Option Investor
Market Wrap

A Setup

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     07-14-2004            High     Low     Volume Advance/Decline
DJIA    10208.80 - 38.79 10286.89 10172.39 1.78 bln   1336/1467
NASDAQ   1914.88 - 16.78  1937.68  1908.98 2.08 bln   1114/1876
S&P 100   541.79 -  2.21   546.01   539.90   Totals   2450/3343
S&P 500  1111.47 -  3.67  1119.60  1107.83 
RUS 2000  559.74 -  2.95   565.88   557.66
DJ TRANS 3085.22 +  5.48  3107.87  3058.57
VIX        13.76 -  0.70    16.59    13.34
VXO        15.10 -  0.58    16.16    14.43
VXN        21.64 +  0.22    22.37    21.07
Total Volume 4,221M
Total UpVol  1,357M
Total DnVol  2,804M
52wk Highs     136
52wk Lows      210
TRIN          1.52
PUT/CALL      0.94

Disappointment over some aspects of Intel's earnings report set markets up for a decline in Wednesday's trading. The parade of warnings from after Tuesday's close and before Wednesday's open also contributed, with those warnings coming from ELMG, IMN, LIN, and KOMG, perhaps among others. Despite gains in banking stocks, tech weakness in Asia sent the Nikkei 2.17 percent lower. European bourses headed lower. So did our futures. Merrill Lynch trimmed its earnings estimates for the bellwether tech stock, INTC, and Deutsche Bank made negative comments about the company's inventories. Prudential cut INTC's rating to neutral. The setup was perfect.

At 8:30, the release of June's import and export prices and retail sales also contributed to anticipated weakness in the markets. May's imports had risen 0.2 percent, and exports had risen 0.4 percent. June's imports dropped 0.2 percent, with the ex-oil number flat. June's exports dropped 0.6 percent, with the ex-ag number dropping 0.1 percent. Exports are the most closely watched of the export/import numbers since they indicate demand for U.S. goods overseas, but also since the import number lags other indicators. The numbers were termed soft, and the setup was almost complete.

Retail sales might have been the most closely watched of all the numbers released Wednesday morning, with overseas analysts mentioning U.S. retail sales frequently over the last week. Although retail sales can be volatile, they're indicative of one component of consumer spending patterns. May's retail sales had risen 1.2 percent and 0.7 percent ex-auto, but economists had forecast a 0.7 percent drop for June. Instead, June's retail sales fell a greater-than-expected 1.1 percent, with May's retail sales revised up to a 1.4 percent gain. June's auto sales fell 4.3 percent, their deepest cut since February 2003, according to one article. Ex-auto retail sales fell 0.2 percent in June. The setup was complete.

Despite the disappointing export and retail sales numbers, futures displayed little reaction at first. They had dropped after the Intel announcement after hours Tuesday and drifted down near the overnight lows just prior to the 8:30 announcements. They drifted slightly lower.

Juniper Network's overnight announcement that it expected Q3 earnings to exceed analysts' expectations sent that stock higher by 9 percent in the pre-market but did little to stem tech weakness. Earnings announcements pre-open included Bank of America's better-than-expected results, but that wasn't enough, either.

The setup worked. For a few minutes. Cash markets displayed the expected weakness at the open, with the SOX plunging through the 440 level to a morning low of 420.69. The TRAN dropped low enough to test last Friday's low. The Nasdaq opened below its 200-ema after closing beneath it Tuesday for the first time since May's weakness, with the Nasdaq then dropping to 1908.98. The Dow fell low enough to touch its 200-sma, perhaps helping to trigger the V-shaped recovery that soon began.

That rebound proved impulsive, to borrow OIN Market Monitor commentator Keene Little's expression. At first markets seemed little disturbed by news of an explosion in Iraq that killed Mosul's governor or the Department of Energy's revelation that crude inventories fell 2.1 billion against an expected climb. The API's industry figures showed an even larger drop of 5.1 billion, with the two figures seldom agreeing. Gasoline stocks also fell against an expectation of a small rise. Even the TRAN chugged higher, stretching above 3100 again. The initial lack of response may have been due to the rise in distillate inventories, perhaps hinting that those inventories had just been shifting up the refining food chain from crude to distillates. Perhaps the lack of response was due to a formation on the intraday chart of the crude futures that hinted that futures were unlikely to move above $40.00/barrel.

Once crude futures moved above $40.00 at about 1:00 EST, however, indices dove.

Annotated 30-Minute Chart of Crude Futures:

Annotated 30-Minute Chart of the SPX:

The official Fed-speak line lately has been that inflationary pressures due to rising energy costs will be transitory. Market watchers have also noted that consumer sentiment usually isn't dented too heavily by rising gasoline costs as long as consumers feel those costs are temporary. Lately, however, a retailer blamed lowered sales on the bite higher gasoline costs were taking out of customer's spending. While tomorrow might see conciliatory statements out of OPEC and non-OPEC oil-producing countries, a continued rise in crude prices should continue to pressure equities.

Also exerting pressure was the 4.48 percent drop in the SOX.

Annotated Daily Chart of the SOX:

While a bounce back up to test broken support at 440 can't be ruled out, neither can a test of 406 likely support. However, as dire as the SOX's chart looks, the Nasdaq's offers some hope that the decline in that index may be almost over on the short term.

