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Reordering the Alphabet

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     07-07-2003           High     Low     Volume Advance/Decline
DJIA     9216.79 +146.58  9261.12  9073.92 1.79 bln   2198/1046
NASDAQ   1720.71 + 18.72  1721.25  1685.41 1.88 bln   2349/ 983
S&P 100   505.50 +  9.42   506.53   496.08   Totals   4547/2029
S&P 500  1004.42 + 18.72  1005.56   985.70
RUS 2000  465.71 +  9.36   465.71   456.35
DJ TRANS 2458.13 + 42.82  2463.03  2416.30
VIX        22.05 +  0.44    22.54    21.79
VXN        33.51 +  1.04    33.99    32.75
Total Volume 7,401M
Total UpVol  5,060M
Total DnVol  2,341M
52wk Highs     864
52wk Lows       23
TRIN          0.49
PUT/CALL      0.71

Reordering the Alphabet
By Linda Piazza
Click here to email Linda

When does the letter "s" outrank the letter "r"? When markets surge and soar rather than retreat and retrace. When support sustains the markets while resistance fails to restrain them.

The surging and soaring began with the Asian and European markets. The Nikkei climbed to 9795, a closing level not seen since last August. The Nikkei has already achieved the upside target promised by this spring's inverse head-and-shoulders formation, but pushes ever closer to its magic 10,000 level. As the opening of our markets approached, the DAX had already climbed toward its next resistance at 3325 and soon shot above that, with next strong resistance at 3500.

This morning's early surge in the U.S. markets powered the SPX above 1000 resistance, the OEX above 500, the COMPX above 1700, and the DJI above 9200, and the indices closed above those levels. Although volume stood at a tepid 1.3 billion on the NYSE and 1.8 billion on the Nasdaq, advancers beat decliners by more than 2:1 on both exchanges. Up volume measured 4.4 times down volume on the NYSE and almost 5 times down volume on the Nasdaq.

The surging markets make both bulls and bears nervous, with markets pundits across the globe questioning the gains. These markets desperately need a pullback. Or do they? For a little while tonight, I'm playing devil's advocate--or rather bull's advocate--just as I did today on the Market Monitor.

While most pullbacks retrace 1/3 to 2/3 of a previous move, strong markets sometimes retrace as little as 1/4 or 25 percent. That's already happened. The standard Fibonacci retracement tool does not include a 25 percent retracement, but Q-charts allows a customization of the retracement tool. I added the 25 percent retracement to many of tonight's graphs. Here's what I found on the SPX daily chart.

Daily Chart of the SPX:

Last Tuesday, the SPX followed a bull flag down, trading as low at 962.10, just off the 25% retracement of the March-to-June rally. After bouncing from that level, the SPX broke out of the bull flag to the upside and now trades safely back within its ascending regression channel. Today, it broke back above its 21-dma and closed above that average. Was this a stealth pullback, one we all noted at the time but didn't consider the real pullback?

Note that RSI broke above the descending trendline, tested it and headed back up again. RSI trendline breaks often prove trustworthy. They're especially helpful because they sometimes lead price action. In this case, RSI broke through its trendline last Tuesday, just as the SPX was bouncing from that 25 percent retracement line and heading up again. Although the 5(3)3 stochastics have zoomed up to levels indicating overbought conditions, they're still in full bull run, turned straight up. The +DI portion of ADX has kicked back up again, although the ADX hasn't yet followed.

I'm supposed to be playing bull's advocate, but that still-declining ADX, coupled with what I know about historical trading patterns in July, makes me hesitant to believe the bullishness implied by the close above the 21-dma, the bounce from the 25 percent retracement, the upside breakout of the bull flag, the bullish oscillators, and the close above 1000. What's it going to take to make me trust what my eyes are seeing? A whole lot, apparently. After the steep declines over the last years, I can't stop the skepticism. Apparently I'm not alone, either, as the two volatility indices, the VIX and VXN, gained 2.04 and 3.20 percent, indicating rising fear as the markets rose. That rising fearfulness may be cheering the bulls, however, as markets need that wall of worry to climb.

Even a cautious market observer has to acknowledge the tenuous signs of economic recovery, but it's difficult to put those signs into perspective when they're liberally mixed with more troubling signs and fears of nasty surprises just around the corner. Today's trading showed a refreshingly rational reaction to news, however, with many stocks sometimes trading according to their outlook, slipping if they offered bad news and gaining if they offered better news.

For example, before the market opened this morning, drugmaker Schering Plough (SGP) debuted the warning season, saying that Q2 and full year profit would be below expectations. Blaming competitive pressures, SGP led analysts to expect Q2 earnings of 12 cents per share, down from the previously expected 18 cents per share, and said second half earnings might not match those of the first half. BMC Software (BMC) and Web content management software company FileNet (FILE) also warned. Houston's BMC said customers had delayed purchasing decisions. A FILE spokesperson mentioned that large transactions had been deferred or delayed.

