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Market Wrap

Conflicting Evidence

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        WE 7-11          WE 7-04         WE 6-27          WE 6-13 
DOW     9119.59 + 49.38  9070.21 + 81.16 8989.05 -211.70  + 83.63 
Nasdaq  1733.93 + 70.48  1663.45 + 38.19 1625.26 - 19.46  + 18.23 
S&P-100  502.48 +  6.40   496.08 +  4.47  491.61 - 10.78  +  4.57 
S&P-500  998.14 + 12.44   985.70 +  9.48  976.22 - 19.47  +  7.08 
W5000   9610.89 +148.38  9462.51 +104.02 9358.49 -153.14  + 57.47 
RUT      473.77 + 17.42   456.35 +  7.60  448.75 -  0.81  -  0.15 
TRAN    2545.58 +130.27  2415.31 -  1.72 2417.03 - 25.25  - 13.28 
VIX       20.72 -  0.89    21.61 -  0.10   21.71 +  0.62  -  1.79 
VXN       32.80 +  0.33    32.47 +  1.54   30.93 -  1.41  -  2.12 
TRIN       0.94             1.98            1.93             1.00 
Put/Call   0.98             1.07            0.99             0.51 


Conflicting Evidence
By Linda Piazza
Click here to email Linda

Conflict brews over President Bush's apparently unsupported allegation that Iraq had sought uranium from Niger, with that statement made during his January State of the Union address. Friday afternoon, CIA Director George Tenet took the blame. CNBC reported on the issue all afternoon, noting that questions about the issue dogged President Bush in his trip in Africa, a trip he intended to focus attention on other issues.

Conflicting evidence presents itself in a study of the markets, too. Economic numbers released this week muddied the economic picture, with this week's much worse-than-expected initial claims numbers conflicting with last week's much better-than-expected ISM services number. Today saw the release of May trade deficit and June PPI numbers, with the trade gap widening to $41.8 billion, in line with expectations that ranged from $41.5 billion to $42 billion. Exports rose 0.9 percent while imports rose 0.7 percent. Increased sales of autos, capital goods, and industrial materials added to export figures, while the imports figure rose in part due to the declines in the U.S. dollar. Are we really importing more goods? The same volume of imports now costs more U.S. dollars, and those figures are recorded in U.S. dollars, but some do believe the higher figure resulted from increasing demand for capital goods and industrial materials.

June core PPI, which excludes energy and food, fell 0.1 percent rather than rising 0.3 percent as had been expected. PPI climbed 0.5 percent. The falling core PPI gave rise to debates whether deflation worries might be legitimate, but the number certainly reflects a continued inability to raise prices among the producers.

Dow biggie General Electric reported Q2 earnings that met expectations, but the bellwether stock narrowed its 2003 expectations to $1.55 to $1.61 per share from its earlier estimate of $1.55 to $1.70 per share. While some also characterized this guidance as being in line since many analysts had pegged the expectations at $1.60 per share, others reacted more negatively and the stock lost 0.25 percent. Whether this number was expected or not, it did not suggest an economic rebound underway. GE traded as high as 28.85 and as low as 27.99 on higher-than-average volume on a light-volume day on the indices, but closed at 28.12. GE blamed higher plastics and oil costs for the narrowed expectations. While the quarterly earnings of 38 cents per share met expectations, they were below the year-ago earnings of 44 cents per share. Revenue, although above expectations, was also slightly below year-ago levels.

Coca-Cola will also be battling conflicting evidence, as a former employee filed a wrongful termination suit against the company in which he charged that the company pumped up revenues and manipulated product test studies. The Justice Department now investigates, adding its heft to the SEC, which began an inquiry into the charges a month ago. During that month, KO has traded down from its June high of $48.34 to today's closing price of $43.91. Although down $0.10 today, KO bounced from its low of 43.35 to close at 43.91.

