Five-Day Winning Streak?
Barely. I spotted a headline about the five-day winning streak when preparing for this article. Indices closed in the green today, but only minimally, with the DJI closing up 11.80 points, the COMPX up 6.55 points, the SPX up 1.74 points, and the OEX up .66 points. Across the indices, daily charts sported doji's. In the case of the two S&P's and the DJI, those doji's formed gravestone doji's, doji's with a long upper shadow and no or little lower shadow.
Doji's at resistance raise the possibility of a three-candle reversal signal known as an evening-star pattern, but that pattern requires confirmation from tomorrow's trading. We'll look at that possibility later when we examine the charts.
This morning brought no hint of possible reversals, however. Before the bell, the release of the durable goods number showed April orders falling 2.4%, more than the expected 0.9% drop. Market participants ignored the report and its internals. Those internals revealed that April orders for core capital goods, those excluding defense goods and civilian aircraft, fell 3% from March's rise of 4.7%. While some felt that the small decrease was reassuring after March's gain, perhaps that core number should be the focus of more attention. It's a leading indicator for the producers' durable equipment (PDE) component of the GDP. With the PDE the largest component of business investment, today's number provides a glimpse into GDP growth in the coming quarters. That glimpse was not particularly reassuring.
Orders for motor vehicles and parts dropped 3%, causing orders for all transportation equipment to fall 5.4%. Orders for civilian aircraft soared 48.6%, but orders for military aircraft dropped 26.4%. Perhaps these results prompted the Dow Jones Transportation Index's 5.79 drop on the day, one of the few indices to lose ground.
Of particular interest to Fed watchers was the 0.1% drop in unfilled core orders. When that number rises, companies must increase production to meet the orders, but with a drop in the number, companies do not need to ratchet up production. The drop was minimal, but when testifying last week, Federal Reserve Chairman Alan Greenspan mentioned the previously rising unfilled core orders as a sign that the economy was recovering.
Although one source characterizes the durable goods number as being a market mover, that didn't happen today. If global markets had primed the U.S. markets for a drop yesterday morning, they did the opposite today. The Nikkei climbed 1.4% and European markets traded in the green, already challenging important resistance as U.S. markets opened. Bonds dropped and the dollar rose ahead of the 9:30 open of the U.S. markets. Later, the FTSE 100 closed above the key 4000 level, at 4071, and both the CAC 40 and DAX closed above 2900.
U.S. markets opened in the green, although perhaps more modestly than the performances of global markets and overnight U.S. futures led market participants to expect. Volume patterns confirmed the bullish tenor of the markets, with strong volume and with advancers leading decliners. Other intermarket relationships confirmed the bullish tenor, too. By 11:45 ET, indices broke through important resistance levels to trade at what would become their day's highs.
The Wilshire 5000 broke through 9100, trading as high as 9156.47. The DJI broke through 8850, trading as high as 8854.50; and the SPX broke through 950, trading as high as 959.39, just below the 960-965 zone traders awaited. The COMPX achieved a 1571.85 high, and the NDX a 1181.93 high. As Jeff pointed out, the BIX also traded over 300, reaching a day's high of 301.42.
As I mentioned in last night's wrap, though, bullish traders had reason to remain watchful, even in a seemingly bullish environment. As the markets moved into the lunchtime lull, a sudden decline sent them toward support levels. The markets tried twice more during the afternoon to reach those highs again, but failed each time. The DJI closed just below 8800, the BIX just below 300, and the OEX just below 480. The SPX managed a close just above 950, the COMPX a close just above 1520, and the Wilshire a close just above 9100.