Although FILE closed up, SGP and BMC both closed down, as did PRAA, the subject of a negative article in Barron's, and RBAK, RITA, and WGRD, all of which either warned or lowered guidance. What I found interesting about those reactions was that the spate of warnings did not scare the markets or diminish their gains. While those stocks declined, ATYT, the subject of a positive article in Barron's, and UNTD, MWD, BEBE, and CSL, all raised by various analysts, all gained. Although I could point to exceptions such as CERN, which was cut to a sell but still gained on the day, stocks seemed to trade in a reasonable relationship to their current outlooks.

I'm a little like the characters in the old movies with an angel on one shoulder and a devil on the other. I've got a bull on one shoulder and a bear on the other. The bear keeps whispering that any improved outlook is already built into prices. Is it? Is there even an improved outlook to be anticipated? Today, CNBC mentioned a Merrill Lynch report staying that the IT spending cycle remained depressed. Results of similar reports related to tech spending have been mixed over the last week. A Goldman Sachs study of expected IT spending showed minimal changes from the year-ago period, a better-than-expected result since expectations had been for a decline of 3.2 percent.

In addition to that better-than-expected result, other results have been positive. Early last week, a CNN Money article referred to a CIO Magazine survey of chief IT officers at 311 companies. Of those that responded, 47.4 percent had either just replaced a significant number of PC's or were currently doing so. In an intraday email update today, Jeff Bailey referenced a Needham statement mentioning expectations for positive business momentum to continue. A survey by Nikkei Market Access showed PC sales for the week ending June 22 climbing 20 percent from the year-ago level.

Certainly these varied outlooks offer some potentially bullish forecasts sprinkled among the bearish ones. In this cluster of reports, the bullish reports might even outweigh the bearish ones. Those studying the markets must negotiate such conflicting outlooks with care. How much weight should be given to the CIO Magazine survey? How much to the Merrill Lynch report? Is either outlook already priced into the market?

With the bear on one shoulder whispering "summer doldrums just ahead" and the bull on the other shoulder whispering "bullish chart formations," I'm adopting a wait-and-see attitude until the SPX clears the June 1015.33 high. That June high now coincides with the resistance offered at the midline of the rising regression channel. A close above that level would imply a move to the top of the channel, although not necessarily without an intermittent pullback or two. That top-of-the-channel level would be marked by a move to 1045-1050 depending on how quickly the SPX rose. Interim resistance would lie at the June high near 1015, also near 1027, and then at 1050, with 1050 being the strongest of the three.

If the SPX should achieve that 1050 level, the low daily ADX number hints that the SPX might settle into a trading range throughout the summer doldrums, perhaps between 937 and 1150. If the SPX instead falls below 1000, watch for support near 990, also at 986, then at 972-975, historical support and the top of the bull flag. Strongest support might lie at the 959-962 level that represents the 25 percent rally retracement. SPX 929 represents the 38.2 percent rally retracement and also is the area of the 200-ema, but there's also light support at 935.

The OEX daily chart displays similar characteristics. On July 1, the OEX dropped out of its regression channel long enough to achieve an intraday low of 484.41, approximating a 25 percent retracement of the spring rally.

Daily Chart of the OEX:

While retracing 25 percent of the rally, the OEX traded down in a bull flag, springing from the bottom of that bull flag at the same time that RSI broke above its formerly violated trendline. As with the SPX, MACD flattens, but the +DI line of the ADX has kicked up again. RSI and 5(3)3 stochastics remain bullish. The OEX closed well above its 21-dma.

Midline regression channel resistance for the OEX would be found at 510-513, and a close above that level would hint at a move toward the top of the regression channel. The OEX would hit the top of that channel near 525, depending on how quickly it rose. The OEX might see light resistance near the June high, near 417.50, near the top of the regression channel, and again at 533 and 542. If the OEX did manage a move to the top of the regression channel, the currently low ADX hints that it might also establish a trading range throughout the summer doldrums.

If the OEX should instead fall, it will fall back into the recent congestion zone with support layered underneath, perhaps strongest at 500.80-501, 497.60-498, and then between 489-491, at which point it would be testing the bull flag's support. Other support might be found at the 25 percent rally retracement just below 485, at 478.50-480, and at the 38.2 percent rally retracement and 200-ema at 469-470.

