With the NYMEX crude contract easing back toward $40.00 as U.S. markets opened, the pump was primed for market gains. Asian markets had realized those gains, also helped by tech strength and reassurances out of China.
Despite a cautionary statement from a Merrill Lynch analyst that Hewlett Packard's (HPQ) revenue gains came to the detriment of pricing, HPQ's earnings resulted in tech gains in overseas markets, helped along by news out of the semi-related stocks. Samsung Electronics posted a 5.6 percent gain after forecasting a computer memory-chip shortage this year. STMicrolectronics (STM) predicted that 2004's industry sales would expand by 30 percent. European chip-equipment companies benefited from the higher-than- expected sales from Applied Materials (AMAT) although Wednesday morning saw UBS Warburg downgrading AMAT and the semi-production industry to a neutral rating.
In addition, China reassured markets made jittery at the thought of a rate hike and a possible hard landing. Vice Premier Huang Ju said that preliminary results of some measures were already being felt. Another report showed that foreign investments in China had slowed, also easing fears that China would be forced to raise rates to cool its economy. Around the globe, metals rebounded. The Nikkei and DAX climbed back above their 200- dma's.
Our futures climbed, too, and the upside promised by the pre- market futures levels was soon delivered. The Russell 2000 gapped up to 545 on the open, headed up to a 10:15 high of 552.75. The SPX soared in the first five minutes of trade, reaching 1,100 by the 9:45 five-minute candle. The Nasdaq opened at 1,917.58, gapping above 1,900 on its way to an early morning high of 1,936.04. Within the first five minutes of trade, the DOW had climbed above 10,000 on its way to an early morning high of 10,093.
The pump might have been primed, but it was about to run dry. Midmorning, the American Petroleum Institute (API) released figures for crude, gas, and distillate stocks, noting that inventories increased for that period, with petroleum deliveries rising 4.8 percent over the same month last year. The Energy Department disputed the figures, saying that crude stocks fell by 1.1 million barrels.
John Felmy, chief economist for the API, discussed the rise in crude oil prices with a reporter from Marketwatch.com, mentioning the record prices in crude oil and gasoline and near-record levels for diesel fuel. His comments urge caution against pinning too many hopes on the informal OPEC meeting to begin this weekend, as he suggested that there isn't a lot of excess production capacity. Only Saudi Arabia has the ability to increase production, he noted, and that increase would not be a large one. OPEC raised its demand forecast, and Felmy noted the strong growth in China and U.S. was keeping demand high. Felmy also remarked that history shows that U.S. consumers don't change behavior until they perceive an increase to be permanent, at which time they change driving habits, choose different cars, and make lifestyle changes. That hasn't happened yet, according to Felmy, but with many speaking of $40.00 as being a floor for crude oil prices rather than the ceiling that it once was, consumers may begin that critical shift in thinking that Felmy mentions.
The process may have begun, with Continental Airlines announcing a hike in fares and possible wage and job cuts to offset the increasing cost of fuels. A late-day headline announced that American and United matched Continental's planned fare hikes.
Many indices had already seen their highs of the day. As they were hitting those highs, crude oil was hitting its low of the day, punching below $40.00 to $39.90 before rebounding.
Annotated 5-minute Chart of Light, Sweet Crude Oil:
The effect of that test of $40.00 and the subsequent bounce was obvious on the five-minute chart of the Dow Jones Transportation Index.
Annotated 5-Minute Chart of the TRAN:
By the end of the day, the SPX had lost 0.26 percent; the Russell 2000, 0.31 percent; the Dow, 0.31 percent; the TRAN, 0.20 percent, and the NDX, 0.08 percent. The Nasdaq eked out a 0.02 percent gain, but closed beneath 1900. Breadth patterns showed advancers leading the decliners by an 18:15 ratio on the NYSE and a 17:15 ratio on the Nasdaq, with total volume at 1.5 billion on the NYSE and 1.8 billion on the Nasdaq. Volume had reportedly been low during the morning's climb, sounding a warning that the climb might not be supported.
