Option Investor
Market Wrap

Work Horses of the Big Caps

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     07-19-2004            High     Low     Volume Advance/Decline
DJIA    10994.06 - 45.72 10148.63 10063.31 1.58 bln   1465/1343
NASDAQ   1883.83 +  0.68  1893.80  1870.14 1.72 bln   1258/1805
S&P 100   536.29 +  0.39   538.61   533.94   Totals   2723/3343
S&P 500  1100.90 -  0.49  1105.52  1096.55 
RUS 2000  554.73 -  0.75   556.75   551.14
DJ TRANS 3105.13 + 16.13  3117.65  3089.62
VIX        15.17 +  0.83    15.83    14.86
VXO        14.95 -  0.40    15.94    14.72
VXN        22.21 +  1.27    22.47    21.55
Total Volume 3,660M
Total UpVol  1,542M
Total DnVol  2,070M
52wk Highs     145
52wk Lows      296
TRIN          1.15
PUT/CALL      0.70

Two work horses of the big caps, MMM and MSFT, pulled the opposite direction Monday morning, plowing index prices first one direction and then the other.

Futures had been drifting before the open, ready to be hitched to one work horse or the other. The Nikkei had been closed for a national holiday. At least in part due to Motorola's decision to trim its chip-unit IPO by one third, chip-related stocks had struggled in Asia. Without the Nikkei against which to take direction, both European markets and U.S. futures had drifted first one direction and then another in the overnight session. Pharmaceutical stocks had been a focus in European trading, with Bayer, Roche and Schering all dropping in response to news related to their companies.

MMM reported before the bell, with the company's Q3 outlook coming in below expectations. That soured investors on other reassuring news within the earnings report. Investors punished the stock, gapping it lower at the open. Four other work horses among the big caps--BA, MO, JNJ and WMT--had at first helped MSFT plow toward the bullish side of the field, furrowing indices up to test resistance, but then BA and JNJ pulled the opposite direction, lending their weight to MMM's decline. After another zig and zag toward the bullish and bearish sides of the field, the day ended with MMM lower by 5.45 percent, leading the Dow losers; BA lower by 0.95 percent; JNJ lower by 0.70 percent; MSFT higher by 1.71 percent; MO higher by 0.33 percent and WMT higher by 0.21 percent. MSFT's strength helped the Nasdaq manage a 0.68-point higher close, but it couldn't rescue the Dow or the SPX.

MSFT had benefited from positive analysts' comments ahead of its Thursday earnings report, with a Goldman Sachs analyst citing strength in the PC and server markets as his reason for believing MSFT might produce more upside than estimates suggested. WMT had confirmed that initial back-to-school sales had been strong enough to maintain its same-store sales estimates of 2-4 percent for July. BA had at first seen modest gains as an exec for that company made encouraging statements about the outlook for the industry at an air show in England. JNJ moved higher and then drove lower despite an upgrade by CIBC World Markets. The firm had speculated that Boston Scientific's recall of its stents last week might help JNJ regain market share.

The pulling power of the declining big caps plowed indices down to new relative lows by midday. Out of the BIX, TRAN, SOX, Dow, Nasdaq, Russell 2000, OEX and SPX, only the BIX and TRAN avoided those new recent lows hit about 12:30, hitting their lows earlier in the day. Surprisingly, given the closing values of the indices, the Nasdaq saw more decliners than advancers, with the adv:dec ratio at 13:18. Down volume exceeded up volume on that exchange, too, as it did on the NYSE. The pattern of advancers to decliners showed an opposite result on the NYSE, however, with advancers leading by a 17:15 ratio. New highs far exceeded new lows on the NYSE, while new lows far exceeded new highs on the Nasdaq.

That comparative strength on the part of the BIX was followed by a break above the BIX June 24 high and a close at a closing level not seen since March.

Annotated Daily Chart of the BIX:

While many have waited for the SOX to lead the indices higher, the BIX was quietly showing strength ahead of Greenspan's testimony tomorrow. As is clear from the chart, the BIX has not yet dropped below its 200-sma and now appears ready to challenge a trendline it violated in April. Those wanting market guidance might watch the BIX's challenge of that trendline, if it occurs, with a break back above the trendline perhaps suggesting that the BIX can help pull other indices higher, especially if the SOX cooperates and does its part to help the tech-related indices, while a downturn at that trendline might suggest that today's BIX breakout was a false one.

