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Low volume, low prices

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      08-30-2004           High     Low     Volume   Adv/Dcl
DJIA    10122.52 - 72.49 10196.78 10122.52 1.02 bln  986/1810
NASDAQ   1836.49 - 25.60  1855.78  1836.49  993 mln  945/2059
S&P 100   536.55 -  4.33   540.88   536.55   Totals 1931/3869
S&P 500  1099.15 -  8.62  1107.77  1099.15
SOX       373.64 -  8.70   382.34   373.64
RUS 2000  544.56 -  7.11   551.67   544.46
DJ TRANS 3085.35 - 23.45  3108.17  3080.06
VIX        15.44 +  0.73    15.58    15.30
VXO (VIX-O)15.11 +  0.32    15.28    14.71
VXN        23.14 +  1.87    23.18    22.31
Total Volume 2,015M
Total UpVol    316M
Total DnVol  1,678M
Total Adv  1931
Total Dcl  3869
52wk Highs   75
52wk Lows    46
TRIN       2.95
PUT/CALL   0.85

Extremely light volume probably attributable to heightened security for the GOP convention in New York coincided with losses across the indices as bonds rallied throughout the session. Crude oil extended last week's losses, closing below 43 and dipping below 42 intraday on the Nymex.

RBC's technical analyst Bob Dickey was out this morning saying that overhead resistance for equities was considerable at current levels but that pullbacks should provide good entry points as market conditions improve for the remainder of the year.

If so, then today provided the first such pullback, with the Nasdaq declining 1.37% to close at 1836.5 and the Dow .7% to 10123. The decline was set up by a bearish oscillator divergence on the 30 minute charts discussed this morning before the open in the Market Monitor. It occurred within the context of the broader daily cycle upphase, which itself has been fighting with the weekly cycle downphase. If today's weakness does not reverse from current levels either tomorrow or by Wednesday at the latest, then the daily cycle upphase that has fueled the market strength of the past 3 weeks should reverse, bringing with it a still-deeper "pullback" for RBC's analyst to buy.

Weekly Dow Chart

The weekly declining channel is in play at current levels, and despite last week's confirmation of the strong advance in the prior week, the bulls weren't able to break resistance this morning. The session high of 10196 was right on the line, and while the weekly cycle oscillators remain in a downphase, a positive week finishing above 10200 should be enough to begin generating buy signals. On the other hand, these oscillators aren't oversold by any stretch, and a break below last week's lows will suggest a retest of 9900 and possibly of the lows for the year at the lower descending channel support line. These are critical levels, insofar as that 10200 resistance level could be considered bull flag resistance as noted for the past several months in this current channel, while a failure to advance here will open the door to a bearish finish for 2004.

Daily Dow Chart

The issue for the Dow is pretty clear on the daily chart, and it looks bearish as of today's admittedly light volume close. The steeply rising support line in place since the year low was broken today with a bearish engulfing candle. This would set up Friday as a gravestone doji top to finish off the daily cycle upphase, but conditions that generally accompany such prints include high volume and long intraday range. Neither of those conditions were present on Friday, with light volume and a narrow range/short upper candle shadow. Of course, chart signals are rarely perfect, and the trendline break with today's long candle looks pretty convincing to me. If it's valid, then we should see 10200 go unchallenged on a daily closing basis, and better yet a move to 10080 confluence/trendline support. The wildcard remains the light volume and ambiguous cycle setup in this timeframe, as the daily cycle appears to be ready to roll over but has yet to do so. A failure to regain the 10160-10170 should be enough to see the rollover follow through, however, and a lower high from the next 30 minute cycle upphase will confirm the new daily cycle weakness.

Weekly Nasdaq Chart

The Nasdaq held the previous week's gains last week, confirming what appears to have been a bull wedge breakout with an implied target as high as 2075. Today's decline reversed all of last week's advance, confirming the 1855-60 confluence resistance below the more significant 1890 and 1920 resistance levels. The bounce from the lows 3 weeks ago has yet to reflect itself in the weekly cycle oscillators, which remain bearish, if somewhat less aggressively so. 1760 remains key downside support, while the descending-channel-that-might-be-a-bull-flag support declined to 1750.

Daily Nasdaq Chart

The break on the daily chart is as rich with implications for the Nasdaq as it is for the Dow above. The implied target on the bear wedge that broke today is at the year lows, with the 22 day EMA at 1839 being tested by today's close at 1836. A close below the 1825-30 support level should be enough to generate sell signals on the daily cycle oscillators, setting up the Nasdaq for a test of support at the 1810 and 1800 levels for starters. Any lower high for the anticipated 30 minute cycle upphase below the 1860 level will confirm the daily cycle weakness.

Weekly TNX Chart

At the beginning of last week I discussed the daily cycle upphase building within the ongoing weekly cycle downphase. In the latter part of last week, we saw ten year note yields (TNX) fail at the 50 week EMA and give up the better part of their advance, closing the week in negative territory. That decline in the TNX (advance in bonds) continued today, with the TNX falling 3.9 bps to close at 4.188%. The most recent downphase in the weekly chart of the ten year. If support between 4.1% and 4.15% fails, next support is at the 4.0%-4.02% level. Overhead resistance above 4.3% is at 4.4%.

