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Market Wrap

Out of Steam

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     08-11-2004            High     Low     Volume Advance/Decline
DJIA     9938.32 -  6.35  9954.18  9841.36 1.71 bln   1114/1665
NASDAQ   1782.42 - 26.28  1786.65  1760.50 1.77 bln   1105/1901
S&P 100   526.54 -  2.23   528.77   522.39   Totals   2219/3566
S&P 500  1075.79 -  3.25  1079.04  1065.92 
RUS 2000  526.63 -  3.20   529.83   517.89
DJ TRANS 3049.89 +  5.02  3074.94  3006.37
VIX        18.04 +  0.57    18.49    17.84
VXO        17.53 +  0.63    18.50    17.30
VXN        29.96 +  0.44    27.70    26.80
Total Volume 3,848M
Total UpVol    972M
Total DnVol  2,825M
52wk Highs      35
52wk Lows      433
TRIN          1.30
PUT/CALL      0.89

A post-Fed-decision rally carried the Nikkei and some other Asian bourses to another day of gains, but then lost steam by the time European markets opened. U.S. futures turned down with cash markets following, but then the decline ran out of steam, too.

Bears could not follow through on early declines, and either aggressive bulls or scared shorts pushed the indices higher again. By the day's end, the Dow had closed down only 6.35 points or 0.06 percent, and the SPX had closed down only 3.25 points or 0.30 percent. Even the Russell 2000 managed to hold onto all but 3.20 points, declining 0.60 percent. The Nasdaq did not fare so well, seeing a decline of 26.28 points or 1.45 percent. Volume patterns showed decliners ahead of advancers on both exchanges, with adv:dec ratios at 14:18 for the NYSE and 11:19 for the Nasdaq. Down volume was 1.8 times up volume on the NYSE and almost four times up volume on the Nasdaq. Total volume stood at 1.4 billion for the NYSE and 1.8 billion for the Nasdaq.

Cisco's (CSCO) building inventories as well as sales warnings from National Semiconductor (NSM) and chip-related company Kulicke & Soffa (KLIC) proved at least partly responsible for early weakness, sending U.S. futures lower immediately after the close Tuesday. Futures failed to build steam when the Nikkei gained and then dropped with the European markets, predicting weakness at the U.S. open. By Wednesday morning, CSCO's Tuesday- night earnings report had garnered analyst attention from Merrill Lynch, UBS, Wachovia Securities and Goldman Sachs, with opinions mixed among the analysts. Merrill Lynch and UBS both downgraded CSCO to a neutral rating, but the other two made positive comments.

Within the first five minutes of trading, the SOX dropped below the 50% retracement of its rally off the October 2002 low, also breaking down from its descending regression channel, ominous signs for those with hopes for a recovery in the sector.

Annotated Daily Chart of the SOX:

NSM and KLIC closed 14.14 and 25.07 percent lower, respectively, with other stocks in the semiconductor food chain also getting hit. Cypress Semiconductor (CY) fell 6.56 percent, with its decline attributed to NSM's. CY wasn't helped by a Smith Barney decision to cut its rating to a hold rating from its former buy rating, either. Teradyne (TER) closed 7.59 percent lower, with its tumble attributed both to KLIC and CSCO weakness. CSFB cut TER's rating to a neutral rating from its previous outperform one.

Yesterday's attempt at a morning-star reversal signal on the SOX was less convincing than the signals produced by some other indices, raising a red flag that I mentioned Tuesday on OIN's Market Monitor. The SOX could not retrace more than 50 percent of Friday's decline while most other indices producing morning- star patterns retraced most or all of Friday's gains.

Wednesday morning, the SOX's relative weakness became apparent when the SOX fell below recent lows and also dropped beneath the 50 percent retracement of the rally off the October 2002 low. That retracement level usually provides strong support when first tested even if it's eventually violated, but the SOX spent only three days steadying at that level before tumbling through it. That's an ominous sign unless it's quickly reversed, but investors showed no temptation Wednesday to buy the dip.

