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Market Wrap

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     08-16-2004            High     Low     Volume Advance/Decline
DJIA     9954.55 +129.20  9967.08  9825.35 1.45 bln   2247/ 559
NASDAQ   1782.84 + 25.62  1789.49  1759.58 1.28 bln   2074/ 994
S&P 100   527.30 +  6.58   528.14   520.72   Totals   4321/1553
S&P 500  1079.34 + 14.54  1080.66  1064.80
RUS 2000  528.06 + 10.67   528.06   517.39
DJ TRANS 3051.14 + 84.22  3051.54  2967.90
VIX        17.57 –  0.41    19.28    17.42
VXO        17.39 -  1.38    18.98    17.39
VXN        26.72 -  0.74    28.22    26.20
Total Volume 3,020M
Total UpVol  2,539M
Total DnVol    397M
52wk Highs      69
52wk Lows      217
TRIN          0.37
PUT/CALL      0.85

The Nasdaq led again, on this time it was to the upside on a rally that added 1.31% to the Dow and 1.46% to the Nasdaq. Volume was on the lighter side of moderate at 1.172B NYSE shares and 1.269B Nasdaq shares, 10:1 in favor of advancing shares on the NYSE and just over 4:1 on the Nasdaq.

The day's advance was an overdue correction within the intraday cycles, and had little impact on either the daily or weekly cycle downphases. The weekly cycle downphase is in its "mature adolescence" here with more room to the downside, while the daily cycle is oversold and showing hints of a bullish stochastic divergence. If today's gains do not get strongly reversed this week with a retest of last week's low, the daily cycle should firm up and begin to generate at least the chop that would ideally proceed the next daily cycle upphase. Bear in mind, however, that the last daily cycle upphase at the end of July proved to be a bull trap, aborting early before plunging under the influence of the broader weekly downphase.

Weekly Dow Chart

The weekly cycle downphase yielded a retest of 9800 for the Dow, and support held, with today's rally adding 128 points to close at 9953. Other than the slight bullish divergence on the weekly Macd histogram noted on the chart, the weekly cycle remains lower and the lower falling channel, still a potential bull flag but growing long in the proverbial tooth, has untested support just above 9600. A break of 9800 would signal that the weekly cycle downphase means business and would target that lower level next. 9944-50 is a significant confluence level, followed to the upside by 10020-40 and the 10200-250 level. It appears that the daily cycle is trying to assert itself and a move to that upper level, significant not just on a trendline basis, would likely threaten the weekly cycle downphase currently in progress.

Daily Dow Chart

The Dow's 1.31% gain was sufficient to violate the primary downtrend in price but not the upper descending trendline that contained the August highs, currently lined up with confluence at 10020. A break above that level should be sufficient to generate a buy signal on the daily cycle oscillators, and the bullish divergence setup is still present on the 10-day stochastic if the advance continues. Downside support at 9800 is key for bulls hoping to realize on that bullish divergence- a move below it would take out the currently higher low on the oscillator. 9940- 50, which held back last week's highs, should now act as support above which a test of 10020 should prove inevitable.

Weekly Nasdaq Chart

The Nasdaq's key 1760 support level remains key support, having been tested at the lows of the current move. Price continues to walk down the lower channel descending trendline, and last week's doji star at the lows of the move sets up a perfect either-or dilemma of accumulation versus distribution. Today's gain sets up this op-ex week for a possible correction within the descending price trend, but there's strong resistance between 1840 and 1890 on the way to upper channel resistance at 1920. A break of 1920 would be required to threaten the weekly cycle downphase and open the door to a possible bull wedge breakout. The last daily cycle upphase attempt failed very early, and bulls will need to make a more substantial attempt in order to abort the current weekly downphase shown here.

Daily Nasdaq Chart

The Nasdaq is still well within the steep downtrend, but it too has maintained that higher stochastic low so far and is a mere 18 points away from a test of 1800 trendline resistance. However, there's a gap to the 1825 level and given the degree to which the daily cycle oscillators have declined, cautious bulls will want to see a move hold above 1800 and preferably take out 1825-35 quickly in order to establish that the daily cycle upturn is not just another whipsaw, such as we saw at the end of July. 1890 is the more significant resistance level above, and the weekly cycle downphase should barely detect a move that fails to at least challenge it.

Weekly TNX Chart

The bond rally has been sputtering as the shorter timeframes work off the overbought condition created by over two months' worth of gains. On the daily chart (not shown), the ten year note yield's (TNX) daily cycle is trying to commence a new upphase within the ongoing weekly cycle downphase. The strong confluence support at the 4% level is looking increasingly difficult to attain, particularly given rising weekly Bollinger support at 4.11%. However, the current bounce of the past 3 weeks is looking like a flag within the ongoing weekly downphase, and until that trend is broken, confirmed by an upturn in the 10-week stochastic, long- timeframe bond-bears will have to wait. A move above 4.4% would likely set the stage for the next leg up on this weekly timeframe, with next resistance at 4.48%, 4.65%, 4.8%, 4.88% and 4.2%. For the day, the TNX rose 4.5 bps to close at 4.258%.

The National Association of Home Builders credited the dip in rates with an increase in confidence as reflected in its Homebuilder confidence index which rose from 67 in June to 71 in August. NAHB president Bobby Rayburn said that lower interest rates "undoubtedly helped push builder optimism to its highest level since October 2003 as potential buyers who might have been sitting it out started diving back into the market when rates headed downward."

