Option Investor
Market Wrap

Higher Dollar Sinks Most Boats

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      08-23-2004           High     Low     Volume   Adv/Dcl
DJIA    10073.05 - 37.09 10131.08 10067.97 1.26 bln  982/1822
NASDAQ   1838.70 +  0.68  1849.12  1835.11 1.21 bln 1245/1797
S&P 100   534.89 -  1.15   537.72   534.33   Totals 2227/3619
S&P 500  1095.68 -  2.67  1101.40  1094.73
SOX       390.09 +  4.09   394.58   386.00
RUS 2000  543.47 -  4.45   549.97   543.44
DJ TRANS 3068.09 - 22.78  3117.03  3065.60
VIX        15.88 -  0.12    16.71    15.79
VXO (VIX-O)15.86 -  0.44    16.92    15.40
VXN        22.54 -  0.52    23.88    22.53
Total Volume 2,470M
Total UpVol  1,147M
Total DnVol  1,279M
Total Adv  2227
Total Dcl  3619
52wk Highs  112
52wk Lows    53
TRIN       0.72
PUT/CALL   0.80

The US Dollar Index rose throughout the session, trading above 89 resistance as of this writing, and driving foreign currency pairs, US treasury bonds, gold, silver and oil lower. Equities decline slightly, with the exception of the Nasdaq which held a fractional gain.

It was a light volume session overall as the markets traded in the aftermath of last week's monthly options expiration. Most of the price action was slow and listless, with the Nasdaq finishing higher by less than 1 point and the Dow losing 37 points compared more substantial declines in treasuries, metals and oil. This was a bullish outcome for the Dow and Nasdaq following last week's strong gains and what had been deeply overbought intraday cycle oscillators as of this morning.

Weekly Dow Chart

The strength that was beginning to appear a week ago from the prior weekly doji asserted itself for the remainder of last week and continued for much of today's session. I noted that a move to the Dow's 10200-250 confluence range would threaten the weekly cycle downphase, and that continues to be the case following last week's gains. While the weekly cycle downphase remains intact and the current bounce appears to be merely corrective, on the daily chart below it has a more impulsive feel, rising steeply from a bullish stochastic divergence and a week-long base (the weekly doji preceding last week's bullish engulfing candle). A move above the 10250 zone would set up the Dow for a challenge of the declining channel resistance line atop the weekly bull flag, and suggest a retest of the year highs and beyond. However, for such to occur, the gains from last week need to continue, and the daily cycle upphase will need to continue to strengthen above last week's lows at a bare minimum. A break below the lower descending flag support line would abort this bullish scenario and suggest a test of 9600 support.

Daily Dow Chart

Today's 37 point decline retraced part of Friday's gains and respected the upper and lower trendlines on what appears to be a pennant between 10130 and 10050. The lower rising support line coincides with the oscillator upphase, and a break below this lower line should cause that upphase to stall. I believe that it would take a move below 9960 to start a new downphase, and were such to occur, it would be a very bearish development. For the moment, however, it appears that today's action was merely corrective, and with the steeply rising pennant support line pressing toward an apex, we can look forward to a what will hopefully be a directional resolution as early as tomorrow. For the time being, the daily cycle remains strongly up against the ongoing weekly cycle downphase.

Weekly Nasdaq Chart

Last week's move resolved the accumulation/distribution doji dilemma from the prior week to the upside, and set up a possible bull wedge breakout targeting the 2075 level. However, there's substantial resistance along the way, and each level will be reinforced by the downside weekly cycle bias while the downphase persists. 1920 continues to look like the key make-or-break level for the current weekly cycle downphase above which we should begin to see buy signals on the oscillators as the bull wedge or even cup and handle breakout scenario comes into play. The current move is so far just a correction within the weekly cycle downphase, and 1835-45, the range that prevailed for much of today's session, is first confluence to test the daily cycle upphase discussed below. So long as 1760 support remains intact, weekly cycle bulls can hope that the doji candle of 2 weeks ago was the early bottom of the current downphase.

Daily Nasdaq Chart

On Friday, the Nasdaq closed just below its high of the day, and today's fractional gains built on that to continue the steep uptrend. While the intraday oscillators were again overbought at the close, there was only sideways selling on the intraday cycles today, with most dips quickly bought back up. On this chart, it appears that no less than a close below 1800 would be required to stall the current daily cycle upphase, with support below that at 1775 and 1745. Above 1845, next resistance is at 1860-65, followed by 1890-95.

Weekly TNX Chart

The most recent downphase in the weekly chart of the ten year treasury note yield (TNX) has seen yields descend from a high of 4.9% to the 4.13% lows. As discussed in the weekend Futures Wrap, a daily cycle downphase appeared to be basing as of Friday for a new upleg, and we saw a powerful move higher in the TNX today, lifting the TNX to its 50-week EMA and testing 4.29% resistance. The weekly cycle downphase is not over and could project to a retest of a 4% support, while a move above 4.4% resistance could spell a new upleg from a higher low. Because of the bottoming action in the daily cycle and today's strong bounce higher, I'm guessing that we've seen the lows for this weekly cycle upphase, but it will take a weekly close above 4.4% at minimum to prove it. For the day, the TNX rose 4.8 bps or 1.13% to close at 4.279%.

