The Stage Was Set, but the Anticipated Act Failed to Materialize
Foreign bourses set the stage for a strong Monday performance on U.S. markets. Asian markets took the stage first, with the Nikkei leaping up almost 100 points on its open and then closing up 191.90 points at 9839.91. That proved to be its highest close since July 10 when the Nikkei last closed over 9900. The Nikkei built upon the strong performance of the U.S. markets Friday afternoon, but market participants also celebrated after Japanese microchip testing equipment maker Advantest reported its first profit in eight quarters. Advantest's management also mentioned expectations for rising orders, a statement that cheered investors and raised hopes for economic recovery.
Europe's markets then took the stage, with Asia's warm-up act readying participants for more good news. That good news came in the form of Germany's closely watched Ifo business climate indicator, which rose to 89.2 from June's 88.8. By the time U.S. investors woke this morning, European markets were surging.
Yet our S&P futures showed a surprisingly lackluster performance in their warm-up to the U.S. open. They had tested but failed to hold over 1000 in the overnight session. Something was wrong. With all these warm-up acts preparing the stage, was our rally going to be a no-show?
CNBC did its part in warming up the audience. Before the markets opened, Maria noted statistics that showed U.S. markets prepped for continued gains. Those statistics included information on IPO's and M&A activity, with the notation that M&A activity has been the busiest in a year. Analysts tried to warm up the crowd. Prudential's chief investment strategist urged increasing equity allocations to 80 percent from 70 percent and also recommended reducing bond and cash allocations. This strategist believes the S&P 500 could gain another 20 percent according to one report. CIBC chimed in, too, with its chief investment strategist saying the U.S. economy was in the early-to-middle phase of a recovery that will be supported by earnings.
Earnings reports before the bell included defense company Northrop Grumman (NOC), copier behemoth Xerox (XRX), Kellogg (K), health insurer Humana (HUM), and BMC Software (BMC). XRX's profit actually slipped and BMC posted a loss and forecast Q2 revenue that will be lower than the previous consensus, according to one report. Still, the crowd prompters characterized all their earnings as beating expectations.
Yet S&P futures still weren't climbing over 1000. Bonds did their part, bowing out and letting equities take center stage. Yields were up significantly in premarket. Even with all that prompting and with the stage perfectly set, the SPX opened only at 999. It quickly tested 1000, rising as high as 1000.68. This act's reception proved tepid, however, and the SPX just as quickly retreated. As it turned out, the SPX had already achieved its climatic act of the day, never again touching that day's high. At the time that day's high was achieved, the SPX also tested a descending trendline off the June highs. The day's action formed a small-bodied candle that just missed being a doji.
Daily Chart of the SPX:
Although today's action saw the SPX turning down from the descending trendline that's been capping prices since the middle of June, we should remember that it's possible to draw another version of this trendline, one that includes the June 14 intraday high. That trendline has not yet been challenged. Still, today's action implies some hesitancy in driving the SPX above the current version of the descending trendline. That descending trendline now coincides with the resistance now offered by the blue regression channel.
What do we know after studying this chart? We know that the SPX still trades within a consolidation or continuation pattern defined by that descending top trendline and either the horizontal support at 975-976 or the rising red trendline marked on the chart. One formation has bearish implications while the other is neutral. We know that the low ADX number shows that the previous trend--the rally--continues to lose strength. We know that MACD has flattened, as it often does during consolidation. We can see that RSI generally maintains its pattern of lower highs, although Friday had seen RSI bump slightly above its own descending trendline. We know that the 21(3)3 stochastics have maintained their series of higher lows.
We know precious little. The SPX consolidates: that's what we know. Market participants wait in their seats, ready to leave the theater or cheer the performance. It's up to the markets now, and we must wait until those consolidation or continuation patterns are broken either to the upside or downside.
Fortunately, the ascending supporting trendline has risen to intercept the horizontal supporting line, so that we no longer have to question which line is most important or whether the bearish or neutral formation appears more valid. A downside violation of one will now be a downside violation of the other. Any such downside violation, especially on a closing basis, would suggest another test of the 25 percent rally retracement near the 982 level that marked the July 1 low, if not a move to the 38.2 percent retracement near 928-930.
An upside violation of the descending trendline is likely to push the SPX back into its ascending regression channel, suggesting a test of the previous SPX highs, if not of the rising midline resistance. Today's candle hints that we'll see a test of downside support before we witness an upside breakout, but there's nothing on the indicators that reliably confirms the potential reversal signal given by the daily candle. Since the SPX again closed above its 21-dma, we must juggle this sign of strength against the daily candle's hint of weakness.
As is often true, the OEX daily chart shows many of the same formations.
Daily Chart of the OEX:
The OEX daily chart sports a small-bodied red candle sitting near the top of the previous day's big white candle, a potential reversal signal. The candle's upper shadow tested but could not move above resistance marked on the chart. As with the SPX, both versions of the bottom supporting red trendlines now coincide, so that a downside violation of one will be a downside violation of both.