The NWX, the Networking Index, showed the effect of the CSCO report, reversing lower after printing a morning-star pattern of its own. CSCO closed lower by 10.55 percent. Wednesday continued the Pacific Crest Technology Forum that opened on Monday, and began the CIBC Enterprise Software and Soundview Semiconductor Conferences, but instead of the tech pop that used to be produced by tech conferences, these and other tech-related indices declined.

Other sectors or indices faring badly included the Disk Drive Index and the XAU, the gold and silver index, down 1.80 percent. Sectors closing higher included the airlines and defensive sectors such as the pharmaceuticals and health care providers. Surprisingly on a day when crude futures closed slightly higher, so did the TRAN, up 0.16 percent.

Annotated Daily Chart of the TRAN:

That high-wave doji can be a reversal signal, too, but it's always a visual representation of the indecision felt by market participants. Both bulls and bears ran out of steam on this index today, as they did in other markets. The story behind the TRAN's high-wave doji proved an interesting one.

Each week, Wednesday's reports on crude oil, distillate, and gasoline inventories assume more importance, but Wednesday, the figures slipped by almost unnoticed. Other crude-related developments grabbed the attention. Early in the morning, market watchers learned that Russian oil producer Yukos was officially in default on $1.6 billion in debt, having received a default notice from a lender. The president of Russia's federal energy agency did nothing to reassure jittery markets when he stated that Yukos' production could be halted if the company could not pay for equipment and operations. He further commented that such an event would be detrimental to Russia's economic health, with Russian energy officials asking that the company be allowed access to frozen bank accounts.

Soon after or perhaps at about the same time, Saudi Arabia revealed that it would have an important announcement about oil production. That announcement, when it came, included the assurance that Saudi Arabia could immediately raise oil output by 1.3 million barrels per day, with the intention of curbing prices.

Crude prices had plummeted at the time that Saudi Arabia stated that it would make an announcement, with most market watchers correctly assuming that Saudi Arabia would make an announcement meant to calm worries and dampen crude prices. Crude futures dropped despite the almost-not-noticed Department of Energy release of figures showing that crude stocks were down 4.3 million barrels from the previous week and an API release showing that crude stocks were down 5.2 million barrels. Analysts had expected a rise in crude inventories, and the surprise decline was not good news. The Energy Department also announced that distillate stocks were up 1.3 million barrels, and gasoline stocks were down 1.8 million barrels. API reported distillate stocks higher by 3.1 million barrels, and gasoline stocks down by 2.4 million barrels.

The International Energy Agency, the IEA, also increased its forecast for 2004's demand for crude by 700,000 barrels. The IEA also mentioned the less-than-desired capacity in infrastructure and production, but felt that those lacks did not justify the current crude prices, prices that were causing economic damage. Borrowing a phrase from Greenspan, the IEA called the $45.00/barrel price "irrational exuberance." Later in the day, others derided the IEA's statement about irrational exuberance, claiming that the IEA routinely underestimated demand. That underestimation might even have led OPEC to cut production earlier in the year, leading to the current pricing problems, one commentator claimed.

Whether or not the IEA is right about the $45.00/barrel price being too high, the forecasted increased demand, coupled with the inventory surprise and Yukos news, might have sent crude prices soaring, but the Saudi announcement undercut that reaction, at least for a time. Crude prices closed minimally higher than Tuesday's close, but did not reach above Tuesday's intraday high.

Another report barely noticed except by those privy to Jim Brown's comments in OIN's Market Monitor was the Job Opening Labor Turnover Survey, released at 10:00. Data included in that survey showed that June's growth in employment was still showing improvement, but improvement at a slower rate than previously. Job openings fell, but more workers were hired than separated from their jobs, which would include workers who were quit or retired, or who were fired or laid off.