It was reported that tomorrow U.S. Treasury auction of 4-week notes will be reduced from 24B to 22B.

Weekly chart of Crude oil

Oil extended last week's slide today, and on the weekly candle chart the most recent candle is based solely on today's move. The bearish ascending wedge noted for the past several weeks broke with authority last week, and the implied downside target is as low as 36. However, there's significant support at 40-41 and at 41.70, with today's spike low on the Nymex reaching 41.40. A break below 41 should kick off a much-welcome weekly cycle downphase.

The news associated with the decline, other than pure technicals, revolved around a number of items. It was reported that Shiite cleric Muqtada al-Sadr told his followers in Iraq to cease their resistance against U.S. and Iraqi government forces following the end of the standoff in Najaf.

As well, OPEC president Purnomo Yusgiantoro said that plans for additional oil capacity expansions were on the horizon. "...In response to expected demand growth in the near future, member countries have plans in place to further increase production capacity by around one million bpd toward the end of this year and into 2005. In addition, plans for additional capacity expansions are available and could be enacted soon. However, this capacity would, typically, become available around 18 months after commencement of this process," Yusgiantoro said.

Iraqi oil exports were running below last week's 2 million bpd 1.4 million bpd today, thanks to pipeline damage caused by last week's acts of sabotage. The repair work is expected to take five days. Fire fighters were working yesterday to put out a blaze in the South Rumaila oilfield caused by the pipeline breaks.

Crude oil closed lower by .925 at 42.25 on the Nymex, a 2.14% decline, and, despite an upgrade from Lehman Brothers from neutral to positive today, both the OSX and OIH closed lower by 1.3% at 107.68 and by 1.12% at 72.01 respectively. Oil bulls pointed to the absence of a resolution in the YUKOS affair, continued strong global demand and, other than in Saudi Arabia, a relative dearth of excess supply capacity. Airline stocks, lofted by the continued decline in crude oil prices, bucked the broader market today, with the Amex Airline Index (XAL) closing higher by .38% at 47.22.

It was a quiet news day. The Commerce Department reported that US consumer spending climbed sharply in July, rising .8% and meeting expectations. Personal Income, however, rose just .1% and missing estimates for a .2% increase. The increase in personal income was the weakest reading since November 2002. The personal savings rate declined from 1.3% to .6% as consumer spending rose faster than income. The personal savings rate was the lowest since December 2002. After-tax income increased 0.1 percent. The closely-watched personal consumption expenditure price index, which the Fed prefers to the CPI, was unchanged, as was the core PCE index. Some analysts were quoted as saying that this confirms that there is "no inflation", and that the robust increase in personal spending bodes well for Q3 growth.

Spending on durable goods increased 4.1%, and June's 5.9% decline in durable goods spending was revised upward to a 3.2% drop. As the most disappointing component of today's reports was the personal income reading, all eyes will be focused on this week's employment report for August, scheduled for release on Friday.

Forrester Research announced that it expects a 7% increase in information technology spending next year, based on a its Q3 CIO Confidence Poll survey of 195 information technology executives. will rise 7% next year, according to the firm's survey of 195 executives.

The markets were less concerned with the impact of Hurricane Hermine and the flight-path of Hurricane Frances than with the ongoing GOP convention in NYC. Despite a limit-up day for cotton futures, volume was light overall not just for cotton futures but for the markets in general. With security tight in New York for the Republican Convention, some analysts wisely connected the light volume with impediments for those trying to enter or even travel within Manhattan.

For tomorrow, we are left with the uncertainty surrounding the fate of the intraday cycles and the ongoing but faltering daily cycle upphase. A relatively orderly bounce attempt turned up the 30 minute cycles, only to see the price collapse into the close. That dip got ahead of the 30 minute cycle oscillators, which stalled but did not reverse their upphase. Any strength tomorrow will generate a bullish divergence on that key intraday cycle, and the short cycles are oversold as well. This is a recipe for a strong intraday rebound, which will either close below today's highs or not. A lower high will spell the end of the daily cycle upphase, while a higher high will re-confirm it. If we see more selling tomorrow after today's very weak bounce attempt, then I will expect that selling to be quite strong and the daily cycle upphase should abort almost immediately. I do not expect to see today's high broken on a closing basis given the trendline break today and the toppiness in the daily cycle oscillators.

Oil is a wildcard, as we saw lower oil prices coincide with lower equity prices. While intermarket trends are anything but stable, the recent decline in the price of oil from its record highs has coincided with higher prices in equities. With oil declining strongly today, it remains to be seen whether bullish pressure is building for equities or not. Again, tomorrow's bounce (or the absence thereof) will tell us a great deal. Given that the daily cycle is threatening to roll over from just below overbought territory, my expectation is for the next extended move to be to the downside, ideally following the intraday bounce discussed above. Hopefully, volume will pick up and provide us more clues as to which way the ambiguity will be resolved.



 
 



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