Anything but Boring
After a boring Friday afternoon watching small-bodied candles march in a straight row across trading screens, the markets treated traders to a bout of volatility in Tuesday's early trading. While U.S. and U.K. markets closed on Monday, Asian and other European markets traded. Their trading, especially Tuesday's move down on most foreign bourses, primed the U.S. markets for a down opening.
The first three five-minute candles dropped the SPX to a low of 927.33 and the DJI to a low of 8540.73, but both indices started their climbs off those lows during the formation of the third five-minute candles. The COMPX started sooner, dropping for five minutes only. The climbs were hesitant until the 10:00 am release of April new home sales, April existing home sales, and May consumer confidence numbers. Then the indices cast aside their hesitancy and moved up with only a minimal pause for breath during the lunchtime lull and a brief pullback at the end of the day.
Breadth proved strong all day, alerting any who might be tempted to short at resistance that today might not be the best opportunity for that tactic. Volume measured 1.5 billion on the NYSE and an even stronger 1.9 billion on the Nasdaq. Advancers led decliners by a 2.4:1 ratio on the NYSE and by a 2.6:1 ratio on the Nasdaq. Up volume was 5.2 times down volume on the NYSE and an even stronger 8.6 times down volume on the Nasdaq. New highs measured 701 to 15 new lows.
The extra boost to the early, tentative climb came from economic numbers that showed the May New York Conference Board's consumer confidence index rising to 83.8 from April's 81, and both April new-home sales and existing-home sales rising more than expected. April new home sales rose 1.7% to an annualized 1.051 million rather than falling 2.7% as expected, and April existing-home sales rose 5.6% to an annualized 5.84 million rather than to the expected annualized 5.7 million.
Many market participants watch home-sales figures closely. The purchase of a new or existing home also predicts the purchase of goods needed to furnish that home. Many feel that low mortgage rates, and the strong housing and refinancing markets they produce have provided the support that has kept U.S. markets out of recession. With the peak season in the real-estate market upon us, those low mortgage rates proved too tempting to pass up. New home sales rose in the Midwest, South, and West. Inventories fell to a 3.9-month supply, down from March's 4.1-month supply.
All was not rosy, however. New home sales fell in the Northeast. Across the U.S., median prices also fell, to $185,100 from March's $185,400. Median prices remained lower than last year's April numbers, too, by 1.1%.
While April inventories of new homes fell, inventories of existing homes rose to a 5.1-month supply, up from March's 4.9-month supply. Also in contrast to new-home sales, median prices of existing homes rose 0.8% to $163,400.
With all the focus on the home-sales figures, the consumer confidence number, and one component in particular, probably figured more strongly in the positive sentiment powering the markets higher today. While the headline 83.8 number was inline or even slightly lower than the 84.7 forecast, the component measuring the confidence consumers feel in conditions six months into the future rose to 94.4 from March's 84.8. The 94.4 number was the highest it has measured since September. The worst of the fighting in Iraq has ended, crude oil prices have eased, and stock markets have climbed.
Yet many questioned how long consumer optimism about the future can be maintained without a turnaround in unemployment, with a current unemployment rate of 6% and a May forecast of 6.1%. A study of the consumer confidence number also revealed that the component measuring current conditions fell to 67.9 from April's 75.2. Those indicating that business conditions were bad rose while those indicating business conditions were good fell. These numbers indicate that the rising headline number was built on a foundation of hopes for the future rather than solid confidence in the present.
Companies reporting today included AutoZone (AZO, 87.41, up $2.49), which gained more than 3% ahead of their earnings report after the closing bell. Initial reports show an EPS of $1.30/share, higher than the expected $1.27 a share, with estimates between $1.20 and $1.31. Stores open at least a year showed sales rising 2.8% from a year ago. As of this writing, AZO was giving back some of those gains, with a bid and ask of 86.66 and 87.12.
Other stocks in the news today included Altria (MO, 42.09, down $0.22), one of the few stocks in the red today after a downgrade to neutral from buy by a UBS Warburg analyst. The downgrade was based on recent share appreciation and Friday's decision by a trial judge who refused to throw out key portions of a federal deceptive-advertising lawsuit. A%&T (T, 18.91, down 1.77%) also fell after a downgrade, this one to a sell from hold by an A.G. Edwards analyst on an unfavorable outlook for the company due to deteriorating industry fundamentals. Cell Therapeutics (CTIC, 13.05, up $1.09 or 9.11%) gained after revealing that its multiple-myeloma Trisenox injection performed well in tests involving five independent clinical studies and one case study.
A study of the charts should prove easy tonight, as they all show the same thing: a move up to strong resistance. Moves over those levels with appropriate volume patterns might be good for bullish trades, keeping high bullish-percent levels in mind and following with appropriate stops. Declines from resistance with appropriate volume patterns might be good for bearish trades, with the recent buy-the-dip sentiment kept firmly in mind and appropriate stops set.