Weekly chart of Crude oil

Crude oil declined today, closing at 45.95 following the victory of Venezuelan President Hugo Chavez in a weekend recall referendum that soothed fears of a disruption of Venezuelan oil exports. The decline started the week on a negative note for September crude futures, but as can be seen on the weekly chart, it's a mere correction well-within the apex of what is one of the steepest wedges I've ever seen on a weekly chart. The ascending wedge is a bearish pattern that tends to break to the downside, in this case with a potential implied target of 36. With that said, there's confluence support at 44 and then in the 40-41 range.

The ticker headlines used the word "plunges" and "plummeted" to characterize the action of the New York Empire State Index data released today at 8:30AM, which was down from 35.6 in July to 12.6 for August, the lowest level since May 2003 and well below expectations of 31.8. The drop resulted from steep declines in both new orders (14.9 from 28.6 in July) and shipments (11.9 from 34 in July). For all the drama of the downside surprise, however, the reaction from the futures was muted, with the Nasdaq futures staying positive as the Dow and S&P retreated briefly into negative territory at 8:30AM. The Empire State Index is a relatively new index and is not a major market mover. It is based on a monthly survey of approximately 175 CEOs and presidents of manufacturers in New York State, compiled and released by the New York Federal Reserve Bank.

The Treasury Department announced that foreign long-term net capital flows into the U.S. rose to $71.8B in June from $65.2B in May, the first increase since January 2004. Foreign gross asset purchases of U.S. securities increased to $85.5B from $62.4B, while U.S. residents sold $13.7 billion of foreign assets net compared with a net gain of $2.8B in May. Foreign central banks purchased $18.3B of U.S. assets in June, up from $14.5B in May.

The Air Transport Association announced that July's traffic rose 9.2% while capacity rose 7.7% from this time last year, attributing the rise to aggressive ticket pricing and seasonal factors. The Amex Airline Index, XAL, was up strongly, adding 5.56% to close at 43.86.

Marketwatch reported that Comerica Bank released a study showing that automobile prices measured against median family income reached their most affordable levels in 25 years in Q2 2004 as incomes rose faster than vehicle prices. The average new vehicle's total cost was $27,126 and took 20.6 weeks of median family income to purchase at Q2 levels.

The media is now calling it the most expensive storm to hit the US since Hurricane Andrew in 1992, with estimates of Hurricane Charley's cost beginning to come in. It was reported that 1 million homes are and could remain for weeks without power, with 2300 people in emergency shelters in the wake of the storm that left at least 17 dead. Federal Emergency Management Agency director Michael Brown said that 11,000 people have already applied for disaster relief.

Some sources have estimated the damage at up to $145B, making it one of the most serious disasters in US history, but the majority of estimates are less extreme. German reinsurer Munich Re placed the insured cost between 7B and 14B US, while the Florida Division of Emergency Management estimated the cost of total economic losses around $15B and the Associated Press reported that the State of Florida is estimating losses at $11B. Economic losses, which include both insured and uninsured losses, are always substantially higher than insured losses alone.

All can agree, however, that impact from the storm was substantial, and the markets treated it as mostly bullish for prices. Orange futures closed limit-up on the New York Board of trade, rising nearly 8% on speculation of significant damage to this year's crop. Insurers also rose, with a number of companies including ALL and AHL saying that the hurricane could be material to current operations but would not threaten the companies' overall financial condition. ALL announced that the Florida Hurricane Catastrophe Fund would cover the company's Florida subsidiaries for 90% of their losses above an estimated retention of $286M up to an estimated maximum reimbursement of $922M. With the broader markets higher, ALL managed a 1.35% gain, while AHL was fractionally higher for the day. HIG closed higher by 1.62%, CB added 1.05%, PRU rose 1.26% and AIG gained 2.36%. Florida banks also rose on the anticipation of disaster relief funding and rebuilding, as did the Dow-Jones Home Construction Index (DJUSHB), which added 2.93% to close at 595.48, regaining its 200 day SMA for the first time since dropping below it in July.

MHC, which operates park model and RV resort communities also lagged the broader market but was nevertheless higher for the day, announcing the closure of two of its communities to reopen for the winter and damage to 30 of its 84 properties. The company said that it does not expect the damage to be material to its overall financial picture and maintained previous earnings guidance. MHC finished higher by .72% at 32.33.

In other news, GOOG announced that it has requested an effective date of Aug. 17th after the close, which, if granted, would allow GOOG shares to begin trading Wednesday morning. After the bell, however, it announced that the SEC and California securities regulators are looking into its issuance of stock options, the SEC in an informal inquiry. The company has made a rescission offer to repurchase the securities in question.

For tomorrow, we will see whether Friday's doji was the start of a more significant move in the daily cycle, or just a consolidation of last week's lows. The strong upside move today for the Dow and Nasdaq following a lower doji on Friday's higher volume is a potential bottom formation, and the intraday move today had an impulsive feel to it. The trouble with cycle analysis is that moves are always uncertain until they've been confirmed with oscillator signals which, by their very nature, always lag the price. It's for that reason that we watch other indicators, such as chart and candle formations and the intraday Keltner channels covered in the Market Monitor. Here, there's reason for bullish optimism, but the downside price trend is very strong and has not yet been reversed.

Provided that Friday's lows remain intact this week, I expect the daily cycle to build a new upphase, complete with the bullish divergence noted above. With the weekly cycle downphase against it, however, the onus will remain on bulls to keep the price advancing long enough to threaten first the daily downtrend and then the weekly downphase at the levels posted above. So far, the bounce we saw today was overdue and likely produced by deeply oversold intraday and oversold daily oscillators. A strong showing from bulls this week will be required to build it into something more.


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