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Market Wrap

Giving it back!

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        05-09-2002        High      Low     Volume Advance/Decline
DJIA    10037.40 –104.40 10144.70 10016.70 2153 mln   1117/2050
NASDAQ   1650.50 – 45.80  1762.28  1725.24 1580 mln   1189/2313
S&P 100   531.69 -  8.93   540.62   531.15   totals   2306/4363
S&P 500  1073.01 – 15.84  1088.85  1072.23
RUS 2000  501.39 -  8.36   509.85   501.37
DJ TRANS 2702.44 – 50.57  2753.93  2700.35
VIX        24.36 +  0.75    24.54    23.39
VIXN       48.08 +  0.28    48.66    47.01
Put/Call Ratio      0.77

Giving it back!
by Leigh Stevens

I saw one headline "where did my rally go!" Good question. The market gave back a portion of the gains made in yesterday's big rebound. All the indices reversed from areas of technical resistance of one type or another - either in the area of the 21- day moving average or at the top of hourly downtrend channels, or both.

Minor intraday rallies that set up after the fairly mild retracements of the recent big rebound (25% in the Nasdaq & 38% in the S&P), didn't get anywhere today and index levels settled back to the their daily lows by the close. The media talking heads seemed to be surprised, or disappointed today that there were not back-to-back up days and upside follow through. I was more surprised that there were not deeper retracements given how prior big rallies have fallen apart so fast.

Even if we have seen a bottom, and the jury is still out on this subject, after a prolonged bear market, preceded by the excessive valuations (the infamous bubble) that preceded the bear, what we can expect is a lengthily bottoming process. A bottoming process, if thats where we are, would normally take time to complete and there would be a lot of ups and downs, not just a big prolonged up move. I would anticipate even that if we have seen an important low, that it might be retested. Trading opportunities on both sides of the market will present in the meanwhile. If we go into free fall again, stay short and sell rallies.

I've pointed out in recent comments that there are price areas that we could look at besides the absolute lows to measure whether the market is putting in a bottom. These areas being gaps created on the charts when stocks and the indices jumped substantially higher on Wednesday's opening, after Cisco's (CSCO) earnings came out the night before.

And upside gap is simply the difference between one day's high and next day's low. There is a common saying that charts gaps tend to both get "filled in" (subsequent trading occurs in the gap area) and/or act as areas of future support in the case of upside gaps.

If the upside chart gaps created over Tuesday-Wednesday, get filled in, in part or all, followed by a rally and no further downswings, this builds some evidence that a bottom is in place. What happens in this regard allows us to better judge the market on a technical basis. As there are no new fundamentals really, with still depressed or sluggish earnings and an economy that is recovering slowly, or quickly, depending on what and who you listen to, it useful to look at this latest rally technically for what clues we can garner.

Conversely, if the index chart gap areas do not get filled in, this is valuable information also as a sign that major lows are in place; i.e., the indices will not see lower lows anytime soon.

Stock or index prices often come back close to these gap areas but don't drop into them at all. If you want a stock chart example just look at Amazon (AMZN), since it gapped higher on the 24th. The gap between 4/23 and 4/24, was between 14.75 and 15.05. Doesn't seem like much, but the recent low in AMZN was 15.75, before the stock took off again in a big surge higher (close: 17.73).

What any gap means is that potential buyers were not able to start buying, during regular session hours anyway, until the price at the top of the gap, as that is where the lowest offers were. If the stock or the basket of stocks represented by an Index is still valuable to traders, they will want to buy when prices again approach a gap area, the price level that developed after the event or news that caused the big overnight jump. This then is the moment of truth, so to speak - do the buyers still want to snap up stocks at the same level? Or, not?

The gap areas are: S&P 500 (SPX): 1054-1056, as taken from the hourly chart. OEX: 520.5-521.8, also taken from the gap between the closing hour and the first hour of the next day's session. The Nasdaq Composite (COMP): 1594.6 - 1625.7 per the daily chart; The Nasdaq 100 (NDX): 1167.2-1212.8; The Nasdaq 100 QQQ tracking stock: 29.3-29.8

News and market events come and go, these gap areas remain, for now anyway. The bears are back on the prowl, so stay tuned.

Stocks fell today as former tech darlings Microsoft (MSFT), Cisco Systems (CSCO) and Oracle (ORCL), which had all had big gains on Wednesday, came off substantially and led the market lower. Although the Wednesday gain in the Nasdaq Composite (COMP) was almost 8% and the give back today was less than 3%, such a fall after the good spirits engendered by the trader high fives of the day before, was disquieting for a market looking for reasons to buy stocks. There have been these big days before, only for prices to resume sinking in subsequent days, and everyone remembers, big time! As there was no substantial change in the fundamental outlook for earnings in these big cap tech stocks, not even Cisco's -- due more to cost cutting and other accounting measures -- what went up on hope came down on fear.

Within tech stocks, losses were recorded in the networking
($NWX.X, -3.8%), software ($GSO.X, -4.2%), semiconductors
($SOX.X, -3.6%), Fiber Optics ($FOP.X, -4.6%) and telecom sectors
($XTC.X, -2.9%). In the broad market, there were steep declines
in biotech ($BTK.X, -4.8%), airline ($XAL.X, -3.6%), retail and
oil services ($OSX.X).

