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Market Wrap

Key Downside Reversal

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     07-21-2004            High     Low     Volume Advance/Decline
DJIA    10046.13 -102.94 10237.12 10045.61 2.06 bln    625/2208
NASDAQ   1847.37 - 42.70  1933.03  1847.37 2.08 bln    728/2280
S&P 100   533.02 -  6.63   544.04   533.02   Totals   1353/4488
S&P 500  1093.88 - 14.79  1116.27  1093.88 
RUS 2000  548.57 - 15.62   566.03   548.57
DJ TRANS 3087.13 - 67.62  3171.66  3087.00
VIX        16.41 +  2.24    16.46    13.91
VXO        16.14 +  1.56    16.14    14.15
VXN        22.15 +  1.24    22.17    19.79
Total Volume 4,542M
Total UpVol    751M
Total DnVol  3,755M
52wk Highs     169
52wk Lows      233
TRIN          1.56
PUT/CALL      0.76

The MSFT rally carried the markets to a strong open that failed immediately for the Nasdaq while carrying the Dow and SPX until 11AM before the decline kicked in. What appeared destined to be a technical correction based on overbought intraday oscillators turned into a relentless decline that completely reversed yesterday's gains for the Nasdaq, SPX and the Dow, breaking the previous day's lows in all 3 cases.

MSFT held most of its gains, but the tech sector was a mess in general. Investors had long expected MSFT to do something with its hoard of cash once the threat of its multiple lawsuits had lifted. Many expected the company to purchase other tech companies, such as SAP, SEBL, ORCL. By repurchasing its own stock and issuing a dividend, the company's message might have been interpreted as a negative judgment on its perception of growth prospects for the sector going forward. In any event, MSFT fared far better than the broader markets, with the Nasdaq taking a precipitous plunge of 2.23% and printing a key downside reversal, having broken yesterday's high at the open and closing below its low at the close. The Nasdaq closed lower by 42 points at 1874, while the Dow lost 103 points to close at 10046.

Weekly Dow Chart

The Dow is breaking below the rising weekly support line the retest of Monday's low and undoing what had been a downside doji spike until this afternoon. The weekly cycle picture has managed to remain as ambiguous as it's been for the past three weeks, with the price decline continuing but at a lackluster pace, such that the 10-week stochastic looks bullish while the Macd is bearish. As I've had occasion to discuss with respect to this and other charts over the course of the past month, we often see gap moves to resolve trendline tests, and with this week's candle currently rejecting moves both above and below it, a break in either direction is imminent. As has been occurring with increasing regularity lately, the oscillators are in an ambiguous state waiting for price to resolve the dilemma. A weekly close below Dow 10000 or above 10250 will determine direction to the downside or upside, respectively, while a break above 10300 would suggest a bull flag and a retest of the year high at 10795 for starters. We've seen the 9800-10200 level as a key confluence for several years, and a break below the rising trendline would suggest a test of that lower level.

Daily Dow Chart

The upper doji shadow which printed as the day's gains were authoritatively wiped out with a close at the day lows is a very bearish formation, a gravestone doji. Note that the highs actually broke all the previous highs to last Thursday, while the low exceed the week's low and set a new low for the daily cycle downphase. The oscillators continue to suggest a bottom forming, and while the daily candle portends more damage to come tomorrow, the oscillators suggest the formation of a cycle trough underway. With the intraday oscillators oversold as of the session close, a bounce is to be expected- but bulls will want to see the rising trendline at 10080 recovered on the way to a test of 10145.

Weekly Nasdaq Chart

The weekly chart of the Nasdaq is clearer than that of the Dow, and looks more bearish on a cycle basis. The bull flag is evident here as on the Dow, but it's looking long in the tooth and tired. Today's reversal lower off the bottom of the rising weekly support line is a bearish failure, marking the second week below the line. There still remain tomorrow's and Friday's sessions to reverse today's decline, and this week's candle is still up for grabs. But if it closes at or below current levels, we'll have a weekly gravestone doji and an imminent rollover in the 10-week stochastic. Resistance is in the 1950 area, with Bollinger support at 1865, below which there's confluence at 1850 and flag support at the 1760 Fibonacci level.