Those frequent inclusions of the word "just" were not accidental or a sign of lackadaisical editing, but rather were intended to emphasize the tenuousness of today's closes. There was nothing tenuous about volume patterns, however. Today's volume amounted to a strong 3.5 billion, with 1.5 billion shares traded on the NYSE and 2 billion on the Nasdaq. Advancers led decliners by identical 19:14 ratios on both the NYSE and Nasdaq. Up volume led on both the NYSE and the Nasdaq, although on the NYSE, up volume began losing ground to down volume as the day progressed. By day's end, up volume was a neutral 1.2 times down volume on the NYSE. New highs numbered 605 against 18 new lows.
Sector gainers today were led by the Dow Jones US Home Construction Index (DJUSHB, up 3.12%). The airline index ($XAL, down 2.90%) led the decliners.
Noteworthy stocks included Costco (COST, 37.35, up 1.43 or 4%), up after reporting Q3 earnings that rose 18% and sales that rose 11%. The earnings surprised to the upside, while sales came in slightly below forecasts. Krispy Kreme Doughnut (KKD, 34.18, up 2.32 or 7.3%), the short-seller's nightmare stock, jumped after reporting Q1 net income of $.22/share, above estimates and the year-earlier $.15/share. Sales increased 24%. Chip-maker Rambus (RMBS, 17.55, up 1.11 or 6.75%) rose after a judge dismissed a shareholder suit against the company.
Toll Brothers (TOL, 28.50, up 1.05 or 3.83%) gained after Q2 net income climbed to $.72/share, higher than the expected $.68/share. Demand increased for TOL after weather conditions improved in April and May, and the war with Iraq concluded, the company said. Traders should note that this is a peak season for real-estate sales.
Notable decliners included Altria Group (MO, 41.33, down .76 or 1.81%), falling despite the declaration of a regular quarterly dividend of $0.64/share; and Semtech (SMTC, 15.40, down 1.50 or 8.88%) down after reporting that Q1 net income declined while orders increased. Office Depot (ODP, 13.20, down $.50 or 3.65%) guided analysts to expect Q2 earnings of $.16-.18, rather than the average prediction of $.18. A company spokesperson reported no signs of significant economic improvement in North America or Europe.
Last night, I began a study of the charts with a look at the Wilshire 5000, and that seems the appropriate place to start tonight, too, beginning with the daily chart rather than the weekly chart.
Daily Chart of the Wilshire 5000:
Last night's study of this chart determined that the Wilshire 5000 had nestled underneath the resistance provided by the violated ascending red trendline and the horizontal resistance at 9100. That remains true, with today's candle nudging up underneath that resistance, too. However, today's candle is a small-bodied candle with a relatively long upper shadow, a potential reversal signal.
Another change appears on the chart. Last night, I mentioned that the oscillators had been forming a pattern of lower highs, and that traders could use a break or continuation of that pattern as a guide to entering trades today. RSI broke through that pattern this morning, confirming today's early rise. However, RSI has now flattened, and the 5(3)3 stochastics did not break through their pattern of lower highs. Both now move further toward overbought levels.
Daily ADX continued to flatten while buying pressure continued to rise and selling pressure continued to fall. The changes in this chart's aspect prove subtle, but demonstrate increased risks to those in bullish plays across the markets, I believe.
Weekly oscillators and ADX (not shown) confirm these conclusions, with weekly RSI now fully in territory indicating overbought conditions and higher than at previous moves to 9100. Weekly 5(3)3 stochastics and ADX flattened. The Wilshire's chart leads me to conclude that although I felt comfortable entering a bullish daytrade early this morning due to the positive market tenor, I would feel less comfortable tomorrow. Even today, I followed that trade with raised stops, letting the market take me out at a small profit.
These chart developments do not preclude the possibility of further upside. The potential reversal signal requires confirmation tomorrow, confirmation that will not be determined until tomorrow's close. However, at this point, bullish traders might take steps to guard profits while bearish traders should remain aware that confirmation has not yet occurred. Those seeking bearish trades might seek confirmation, then, in market action and in intermarket relationships such as the performance of bonds and volume patterns, always prepared to exit on strength.
