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Last Hurrah or Sustained Bullish Move?

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      05-08-2002          High     Low     Volume Advance/Decline
DJIA    10141.83 +305.28 10148.94  9847.96  1.50 bln   2021/1177
NASDAQ   1696.29 +122.47  1696.35  1625.73  2.39 bln   2465/1085
S&P 100   540.62 + 22.40   540.80   518.22   Totals    2486/2262
S&P 500  1052.67 + 20.76  1075.96  1052.65             
RUS 2000  509.75 + 10.77   509.83   498.98
DJ TRANS 2753.01 + 69.17  2756.56  2684.57
VIX        23.16 -  1.41    24.09    22.28
VXN        45.85 -  4.27    49.16    45.85
TRIN        0.38
PUT/CALL    0.65

Last Hurrah or Sustained Bullish Move?
By Buzz Lynn
Click here to email Buzz

Strike up the band! Party hats and horns! Happy days are here again! I almost expected CNBC's finest to begin high-fiving each other again. The truth is that +305 on the Dow, +122 on the NASDAQ Composite, and +39 on the S&P 500 was a huge day in terms of point gain.

We can attribute today's gains to. . .what? Cisco! I was thinking, "You must be kidding. CSCO caused that???" Nice thought. But that would be like giving roosters credit for the sunrise. Let's get some things out in the open that apparently went unnoticed, or perhaps noticed and ignored by market cheerleaders.

First CSCO "beat the numbers" by $0.02 thanks to cost cutting measures. Can you say, "You're fired" and "Let's buy our occupied buildings from the owners"? Sure I knew you could! A company can always cut costs by laying off employees and stopping real estate lease payments. While laying off employees probably yielded the greatest gain, the Street likes the idea that CSCO is eliminating their synthetic real estate leases. That's an arrangement similar to a sale-leaseback, except the tenant can depreciate the building they don't own in addition to expensing the rent payment. It's an off-balance sheet accounting gimmick that many companies, including CSCO yesterday, are washing their hands of to avoid tough accounting questions while implying to shareholders, "We're coming clean and want you think more highly of our accounting practices".

Really? And what should we have thought of your accounting practices until you [the company] came clean? Seems to me kind of like a hardened criminal playing the "born again" card in front of the payroll board in order to get out of jail. One freshly polished Oscar for Mr. Chambers please. While Chambers' leadership abilities and understanding of business (nobody better) are commendable, they guy is also king of spin with masterful blurring of the line between good information and cheerleader.

Second, revenues came in at the low end of expectations at $4.72 bln. That certainly does not indicate growth in the industry. In fact, CSCO will no longer provide expected revenue growth figures. Why? Because they are flat.

Third, did anyone notice the book to bill ratio? If they had, they would have noticed it under 1 this quarter, near 1 last quarter and over 1 the quarter before that. Those are three data points that make a descending line. The trend is still down! It means that orders are not coming in as fast as CSCO is collecting from previous sales. I'll have to look to see what's happening to accounts receivable. Maybe a sharp-eyed reader already has the answer. While in general, a shrinking number is good along with a shrinking collection period (After all, we all try to get that money in the door fast. DELL has this down to an art form.), reality is that fewer sales are booked.

Just as an aside, did anyone notice that Lehman made a call on Applied Materials (AMAT) suggesting that it will provide worse than expected bookings guidance when it reports earnings on May 14th? So AMAT will guide semiconductor equipment manufacturing sales bookings down, yet the semiconductors (SOX rallied over 11% today. Unbelievable. And who said speculators had exited the market? No matter, as long as they are alive and well, there will be another rally to short. Just maybe not right now.

Let me offer up two cents on market action while we are at it. Despite today's big point gains across the board, I caught Art Cashin on CNBC offering cautionary notes. This is one commentator I like precisely because he doesn't cheerlead - he comments and clarifies the mood of the trading floor by offering relevant facts. He noted that a lot of today's action was electronically hedgefund-induced and didn't necessarily mean that retail buyers were jumping in. He noted that the markets had been extremely oversold and equated them to coiled springs. Furthermore, he stated that many shorts were covering today following an opening rally that failed to produce a significant selloff. That possibly ushered in more short covering. Sellers were notably absent.