Because it's the broadest of all our markets, the Wilshire 5000's chart merits study. To see the best overall view of the Wilshire, we'll look at the weekly chart.
Weekly chart of the Wilshire 5000:
This weekly chart shows that today's move brought the Wilshire 5000 up to strong resistance, with the index ending the day at 9087, just below the August, 2002 high of 9096.27. Today, the Wilshire traded a high of 9096.07, just $.20 below that August high. A coincidence? Not likely. More likely, nervous bulls hesitated to drive the index above that important resistance ahead of the closing bell or bears felt confident enough to sell the stocks composing the index.
Weekly ADX shows the Wilshire's trend declining to its current 20.35, just above the key 20 level that denotes a range-bound rather than a trending market. This is in keeping with the Wilshire's trading pattern since last July, when it has been range bound. Both buying pressure (orange) and selling pressure (blue) lines kicked up over the last days, indicating that perhaps there will be a battle at hand as bulls and bears both defend current levels.
Weekly RSI shows potential bearish divergence, but that bearish divergence will be negated if the Wilshire pushes above the current levels while RSI remains in overbought territory. The weekly 5(3)3 stochastic is deep in overbought territory, too, but is somewhat inconclusive as yet. In the interest of simplicity, I have not included the 10-week and 30-week averages on the chart, but they show a bullish crossing of the 30-week by the 10-week.
The daily Wilshire 5000 chart shows another interesting characteristic. The Wilshire fell below an ascending trendline on 5/19, and today's move brought it up to test the underside of that violated trendline, now intersecting with that longer-term horizontal resistance.
Daily chart of the Wilshire 5000:
The violation of the ascending trendline could not be considered bullish, but it might not be as bearish a development as it appears. When a market ascends too quickly, it often violates a first trendline and consolidates or forms a new trendline that ascends less steeply.
The daily ADX had been dropping, but appears to be flattening, perhaps indicating that although the rally has lost some strength, this may not yet be a range-bound market on a daily basis. It certainly wasn't today! Buying pressure has been increasing over the last week as selling pressure decreased. Yet both the RSI and 5(3)3 stochastics have moved up rather quickly on the recent move, perhaps showing that much strength was expended getting the Wilshire to this level. Both also show a pattern of lower highs recently, with that pattern about to be tested again as the Wilshire tests that overhead resistance.
Based on these charts, there still appears to be some momentum left to the current move, although the weekly charts predict that the upside is somewhat limited, depending on your definition of "limited," of course. The sixty-minute chart (not shown) indicates overbought conditions, but it also shows a strongly trending market in which oscillators may not be particularly useful as a guide to next action.
Perhaps of some importance, however, is the appearance of the candle on the hourly chart. That candle is a gravestone doji, a candle that appears today on many hourly charts across the indices. A gravestone doji (in which prices closed at their low of the period, also the opening value of the period) is commonly a reversal signal.
Using the Wilshire as a proxy for the broader markets, all possibilities remain open: a move above resistance, with weekly charts predicting a proportionately brief move up before a retest of support; consolidation at current resistance; or a move down from here. The Wilshire 5000, like many of the other markets, did not retrace even 38.2% of the March rally before climbing again, with a 38.2% minimum retracement expected in even the strongest of markets. Therefore, I don't believe we've yet seen "the" pullback. Whether that occurs after a move above resistance or before remains in question, but that gravestone doji indicates that there might be at least some initial hesitancy before moving above that level tomorrow.
What should traders do? As much as I'm fearful that we're near an intermediate-term market top, the only advice I can give is to trade what you see. That admonition must always include volume patterns and other intermarket relationships in your vision, but that's particularly important now. This week, trading what you see will mean trading bullish on moves above key resistance and trading bearish on moves below, always honoring the stops that are appropriate to your trading style. Bullish traders should remain cognizant of several market breadth indicators showing that risk is shifting to those in bullish trades, while bearish traders should remain aware of how swiftly further shortcovering could turn a winning trade into a losing trade. A special caution for bearish traders remains in that hourly gravestone doji, as that might predict a short-term move down, trapping bears, before the bullish sentiment carries the indices higher again.
The two S&P's sport charts similar to the Wilshire's.
Daily chart of the SPX:
The upper blue line just under the border of the chart is the 965-966 level. This line marks the August, 2002 high of 965 and the September, 2001 weekly low closing value of 965.80. On this daily chart, the SPX's violated ascending trendline has not yet intersected with the horizontal resistance, hinting either that horizontal resistance should more properly be placed at 960 or that the SPX's daily oscillators might be predicting a further rise before that joined resistance is hit. It proves somewhat more difficult then to pinpoint exact SPX resistance.