Daily Nasdaq Chart

The daily Nasdaq candle didn't get the benefit of an upper shadow because the decline commenced immediately at the gap-up opening levels and continued until the close at the day lows. The oscillators on the daily look similar to that of the Dow, but interestingly, the low of the week was not broken. 1865 is the next support in this timeframe, and as noted in the Market Monitor, a break below it would put the daily cycle oscillators in position for a trending move in oversold territory. That's the lower probability outcome, and if it occurs, it will be because the longer weekly cycle is dominant, overwhelming the daily cycle which is currently in a trough and due to begin its upphase.

Weekly TNX Chart

Bonds slid today, with the TNX rising 3.9 bps to close at 4.487% after trading both sides of the 4.5% resistance line. The daily cycle oscillators (not shown) printed the first buy signals from oversold territory, just starting an upphase that portends more weakness for bonds for the coming sessions. Resistance above 4.5% is at 4.64%, followed by 4.75% and 4.8%. This daily cycle upphase runs counter to the weekly cycle downphase on the chart above, projecting to a retest of support at the 4.02% level. Often, juxtaposition of two cycles results in uncertain sideways chop, and we've been seeing that for the past two weeks. With any luck, we'll see a range break by the end of the month to resolve the uncertainty in one direction or the other. Downside support is at 4.4% and 4.32% for the TNX.

There were no significant economic data released today, with the market news dominated by Fed releases and earnings reports. The Mortgage Bankers Association reporting that its Market Index declined 4% to 617.9 for the week ending July 19. The Purchase Index, which measures requests for loans with which to make home purchase, declined 6.1% to 440.3 while the Refinancing Index was lower by 0.7% to 1,651.1. Interest rates were mostly flat to slightly lower during that period.

The American Petroleum Institute that crude oil inventories for the week ending July 16 rose 38,000 barrels to 300.1M, while the Energy Department reported a drop of 3.6M barrels. The two organizations frequently disagree as to the weekly changes. According to the API, gasoline stocks rose by 3.9M barrels (the Energy Department reported a 2.5M barrel increase) to 212.6M while distillate stocks declined 59,000 (rose by 1.7M barrels according to the government) to 116.6M barrels. For the day, crude oil futures closed higher by 14 cents at 40.58

Philly Fed President Santomero was out this morning ahead of Greenspan's testimony before Congress, noting that while recent economic data has been disappointing, it should be interpreted in the context of an upward trend of a strengthening economy. He expects consumer spending to expand while inflation remains at acceptable levels. He expects the Fed funds rate to rise at a "measured pace", but that such pace would ultimately depend on the prevailing data.

Chairman Greenspan addressed the House Financial Services Committee with the same text presented yesterday to the Senate Banking Committee, reiterating the message that the Fed views current conditions as being reflective of a healthy expanding economy. The economy should no longer require the strong accommodation afforded by the pegging of overnight rates near current low levels, and that rate hikes would take place at a measured pace. He expects that rising income from increased employment will bolster consumer spending. He expects inflation to remain tame, but indicated that more aggressive increases to the overnight rate would be appropriate if inflation were to flare up. He also indicated that from now on, the Fed would base its outlook for inflation on the Core Personal Consumption Expenditures (PCE) Price Index (which strips out food and oil prices) rather than the overall PCE as it had formerly done.

Chairman Greenspan, in response to a question about asset bubbles, told the Committee that he felt that the Fed had successfully minimized the "great distortions" that can result from its measures, and mentioned the current unwinding of the carry trade occurring in response to the reduction in Fed stimulus this year.

In an afternoon speech to the Dallas Rotary Club, Dallas Fed chief McTeer repeated the view that the current soft patch in the economic data is just that. He acknowledged, however, that while energy prices are volatile and, in his view, temporary, he went on to state that "over time, people use gasoline and electricity, and you can't ignore it forever... At some point you have to say the headline number is the relevant one. [...]The little upward movement in inflation we've had over the last two or three months means that a 1% fed-funds rate is lower in real terms than it was. And so, even though we raised the target rate a quarter point, it's probably lower in real terms than it was before we did that, because of inflation." He reiterated the opinion that job growth would accelerate.

Overall, the currency markets were impressed with the Fed's releases for the day, with the US Dollar Index rising to the 89 level, a 2-week high, and gold, euros and silver all declining to new lows for the week.

There was a plethora of earnings reported throughout the session and covered in the email updates and Market Monitor postings. Some highlights include UTX, which reported Q2 net income of $1.66 per share, up from $1.26 and exceeding expectations of $1.58 per share. UTX closed higher by 2.32% at 92.67.

MRK announced Q2 earnings of 79 cents per share, unchanged from last year and meeting analyst estimates. Total earnings were 1.78B. Global sales were higher by 9% to 6B, exceeding estimates for 5.9B. PFE beat by a penny, announcing Q2 EPS at $0.47 per share. MRK closed lower by .51% at 44.60.

AMR reported Q2 earnings of 3 cents a share or $6M, compared with a loss of 47 cents in Q2 2003. The gains were mostly based on government grants, with a net loss of 15 cents per share stripping out one-time special items. This was 5 cents worse than estimates of a 10 per share loss. The stock got hit for a 5.98% loss to close at 8.81. NWAC lost $182M or $2.11 per share compared with a profit of $2.45 in Q2 2003. Fuel costs were a factor cited in both reports. Losses were 90 cents excluding one-time charges, beating expectations of a 1.21 per share loss. NWAC lost 5.15% to close at 8.48, and the XAL index fell 4.25% to close at 4.687.

IMCL got smoked for 19.01% as of this writing on what the media attributed to disappointment over sales of the firm's Erbitux cancer treatment. Q2 revenue was $71.5M, up from $17.9 million in Q2 2003 but down from $109.6M in Q1 2004, which had received a boost from one-time payments. Revenue from sales of Erbitux came in 4M below expectations of 75M, and the Company announced that its application for Erbitux would be filed in 2005 rather than in the second half of 2004 as previously expected. Friedman, Billings, Ramsey downgraded the company to "neutral" from "buy".

GM's profit rose 49% in Q2 on gains attributed to its financial services division as its global and North American market share declined. Earnings were $2.36 per share or $1.34B, beating estimates of $2.24 per share and up from Q2 2003's $1.58 per share or $901M. The stock fell .57% to close at 43.35.

After the bell, EBAY reported earnings of 28 cents per share or $190M, up from 91.8M or 14 cents per share in Q2 2003, beating expectations of 27 cents. Sales increased over the previous quarter and the company raised its earnings target for the year to $1.17 per share, which was below analysts' expectations of $1.19. The stock was trading lower by 10.61% at 70.42 as of this writing.

MXO met expectations with a 26.1M net loss for the quarter, 11 cents per share. Excluding one-time items, the company missed lowered estimates by a penny and came in light on revenue. MXO was down 4.5% at 5.52 after hours.

QCOM beat estimates by 4 cents with earnings of 57 cents per share or $483M, and issued guidance of $2.15-$2.18 per share, above estimates of $2.06. QCOM was lower by 3.14% at 67.35 as of this writing. SEBL met reduced expectations of 2 cents per share after warning earlier in July, with revenue of $301.1 against expectations of $303M. The stock was down 3.35% at 7.78 as of this writing. ATVI got smoked after beating expectations of 5 cents per share on $189M in revenue with earnings of 8 cents per share on $211.3M revenue- the stock was lower by 8.86% at 14.40.

There's a trader's cliché about a rising tide buoying all ships or something to that effect, and the general reaction to earnings news today was to sell. Be it the softness of the economic data alluded to by the various Fed chiefs today, or Greenspan's and McTeer's acknowledgment of the unsustainability of an overnight rate at current low levels and the threat that rising inflation would force the Fed's hand- whatever the reason, the markets were in a selling mood, with bonds, stocks, precious metals and foreign currencies going over the side. This rising dollar/falling-everything-else trade is the reverse of the trend that gave us the stellar 2003 rally.

The daily cycle trough is troublesome here, because it ups the ante for traders. On the one hand, it is trying to turn up from a likely bottom. If it does, we have little reason to doubt a multiweek bounce. If it does not, however, the selling could be violent and would suggest more serious bearishness going out to the longer timeframes. Any trader who's been close to the markets for the past three years has learned not to be religious about a direction, and I'm ready to accept either one from here. If today's lows don't produce the bounce required by the intraday cycles, then a retest of the year lows could be mere hours away.


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