Although the retracement levels cluttered the chart, I included Fibonacci levels on the chart to show where a typical retracement might take the Wilshire 5000 if the index turned down from current levels. The rally proved stronger than many expected, and now market wisdom predicts a shallow pullback. That shallow pullback should still retrace 1/3 to 1/2 of the rally, however. Market participants might begin looking for a steadying on a Wilshire 5000 move to its simple 200-dma at 8620, its 38.2% retracement of the rally at 8525, or its 200-ema at 8379, just above the 50% retracement at 8330. Of course, should the Wilshire confirm the break above 9100 by producing two or three daily closes above that level or a 3% move above it, bullish sentiment might carry the Wilshire toward 9325, at which point those retracement values would need to be recalculated.
I've also included Fibonacci retracement values on the daily SPX chart.
Daily chart of the SPX:
Like the Wilshire, the SPX daily candle demonstrates a potential reversal signal, with the SPX printing a gravestone doji at resistance. Unlike on the Wilshire's chart, the RSI did not confirm today's move by a break through the pattern of lower highs. The daily 5(3)3 stochastics also did not break above their pattern of lower highs. ADX remains flat this week despite the increase in prices, showing that the upside trend does not yet regain strength.
I reiterate the same cautions here as I did with the Wilshire. The potential reversal signal remains a potential signal only until tomorrow's trade either confirms or negates that potential. However, this potential reversal signal, the failure of the oscillators to break above that pattern of lower highs, and the positioning of those oscillators in overbought territory confirm the risk to those carrying bullish trades.
The Fibonacci retracement levels show that if tomorrow's trading confirms the reversal signal, a 38.2% retracement would take the index to the 894 level. On a pullback, traders might first begin looking for strength on a move down to the 200-ema at 911, the 38.2% retracement at 894, the 200-sma at 885, or the 50% retracement at 874.
If the SPX should instead continue to move up, as is possible, traders should add today's high to possible resistance levels, as well as the known 960-965 resistance. Although a breakout above those levels appears unlikely at the moment, that breakout would see next resistance near 990 and then near 1000.
The OEX daily chart shows similar characteristics: a gravestone doji, a flattening of RSI at the trendline delineating the pattern of lower highs, a failure of the 5(3)3 stochastics to break through its own trend of lower highs, and a flattening of the ADX. However, the daily ADX may be turning up slightly, although the movement proves far from conclusive as yet. The 5(3)3 stochastics still move up, however, as do the 21(3)3's, with the longer-term 21(3)3's not yet in territory indicating oversold conditions.
On a pullback from current levels, traders should watch for strength or a steadying on a move down to the 200-ema at 461, the 38.2% retracement at 452, the 200-ema at 448, or the 50% retracement at 442. If the OEX should instead break above the current range, traders should add today's high to resistance levels to watch, as well as the known 487-490 and 500 levels. A move above 500, although appearing unlikely at the current time, might see a move up to next strong resistance near 550.
A discussion of the OEX would not be complete without a mention of the VIX, as one reader reminded me today. The VIX and VXN gained today. The volatility indices sometimes do gain on a day when the indices trade near key support or resistance, as some fearfulness creeps into trading. Last week, the VIX touched the lower line of a descending trendline that has defined VIX lows since last July, and has begun moving up and away from that line, but it has not yet reached the sub-20 levels that marked the August and March lows for the VIX. Therefore, it's difficult to ascertain whether the VIX will continue up from current levels as indices turn down from resistance or follow the trendline down to the sub-20 level while the indices maintain levels above key resistance.
As I did last night, I'm using the DJX's chart as a proxy for the DJI's, since Q-chart's DJI chart skipped some of the daily candles.
Daily chart of the DJX:
The DJX chart features the same gravestone doji under resistance as seen in the other charts. RSI flattens just beneath the line indicating overbought levels, at an equal high as that made during lower price highs. If this action continues, it indicates bearish divergence. The fast line of the 5(3)3 stochastics poked above the trendline of lower highs, but the slow line has not confirmed. ADX appears to have cupped up, but remains below the key 20 that indicates a trending rather than a rangebound market. Buying pressure has been moving up, but may be showing a tendency to flatten.