Today's candle's shape and position suggest a test of support before an upside breakout, but as with the SPX, indicators show mixed evidence. They don't reliably corroborate the potential reversal. That potential reversal signal is also undercut by its occurrence during consolidation rather than at the top of the rally. Even if tomorrow's trading results in a red candle that confirms the potential reversal signal, that reversal could hold for only a day or two. If those intersecting supporting trendlines are violated to the downside, this suggests a test of the 25 percent rally retracement at the July 1 low near 484 or perhaps even a test of the 38.2 percent retracement.
As with the SPX, an upside break suggests a test of previous recent highs. Like the SPX, the OEX again closed above its 21-dma.
On Friday, the Dow Jones Industrials broke out above the top of its descending trendline. Today's candle questions that breakout, however.
Daily Chart of the DJX, as a proxy for DJI:
Like the two S&P's, today's DJX candle was a near-doji printed at the top of the previous day's big white candle. This would be a potential reversal signal if it came after a sustained upward movement, but has less significance when it comes during consolidation. It still might portend at least a day or two's reversal, enough to push the DJX back into its consolidation pattern. It might be easier to argue, too, that the DJX has been in an uptrend since early July, forming a pattern of higher highs and higher lows, so perhaps this formation has more significance than it did for the two S&P's.
As with the S&P's, nothing on the indicators signals conclusive evidence of anything but the facts we already know: this market has been consolidating. The DJX has seen a minor breakout above its descending trendline, but perhaps not a convincing breakout. It, like the other two markets already discussed, may be signaling a need for at least one more trip down toward support.
Throwing that conclusion into doubt, however, is the recent performance of the Dow Jones Industrial's sister index, the TRAN. The TRAN has been achieving a series of higher highs and today closed over 2600 for the first time since early July 2000. The TRAN often leads its sister index, suggesting that perhaps the DJI's upside breakout was real. If it's not, and if the DJI does not hold onto gains and then best its June highs, we may be seeing divergence between the two indices, a bearish sign.
Despite the DJX's possible upside breakout above the descending trendline, the NDX's daily chart looks the most bullish of the indices depicted in this article.
Daily chart of the NDX:
The NDX still maintains its ascending regression channel. Instead of squiggling around between 50 and 60, the RSI pulses up and down in a normal manner. It's been pulsing upward over the last week as the NDX traveled up to test resistance. That resistance consists of the midline resistance of its regression channel as well as the resistance implied by a possible bull flag.
Today's candle was a doji, indicating indecision and creating a possible reversal signal that requires completion by tomorrow's action. As with the other indices, this possible reversal signal forms within a consolidation band, and so might not be as significant as it would be if it had formed at the top of a sustained upward movement.
Oscillators give mixed messages with stochastics still cycling up but with ADX easing further, indicating a further weakening of the former trend. That sometimes happens with bull flag formations, so we can't give that easing of the ADX too much weight just yet. However, in late June, at about the same time that ADX began descending, MACD broke below its pattern of higher lows, perhaps also a confirmation of impending weakness. RSI and stochastics tops have been showing bearish divergence with the price highs, too. That's been going on some time, however, without higher price highs being impacted, so we can't and shouldn't make our trading decisions on this information alone. Those divergences should, however, make us cautious.
Developments during the day and after hours didn't seem to affect market participants strongly, either, giving few clues as to market direction. Citigroup (C) and JP Morgan (JPM) ended flat today after reaching a settlement with the SEC over the investigation into Enron-related charges. After-hours releases included earnings announcements from Sprint (FON) and Barrick Gold (ABX). Excluding onetime costs and gains, FON earned a better-than-expected 35 cents per share, two cents ahead of expectations and four cents ahead of year-ago levels. Sales fell 8 percent from the year-ago period. Meeting expectations, the PCS unit lost 9 cents a share, up from its 17-cent loss in the year-ago period, while adding more customers than expected. Sales rose in the PCS unit. At 11 cents per share, ABX's Q2 income matched that of last year's second quarter, beating expectations for 6 cents per year. It seems unlikely that these announcements will guide the markets one direction or the other.
Nor is it likely that tomorrow's economic releases will tell us much. Tomorrow's economic release includes only July consumer confidence, due at 10 am ET, with a market consensus of 85, up from June's 83.5. As Jim noted this weekend in his Wrap, this consumer confidence number compiled by the Conference Board does not normally move the markets. Economists consider small changes in the number to be noise, with one source noting that only a change of 5 points or more would be considered significant. Two components compose this number: the expectations component and the current conditions component. The expectations component composes 60 percent and is considered a better leading indicator.
It's not until later in the week that economic releases heat up again. Let's hope we're not doomed to endure another day or two of no-show market performances until then.