Annotated Daily Chart of the Nasdaq:

Confirmation of the possible reversal signal would occur with an open tomorrow above today's close, preferably a gap higher opening, and then a continued climb. Any reversal might be short lived, however, consisting of a rise to test broken support, perhaps near the midline of the descending regression channel or perhaps a bit higher, near the 1960 former support or the 50-dma, now at 1964.78.

The Russell 2000 also offers hope of a possible bounce, but one that might be short lived.

Annotated Daily Chart of the Russell 2000:

A drop through the Russell 2000's 557.70-ish support instead would suggest a possible retest of May's low.

The Dow clung to recent support, managing a close above the 200- sma and the midline of its descending regression channel, prepared for a downturn through that channel or a rise up to test Wednesday's high and then the 100-dma and perhaps 10,300-10,350, with each step dependent on a successful retest of lower resistance.

Annotated Daily Chart of the Dow:

The SPX also continues to bounce from tests of the midline support of its descending regression channel, although the term "bounce" must be loosely applied. The SPX has not retested its 200-sma, but market participants should watch for a possible test of that average, now at 1,102.65, as it was touches of that SPX average that bounced markets in May. A failure to bounce on a test this time could send the SPX toward 1,090 and then toward the bottom of its regression channel, sending other indices lower, too, but market bears should probably prepare for at least a tepid bounce attempt if that average should be touched.

Annotated Daily Chart of the SPX:

Did anything change in after hours to change the pictures on these charts? After-hours earnings included INTC competitor AMD, with the company saying that higher sales produced a Q2 profit in comparison to the year-ago loss. Reports characterized earnings as being in line with estimates. At the time this report was prepared, AMD was trading at $13.33, down from the close at $13.74. AAPL's earnings of 16 cents/share beat expectations for 15 cents per share. Sales of $2.014 billion also beat expectations for sales of $1.94 billion. As this report was prepared, AAPL was trading at $29.70, up from the close at $29.58. QLGC and SNDK also reported after hours, with both gaining after hours. QLGC traded at $25.68 as this report was prepared, up from the close at $24.50. QLGC reported earnings in line with expectations. SNDK had climbed to $23.82 as this report was prepared, up significantly from the close at $19.98. SNDK beat forecasts by 8 cents a share. Revenue was $433.29 million against expectations of $410.89 million.

Nasdaq futures climbed after the cash close, at least keeping alive the possibility that it could deliver on the suggested reversal signal. Dow and SPX futures climbed, too, building hope that they could cling to midline support on their descending regression channels. In a climate of increasing fuel costs, however, those hopes prove tenuous, and an 8:30 report tomorrow could explode them.

Thursday's economic reports include the much-awaited June PPI, to be released at 8:30. For more than a week, I've been reading reports on forex-related sites about how the dollar has been pressured by worries about the PPI. May's core PPI, excluding food and energy costs, had shown a 0.3 percent increase, with expectations for June's number at a 0.2 percent rise. May's PPI had shown an 0.8 percent increase, with expectations for June's number from a flat number to a 0.2 percent increase. A much higher than expected PPI number could damage any hopes for a bounce.

Also to be released Thursday morning are the initial claims numbers, with last week's claims at 310 thousand and with expectations for a rise to 335-340 thousand. For two weeks in June, we saw the claims number surprise to the downside, with the lower-than-expected number attributed to Federal holidays during the week. We'll see if expectations have been managed better this time with the July 4th holiday falling within the current reporting week.

Economic reports won't conclude with these releases, however. An additional 8:30 release includes the NY Empire State Index for July, with the index at 30.2 for June and forecast to measure 28 for July. At 9:15, June's capacity utilization and industrial production numbers will be released. At noon, the Philly Fed releases July's index, with the prior number at 28.9 and expectations for 25. At 2:00, the Treasury Budget figures for June will be released, with the previous number at $21.2 billion.

In addition, more than 100 companies report Thursday, including Citigroup (C, before the open), Cypress Semiconductor (CY, before the open), Fairchild Semiconductor (FCS, before the open), Marriott International (MAR, before the open), Nokia (NOK, before the open), Pepsico (PEP, before the open), Southwest Airlines (LUV, before the open), Stryker (SYK, after the close), and UnitedHealth Group (UNH, before the open).

As should be obvious from this detailing of only some of the economic and earnings reports due tomorrow, market participants will have much to digest on this option-expiration Thursday. The pin-them-to-the-numbers game usually begins Thursday afternoon, too, so that any move higher might be tempered or reversed by any one of those numbers, technical considerations as indices reach the top of recent consolidation zones, higher crude prices, or that usual pin-them-to-the numbers tendency. During May's consolidation, false breakouts occurred with increasing frequency as time progressed, and that may be happening now, too. As this report is written, markets look ready to attempt a bounce, but those bounces will be bounces into consolidation zones or proven resistance, so trade them with care if you must trade at all. Trade has been choppy within those consolidation zones, and may grow choppier still, as May's pattern proved and today confirmed.

If markets instead head lower tomorrow, bears should keep that SPX 200-sma on the radar screen, making plans as to how you'll handle tests of that moving average from which the markets bounced in May.


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