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Market Wrap

Repeat Performance

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02-05-2003                   High    Low     Volume Advance/Decl
DJIA     7985.18 -  28.11   8152.53 7967.82   1675 mln  513/1116
NASDAQ   1301.50 -   4.65   1332.82 1299.35   1326 mln  473/703
S&P 100   426.01 -   2.83    435.62  425.19   totals    986/1819
S&P 500   843.59 -   4.61    861.63  842.11
RUS 2000  366.99 -   1.73    373.06  365.95
DJ TRANS 2156.42 +  11.04   2191.72 2145.08
VIX        36.81 +   0.11    37.51   35.52
VIXN       48.51 +   0.20    49.11   47.14
Put/Call Ratio 1.09

Repeat Performance
By Steve Price

That's it? That's all we got from Colin Powell's carefully prepared multimedia presentation? No sell-off? No Breakout? I had planned on writing an in depth analysis of the big move following the U.N. presentation. Certainly North Korea's indication that it was reactivating its nuclear program would get the market moving south, and it did. But only until Colin Powell began speaking. Once the speech began we started heading higher, and held those gains throughout and after the presentation.

Powell essentially presented a slew of evidence regarding Iraq's attempts at hiding weapons. He showed aerial photographs of cargo trucks leaving weapons sites two days before inspectors arrived. He played tapes of Iraqi officials talking about hiding modified vehicles (believed to contain weapons facilities), deleting references to nerve agents and cleaning up sites to get rid of forbidden ammo. He showed photos of sites being bulldozed to remove evidence of chemical agents in the top soil. He outlined Hussein's links to terrorism and demonstrated how the country is likely acquiring aluminum tubes for uranium enrichment, rather than conventional weapons. He cited inside sources and Al Qaeda operatives.

When all was said and done, the reaction from other countries, including Russia, China and France, was a big "whatever, dude." There was no smoking gun and he said nothing to the extent that the U.S was heading into Iraq with or without a coalition. France, Germany and Russia all said that they want to give inspectors more time to confirm U.S. allegations. Of course, that seems circular logic after the essence of Powell's speech was that we weren't going to find a smoking gun because Iraq is involved in a massive campaign to hide it.

We got a continued rally following the speech and ran right up into the same resistance levels we have tested for the last week. I like to look at the point and figure charts, which measure more decisive moves, as they require a bigger swing to register movement. Only a full box move, which in the case of the Dow is 50 points, registers another tick. It takes three of these moves in an opposite direction to reverse a current bullish or bearish column. Those charts are now registering reversals on an almost daily basis. In fact, the Dow reversed lower yesterday, showing us on the verge of a very bearish triple-bottom breakdown, which was confirmed by a similar formation in the SPX. In fact, that bearish reversal turned out to be a pretty good buying opportunity. Prior to that, we had seen a reversal higher that turned into a great shorting opportunity. In fact each bullish and bearish reversal we have gotten over the last week has actually been an opportunity for a contrary trade. A look at these signals on the charts below just highlights how schizophrenic the last couple weeks of trading have been. Sentiment changes on an almost daily basis and today's rally should be taken in that context.

60 minute Chart of Dow

Daily Chart of the Dow

Point and Figure Chart of the Dow

Of course, today's action is a little different in the timing. We did get two big news/market events out of the way prior to this move that had been weighing on the market over the past few days. Networking giant Cisco reported earnings after the bell Tuesday. This morning's reaction to its release carries more weight than some of the movement we've seen previously, as it followed releases from IBM and Microsoft that moved the markets in a direction that continued for some length. Those earnings reports from Microsoft and IBM, which both beat estimates, but were accompanied by cautious statements about 2003, sent the markets into a free fall. We had already begun to roll over from highs around Dow 8800 when those reports came out, and the drop picked up speed until finally settling into our current range between Dow 7900 and 8200. Cisco beat earnings, but missed revenue forecasts. It also said it was operating in the "most challenging environment the information technology industry had ever faced." After selling off after the initial release, the stock found buyers and traded higher today. One thing traders need to be aware of is that a significant percentage of Cisco's revenue came from government spending, masking a continuing soft private IT spending environment. Of course everything traded higher following the Powell speech, which leads us to the next point.