The SOX closed modestly higher, but did not contribute much strength. It has, however, approached the bottom of its descending regression channel. A 100-week moving average just below 400, at 399.81, might lend support the expected round- number support near 400 as well as the bottom-of-the-channel support, producing a technical bounce. Now that the SOX has dropped below the 38.2 percent retracement of the 2003 rally, it has vulnerability down to about 384-385, the 50 percent retracement level, so a dip that low would not be unexpected and would not undo the bullishness of the 2003 rally. A retracement to a 50 percent level is deeper than bulls might like but still not uncommon. A drop below that 50 percent retracement level becomes bearish, however.

On a SOX bounce, if one should occur, resistance might now be expected at that 424-426 level, the 38.2 percent retracement of the rally, as well as at the midline of the descending regression channel and then the 50-dma, far overhead now. A move above the 50-dma suggests a test of the top of the descending channel.

Annotated Daily Chart of the SOX:

While it's not uncommon to see a 50 percent retracement of a rally, a retracement the SOX has not yet made, the SOX does need to bounce soon to avoid falling out of the descending regression channel. Such a fall would suggest that the channel is not a bull flag, but something more ominous. A SOX fall out of the regression channel would hint that other indices could also fall out of their respective regression channels.

The Nasdaq also approached the bottom of its descending regression channel, and also produced a modest gain.

Annotated Daily Chart of the Nasdaq:

The Nasdaq sprang up from its low, but the declining MACD suggests that it still could have vulnerability down to the 1850 level, the bottom of its descending regression channel. The Nasdaq, however, has moved into a zone on its weekly chart where it's difficult to pinpoint likely support if that technical level at the bottom of the regression channel doesn't hold. The 1860- 1880 level looks like one possibility, but the 38.2 percent retracement lies all the way down at the 1756 level. While that level seems heart-stoppingly low, bulls can be cheered by the realization that the Nasdaq, unlike the SOX, has not yet retraced even 38.2 percent of the rally off the late 2002 low. As troubling as the retreat has been this year, the pattern doesn't yet look bearish on a weekly chart. Weekly MACD dips just below the signal line, however, so that a strong bounce is needed to turn it higher again.

One further comfort comes from a study of the Nasdaq's weekly chart. The 200-week moving average (simple) crosses at 1869.39, with that average lending credence to the historical support shown from the 1860-1880 level, and with the Nasdaq now close to that level. That suggests a possibility that the Nasdaq might steady somewhere from the current level down to the bottom of its descending regression channel, although it doesn't suggest the strength of any bounce.

A sustained Nasdaq move above 1900, accompanied by a strong bounce on the SOX, might cheer Nasdaq bulls enough to send it retest the 1920-1926 zone, and then the midline resistance on its descending regression channel if the 1920-1926 zone can be safely negotiated. Unlike the SOX, however, the Nasdaq's moving averages group closely together overhead in the 1980 level, appearing to fence off the Nasdaq if it should attempt a test of that zone. It will need to break above those averages before it can test the top resistance of its regression channel. As those averages are configured now, that appears to be a difficult task, and the pressure of those overhead moving averages might even turn the Nasdaq back from a lower level.

The Russell 2000 also produced a possible reversal signal in Monday's trading, suggesting that it might rise to retest 552.75 or even the converging 200- and 50-dma's. MACD now suggests that the Russell 2000 may find it difficult to press through those averages, but market participants would need to take a look at conditions again as those averages were tested.

Annotated Daily Chart of the Russell 2000:

The Russell 2000's bounce was produced as it touched top support of May's congestion zone. On further dips, support might be found anywhere within that zone, with 535, 540, and 549 appearing to offer possible support.

The Dow, like many other indices, has moved into the lower half of its descending regression channel, below the midline support. MACD suggests that it could test the bottom of its descending regression channel, but May's congestion zone might also slow its descent.

Annotated Daily Chart of the Dow:

Although the Dow's daily candle showed a lower shadow, a sign that the Dow had tested support and risen from that support, the candle did not produce the same type of reversal signal seen on some other indices, creating more doubt about the Dow's ability to climb than exists with respect to the other indices, but that could be changed by earnings reports tomorrow. The SPX did produce a possible reversal signal, however, a doji at potential support.

