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Market Wrap

How Crude!

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     08-04-2004            High     Low     Volume Advance/Decline
DJIA    10126.51 +  6.27 10162.42 10068.11 1.64 bln   1334/1464
NASDAQ   1855.06 -  4.36  1864.80  1842.20 1.64 bln   1350/1665
S&P 100   538.49 +  0.57   540.29   535.31   Totals   2684/3129
S&P 500  1098.63 -  1.06  1102.45  1092.44 
RUS 2000  546.07 -  0.96   546.07   536.52
DJ TRANS 3119.47 -  1.07  3134.20  3083.84
VIX        16.21 +  0.18    16.65    15.82
VXO        15.55 +  0.34    16.41    15.17
VXN        25.05 -  0.03    25.65    24.63
Total Volume 3,594M
Total UpVol  1,534M
Total DnVol  2,020M
52wk Highs      89
52wk Lows      249
TRIN          1.31
PUT/CALL      0.92

Markets again waffled around near support Wednesday, refusing to break out in either direction. Daily candlestick charts show many indices producing high-wave candles, candles with small bodies but long upper and lower shadows. They're indicative of indecision. Volume patterns echoed that indecision, at least on the NYSE, with advancing and declining issues closely matched. The Nasdaq saw more decliners than advancers by a 14:17 adv:dec ratio.

An intraday chart of the OEX depicts the indecision.

Annotated 60-Minute Chart of the OEX:

Other indications of indecision appeared. The SPX and Dow pierced their 200-ema's and then bounced, ending the day between their 200-ema's and 200-sma's. The SOX pierced 400 and then bounced, but ended the day between 400 support and 420 resistance. The Nasdaq pierced 1850 and then bounced. The BIX approached its 72-ema, an average from which it's bounced seven days out of the last 24 trading days, and bounced once again, but couldn't close over 350, producing a high-wave doji for its day's efforts. The TRAN pierced its 30-dma and 3100 and bounced, but couldn't drive over the descending trendline off the 7/01 high, with the TRAN also producing a high-wave doji.

That indecision was all crude's fault.

Perhaps other factors played a part. Futures succumbed to downward pressure pre-market, and the cash markets followed through on the opening. Those pressures included the Nikkei closing at a 10-week low, UBS lowering the rating of some European chip stocks to a reduce rating, European banks reporting lower trading revenue and warning of a difficult environment for global financial markets, as well as September crude futures spiking to a record $44.34 a barrel in after-hours trading Tuesday night.

In addition, although earnings season has begun to wind down, earnings reports or warnings still impacted markets. Late Tuesday, fiber-optic networking equipment manufacturer Ciena (CIEN) warned that it would not meet revenue expectations. The company cited cautious spending habits by its largest customers as one reason behind the warning. JP Morgan downgraded the stock to an underweight rating from its previous neutral rating. The stock plummeted in pre-market trading and opened $0.50 below Tuesday's $2.76 close. It closed down 24.64 percent, at $2.08. The news hit Cisco (CSCO), Lucent (LU) and Nortel (NT), all also opening lower, although only NT closed lower out of those three. The XTC, the North American Telecoms Index, opened lower and dropped toward its 200-sma as market watchers worried about those cautious spending habits by CIEN's largest customers. The XTC closed lower by 0.57 percent.

In addition, Internet commerce and TV-shopping company InterActiveCorp (IACI) guided analysts to expect 2004 operating income at the low end of its former forecast. Although earnings beat expectations, the company faces increased competition from hotel and airline web sites. Travel revenue dropped quarter- over-quarter for the first time. IACI opened at $22.30, $4.73 below Tuesday's close, and closed at $22.80, down 15.65 percent. IACI is a component stock of the Philadelphia Internet Index, $DOT. That index closed lower by 1.11 percent.

Shortly after the open, attention turned to July's non- manufacturing ISM and June's factory orders numbers, both released at 10:00, with markets coming off their lows just ahead of the release. June's non-manufacturing ISM had been 59.9 and expectations for July's number had ranged from 61.5-63.00, depending on the source. The Institute for Supply Management said that July's services index rose to 64.8, a higher-than- expected result, but the employment component fell to 50 percent from the previous 57.4 percent. The ISM reported that transportation, communication, wholesale trade, utilities and business services saw the biggest gains. With global attention already focused on Friday's non-farm payroll report, the loss in the employment component now has market watchers speculating that Friday's much-awaited number won't meet the expectation for payrolls to rise by 235,000.

May's factory orders had declined 0.3 percent, but June's were expected to rise from 0.55-0.9 percent, also depending on the source. Factory orders increased 0.7 percent, a strong result given that was in comparison to May's unexpected revision to a 0.4 percent climb rather than the previously reported loss. However, economists greeted the number with some disappointment since much of the gain was due to increased orders for defense aircraft. Markets dropped back to retest their lows.

The release of the crude oil, gasoline, and distillate inventories shortly after 10:00 and shortly before 11:00 may have produced the first real bounce of the day. As is usual, the Department of Energy and API industry group announced disparate figures, with the Department of Energy showing crude stocks down 1.9 million barrels, distillates up 2.1 million barrels and gas stocks up 2.4 million barrels; and the API showing crude inventories up 800,000 barrels, distillate stocks down 60,000 barrels, and gas stocks rising by 3.5 million barrels. While it's difficult for an industry outsider to reconcile the figures, both showed rising gasoline stocks in a seasonal pattern that shifts inventories toward gasoline production as refineries ramp up to meet increased demand in the summer. The API announced that September unleaded gas had dropped 3.2 percent. Shortly after the API released its results, crude futures for September delivery eased off their high. That first easing was to precede the completion of a H&S and a plummet through the neckline, almost all the way to the downside target.

Annotated Ten-Minute Chart of Crude Futures:

Markets needed some hope that crude futures would ease. Tuesday, OPEC admitted that over the short-term period, it did not have the capacity to further increase production. To try to stem the ramping up of crude prices, Saudi Arabia's Saudi Aramco announced early Wednesday that it was starting production ahead of schedule on the offshore Abu Safah and predominantly onshore Qatif oil fields. The company also announced that it would consider delaying the shutdown of older wells. Before this morning's developments, crude futures looked as if they would soon reach the fabled $50.00 level. Many suggest, however, that markets will remain pressured until crude prices pull back significantly.

Annotated Daily Chart of Crude Futures:

With markets trading in opposition to the cost of crude, indecision as to market direction rules here, too. Crude futures spent about six weeks trying to break through resistance at $42.00, so presumably that level or some of the other levels marked on the daily chart might now provide support. Yet in the past, prices tended to retreat to the 50-dma, currently at $39.78, to regroup before rising again, so there is perhaps vulnerability down to at least that level. A drop that deep would allow indices time to rise or consolidate for several days. A bounce at $42.00 or above would ratchet up the pressure again.

Whatever caused that 10:30 bounce, rumors of a bomb explosion in Athens may have been a precipitating cause for a stumble in the markets. The bomb was a homemade one targeting an electrical substation and caused no injuries, with the information soon forgotten despite the approaching opening of Olympic games in Greece. Markets moved to their highs of the day and then retreated again into the close, producing those high-wave candles. Let's take a look at some of the charts.

Inconclusive oscillator action revealed indecision on the SOX's daily chart.

Annotated Daily Chart of the SOX:

A study of intraday charts (not shown) reveal bullish divergence as Wednesday's higher low was hit, with oscillators hitting equal lows while price hit that higher low. It's possible that the divergence predicted only the bounce that has occurred. However, I advise watching the potential inverse H&S. The neckline of that formation is difficult to determine, but may currently be at about 417. Cautious traders should wait for a move above 420 as confirmation of that formation, and should be aware of the OEX's inability so far to meet the upside target after confirming its recent inverse H&S, as depicted in the first chart in this article. For now, the daily SOX chart does not give us much information about likely direction, but instead indicates that bulls began buying the SOX stocks as the SOX hit the bottom of that channel and its P&F downside target. Whether the dip-buyers will be joined by others remains to be seen. This was a technical level at which to buy the SOX, and some did. That's about the only conclusion we can reach.

Oscillator evidence remains ambiguous on the Nasdaq, too. Dip- buyers also stepped in at the bottom of the descending regression channel, but the climb couldn't be called precipitous.

Annotated Daily Chart of the Nasdaq:

The Russell 2000 also bounced from a higher low today, but also couldn't manage to turn oscillators into a more bullish mode.

Annotated Daily Chart of the Russell 2000:

Although the 200-ema is not as closely watched as the 200-sma, it may be playing a minor part in support/resistance on the Dow, too. That average helped keep the Dow hovering on the midline of the descending regression channel on the daily chart.

Annotated Daily Chart of the Dow:

The Dow's oscillators look more bullish than those on other indices. At the day's low, the index was moving into the top of May's congestion zone. Declines might slow or find support somewhere within that zone, so that it's possible that the Dow might try to bounce from the midline of its regression channel. If it does, it faces a river of moving averages at historical resistance near 10,200-10,240.

The 200-ema may also have played a part in the SPX's trading behavior Wednesday, with the SPX ending the day between the 200- sma and -ema. The SPX appears to be rounding over beneath the 200-sma, but may actually be moving up in a tight ascending regression channel. Until proven otherwise, however, such a tight pattern of higher highs and higher lows should be viewed as a possible bear flag when it forms after a steep decline.

Annotated Daily Chart of the SPX:

Not only do charts present doji or high-wave candles indicative of indecision, but some P&F and bar charts conflict, and some indices' charts slant to the slightly bearish while some slant to the slightly bullish. After hours, equity futures dipped slightly with Dow futures perhaps dipping slightly more than the others, perhaps erasing some optimism that the Dow was outperforming other indices and would perhaps lead them higher.

After-hours developments included disappointing earnings from United Online (UNTD) and lowered revenue guidance from Wireless Facilities (WFII), with both plummeting in after-hours trading. WFII also said it would restate earnings from 2000-2003, blaming foreign taxes for the need to do so. WFII supplies services and equipment for the wireless industry. Biotech ICOS (ICOS) dropped in after-hours trading after it announced a less-than-expected Q2 loss but also less-than-expected revenues. Those results aren't likely to help build optimism, but software company Aspen Technologies (AZPN) beat expectations and was up over 20 percent in after-hours trading.

Thurday's economic releases will be light. At 8:30, the Department of Labor releases the initial jobless claims number for the week of 7/31. Initial claims for the previous week had bumped higher, to 345 thousand, but predictions for this week suggest that claims might fall back to 340 thousand. While these numbers are sometimes watched closely, Friday's employment report will probably draw most of the attention this week.

Natural gas inventories will also be released Thursday as will the money supply figure, at 10:30 and 4:30, respectively.

Tomorrow's performance may be guided by jitters over Friday's non-farm payrolls number, the SOX's ability or inability to confirm its inverse H&S, the SPX's ability or inability to climb above its 200-sma, the Dow's behavior near 10,000 or 10,200, and the price action of crude futures. Crude futures traded lower in after-hours, but approached the downside target of the H&S on the 10-minute chart and appeared to level off.

Unfortunately for those of us trying to guess market direction, crude prices depend on geopolitical developments out of our control or beyond our knowledge this evening. A reassurance out of Russia or from OPEC member could send futures lower. A terrorist strike against a pipeline somewhere could send them higher. I can imagine shorts waiting with held breath for a sign that those futures will continue lower, ready with their trigger fingers on the buy-to-cover buttons if they do not.

Extended losses in the crude futures may allow markets to steady or even move higher, while a rebound in the crude futures will pressure already-jittery markets. Unless crude futures break through their 50-dma, however, markets will remain under pressure and gains may be tepid or quickly reversed. The suspicion that H&S's or bear flags may be building on some charts on some intraday charts may be deepened. In that climate, perhaps only adept scalpers should consider long positions until any breakout has proven itself.

However, I would be careful about any position. Indices appear perched on the edge of precipice and some of those P&F downside targets show just how deep such a precipice could be. However, we've been here before, convinced that markets were going to tank, piling into short positions, only to find ourselves squeezed along with the other shorts. The charts I've displayed above do not offer evidence that markets are yet being pushed over the edge, although they do offer evidence of extreme pressure and indecision about how to respond to that pressure. The markets are at points that have been bought before, and someone is trying to do some buying, but it may or may not stick.

The OEX, the index I watch most, is chopping along above weekly support, and many others are chopping above known support, too. In the Market Monitor on OIN, I'm advising subscribers to prepare to be whipsawed if entering any position, have nearby profit targets in mind, and make plans in advance of entering a position to protect any profits, and that's what I advise here, too. One of these days, perhaps soon, markets will begin a directional move, but expect those whipsaws until that happens.



 
 



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