There were some gains again in prior favorite sectors like the gold stocks ($XAU.X, +2.1%) and in the defense sectors; e.g. Boeing, +1.3%. In the Dow, the prior themes favoring consumer defensive stocks led to gains in McDonalds (MCD), Johnson and Johnson (JNJ), Phillip Morris (MO), P&G (PG), and Eastman Kodak (ED).

This is a market that is now going to be lacking in news relating to stocks themselves and is likely to be unsettled by political events and news, especially anything relating to terrorism or possible terrorism. The Mid East backdrop is not comforting as investor wait for the other (Israeli) shoe to fall in the Gaza, after the big suicide attack just as Sharon was meeting with Bush.

Crude oil is on the rebound this week, which weighed heavily on the Dow Transportation Average, which gave back most of its gains from yesterday. Oil prices were the culprit. Oil was driven by the Mid East battles and for supply/demand reasons relating to the onset of the summer heavy gasoline usage. Nearby crude futures are up almost $2 this week. June oil futures went from around 26.00 to just under $28 today.

Investors briefly relived prior days of terror when a report crossed the wires that some pieces of anthrax tainted mail had been found at a Federal Reserve off-site mail facility. The news hit hard at first, causing a Dow loss of over a 100 points. The averages were quick to bounce back, though sellers turned more aggressive in the final hour of trading.

Bonds ended with healthy gains after relinquishing massive ground on Wednesday. Weakness in the stock market was the main driver for bonds and the anthrax scare at the Fed, which motivated a "flight-to-quality" play.


There was a release on weekly initial unemployment claims, which fell 11,000 to 411,000, making the lowest reading in two months. However, continuing unemployment claims jumped to another multiyear high of 3.8 million, even excluding 1.4 million workers who are getting extended benefits.

Additionally, the April import price index climbed 1.4 percent its largest monthly increase in nearly two years due to soaring oil prices. News that could only gladden the bears return.

Friday will see the release of the April producer price index, estimated for a rise of 0.4 percent and a 0.1 core rate. The core rate strips out the food and energy components.

The Minutes of the mid-March FOMC meeting revealed that the central bank remained worried about the stock and energy markets, unemployment and soft business spending. NO KIDDING! The FOMC minutes also indicated that members felt they could push up rates slightly without first shifting to a tightening stance.

Shares of Electronic Arts (ERTS) had a strong rally after the company reported Q4 results of 39 cents a share, reversing a loss from a year ago. Revenue came in at $469.7 million, well above the $307.3 million a year earlier. The game sector has been hot lately. ERTS was the second video game maker to rally strongly in after hours trading this week. One of ERTS's rivals, Activision (ATVI) jumped 10% earlier this week after hours and after earnings came in well over estimates. Well, we always have games to take our mind off the economic and stock market woes!

My key general market indicators suggest that a bottom should be at hand. The only thing that bothers me still is that the volatility measures are not yet at the higher levels usually associated with major market bottoms. The CBOE Volatility Index ($VIX.X) is on an upward trend, having risen from the 20 area to intraday readings as high as 26.6 over the last 3 weeks. VIX closed at 24.4 today. My study of past market bottoms suggests that past major market lows have coincided with closing VIX levels of 27 or more. Getting closer, but not there yet.

Otherwise, the market is quite oversold on an advance-decline, volume and price basis. However, oversold never makes a bottom by itself, just as the Nasdaq stayed extremely overbought for weeks while building a top. And oversold markets can get more oversold. What to do?

Stay with put positions taken at higher levels. That is, as long as the Dow's down trendline as shown below is not decisively penetrated by a move to above the high of this week, at 10,144 -- a weekly close at 10,150 would do it. Otherwise, the Industrials continue to trade in a downtrend. However, if the Dow does start to move up through this line, the other indices could start to follow the leader here. That would be an occasion to start taking some money out of puts and placing some bets on a rising market.


There are a couple of ways to look at momentum in the Dow, on a weekly basis. There has not been a close yet under the 40-week moving average. Such a close, below 9890, would be a definite technical negative. 9670 is a 38% retracement level and that becomes a possible downside target if we slipped below 9900. Hey, it doesn't seem likely now, but a move to this level would still only be relatively small retracement of the last big up move.

The weekly MACD Indicator is a good visual measurement of the downward price momentum seen in the trend of lower weekly highs and lows.


The breakout point on the Weekly Nasdaq chart is at 1755-1750. Next week, a close at or above 1750 is needed to suggest that a bullish upside breakout (above the major weekly down trendline) has occurred. You can see we have some ways to go, unlike the Dow. 1500 is support implied by the low end of the weekly downtrend channel. At that juncture of course we are getting closer to the prior downswing low in the 1390 area; the weekly close was 1423.

The daily chart indicates the recent oversold condition was not only suggested by a very low stochastic, but on a price basis, by the lower trading envelope set 7.5% below the 21-day moving average. A daily close over the average, now at 1706, is needed to suggest a possible upside reversal, for at least a move up toward the upper band, in the 1800 area. My crystal ball is foggy on what would spark such a move.

Keep in mind that the current momentum, as measured by the 14-day stochastic is up. There is potential for some bullish surprises, although today's action is disappointing to the bulls. Meanwhile, the bears are licking their chops. Stay tuned.

Leigh Stevens
Chief Market Strategist
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