 level, before rebounding into the close. (On a side note, the breakdown in the Dow below the 10,560 area Monday illustrates how to gauge key technical levels in the current market environment and trade off of those levels. That is, have your action points in place and trade what the market gives you.)
Coming away from Monday's trading, there are two observations I'd like to lay forth concerning the Dow. The first is that its break below 10,500 is most disconcerting and may pressure the broader markets. But the second, and perhaps more encouraging, point is that the Dow was able to claw its way back above 10,500 into the close of trading Monday. That was definitely a psychological victory for the bulls, despite the Dow shedding 100 points. As the Daily Chart of the Dow clearly depicts below, there's not much support below the 10,500 level, except for two lows around the 10,440 level traced in late April. Hence the significance of 10,500, including the fact that it is the site of the Dow's 38.2% retracement level. Below 10,500, however, the next meaningful support that I can find is around 10,230 - its 50% retracement level.
The Dow could very well bounce from the 10,500 level this week and, in fact, may trace a relative low at that site. So how you trade the Dow and its 30 components right now is a matter of style and risk tolerance. Dip buyers can scale into relatively strong Dow stocks at the 10,500 level with tight mental stops just below, or the shorts can look to sell relatively weak Dow stocks on any further decline below 10,500. And to get a better feel for which direction the Dow might trade, we can turn to the price action in the S&P 500 (SPX.X). The S&P's advance above the 1225 resistance level late last week proved to be a bull trap, or head fake. The S&P settled right on the 1225 level Friday, but Monday's weakness across the Bank, Retail, Cyclical and Drug sectors dragged the broad market index below 1225. We're now left with minor support around the 1210 area, and major support at 1200. But again, monitoring the direction in the S&P should help to better gauge the Dow.
To segue from the broader market, the CBOE Internet Index (INX.X) rebounded Monday after its recent two-week pullback. In a research report, U.S. Bancorp Piper Jaffray Net analyst, Safa Raschtchy, opined that Yahoo (NASDAQ:YHOO) would beat the high-end of estimates for its current quarter. The high-end, by the way, is pegged at 1 cent per share in earnings and $184 million in revenues. Nonetheless, shares of Yahoo did boost the INX and carried several Web shares higher. The INX finished 6 percent higher, led by the nearly 14 percent gain in shares of Yahoo and substantial gains in shares of eBay (NASDAQ:EBAY), HomeStore.com (NASDAQ:HOMS) and DoubleClick (NASDAQ:DCLK), among others. The INX has been extremely volatile over the past two months relative to the COMPX and may offer trading opportunities for both bulls and bears in the short-term.
My sense is that much of Monday's advance in the INX stemmed from frantic short covering, especially noting the closes in Yahoo, eBay and DoubleClick - parabolic, baby! Each of the four aforementioned stocks have fairly high short interest, and Safa Raschtchy's positive comments on Yahoo induced fear into the bears. The move in the INX Monday could very well be perpetuated this week if the shorts remain on edge, so it may be worth while to monitor the Internet complex this week.
The Biotech Sector (BTK.X) fared far worse than its Nasdaq cohort in the Internet sector. That's because Biogen (NASDAQ:BGEN) was the recipient of several downgrades, following its detailing of disappointing results last Friday for one its drugs under development for the treatment of psoriasis. Those results released last Friday prompted a slew of downgrades Monday morning which continued to pressure shares of Biogen. The stock finished $5.46, or 9 percent, lower - shares have lost over $12 in just the last two trading days! The Biogen-related selling across the biotech sector has weighed heavily on the BTK, which had recently been a bright spot within the tech sector. For those who monitor the BTK closely, keep a very close eye on that 575 level!
The warnings season rolled on after the bell, with Applied Micro Circuits (NASDAQ:AMCC) reporting that it would post a net loss of between 4 to 6 cents for its current quarter, while its previously lowered guidance had set forth expectations for 2 cents per share in profits. The Applied Micro warning is not at all surprising. Its biggest customers are: Alcatel (NYSE:ALA), Cisco (NASDAQ:CSCO), JDS Uniphase (NASDAQ:JDSU), Juniper (NASDAQ:JNPR), Nortel (NYSE:NT) and Tellabs (NASDAQ:TLAB). The vast majority of the aforementioned have already warned so the impact of Applied Micro's news may be minimal. Nevertheless, keep in mind that Applied Micro competes with the likes of PMC-Sierra (NASDAQ:PMCS), Triquint Semiconductor (NASDAQ:TQNT), Vitesse (NASDAQ:VTSS) and Maxim Integrated Products (NASDAQ:MXIM). Applied Micro shed $1 in the after hours session.
To revisit my ranting, the tedium we've been enduring recently is, in large part, a product of the Federal Reserve's meeting this week, which begins tomorrow (Tuesday). It's a two day meeting that culminates with the Fed announcing its decision on short-term interest rates Wednesday afternoon around 2:15 p.m. EST. Currently, the Fed Funds target rate is set at 4.00 percent. And the market, along with those dismal scientists (economists), are divided between whether or not the Fed will cut by 25 or another 50 basis points. This event Wednesday, in my very humble opinion, could break the Nasdaq out of its trading range. My sense is that a 25 basis point cut would cause a sell-off while a 50 basis point cut would rally the Nasdaq. But, I'm sure that opinion is shared by many market participants so I don't know how much credence it garners. In addition to the actual announcement on the cut, the market will be listening for guidance on whether or not any further cuts lie ahead.
There are innumerable scenarios that we could set forth concerning the Fed announcement Monday and the market's reaction. What it boils down to is knowing your risk tolerance and time frame and, more importantly, having a strategy in place for multiple scenarios. Finally, recall the last rate cut. Remember how the Nasdaq and Dow faded following the cut on May 15th? And remember the following day and the massive advance across the broader markets...Innumerable!
For those unfamiliar with the ways of point & figure charting, especially the intricacies of the awe-inspiring Bullish Percent, I highly recommend checking out Jeff Bailey's Online Seminar on these very topics Tuesday night. You can sign up through the following link: