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Market Wrap

Doji Day

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     07-26-2004            High     Low     Volume Advance/Decline
DJIA     9961.92 -  0.30 10003.80  9913.92 1.67 bln    893/1913
NASDAQ   1839.02 - 10.07  1860.12  1829306 1.61 bln    968/2059
S&P 100   530.09 -  0.29   532.33   527.17   Totals   1861/3972
S&P 500  1084.07 -  2.13  1089.82  1078.78 
RUS 2000  533.49 -  5.74   542.29   531.40
DJ TRANS 3048.60 +  5.16  3072.63  3036.46
VIX        17.30 +  0.80    17.93    16.98
VXO        17.00 +  0.37    17.85    16.88
VXN        25.29 +  1.38    25.98    24.57
Total Volume 3,637M
Total UpVol    933M
Total DnVol  2,658M
52wk Highs      43
52wk Lows      421
TRIN          1.31
PUT/CALL      0.81

QQQ and Nasdaq broke below their previous year-to-date lows this morning, the first of the major indices to do so. The OEX, Dow, and SPX all came close to doing so but managed to hold above the previous lows. Much of the losses were corrected in the final hour of trading.

Volatility rose, with the QQV up 7.61% to 23.62 and the VXO adding 2.22% to 17. While these levels represent significant increases from the recent lows, they continue to reflect relative complacency on a longer-term basis.

Several investment houses were out with opinions on where the stock indices are likely to go next. Prudential's Ed Yardeni lowered his year-end 2004 target for the SPX from 1300 to 1190 and his 2005 target from 1450 to 1300 citing investor disappointment regarding high oil prices and uncertainty surrounding the presidential election. Prudential also cut its technology weighting to underweight, with strategist Edward Keon advising clients that he sees at best single-digit growth for 2005, compared with the previously expected rates of 11% overall and 18% for the tech sector.

Merrill's Richard McCabe was out early in the morning, stating that his short term momentum indicators were "extremely oversold" and that a "new rally phase" could develop in the short-term. He went on to note, however, that sentiment was not sufficiently negative to lead him to expect a resumption of the post-2002 rally. CSFB's Garthwaite disagreed, advising clients that valuations remain above their long-term averages, and that a correction to those averages would require another 3% decline. However, he added that a throwunder of just one standard deviation could result in an additional 18% decline for equities. He went to say that "Implied volatility remains low, the CSFB chartists' view continues to be negative, and the ratio of gainers to losers remains well above levels that have been associated with previous turning points in the markets."

Weekly Dow Chart

Last week's candle broke the rising weekly support line on a closing basis for the first time since the 2003 bottom, with Friday finishing at the week's low. The move resolved both the price and oscillator ambiguity to the downside, printing a fresh sell signal on the 10-week stochastic and reversing the bullish kiss on the Macd. While the potential bull wedge remains intact, with the parallel pattern of lower highs and lower lows above 9800, the action was decidedly bearish, particularly with respect to the shorter timeframes, which failed to bounce on schedule and which trended lower as the price decline continued.

Daily Dow Chart

The Dow daily chart left off with a doji star for the day, with moves to both the high and low rejected and price settling unchanged, lower by 0.3 at 9961.92. The 10-day stochastic buy signal that had me expecting a bounce last week above 10K aborted its fledgling upphase and is now trending, still showing a very slight bullish divergence but bumping along the bottom of its range as it did in March and in May. The Macd has not confirmed with any buy signals, showing only a slight histogram divergence as highlighted in the chart. The spike low in May to 9840 is support below the levels tested today at the previous May lows of 9900. While the oscillator setup continues to suggest bullish pressure building, the bottom of the current descending channel is well below 9720. We recall 9800-10200 from years past, however, and despite the downside whipsaw, the daily cycle oscillators remain at levels that have more risk for bulls than for bears. A break back above 10020 would have the daily cycle back on buy signals. However, as we've seen since last week, picking bottoms in this market is very risky business.

Weekly Nasdaq Chart

The Nasdaq had been weaker through the bulk of the decline, and last week did not disappoint. An initial retest of the rising weekly trendline (which had broken the previous week) was repelled with authority, leaving a long doji shadow atop what proved to be a bearish reverse hammer or gravestone doji. As with the Dow, the bull flag is still intact. However, the oscillators have also resolved their uncertainty to the downside, with sell signals printed from lower price and oscillator highs. Resistance is in the 1930 area, while flag support and price confluence now line up at the 1760 Fibonacci level.

Daily Nasdaq Chart

The Nasdaq's 10 point decline was sufficient to maintain the steep downtrend on the daily chart, with the close at 1839 leaving the upturning 10-day stochastic rolling over for a trending move within oversold territory. Bollinger and regression channel support are down to 1820 here, and while the risk to bears is obviously increasingly with each decline, previous support between 1880 and 1900 is now resistance. As even Merrill's McCabe noted, the increases in volatility, while respectable, are not at absolute levels from which a bounce appears readily obvious. While the weekly cycle pointed south and the daily unable to turn from previous support at the y-t-d lows, the onus is on bulls to regain former support before imputing too much significance to an oversold daily chart.

Weekly TNX Chart

Bonds declined today from the open, falling further with the release of the record existing home sales data (see below), with the ten year note yield (TNX) closing higher by 4.3 bps at 4.475%. Resistance above is at 4.48%, followed by 4.5%, 4.64, 4.75% and 4.8%. This daily cycle upphase is opposed to the weekly cycle downphase on the chart above, projecting to a retest of support at the 4.02% level and possibly to what appears as daily bullish descending wedge support as low as 4.32%. A break above 4.5% would have a bullish implied target of 4.8%, with stronger resistance at 4.5%.

At 10AM, Existing Home Sales for June were released by the National Association of Realtors, with the number of existing homes sold rising 2.1% from a revised 6.81M level to a record 6.95M units. This represents a 17.4% increase over last year. The NAR also announced that the median sales price reached a record $191,800 in June, a 9.6% increase.

K announced earnings of 57 cents per share, up from 50 cents in the same fiscal quarter of 2003 but missing estimates of 54 cents. The company reaffirmed its 2004 outlook of $2.07-$2.11 per share, below the consensus estimates of $2.14 per share. K finished higher by 1.29% at 40.75. WMT announced that July sales were headed for a 2-4% increasing, matching prior forecasts buoyed by warm weather summer buying and back-to-school products, but closed for the day lower by .96% at 52.65.

TSN beat expectations of 36 cents, coming in at 45 cents per share but announced that 2004 results will miss previous estimates of $1.41 per share, guiding to between $1.20 and $1.30 per share. The stock got smoked for a 7.37% loss, closing at 18.48.

Google, which has requested to trade under the symbol "GOOG", seeks to price its IPO at $108-$135 per share for 24.64M shares. The company expects to raise $3.3B to $3.8B, above the 2.7B that marked the highest estimates in its previous filings. ASKJ was higher on the morning announcement of the extension of its advertising pact with Google through 2007.

AXP reported Q2 earnings 68 cents a share, beating expectations by a penny and up 9 cents from Q2 2003's results. Revenues roses 14% to $7.26B, exceeding expectations for $6.91 billion, and the stock closed higher by 1.64% at 48.90.

After the bell, GNSS reported earnings excluding charges of 5 cents per share, beating estimates by a penny. The stock was lower by 1.13% for the day at 9.60, sliding lower to 9.45 after the announcement. Homebuilder CTX announced a 21% y-o-y- increase in net earnings to $1.35 per share, with sales increasing 33% since last year. The company upped its fiscal '05 earnings target to $6.75-$7.25 share, compared with expectations for $6.78 per share.

The future is anything but clear from here. On the one hand, the daily charts tell us to expect a bounce, but the weekly charts are reasserting their ongoing downtrend and suggest a possible move to the lower bull flag supports or below. The rally off the 2003 lows generated a slew of extreme readings, including breadth and the TRINQ, the volatility indices, and, among others, on the oscillators. It is easily imaginable that the intraday and daily oscillators will continue to trend as the longer cycles continue to dominate to the downside. While the daily candles printed lower doji shadows, the intraday action was not the stuff of classic doji bottoms- the crowd was not gleefully selling through support and the reversal was not sudden, swift or on much higher volume. I'm not trying to talk down the bullish case, but am rather trying to provide a counterpoint to it. I personally expect to see the daily cycle generate buy signals at or close to current levels. However, that gut feeling is tempered by the foregoing arguments. The indices do not have to continue today's 3PM bounce, and patient bulls should continue to so be, at least until at least one or two levels of prior support have been regained. Until it reverses, the daily trend remains down.


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