Annotated Daily Chart of the SPX:

As the chart annotations suggest, bulls hoping for a completion of the reversal signal want first to see an open above Monday's close. Then they want to see a push higher, through the 200-sma and the midline of the descending regression channel.

Is that move likely to happen? After the cash close, YM, NQ and ES futures dropped, reacting to after-hours earnings announcements. Although Corning (GLW) rose in after-hours trading on results that beat expectations, Flextronics (FLEX) dropped after it failed to meet expectations. Corning's bullish outlook for the coming quarter couldn't offset FLEX's 4 cps and financial target disappointments. J2 Global Communications (JCOM) also reported after the bell, with that stock rising in after-hours trading. At the time this report was prepared, GLW had last traded at $12.07, up from the $11.27 close; FLEX had last traded at $12.65, down from the close at $14.06; and JCOM had last traded at 24.46, up modestly from the close at $26.40.

To help gauge whether markets can build on potential reversal signals or will continue lower, watch how the futures trade in relationship to the Nikkei's trading pattern tonight. The Nikkei will be reacting for the first time to Friday's declines and today's follow-through on some indices. Friday, the Nikkei tested its 50-dma at 11,348.66, bouncing above it, but the Nikkei verges on a confirmation of a H&S on its daily chart, too, with MACD evidence mixed. If the Nikkei should plunge through its 50- dma and then the 11,250 support level, watch to see whether our futures show weakness, too, or do not react to Nikkei weakness. Conversely, if the Nikkei continues Friday's bounce from its 50- dma, watch to see if our futures show strength, too, or are not able to capitalize on strength in the Nikkei.

If our futures dip despite Nikkei strength or fall with a Nikkei decline, our markets are in danger of opening lower, not following through on bounce potential. If futures do not react to weakness in the Nikkei or are able to bounce with the Nikkei, it's possible that markets will attempt an early bounce, but trading might remain cautious in the morning and early afternoon hours. While Monday might have been light on economic developments and earnings report, Tuesday's offering includes the much-watched Greenspan testimony on the economy and Fed policy before the Senate Banking Committee. That testimony begins at 2:30, with all eyes focused on his speech as it's released just prior to his testimony and all ears focused on the Q&A session that follows.

Chain store sales appear first on the day's agenda, however, with ICSC/UBSW releasing the figures at 7:45 EST. June's housing starts and building permits come next at 8:30, with May's numbers at 1.97M and 2.08M, respectively. Redbook retail sales will be released at 8:55, with the last reporting period showing a 0.5 percent drop.

Important earnings announcements include MO and TASR before the bell, and MOT, SUNW and TXN after the bell. Motorola figured in the performance of the overseas markets last night, sending some tech stocks down when the company decided to reduce the offering of the IPO for its chip unit by one third, as mentioned earlier. CIBC reduced its rating on Motorola Monday, citing its lessening outlook for operational profitability in the handset market. Motorola wasn't alone, however, as TXN also received a downgrade, this one to an equal-weight rating from its previous overweight rating by Lehman Brothers. Lehman cited softness in the wireless industry. Both stocks closed lower Monday.

Keep crude prices on your radar screen, too, as crude futures rose Monday to test the $42.00 level again, reaching a few cents above the early June high. As has been discussed several times on this page, rising crude prices pressure the markets.

On the short-term, markets still appear vulnerable despite the reversal signals produced on many indices Monday. Most markets appear ready to attempt bounces, but those bounces may be undercut by overnight developments. If they occur, they may produces climbs up to recently broken support, to establish whether that support will now serve as resistance. A failure to hold as resistance could send markets higher. If recently broken support holds as resistance, indices may roll down again through their descending regression channels. Some may choose to watch the SPX as their bellwether index, watching to see if it can climb above the 200-sma and the midline of its descending regression channel or whether it rolls over and tumbles down through that channel.

Long term, matters don't look dire just yet, but most of us trade short- to intermediate-term. On those time frames, remember that most indices still trade within consolidation formations, most of those being descending regression channels. Trading may remain choppy until there's a breakout, one direction or the other.


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