Foreign markets presented conflicting evidence of global economic strength or weakness. The Nikkei fell 320.27 points or 3.22 percent in Friday's trading, but other global bourses took little notice. The FTSE 100 closed up 0.73 percent, the CAC 40 traded up 1.29 percent, and the DAX added 1.73 percent. Our markets behaved similarly, with the Dow adding 0.92 percent, the SPX 0.95 percent, the OEX 1.08 percent, and the COMPX 1.05 percent.

I ended last weekend's Market Wrap with the prediction that the indices seemed primed to move higher, perhaps only over the next week or so, with maybe a down day or two along the way. We got the move higher from last weekend's levels and the couple of down days. Do I still believe that the move higher will end in within that period I predicted? The charts present conflicting evidence.

Daily Chart of the SPX:

After breaking out of its bull flag week before last, the SPX this week maintained 986 support. Friday, the SPX dipped below its ascending trendline and its 21-dma, but closed above both. That's the evidence on the bullish side of the case.

The bearish side can present evidence, too. The SPX's rise did not even test the midline resistance of the ascending channel, nor did it test the June high. While the SPX made a lower high, the 5(3)3 stochastics were perhaps setting up bearish divergence, with the stochs making equal highs while the price made a lower high. RSI turns over again from a lower low, not signaling divergence, but not signaling strength, either.

MACD remains inconclusive and the modest ADX level currently shows a trend-less or range-bound market. I haven't shown the hourly chart here, but it depicts similar conflicting evidence: RSI turning up again while the stochastics turn down out of overbought territory, the -DI ADX line making a bearish cross of the +DI line, and a flattening MACD.

Bearish and bullish evidence appears evenly matched, but next week's evidence of continued economic weakness or economic recovery may make one case stronger than the other. Market pundits will have much evidence to weigh, with such heavyweights or former heavyweights as C, INTC, MOT, PHTN, FRMD, TER, YUM, JPM, GENZ, GMH, AMD, AAPL, CDWC, CERN, IBM, ISSX, QLGC, SNDK, MO, KO, GM, IGT, NXTL, NOK, SAP, DCTM, CY, IDPH, MCHP, MSFT, NFLX, PSFT, SFA, SNWL, UTSI, WEBX, XLYX, and ERCY reporting. C reports Monday before the open, and INTC, MOT, PHTN, RFMD, TER, and YUM report Tuesday.

While many point to the easy comparisons to be made and the possibility that many companies can surprise to the upside, GE's experience Friday showed that participants will look beyond the easy comparisons. In addition, markets seemed priced to perfection. Take a look at only one of these stocks due to report next week.

Daily Chart of SFA:

This is a good-looking price chart complete with ascending moving averages, a stair-stepping climb higher, and an ADX still above 30, but that steep rise cannot persist forever. SFA must consolidate or pull back at some time. Evidence shows warning signs in the form of bearish divergences on the indicators. Even ADX has begun to slope down. These kinds of divergences have shown up previously in the chart--check out the stochastics highs in mid-May and mid-June and compare them to price highs--while prices continued to move higher, but they will someday signal what bearish divergences usually do signal.

SFA has more than doubled in price since February. The company's prospects had better have increased, too. Dramatically. I have no foreknowledge of SFA's likely results, and it's possible that they will surprise to the upside and the stock will continue to gain. This is just meant to be a representative chart. I can reproduce dozens of charts that look like this one. So far, few have stumbled, with most continuing to climb, consolidate, and then resume their climbs. Perhaps they can do that all the way into next year, but that seems doubtful.

In addition, next week's economic calendar is full, with the Kansas City Fed Manufacturing Index due Monday; NY Empire Manufacturing Index due Tuesday along with retail sales; June CPI, Capacity Utilization, and Industrial Production due Wednesday; Initial Claims, Building Permits, Housing Starts, and the July Philadelphia Fed due Thursday, and July preliminary Michigan Sentiment due Friday. Several of those numbers will have the capacity to move the markets, but perhaps none will be as important as the Greenspan testimony at the House on monetary policy. That testimony takes place at 10:00 ET Tuesday and it wouldn't be unlikely for market participants to decide to take profit ahead of that testimony.