Note, however, the series of lower highs on the oscillators. As with the Wilshire 5000, that pattern will be tested at the same time that the resistance is being tested. An upside break in the pattern might predict or confirm an upside break of resistance. A downturn in those oscillators might predict or confirm the opposite.
The OEX chart shows similar characteristics, with OEX 487-490 being an appropriate action zone for this index.
The Dow Jones Industrials' chart appears somewhat different, however, with the Dow lagging the S&P's in approaching the 9000-9100 top of its July-to-present trading range. That 9000-9100 level represents the March, 2001 monthly low; a S/R zone for the DJI in October, 2001; and the August and December, 2002 tops. The 8800 level appears to be next strong resistance for the DJI, although a claim could just as easily be made for 8870, 8950, and several other numbers between current levels and 9000.
Daily chart of the DJI:
When viewing this chart, please note that I've used the DJX as a proxy for the DJI as Q-charts has skipped many daily candles for the DJI and the listed fix hasn't repaired the problem.
As with the other charts, the DJI fell beneath an ascending trendline and now rises to test the trendline again, at the same time that it's testing that 8800 resistance. On the DJI, however, ADX has declined to a level that shows this to be a trending market in which oscillators might be given more credence. Those oscillators move toward territory indicating overbought conditions, but are not quite to those levels yet, so there might still be more upside to the current movement. The ADX also shows buying pressure increasing again after having fallen.
Note that the daily 5(3)3 stochastics have been forming a series of slightly lower highs and the RSI a series of equal highs, with both those patterns soon to be tested again as the index tests resistance. As with the other indices, a break or continuation in these patterns can predict or confirm the DJI's action near resistance. The DJI also did not retrace the minimum 38.2% amount after the rally, so it's still due a pullback, perhaps after a further move up. Although the DJI did not print a gravestone doji on its hourly chart, it did print a small-bodied candle that's also indicative of a reversal pattern.
The NDX's chart appears different from that depicted on the other charts, in that the weekly chart indicates that the NDX may be forming a bullish right triangle, with a horizontal top near or at current levels. It's possible to place that top anywhere from 1160 to 1190.
Daily chart of the NDX:
This chart shows the upper resistance placed at 1160, but I would consider a resistance zone from 1160-1190 rather than a strict line of resistance at current levels. Here, daily ADX had declined, but appears to be flattening as buying pressure picks up again and selling pressure declines again. Oscillators move up. As with the oscillators on other charts, a series of lower highs has been forming, and it remains to be seen whether that pattern will be broken as oscillators and prices turn up from here or if it will continue as prices drop, too.
The NDX's hourly chart (not shown) also depicted a doji, although not the gravestone doji seen on some other charts. Bears should be wary of jumping into bearish plays based on a possible reversal as depicted by that hourly candle, however, as it may indicate only a brief downturn.
If the indices turn down in concert with hourly, daily, and weekly oscillators, especially if the daily oscillator pattern of lower highs is maintained, I would again look for a 38.2% retracement from current levels. If the indices instead sustain movements above the named resistances, especially if the daily oscillators break above their patterns of lower highs, I would expect bullish sentiment to carry the indices higher before that downturn, at which point I would begin watching retracement levels again. Weekly oscillators predict limited upside, but they're slow to turn. SPX 1000, OEX 490-500, DJI 9000-9100, and NDX 1350 are not out of the question if bullish sentiment continues, but I would follow any bullish trade with close stops. Bullish percent numbers, imbalanced new highs vs. new lows, and strong resistance levels combine to make me extremely nervous about bullish plays while remaining aware that more upside is possible.
Tomorrow's economic releases include only one economic number, but it could be a market mover. The Census Bureau releases the April durable goods orders number at 8:30 am ET, with a decline of 1-1.2% forecasted. The prior number was a 2.0% increase.
Although the durable goods orders number can be volatile and subject to large revisions, it's considered a leading indicator. Market participants closely study orders relating to non-defense capital goods as this category gives market participants a first glimpse into the producer's durable equipment portion of the GDP. This number might be particularly important in this post-Iraq climate as participants await signs of the fabled second-half recovery. Wednesday sees the preliminary GDP release.
Earnings releases tomorrow include Agile Software (AGIL, forecast of -.08 eps, after market close), discount retailer Costco (COST,.31, before the bell), homebuilder Toll Brothers (TOL, no forecast, before the market opens), homebuilder and financial-services provider Hovnanian Enterprises (HOV, 1.21, after market close), oil-and-gas services provider Veritas (VTS, no estimate, after market close), fragrance and cosmetics company Elizabeth Arden (RDEN, -.90, before the market opens), Krispy Kreme Doughnut (KKD, 0.20, before the market opens), and Whitehall Jewellers (JWL, no estimate, before the market opens), among others. While the earnings calendar is light this week, this broad spectrum of releases should at least give some insight into various areas of the economy.