Not Quite There
Have we finally run out of gas? It is starting to feel that way, as we are approaching significant levels in all major indices. That's not to say we won't travel further into the green, but we may need to re-fill the tank in order to do so. As we get to major resistance levels, not only has a whole bunch of cash been shifted from other assets into stocks, but shorts start to smell blood in the water, and begin picking tops.
After a 1700 point gain in the Dow, we got a snapshot of how we'd react to the August high when we got there, with a blow-off top this morning. The Dow traded within 34 points of the August rally top at 9077, before pulling back hard; following manufacturing data that was released mid-morning. After topping at 9043.37, the blue chips pulled all the way back and re-tested support at 8800. The approach to the August high provided a low/risk high reward short play that could be closed if that August high was broken. And boy did the shorts play.
Following last week's surprisingly strong Chicago PMI number, which indicated a shift from contraction to expansion, analysts were expecting The Institute for Supply Management (ISM) report to also show an increase. After two straight months under a reading of 50, which indicates manufacturing contraction, the number was expected to come in as 50.8. The monthly diffusion index increased, but only to 49.2, indicating the manufacturing sector is still in contraction mode. This was a big disappointment after most of last week's economic numbers were positive. While it led to a sell-off intraday, we still saw a higher low on the pullback, with buyers coming back at 8800, driving the average back up to a close of 8862.57, down only 33 points on the day. It makes sense that we would see some consolidation as we test that August high, with the 200-dma of 9177 also just above. We haven't seen the Dow above the 200-dma since the end of May, and it will take some real buying to get us over this next hump. If we do, we could see blue skies above for a while, however, we need to crack that level first. One more bullish sign we are seeing is a series of higher highs and higher lows.
Daily Chart of the Dow
There are a number of other factors that could also weigh into a pullback, before we get that run. First, the bullish percentages are all much extended from the recent rally. The bullish percent measures the percentage of stocks in a given index that are giving point and figure buy signals. The Dow and NDX are in overbought territory at 72% and 80% respectively (70% is overbought), while the Nasdaq Composite is sitting on its bearish resistance line at 48% and the S&P 500 is sitting on its bearish resistance line at 66%.
We are also seeing the Dow run out of steam at the 38.2% retracement level from the all-time high, to July's recent low, for the second time at the same level. This would represent a more macro view of the action, and coincides with the other factors measured above. Traders need to be aware of all of these barriers currently facing us at the end of a long rally. As we head deeper into the holiday season, we will see less and less trading activity, virtually coming to a halt between Christmas and New Year's Eve. Therefore, we will require more than just aimless drifting to get over these levels.
Weekly Chart of the Dow
The morning started out positive following good news from United Airlines, which submitted another tentative deal for a vote from its mechanics and Wal-Mart (WMT), which said it had experienced record one-day sales on November 29, the day after Thanksgiving. The retail behemoth registered domestic sales o $1.43 billion, compared to last year's day after Thanksgiving total of $1.25 billion. WMT cited more customers and higher average ticket price. The Wall Street Journal said retail sales were better than expected, with a 12.3% increase on Friday and 9% on Saturday. There has been quite a bit of concern over whether the gains following recent positive news about unemployment and personal spending would be derailed with a slow holiday shopping season. Any broad based economic recovery will be highly dependent on consumer spending, which makes up 2/3 of GDP. So far, the pre- holiday shopping season had been disappointing, with several retailers, Wal-Mart included, saying November sales had come in below expectations.
This morning's retail data was certainly a bullish sign, but we have to remember that comparing this year's sales to last is not an exact measure. With a late Thanksgiving, and six fewer official shopping days between Thanksgiving and Christmas, the shift in sales from November to December is a reasonable expectation. This weekend's big number was also somewhat expected, as shoppers who may have put off shopping to avoid the crowds, having one extra week last year, had a shorter time frame this year, with one less weekend. One note, however, is that the discounters saw much of the gain from last year, indicating shoppers shifting their budgets to the less expensive side this year. That was apparent this weekend, as I traveled back to Chicago. I stayed near my old condo just off Michigan Avenue, and this weekend's crowds were nothing like those of past years. In fact, there were NO LINES at Crate and Barrel on Sunday afternoon. In the past I can remember standing in line for 20 minutes just to get up to the register. This year I simply walked up and was helped immediately. The Retail Index (RLX.X) finished up mildly, after an initial surge in the morning. There have been some cautious comments from retail groups, warning us not to get too excited just yet. The Association of Shopping Centers warned that this weekend represented only 10% of total holiday sales and there was a long road before declaring the season a success. The Bank of Tokyo, which puts out chain store sales numbers, made similar statements. Certainly things could be worse, and this morning's data is a positive, but I'm not jumping on the retail bandwagon just yet.
We got some additional good news for the techs, after Intel (INTC) and Advanced Micro Devices (AMD) were upgraded by Lehman Brother's Dan Niles. He cited the 180 million PCs that are now over four years old, which will most likely need replacing, as well as improving corporate profits that could drive business investment. He also mentioned the fact that Windows 95 will enter the non-support phase for Microsoft at the end of the year and Windows 98 and NT will enter the non-support phase in June of next year. Those upgrades helped lift the Semiconductor Index to a morning high of 393.80, which was an 84% gain since the middle of October. It also tested resistance at 400 from June and July, as well as the 200-dma at 407 and the PnF bullish vertical count of 412. The group fell back to a close of 375 by the end of the day, but still showed a slight gain.
This group helped the Nasdaq Composite break its 200-dma intraday once again, and post a small gain, which it held onto at the close. The Nasdaq 100 closed just above its 200-dma for the 3rd time in the last 5 days, and these indices have been creeping and crawling around those 200-dmas for the last week now. Those gains could be extended after software maker Citrix Systems guided higher after the bell. It cited uncertainty in IT spending, which is a mantra we are hearing from virtually every tech, but nevertheless raised its earnings and revenue guidance, sending the stock up $1.43 (11.5%) after hours. With the Dow testing its own this morning, look for a crossover and hold by all three before breathing a sigh of relief to the long side. While either the techs or the Dow cracking those averages looks bullish, one is bound to be an anchor for the others if they can't all accomplish the task.
Chart of the Nasdaq Composite
Now that we are bumping our heads against that 200-dma in all three averages, traders can look for a decisive move above those levels as a signal to sharpen the horns. However, the most prudent action would be to buy a pullback to support at those levels. If we fail to hold the 200-dmas and head lower, then we don't want to get caught in a bull trap. The trick then will be to find a higher low on the pullback. If we get a lower low, trading down to Dow 8600 or Nasdaq 1350, then we will have broken the rising trend, and we can reassess overall market direction. It is rare that so many significant levels converge, so let's pay close attention and take advantage of the signals.