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Market Wrap

Higher Highs

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The markets marched higher today on solid volume, breaking Friday's highs and setting new highs as the volatility indices scoped multiyear lows. The indices peaked at lunch and began a slow rollover that picked up speed until the final half hour of the cash session, from which time the indices began a sharp bounce to correct the better part of the afternoon weakness.

The strength today extended what had become a trending move across the intraday cycles and continued the upside whipsaw in the daily cycles that we followed last week. The lack of pullback was sufficient to generate the first stochastic buy signals on the weekly timeframe, the first such signal since before the summer.

Weekly Dow Chart

The Dow closed flat for the day, up 1.69 at 10314, failing at a high of 10348. The move higher started this week's candle just below the upper descending resistance line of the bull flag in play from the January highs. A move above the 10350-10400 zone on a weekly closing basis would set up a move to 10500 resistance, but the bull flag breakout would imply a move to the year highs and beyond. Confirming this bullish picture is a slightly higher stochastic and Macd histogram low as highlighted above, forming a bullish oscillator divergence. A rollover below the 10300 level would start a retracement of the gains over the past month, but on this weekly timeframe, the trend is in the process of reversing to the upside.

Daily Dow Chart

The higher open on the Dow kept the day's candle right on the steeply rising daily trendline, but all of the day's gains had blown off in a doji spike by time of the cash close, setting up a bearish gravestone doji formation. A break below today's low of 10292 would bring us closer to a bearish Macd cross to confirm the rollover in the 10-day stochastic. Next support is at 10260, followed by 10190-10200. The daily cycle oscillators combine with today's upper doji shadow to paint a picture of an imminent daily cycle downphase, but it will take a close below 10260 to break last week's range and put a bearish tint on the consolidation. The weekly cycle buy signal discussed above suggests that a daily cycle downphase from here should find support at a higher low- how high or how low that daily cycle bottom proves to be will tell us a great deal about the fate of the bullish weekly formation that bulls have been eyeing all year.

Weekly Nasdaq Chart

The Nasdaq outperformed the Dow again today, closing higher by 16.1 points at 1910.4. The high was at 1919.21, but bulls were happy to have closed above the 1890 confluence line. As on the Dow, the lack of pullback for the past month was enough to generate the first weekly cycle buy signals. Confluence, Fibonacci and trendline resistance line up at the 1940 level, above which bulls will be looking to the 2000 and 2025-30 levels. As with the Dow, a break above the descending upper flag resistance line has very bullish implications, suggesting that the decline this year was merely corrective following 2003's impulsive rally. While the decline this year looks longer than a bull flag would ideally be, the upper resistance line is nevertheless set up as a key watershed between bull and bear territory.

Daily Nasdaq Chart

The daily Nasdaq looks considerably more bullish than the daily Dow, with an unfilled upside breakaway gap printed by today's open. On this chart, there's rising resistance in the 1930 area but if the bulls manage another advance tomorrow, the 10-day stochastic should complete its upside whipsaw with a new buy signal. That would be a very bullish development, but as noted last week in the Market Monitor, bulls need to continue their advance. The upside whipsaw in the 10-day stochastic stopped what had been daily cycle downphase, but until the previous oscillator high is either matched or exceeded, there remains the risk of a bearish divergence against the higher price high. A rollover in price from here would suggest a strong daily cycled downphase to follow, with the implication that the daily cycle upphase from the August low has been a corrective bear flag. 1870-80 is key downside support, following which the lower rising trendline and the 1835 levels will be in play.

Weekly TNX Chart

Treasury bonds rose today, with the ten year note yield (TNX) declining 2.9 basis points to close at 4.151% for a .69% move on the day. On the weekly chart above, this week's candle (comprised solely of today's data) remained within the lower end of last week's range, and appropriately, there were no particular sharp or impressive moves in either direction. Rising weekly support at 4.1% remains unbroken, with the lower spike 2 weeks ago repelled with authority from the lower line, bouncing higher in a doji hammer. The weekly cycle oscillators are turning up, with the 10-week stochastic printing a buy signal today. This suggests that the lower wedge support line is likely to hold on this run, and that higher yields / weaker bonds are on deck, at least in this weekly timeframe. A break below 4% would suggest a bear wedge breakdown targeting the 3.1% support level, while a bounce from the line will have resistance at 4.4%, 4.88% and ultimately 5% at the top of the wedge.