And while the volume was strong (1.5 bln NYSE; 2.39 bln NASDAQ), it wasn't a barnburner. Breadth was strong though at better than 2:1 on both exchanges. Nice on both counts but not stellar.

Now take everything I said and toss it aside. While I am still fundamentally convinced this is a bear market, there are interesting technical developments that suggest there might be some legs to the bull this time around, fundamentals be damned. But as is true every time, nothing goes up or down in a straight line. Let's take a look.

Dow Industrial chart - INDU:

Starting with the weekly, we see a bullish divergence in black with a deeper stochastic selloff into oversold than the last one coupled with a higher low on the candles compared to the last one. Usually, this is bullish. But the real focus is on the daily chart where the declining upper trend line was broken to the upside today. That is bullish too, but also dangerous in that it came so far so fast. The real test now will be at former horizontal support at roughly 10,100, then again at roughly 9975- 10,000. Breakdown at 10,100 takes the points off the horns. 10,000 would mean to me that today was a one-hit wonder born of short covering and few sellers. Failure there is bearish.

Speaking of bearish, as traders, we need to watch the 60-min chart too, which is way overbought stochastically and stratospherically topped out on the candles. It's ripe for immediate correction. Don't let today's bullish move have you placing market orders for calls at the open tomorrow. It could result in you paying the highest price of the day only to see losses on positions from there. If stochastics can cycle to oversold with minimal candle damage (say to 10,050 or higher), I would consider calls on the emergence from oversold.

NASDAQ chart - COMPX (weekly/daily/60):

After a better than 100 point one-day gain on the NASDAQ, pundits are jacked up like a workaholic on 5 cups of morning coffee. Don't fall for it. Despite the gains, the NASDAQ is still the weakling index. Besides that, and more to the point, gaps get filled, as history shows on the daily chart. I would expect his one to be no different especially given the magnitude of the gain.

Removing rose-tinted lenses or sharp horns, we note that the index closed just under its horizontal resistance of 1700 on the daily chart. A close over that would have more meaning. The real test comes to see if the breakout can hold support at roughly 1665-1675 on the theory that what was once resistance can become support. Daily stochastics? Emerging like the green buds of spring, but far from convincing with only a fast line break over 20%. Too early to tell if bulls will prevail here.

And that 60-min chart - way overbought with a gap to be filled. I'd be a call buyer only if the daily stochastics emerge from oversold, the 60-min stochastics cycle to oversold and re-emerge with candles holding above 1667.

SPX chart - SPX (weekly/daily/60):

Again, another huge move up that likely can't be sustained. Lots of resistance at this level and again at 1100 on the weekly chart. Same for the daily even though the stochastics have emerged from oversold. Bullish, perhaps, but the chart needs anther day to season. Meanwhile the 60-min chart like the others above is over bought at resistance and begging to be sold. I'd only consider calls at a pullback to and bounce from 1175 once 60-min stochastics emerge again from oversold.

For tomorrow? I'll enter my SWAG (Scientific Wild something Guess) prediction: With 60-min charts grossly overbought at resistance, I'd guess the market buy orders will cease at exactly 10:00 a.m. ET before the market decides on a bit of consolidation for the rest of the day. More to the point, that will likely be the high of the morning and maybe the day. I'll favor calls then, but with failure of any support lines, the horns come off the bull and trading range resumes. ARMS index too is very low at 0.38, which says that everyone is on the same side of the trade - far too many bulls on the tape to sustain. Having said that, I've jinxed myself and I'll be wrong. (Hey, it's only a guess!)

As for economics, the only thing on tap for tomorrow would be the FOMC minutes and Import/Export prices - no surprises expected except the unexpected curveball from the Fed minutes. VIX remains a non-issue at 23.16. Trade 'em. Don't take 'em home.

See you at the bell.

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