Jeff Bailey sometimes poses the thought that perhaps markets aren't hit or buoyed by a specific piece of news as much as they were already primed to move a certain direction and the news provided the impetus. Right now, markets are priced as if the economic recovery had already begun, and that's where the danger lies. With conflicting technical developments, confirmation must come from price action, however.

One type of price action would be consolidation, with the SPX holding current 986 support while daily oscillators relieve overbought pressure. The modest level of the ADX hints at that possibility. If that's to happen, look for MACD to remain flat while price holds above 984-96 and RSI and the stochs travel down toward oversold levels. If consolidation occurs, it might do so in the form of a bearish right triangle, with a flat bottom either near 984-986 or slightly lower at 972-975, with a descending top formed from the two recent highs. This formation appears to be setting up on the chart and would indicate likely lower prices sometime within the next two weeks, but bearish formations can break to the upside, too.

This range would be difficult to trade as traders could not be sure how many touches of the upper trendline would occur before a fall through the lower trendline, with the best policy perhaps being a decision to wait for either an upside or downside break of the triangle.

A fall through 984 might therefore find next support at 972-975 historical support, but a break of 972 might drive the OEX down to 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.

If the SPX instead bounces from the 984-986 level, it perhaps will see next resistance at 1000, of course, and then at 1010 and 1015, near the June 1015.33 high. Above that is the resistance implied by the midline of the rising regression channel, somewhere between 1023 and 1027 depending on how quickly the SPX should rise, and then again near 1045-1050. Evidence does not currently suggest a move above the June high, but instead would favor either range-bound trading or a move lower, perhaps to test the 25 percent retracement near 960 again. Ahead of the initial reactions to Greenspan's address and the earnings and economic numbers due next week, it's not possible to project how deep a retracement would take the SPX, but a retracement between 25 percent (960) and 38.2 percent (929-930) seems most likely. That depends on earnings that reasonably approximate expectations and outlooks that leave room for hope of economic recovery. There's no guarantee that either will happen.

The OEX daily chart also displays conflicting evidence. The OEX also tested its descending trendline and its 21-dma, and closed above both. It also formed a lower high, but held 494-496 support. Bearish divergence shows up on the chart.

Daily Chart of the OEX:

Here I've included both the 21(3)3 and 5(3)3 stochastics. The 5(3)3 stochastics reveal bearish divergence (equal stochastics highs while price makes a lower high), but the 21(3)3's do not, although their downturn in midrise signals weakness, too. Unlike the SPX's RSI, OEX RSI kicked back up again on Friday, perhaps indicating that market strength was concentrated in the big caps that might be represented in the OEX. That conclusion is belied by the RUT, however, which also gained and showed an RSI that kicked back up.

OEX MACD flattens. I have not shown ADX here, but it dives even more strongly than the ADX for the SPX, indicating a continued loss of strength in the previous rally. -DI made a bearish cross of +DI, but they're still close and can recross in the other direction.

Although the low ADX shows that oscillator evidence can be trusted since the market is not strongly trending, the oscillator evidence proves inconclusive and may be pointing to a choppy market. Price must guide decisions and hopefully will realign the oscillators so that evidence can be found of future direction. CCI, shown here, is also inconclusive as it oscillates around the signal line. The same possible bearish right triangle sets up on this chart, with the preferred tactic possibly being to await either a downside or upside break of the triangle to initiate plays.

Support is layered underneath the current position, perhaps strongest at 500.80-501, 497.60-498, 494-496, and then 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.

OEX resistance is also layered closely overhead, in two-point increments. OEX 504 and 506 have proved to be resistance in the past week. The descending trendline off the recent price tops crosses near 507.75, just below last week's 508.28 high. The OEX would find a zone of resistance between 510-513, and a close above that level would hint at a move toward the top of the regression channel, currently near 530. If the OEX moves that far, it might then 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 each of these charts presents conflicting evidence, a comparison of the DJI and NDX offers even more conflicting evidence. Unlike the other indices, the DJI did not close above its 21-dma. In fact, it challenged that average and fell back from it, displaying more weakness than the two S&P's.