Weekly chart of Crude oil

Crude oil rose strongly today, adding 2.45% or 1.05 to close the day session at 43.85 on the Nymex. The weekly chart of front- month crude futures shows a bearish stochastic divergence, and the sharp break from the bear wedge apex 4 weeks ago suggests more weakness to come. However, the bearish divergence is of limited reliability because the weekly stochastic has been trending in overbought for months. I would be more impressed with a break below the rising channel support confirmed with a move below 41 confluence.

The media attributed today's strong rise to the threat posed by Hurricane Ivan, whose flight path has edged westward and now threatens the Gulf of Mexico. Hurricane Ivan, which remains the strongest of this year's series of hurricanes and is still measuring force-5, threatens not only damage to key infrastructure in the Gulf, but also the threat of downtime due to evacuations and delays. Reuters reported that energy companies have already moved more than 3,000 workers off rigs in the area as a precaution.

Compounding this turn of events was uncertainty due to the plethora of stories to cover last Thursday's explosions in North Korea. The story was reported after the fact as being one explosion with a "mushroom cloud" that left a crater and a mushroom cloud more than 3 kilometers wide. The uncertainty was nearly total, with National Security Adviser Condoleezza Rice saying, "We don't think ... that it was a nuclear event. But we're looking at it and we'll get further analysis. There are ... all kinds of assessments that are going on. Maybe it was a fire, some kind of forest fire." The uncertainty resolved somewhat today, with North Korean Foreign Minister Paek Nam-sun saying that that the explosions were deliberately set as part of the construction of a hydroelectric dam project. North korea has invited foreign envoys to visit the scene and see for themselves, but it remains a mystery why no statements were made 4 days earlier to explain a matter of global concern.

The Commerce Department reported that revenues in three major US service industries accounting for approximately 15% of the US GDP increased by 5.4% from Q1 to Q2 2004, reaching $598.1B. The data is the conclusion of a new quarterly survey covering following sectors: professional, scientific and technical services; information services; and administrative, support and waste management services.

At 2PM it was announced that the US federal budget deficit declined to 41.1B in August, down from the 76.6B last August. The cumulative deficit for FY 2004 is 436.9B with one month to go. At this time in 2003, that figure was 401B. The 41.1B deficit exceeded the 40B level projected by the Congressional Budget Office.

U.S Airways (UAIR) is seeking protection from its creditors for the second time in the past 10 years, filing a Chapter 11 proceeding over the weekend. The filing comes following the airline's failed attempt to obtain cost concessions from labor unions, some of which Reuters reported to be key shareholders of the company as well. The company has assets of approximately 8.8B and liabilities of 8.7B, though those assets include some 2.5B of goodwill. Another 1.45B of its assets is cash and cash- equivalents. Later in the afternoon, the Association of Flight Attendants-CWA (the union represent UAIR flight attendants) claimed that it never received the full details of the company's latest contract proposal, and that there were important delays in its receiving information from the company. UAIR closed lower by 29.45% at 1.03.

For tomorrow, bulls will hoping for a shallow or sideways correction to relieve the overbought intraday cycles, and particularly the 30 minute cycles which were in a downphase at the cash close. The daily cycle is still up for grabs on the Nasdaq and Dow, both of which suggesting that the easy part of the recent rise has been seen. On the other hand, the weekly cycle, which obviously lags its shorter-term counterparts, is only now printing buy signals. That's a bullish sign for longer term traders, and sets up a bullish expectation for higher highs and higher lows for the daily cycle. My own feeling is that a daily cycle correction, most likely to a higher low, is the next major move on the daily horizon. If I'm wrong and the daily cycle begins trending in overbought from here, we will be much more likely to see a retest of the year highs within the context of a weekly bull flag breakout led by the Dow. For that reason, the trendlines on the weekly chart highlighted above are the key upside levels to watch in the event of further strength this week.


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