These chart details lead me to reach the same conclusion as that reached with the other indices. If the DJI should confirm that evening-star formation, traders should begin watching for next strength or a steadying on a move to the 200-ema at 8502, the combined 200-sma and 38.2% retracement level at 8306, or the 50% retracement level at 8138. I would also add historical support levels at 8200 and 8250 to this list.
If the DJI should instead move up, traders should look for next resistance at today's high, 8880, 9000, and 9050. Although a move above those resistance levels appears unlikely, such a move might initiate a new leg up, sending the DJI toward 9375.
Yesterday, I noted the potential for a bullish right triangle formation on the NDX, although other writers have noted different, equally valid formations. On the following chart, I've indicated one possible top for the NDX bullish triangle, although as I stated yesterday, I would consider a 1160-1190 resistance zone for this top rather than the specific 1160 resistance.
Daily chart of the NDX:
On this chart, you'll encounter the same aspects as found on the other charts: a doji at resistance, RSI and stochastics staying beneath a pattern of lower highs, RSI flattening, and ADX remaining flat. Buying pressure may be flattening after its recent climb, too.
If the potential evening-star formation is confirmed, traders should look for next strength or a steadying near the intersecting historical resistance at 1100 and the 38.2% retracement at 1089, the 200-ema and rising blue trendline at 1081, and the 50% retracement at 1060.
If the NDX should instead move up, next resistance might be found at 1190 and the round-number resistance at 1200. Although an extended move up appears unlikely without a pullback occurring first, a move over 1200 might see a next leg initiated, with a rise to 1300 then made possible. As with the other indices, however, the risks now shift to those in bullish positions, while those seeking bearish trades should remain aware that the potential evening-star formation has not yet been confirmed.
The appetite for tech stocks may continue, however. After the bell, Agile Software (AGIL, 8.10, up 0.38 or 4.92%) reported higher sales, resulting in a narrowing of the Q4 net loss from the same-period loss reported last year. That loss was $.06/share, less than last year's $.39/share. This report beat expectations. Although after-hours trading often proves unreliable, AGIL added to its gains in after-hours trading, with bids and asks of 8.95 x 9.05 at the time this article was written.
Tech Data (TECD, 26, down 0.33 or 1.25%) extended its losses in after-hours trading, however, after reporting a smaller-than-expected net profit of $.38/share, 40% less than last year's $.60/share. At the time this article was written, bids and asks were 24.76 x 25.
Tomorrow's economic calendar includes releases of initial and four-week jobless claims, Q1 preliminary GDP, corporate profits, the help-wanted index, natural gas inventories, chain deflator, and money supply. Initial claims will be released before the bell and will be closely watched. The preliminary chain deflator and Q1 preliminary GDP will also be released before the bell, while the help-wanted index will be released at 10 ET.
Previous four-week jobless claims numbered 428,000. The previous initial claims were 433,000, and I've located predictions that vary from 420,000 to 435,000 for the current number.
Although gross domestic product measures economic activity, of intense interest in the current climate, the preliminary Q1 GDP number to be released tomorrow might be discounted as old news, as the market has often discounted numbers collected while the U.S. dealt with the Iraq situation. The prior number was for 1.6% growth, with the forecasts for the current number between 1.8-1.9% growth.
Earnings to be released tomorrow include Take-Two Interactive Software (TTWO, 26.25, up 1.26 or 5.04%) and Chico's (CHS, 21.60, up 0.59 or 2.81%) before the bell; and McData Corporation (MCDT, 11.05, down 0.45) and J.D. Edwards & Company (JDEC, 12.02, up 0.59 or 5.16%) after the close.
See you tomorrow morning!