The DJI also touched its 25 percent rally retracement, doing so on July 1 when it also dipped to the bottom of its bull flag and then sprang up from that level. I haven't included the Fibonacci lines on this chart because I wanted to show a comment I'd first written on June 13, before that dip to the 25 percent retracement value, but the 25 percent retracement lies at about 8880. On June 13, I'd speculated that the bullishness of the chart formation would be preserved with a fall to 88.80 (using the DJX chart as a proxy for the Dow's). I'd expected that plunge to 88.80 to take place sooner so that the DJX would have remained within the regression channel while retreating to 88.80, but the violation of the ascending channel was brief, taking place as the DJX traded within its bull flag.

Daily Chart of the DJX:

I can add little to a discussion of this chart that hasn't already been said about the other charts. The bull flag, the regression channel, the close above the 21-dma, and the positive RSI action all appear similar.

Midline resistance would be found between 93.20-93.80, depending on how quickly the DJX rises. A close above that midline resistance and the June high might portend a move toward the top of the regression channel, near 95-95.50, depending on how quickly the DJX rose. Other resistance might be found at 9700 and 9900, but the DJX might also retreat once it hit the top of its regression channel. ADX measures less than 20, an indication of range-bound rather than trending markets.

If the DJX should instead decline, participants could first watch for support at 9200, then in 50-point increments down to 8950. The 25 percent rally retracement lies at 8880, some support exists between 8710-8740, and the 38.2 percent retracement and 200-ema lie between 86.20 and 86.50.

When studying the NDX chart, it quickly becomes apparent that the NDX has already moved above the midline resistance on its rising regression channel. This perhaps portends that other indices will do so, too. Although a classic bull flag might see a tighter range of lower highs and lower lows, the NDX pattern over the last several weeks could also be described as a bull flag, with the breakout having taken place. The NDX moved above its 21-dma last week, perhaps also portending that the other indices would do so today. It also tested and sprang up from its 25 percent rally retracement level and RSI broke above its trendline as that was happening.

Daily Chart of the NDX:

This action hints that the NDX will test the top of its regression channel, perhaps near the 1320-1350 historical resistance, although market participants might have liked a bigger closing margin above its 1280 former resistance before they started counting on testing higher resistance. Oscillators look bullish, however, with the ADX above 30 and perhaps turning up again.

Support lies beneath at 1280, although that support remains questionable, between 1265-1266, near 1250, and between 1220-1223. A steeper fall might bring the NDX back to test its 25 percent rally retracement at 1184 or to 1180 support. Other support can be found between 1162.50-1165.50 and then at 1140, the site of historical support and the 38.2 percent rally retracement.

Even though I'm viewing these charts with a bear sitting on one shoulder, the indices seem primed to move higher, perhaps only over the next week or so with maybe a down day or two along the way. Many 30-minute and 60-minute charts display oscillators that indicate short-term overbought markets, but the high ADX levels on those 30-minute and 60-minute charts hint that the upward trend remains strong and that oscillators can't be trusted. I'm still inclined to listen to the bear, particularly with the summer doldrums almost upon us, so can't quite believe the evidence I'm seeing. Not even the bear is whispering that it's time to short the markets just yet, though. He's just growling warnings.

Tomorrow, that may all change. What would change the outlook? Nothing I can predict at this point since earnings and economic releases will be light. AA will report. As Jim mentioned this weekend, this will be the first Dow component to report. GE reports on Friday. Nasdaq biggie YHOO reports on Thursday.

Tomorrow morning's economic reports include Chain Store Sales at 7:45 ET, previously -0.5%, Redbook Retail Sales at 9:00, previously +0.9%, and the June Richmond Manufacturing Index at 10:00, previously at -5.

Out of those numbers, the Richmond Manufacturing Index at 10:00 ET might be the most likely suspect to initiate a pullback on those 30-minute and 60-minute charts. May's Consumer Credit will be released at 3:00 p.m. ET, previously $10.7 billion and with a market consensus of $5.0 billion for May, but with predictions ranging from $1.5 billion to $5.3 billion. As the wide-ranging predictions demonstrate, this number can prove volatile. Perhaps due to the warnings Jonathan Levinson and others have issued about the dangers of higher consumer credit, market participants should pay more attention to this number than they usually do. Because of that volatility and because the information is considered old news, it's not often a market mover.

Earnings warnings are likely to accumulate as the week progresses. Also, as the end of the week approaches, expect attention to focus on Friday's upcoming economic release of the PPI and core PPI. Numerous weekend articles focused on Friday's PPI, with many articles speculating on the various forces that might impact the number. For example, producers from car manufacturers to 3M have been using incentives and discounts to prop up demand and undercut competitors.

Be careful picking a top just yet. If markets are going to dive rather than consolidate, we'll have evidence of that happening when key support levels are violated, and you may just get a better chance for a higher top.

Linda Piazza


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