We have been waiting for Secretary Powell's presentation to give us a clue as to when we might begin an Iraqi invasion. As I've said before, I remember a law school professor cautioning me, when trying to decipher Supreme Court decisions, to look at what they do, not what they say. Applying that logic here, we essentially got a repeat of what we've already seen. The U.S. presented evidence of Iraqi deceit. It did not say it was going to invade with or without a coalition. President Bush did mention that possibility in his State of the Union address, but the general feeling is that the U.S. will invade when it does get a coalition, which it likely eventually will. There was nothing to suggest we'd be invading prior the next weapons inspection report on February 14. But in reality, we did nothing to change the timeline today and that seems the most reasonable explanation for post-speech the rally.

The boost we got across the board during the Powell speech was certainly something to indicate that Iraq is still dominating the news front. However, after seeing the futures trading down overnight following Cisco's release, most techs opened to the upside this morning. That was a full hour before the speech began and gave us an indication that the response to Cisco's comments wasn't similar to the one we got from IBM and Microsoft. In the end, after the late day drop, Cisco finished unchanged at $13.20. That could simply be because we have already sold off from those reports and this one wasn't any worse, even if it was disappointing. It could also mean that we were seeing short covering ahead of the Powell speech. With so many factors to figure in, we need to focus on what we saw. In essence, it goes back to the rule I mentioned earlier - what they did, not what they said.

What they did was rally stocks right back to the same level of resistance we have seen for the last week, where we stopped dead in our tracks. As I mentioned earlier, PnF reversals (which these were) over the past week have simply provided an opportunity for contrary action at support and resistance levels. Traders entering short positions when the Dow hits 8150 and buying in those positions when the Dow hits 7950 have had a pretty good week. It is a tight range to have to trade within, but has worked like clockwork recently. The intraday swing today was a textbook example of selling strength/resistance and buying weakness/support. Of course, in an overall downward trending market it feels much better to initiate the sale first. However, if we take the emotion out of it and simply trade what we see, either side of the range has provided equally good opportunities. The reversal we saw today, after topping out at Dow 8150 looked pretty powerful and bearish, but so did the bounce off of 7950 all the way back up yesterday afternoon and this morning.

One indication that war tensions eased after the Powell speech came from the gold market, which bid higher once again this morning, as it has the last couple of days leading up to the speech. The defensive play has never been more obvious than it has recently, but gold bugs weren't feeling so bold this afternoon. The gold futures traded all the way up to 388.90 before Powell spoke, then plummeting after the speech all the way down to 371 after hours.

Chart of Gold Futures

Crude oil futures actually remained close to unchanged. However, there were reports that Venezuela, which has increased its production recently, in spite of the ongoing general strike, had also increased exports. We also got news that OPEC production had been higher than expected. That news likely would have dropped oil prices if not for the uncertainty surrounding action in Iraq. While gold futures reflected a lower state of alert, oil prices did not. They also did not reflect imminent, action, however, remaining close to unchanged.

So what do we make of the future trading environment? Today's action was tough to decipher, as we got a bullish reaction, then a decisive turnaround into the red by the close. The Nasdaq Composite, which took out support at 1300 intraday on Tuesday, showed an initial gain of 27 points, before rolling over to settle just above that 1300 level, with a close of 1301. A close beneath 1300 would be a good indication that the next drop may not be bought. However, until we see that next dip give way, then we have to stick to what we have seen.

We can listen to the talking heads give us lessons all day on television about where we are headed next. However, the tone certainly changes quickly from day to day. When we do finally get a breakout, the general rule is that the longer the consolidation, the bigger the breakout/breakdown. Remember that any upside breakout still has possible strong resistance at former strong support around Dow 8300, along with a head and shoulders neckline break in the 8200-8300 range. On the downside, there is little to support us before we hit the July lows. Trade what you see, because opinions have been wrong more than right in recent sessions.

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