Daily Chart of the DJX, as proxy for DJI:

Because the DJI could not close above its 21-dma, it perhaps might be expected to show more price or oscillator weakness, too, but prices this week also maintained 9050 support on a closing basis and oscillators show similar mixed evidence.

The comparative weakness might lend more evidence to the theory that the DJI will again test its 25 percent retracement level near 8880, but the holding of 9050 support challenges that evidence. The DJI appears to be setting up a bearish right triangle, too, with the likely outcome being a downside break of that triangle. The break might not be catastrophic, however, perhaps portending a drop only to a 25 percent or 38.2 percent retracement of the rally. Support might be found 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 86.60.

An upside break of the potentially bearish right triangle would occur at a move over 9200, with last week's 9260 level providing next resistance, and with 9300, 9350, and 9400 also providing possible resistance. DJI 9400 would be the location of the midline resistance. Although oscillator evidence does not now point to a move above the midline resistance, a break above that level might send the DJI to test the top of the channel, currently near 9770. Interim resistance would be found at 95-95.50 and 9700.

One caution exists: Unlike the DJI, the TRAN did make a higher high this week, and at 2538.45, it closed far above its 21-dma at 2461.61. The TRAN often leads its sister index, the DJI, but Dow theory says that the DJI now must confirm that higher high on the TRAN. If not, we have seen divergence between the sister indices, and that predicts a fall in both.

The NDX also shows far more strength than the DJI, offering another piece of conflicting evidence. The NDX broke out of its bear flag formation and traded at a new relative high this week. Not only did it trade at a new relative high, but during this week's pullbacks, it also found support at the level of its June high. Oscillator evidence proved much less bullish than the price action, however.

Daily chart of the NDX:

Bearish divergences have been setting up, but just as with the SFA chart shown earlier, we've seen those NDX bearish divergences set up at other points throughout the rally without any significant damage to the rally. At some point, they will result in the pullback they're predicting, but it's not yet clear that time is upon us. ADX remains strong, above 30, but it has flattened. The buying pressure line has turned down, but there has as yet been no bearish cross of the two lines.

It's also possible to draw alternative lines to the ones I've drawn on the formation, what Jonathan Levinson calls a bulloney bullhorn: a widening formation of ever higher highs and lower lows that indicates emotional and unstable trading. Because these are widening formations, it's difficult to pinpoint a breakout or breakdown, but traders looking for a sign of a breakdown might first watch for a move below 1250. It's difficult to suggest a short/put play at such a breakdown, though, because that brings the NDX into a congestion zone in which support might be found at any one of several different points, including the 21-dma near 1235, 1200, and the July 1 low of 1180. NDX 1162-1166 might offer next support, with 1140 the site of historical resistance.

NDX proves the most difficult index for which to predict action because the emotional trading displayed by the bullhorn or megaphone formation produces unclear indicator evidence. This adds confusion to the conflicting evidence presented by all the indices: a strong TRAN coupled with a weaker sister DJI index; S&P charts with bearish right triangles holding support and the 21-dma; individual stock charts showing bearish divergence while charts continue to stair-step higher.

Markets behaved pretty much this week as I predicted last week. My best guess for immediate market direction is one I dread to make: markets that stutter one direction and then another, chopping around in a trading range in a manner that defies easy trading decisions. I do believe that markets will retrace again within the next two weeks and possibly next week, although perhaps not as deeply as many expect. Next week will give me and all of us a better look, though, and it's my sincere hope that my best guess for immediate market direction proves less trustworthy than last week's best guess turned out to be. We'll have more evidence before us this time next week, and perhaps our guesses will be less guesswork and more analysis of less conflicting technical and fundamental evidence.

Linda Piazza



 
 



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