Weak sectors included the HMO, the Morgan Stanley Healthcare Index; the XAL, the Airline Index; the DJUSHB, the Dow Jones US Home Construction Index, and the BTK, the Biotechnology Index. Not all sectors lost ground, however. The SOX gained 0.97 percent; the INX, the CBOE Internet Index, 1.19 percent; and the NWX, the AMEX Networking Index, 1.78 percent. Other gainers included telecoms, gold, iron and steel, and the XBD, the Securities Broker Dealer Index. HPQ, credited along with AMAT with sending techs higher across the globe in overnight trading, closed higher by 3.63 percent, but AMAT tumbled 1.11 percent.
The day's trading pattern left troubling long upper shadows on many candles. If those candles had been formed at the top of a rise, they would have been dubbed shooting stars and would have been possible reversal signals, but their formation in the midst of a consolidation zone eliminates some of the bearish implications. It was just last Wednesday that I discussed hammers formed in the midst of the same consolidation patterns, and the way that their bullishness was erased by their positions within those patterns.
Let's look at how much damage the day's trading produced, beginning with the S&P 500.
Annotated Daily Chart of the SPX:
The SPX remains above its 200-dma, still mired in the congestion zone that has captured it throughout much of April. While Wednesday's candle does not have the same bearish implications that it would if produced at the top of the climb, it may nevertheless be suggesting another test of the 200-dma. Although the MACD histogram grows less negative, also watch the value of the MACD lines, as they're on the verge of moving lower and erasing the bullish price/MACD divergence that has been present.
Annotated Daily Chart of the Nasdaq:
Despite gains made in the SOX and several other tech sectors, the Nasdaq's daily candle was not a bullish one, and may be predicting another test of support.
Annotated Daily Chart of the Dow:
The Dow's chart shows some of the same characteristics seen on others. The day's candle was anything but bullish, but was produced from within a consolidation zone and so might only be a part of the normal back-and-forth of such a zone. As was true on other charts, the bullish price/MACD divergence, so cheering to bullish traders, could be erased with a strong downdraft or even several more days of lower prices.
Annotated Chart of the Russell 2000:
The Russell 2000's pattern looks somewhat better formed than that seen on other charts, and its formation is that of a possible "b" distribution formation. Unlike what is seen on several other charts, no bullish price/MACD divergence exists on this chart. Even a likely "b" distribution pattern must be watched for a downside or upside break, however.
All these charts show indices mired in congestion zones that may or may not break this week. With OPEC holding an informal meeting beginning this weekend and with option expiration week rapidly drawing to a close, the effort to hold indices steady may continue through the end of the week. Determining when breakdowns or upside breaks will have occurred has been made more difficult by the broadening or spiky nature of some of the consolidation patterns. Watch for MACD levels to dip on some indices, erasing that bullish price/MACD divergence, as one guide to market behavior. For guidance, market watchers might also pay special attention to the price of crude, watching for new highs or a downturn below $40.00 again, a move that might spike a relief rally. In addition, keep an eye on the yields for the benchmark Ten-Year Treasury Note. After piercing the neckline of a reverse H&S formation, yields fell below that line again, but are now headed higher again. Another pullback might ease pressure on equities, while a push above that neckline and then above recent highs might apply more pressure.
Annotated Daily Chart of the TNX:
From this vantage point ahead of tomorrow's open, it appears that monumental efforts have been made to hold indices above key support and may continue to be made. If fund flows are negative this week, as Jim postulated they might be based on his observations of selling patterns today, then those efforts might be swamped, but that remains to be seen.
In after-hours news, Intuit and Brocade both traded lower after releasing earnings reports, with Intuit beating expectations but saying that it would lose 6-10 cents per share in Q4, a greater- than-expected predicted loss. Brocade met expectations according to early reports but announced that it would reduce its work force.
Economic reports due Thursday include the usual weekly initial claims, with forecasts ranging from 326-330,000, with the previous number at 331,000. That number will be released at 8:30 EST. The Conference Board releases the April's Leading Indicators at 10:00 EST according to one report and earlier according to another, with estimates for the expected gain ranging from 0.1 percent to 0.2 percent. The prior number stood at 0.3 percent. Since most of the data comprising this report's data base has been previously announced, this number doesn't usually prove to be market moving. Perhaps of more interest will be May's Philadelphia Fed report to be released at noon, with the forecasts I've seen ranging from 30.5-33 against April's 32.5.
It's difficult to know what catalyst might break the indices out of their current consolidation zones, but due to the spiky, broadening nature of those zones and to this being opex week, enter trades with care, making sure that the risks taken or contracts entered are account-appropriate ones.