The major market averages, as a whole, ended Monday with a slight negative bias. But I got the feeling that the day's trading was one filled with hesitation, or more of a wait-and-see attitude. That's because of the light volume on the NYSE and Nasdaq markets as well as the tight trading ranges across the averages.
The two Mondays prior to today saw relatively light trading activity, so the light volume isn't as peculiar by itself. But the accompanying price action today made me believe that a lot of market participants lacked the necessary conviction to move the market in one direction or another. Also, I think the closing figures of the averages reflect that hesitancy.
The news of anthrax surfacing across the country may have been a small part of traders' reluctance to commit to positions Monday, but I think the majority of market participants were on hold ahead of this week's numerous earnings reports.
Although, there were a few significant reports before the bell. Bank of America (NYSE:BAC) reported a solid quarter Monday morning. The stock led a rebound in the Bank Sector Index (BKX.X) Monday afternoon, which carried the S&P 500 (SPX.X) higher into the close. In fact, the broader financial complex finished strongly Monday afternoon, as measured by the BKX.X, Insurance Sector Index (IUX.X), and the Securities Broker/Dealer Index (XBD.X). The financial complex, as a whole, is the largest industry group within the S&P 500. And, though preliminary, its strength Monday bodes well for further upside in the S&P 500 over the short-term.
Away from financials, the energy sector weakened in the wake of Global Marine's (NYSE:GLM) guidance. The company - an off-shore oil drilling outfit - suggested that the rebound in drilling activity would be pushed "further into the future" due to the weakening economy. The energy sector, like the banks, is a metric that offers insight into the broader economy. Demand for energy is correlated with economic activity in many ways. And Global Marine's guidance suggested that demand for energy has not yet rebounded. The drillers were especially hard hit in the wake of Global Marine's guidance as measured by the 3 percent drop in the Oil Service Index (OSX.X), of which Global Marine is a component.
With the mixed messages from Bank of America and Global Marine, there was all the more reason for traders to wait for further guidance from corporate America. The hesitation I previously alluded to was evident by the inside days traced by the Dow Jones Industrial Average ($INDU), S&P, and Nasdaq-100 (NDX.X). To recall, an inside day is one in which a stock/market trades within its previous day's range. (I've expanded the three charts below to better depict what an inside day looks like.)
The INDU is churning around a retracement level at the 9300 level. If it can breakout above its very short-term trading range, as measured by an advance past the 9450 level, then it could have upside potential to the 9650 to 9700 area. Conversely, if the INDU breaks below its very short-term trading range, as measured by a breakdown below 9150, then it could have downside potential to 9000.
The SPX, too, is churning around one of its retracement levels around the 1085 level. The SPX's set-up is pretty similar to the INDU's in that a retracement level lies above current levels as a possible upside target, while a psychological and technical support level lies below current levels as a possible downside target. In the case of the SPX, a breakout above 1100 could carry the index up to 1125, while a breakdown below 1072 could carry it down to 1050. In either case, we're talking about the potential for 25 points, which is a big move for the SPX. Of course I'm arguing that much on a short-term basis.
While the NDX, like the SPX and INDU, traced an inside day Monday, its current technical set-up is a bit different than that of the SPX and INDU, but that's usually the case. The NDX is coiling around the upper-end of its partially-filled post-attack gap around 1365. If the NDX breaks out above the 1400 level, then I could foresee an advance up to 1450 to 1475. But to the downside, the NDX has several potential support areas. First, there's a two-day double-bottom in place at 1333; I don't know what's special about that level, but buyers stepped up at 1333 last Thursday and Friday. Second, the lower-end of the NDX's gap sits around 1310, which is another potential support level. Still lower is a retracement level at 1270, which could potentially serve as a downside target for shorter-term trades. But, unlike the INDU and SPX, there are several potential support levels, so the downside potential from current levels isn't as clearly defined.
An earnings report after the bell Monday should impact trading in the Semiconductor Sector (SOX.X) Tuesday morning, which will in turn impact trading in the NDX. Novellus (NASDAQ:NVLS), a component of the NDX and SOX, reported third-quarter numbers that me expectations, but the company said, in essence, that it has yet to see a pick-up in demand for its chip-making equipment. The stock shed about $1.50 in the after hours sessions and dragged most SOX components lower.
Apropos to Lehman Brothers downgrading about a dozen chip equipment stocks Monday morning, which was the source of most of the NDX's weakness Monday. Good call.
I don't know if Novellus' report will be enough to breakdown the NDX. There are plenty of earnings reports from big tech companies over the next few days that could either exacerbate Novellus' news or negate it. What I do sense, however, is that the major market averages are once again at a pivot point, from which I think they'll make a big move. I had the same feeling last Tuesday, just before the averages made their most recent push higher. But, like last Tuesday, I don't have any insight into which direction the markets will break.
I can argue a pretty strong bullish case because of the current bullish percent conditions of the INDU and NDX -- both indexes are in Bull Confirmed mode, which is the strongest of short-term buy signals. I think that the current Bull Confirmed mode of the INDU and NDX is helping to lend the bid that we continue to see materialize following any pullback in the averages. They bought 'em on the dip again Monday. Because of that rebound, I tend to continue to lean to the bullish side.
On the other side, I keep thinking about how overbought the averages are as measured by Stochastics. All three averages are grossly overbought and have come a long, long way, baby, in a short amount of time. If the INDU, SPX, and NDX spent a little more time trading sideways, then I'd grow more bullish. In the meantime, they're all overbought insofar as a certain oscillator is concerned.
Finally, there are several variables to contend with this week that have the possibility to push the averages either way, yet these unknowns are difficult to predict. First and foremost is earnings. But, it's also expiration week. There are a lot of mysterious happenings in the market around options expiration. And, yes, she (the market) does move in mysterious ways.