At 2:00, July's Monthly Budget Statement was released, with June's having been a $54.2 billion deficit and July's showing a whopping $69.2 billion deficit. The year-to-date budget deficit stands at $395.8 billion. Expectations had been for a $66 billion figure for July. Perhaps because the surprise was attributed to greater outlays than expected and that was attributed to calendar distortions, no ill effect occurred. Many markets began the late-afternoon climb immediately afterward during the program-trading window.

That bounce helped improve the Nasdaq's outlook. While the SOX and NWX reversed just-produced morning-star reversal signals, the Nasdaq bounced after breaking down intraday.

Annotated Daily Chart of the Nasdaq:

The Nasdaq has already broken below its descending regression channel, gapping down as it did so. It produced a not-so-classic morning-star reversal signal, but as sometimes happens in down- trending markets, the only reversal was the candle needed to produce the reversal signal. Wednesday, the Nasdaq opened near the bottom of the recent range, broke below that range, but tested the 38.2 percent retracement of the rally off the October 2002 low when it did so. It bounced, closing back within that range.

The SOX's example suggests that the Nasdaq could also eventually break below this important retracement level, with the SOX already below the 50 percent retracement, but if the SOX manages a bounce to retest broken support, the Nasdaq could bounce, too. If the trend is down, it's best to assume that it will remain down, so the assumption now is that any bounce would roll over at resistance, with that Nasdaq resistance now from 1806-1820, the gap from Friday and the bottom of the former descending regression channel.

If the Nasdaq's chart displays some ambiguity, so do the charts of the SPX, Dow, and Russell 2000.

Annotated Daily Chart of the SPX:

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Russell 2000:

The OEX chart shows similar characteristics, forming a possible "b" distribution pattern or basing pattern prior to a rise from the bottom of its descending regression channel.

If the SOX still leads, it's leading these other indices to a breakdown out of those descending regression channels. However, the TRAN's action, with that index valiantly clinging to its descending regression channel support despite rising crude prices, suggests that the TRAN may be trying to assume a leadership role, too. Both should be watched.

After hours, the SMH, KLIC, and CSCO all added a few cents to their closing values, with futures climbing slightly, too, but not enough to provide much encouragement to bulls. Fox Entertainment (FOX), News Corp (NWS), Cyberonics (CYBX), and Bob Evans Farms (BOBE) were among companies reporting after the close. FOX climbed on a better-than-expected result, NWS was flat, CYBX first posted a strong gain and then erased that gain after reporting earnings in line with analysts' expectations but ahead of its own, and BOBE tumbled after missing. Higher costs impact all kinds of companies, and BOBE mentioned rising hog prices.

After last week's disastrous non-farm payrolls number, more attention than ever may focus on the initial jobless claims number at 8:30 tomorrow. Last week's number indicated claims at 336 thousand. Other 8:30 releases include July's Import Price Index, with June's showing a drop of 0.2 percent, July's Advance Retail Sales, with June's showing a drop of 1.1 percent and ex- auto July Retail Sales, with June's showing a drop of 0.2 percent. I heard several commentators mention the retail sales figures, with some commenting that various indicators of consumer sentiment and spending patterns had been trending down lately.

Thursday, the CIBC Enterprise Software and Soundview Semiconductor Conferences continue, but DELL's Thursday-after- the-close earnings statement will also affect the performance of techs both before and after the earnings release. It would not be surprising to see the SOX climb to retest broken support as shorts rush to cover ahead of Dell's report, with that broken support from 380-386. For first indications that markets could be strengthening enough for a countertrend bounce, watch to see if the SOX and TRAN can both pick up steam to the upside or if crude prices instead pick up steam, sending the others lower.

With the SPX, OEX, Dow, and Russell 2000, the task for those seeking to gauge market direction proves easy: watching for either upside or downside breaks out of the possible "b" distribution patterns, and remaining cautious about trading the chop within them. With a downtrend firmly in place, all bounces should perhaps still be considered countertrend moves and sell- the-rallies should remain the favored tactic. Be ready to jump out if proven wrong, however.


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