Weekly chart of Crude oil

Crude oil finished positive last week, but substantially below its intraday spike high above 49. Had the week finished negative, it would have been a textbook gravestone doji. It appears that the bears were off by a day, as today's decline completed the picture, breaking back below 47 with a 1.55 point loss to close at 46.10 for a 3.25% decline. This weekly chart is displaying this week's candle based on only one out of five days' data, and so the picture is almost certain to change. But a break below 46 should see a downside reversal and could constitute a bearish ascending wedge breakdown with an implied target as low as 36. Note the 10-week stochastic bearish divergence, which also suggests a strong downphase to follow on a sell-signal if printed from current levels. I expect former resistance in the 40-41 area to provide firm support. However, the recent steep weekly uptrend appears to be under attack this week, and 46 is shaping up to be the key battleground.

Part of today's weakness in oil prices were attributed to the resumption of exports from Iraq's northern and southern outlets after a 3-month halt for the northern and 2-week halt for the southern. CNN reported that the northern Kirkuk pipeline was pumping a little more than half its normal capacity at 454,000 bpd, while flows from the southern Gulf terminals was running at its normal level of approximately 2M bpd. This news dominated Russian news to the effect that Yukos intends to cut its output by 4.5% and reduce capital expenditures by more than 1/3. Yukos CEO Steven Theede said that "Despite numerous requests to allow legal access to our bank accounts in order for Yukos to continue normal operations, collection orders remain in place and no cash is available to the company from those accounts." Yukos currently accounts for approximately 20% of Russia's production, generating roughly 1.7M bpd.

The oil and broader markets mostly ignored increased fighting between U.S. Marines and Shiite fighters around a shrine in Najaf, with Al Jazeera reporting damage to the gold-domed mosque caused by the fighting.

Dallas Fed President Robert McTeer told CNBC in an interview today that in his view, the economic recovery "is in a soft spot right now" but that, despite persistently high prices of oil, the economy is not "in jeopardy". He added that, on an inflation- adjusted basis, oil prices are not particularly high. "Petroleum products are in many, many things, and it is very important and it is troublesome, both in adding to price pressures and in adding to weakness overall." While the Fed considers it in determining monetary policy, McTeer said that it remains one factor among many. Addressing recent developments in Fed policy, he said that "The Fed has not really tightened monetary policy in any strict sense. It's reduced its degree of accommodation. The target fed funds rate is still only 1.5 percent - extremely low. The target fed funds rate is still negative or close to zero in real terms."

Overall, it was a quiet day news-wise with no major economic reports released.

FDX was strong throughout the session, closing higher by 2.11% at 80.97 after raising both fiscal Q1 and full-year guidance this morning. The company said that it expects its business to remain strong despite threats to the global economy such as an extension of the rally in oil prices. The company raised guidance for Q1 earnings from $.90-$1.00 per share to 1$-$1.10, and for the full year from $4.20-$4.40 to $4.40-$4.60. Consensus expectations were for $.96/share for the quarter and $4.48 for the year. The company attributed the change to strong demand for international express, ground and less-than-truckload services.

WMT warned to day, lowering its August forecast and citing weak back-to-school demand. The company reduced expectations for August sales from a 2%-4% increase to a 0%-2% increase. Some analysts blamed the decline on increased prices for gasoline affecting low-income consumers in particular. WMT was sold on the announcement, finishing the session lower by 1.56% to close at 53.80. The Retail Index, the RLX, closed lower by .4% at 385.70.

For tomorrow, we're left intermarket questions that edged a little closer to resolution today. As noted last week, the daily cycle downphases for the US Dollar Index and the Ten year treasury yield entered bottoming territory, and today those assets made strong moves to the upside. Gold, which had been looking equally toppy, declined 1.16% today. Equities remain the wildcard for the simple reason that their daily cycle oscillators bottomed a week earlier and spent last week strengthening to the upside as price made strong gains. The general trend I've observed since 2003 has been the tendency of the USD Index to trade against the prices of equities as part of the binary dollar relationship. For this reason, I'd expect to see equities move lower as the dollar rises. However, that relationship has been far from iron-clad, and furthermore, the daily oscillators show no indication of weakness for the Dow or Nasdaq yet. For this reason, I remain open-minded to the possibility of a downside whipsaw for the Dow and Nasdaq, but until the daily oscillators turn back down, traders following that daily timeframe can continue to expect higher prices from the current cycle upphase. While the intraday cycles suggest weakness at the open tomorrow, that weakness should be sideways-down, corrective within the ongoing daily cycle upphase.


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