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Market Wrap

Naz Pulled up by the SOX

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      09-20-2004           High     Low     Volume   Adv/Dcl
DJIA    10204.89 - 79.57 10283.87 10187.19 1.46 bln 1078/1705
NASDAQ   1908.07 -  2.02  1921.50  1900.24 1.55 bln 1239/1765
S&P 100   541.93 -  3.87   545.80   541.08   Totals 2317/3470
S&P 500  1122.20 -  6.35  1128.55  1120.34
SOX       399.90 + 11.40   404.55   384.80
RUS 2000  570.74 -  2.43   573.97   569.86
DJ TRANS 3242.33 - 15.06  3259.17  3239.23
VIX        14.43 +  0.40    15.29    13.98
VXO (VIX-O)13.78 +  0.23    14.69    13.78
VXN        20.56 +  0.43    21.49    20.02
Total Volume 3,016M
Total UpVol  1,326M
Total DnVol  1,582M
Total Adv  2317
Total Dcl  3470
52wk Highs  203 
52wk Lows    54
TRIN       0.78
PUT/CALL   0.92

The Nasdaq tested last week's highs, following the SOX which closed higher by 2.93% and broke week's high on a closing basis. The Nasdaq failed to hold its gains, closing fractionally negative at 1908, while the Dow and SPX remained in negative territory for the duration and closed lower by .77% and .56% respectively. The Dow's loss was notable alongside the Nasdaq and SOX strength, with the Dow breaking and closing below last week's lows.

Weekly Dow Chart

The weekly charts provide the most bullish view of the markets at current levels, with the bullish divergent buy signals still in place on both the Dow and Nasdaq despite their inability to break the descending weekly resistance lines. The Dow's loss today kicked off this week's weekly candle below 10300 trendline resistance, with an intraday high of 10284. The weekly cycle oscillators remained on buy signals, but the indicators undrew part of the uptick that was showing as of last Friday.

The 10300-10350 level is shaping up as the key battleground between bulls and bears. The current descending channel has been confounding bulls and bears all year- it's either a complex top at a low high, or the bull flag off the rim of a bullish cup and handle formation. A break above 10300-10350 on a weekly closing basis would rule strongly in the latter's favor, while a failure from here will set up a tense retest of 9900 and ultimately 9700 support. The weekly cycle oscillator upturns are quite bullish here, but even the 10-week stochastics lag the action considerably and are only reflecting the recent gains. Bulls need to break the 10300-10350 line in order to confirm the new weekly upphase, while a rollover from and a move below 10150 support should be enough to whipsaw the upphase back down.

Daily Dow Chart

The Dow daily is the most bearish of the bunch today, with today's decline leading its peers to the downside and breaking below last week's lows on a closing basis. Bulls are eyeing the support to 10180, being the lower descending trendline support level under what appears to be a bull flag. While the daily cycle oscillators are in a clear downphase, that downphase will require that the 10180 level break this week. A bounce from here would target the 10300 on the way to a test of 10350 and descending resistance at 10380 on this chart. A move above 10300 on a daily closing basis would most likely stall or abort the daily cycle downphase currently in progress.

Weekly Nasdaq Chart

The Nasdaq was a tower of power for much of today's session, benefiting from sector upgrades from Sanford Bernstein and RBC Capital Markets for the SOX which led the charge to the upside. The Nasdaq ran to the upper weekly descending resistance line and Fibonacci resistance at its session high of 1922 before falling back to the 1900-1910 range.

The weekly Nasdaq chart looks more bullish than that of the Dow in some respects, with clearer buy signals from more oversold levels on the oscillators. The run up from the lower channel support line was steeper and the price action on this week's one- day-old candle is more insistent, with price pushing today at the upper descending resistance line. On the other hand, the bullish stochastic divergence on the Dow is absent here, and the selling in the early summer was more violent on the Nasdaq than on the Dow. In any event, 1920-25 resistance is the bull flag resistance level to break, analogous to the 10300-10350 Dow level discussed above. Below 1890, next support is at the 1845 level. Below 1820, the weekly cycle buy signals should whipsaw.

Daily Nasdaq Chart

As on the Dow, the daily COMPQ chart is less bullish than that of the weekly. Today's failure at 1922 left a tall upper doji shadow, and the negative close near the opening lows left us with a bearish gravestone doji. A failure to regain the highs tomorrow will result in further weakness in the daily cycle oscillators, but bears need to see the 1890-1900 level taken out in order to damage the still-intact rising channel off the summer lows. Last week's sideways range continues to look like consolidation above 1900, but below 1890, there's little support to the 1870-75 level.

Daily Nasdaq Price/Volatility ratio chart

The Nasdaq volatility index (VXN) rose .43 today to close at 20.56, rising alongside price at various points throughout the session. Over the years, many analysts, myself included, have noted the inverse correlation between volatility and price. "When the VIX is high, it's time to buy- when it's low, it's time to go." The VXN is the Nasdaq's VIX, and we've been noting extremely low relative readings in recent months. The trouble is in knowing how low is "low", and for this purpose, I prefer to watch ratio charts between the Nasdaq's underlying price and its volatility index. The COMPQ:VXN chart above follows this relationship, and the oscillators follow the turns. The ratio fell today, losing 2.08- that level is insignificant, except that the oscillators are oversold and verging on a turn lower. A downleg in the ratio suggests that the Nasdaq's price will decline relative to the VXN. I'll be following this tomorrow in the Market Monitor, but another up day for the VXN / down day for the Nasdaq should kick off a new downleg for this ratio- a bearish outcome for the Naz.

Weekly TNX Chart

Bonds rose strongly today, ahead of the FOMC announcement scheduled for 2:15PM tomorrow. Ten year note yields (TNX) fell 6.9 bps to close at 4.058% in a 1.67% decline for the day. The move reversed all of Friday's gain in the TNX / decline in ten year bond and retested last week's TNX lows, the current lows for the move that commenced in June. A break below current levels sets up a retest of lower channel support and old confluence close below at 4%.

Treasury Secretary John Snow spoke in front of the National Press Club today, reiterating his optimistic view of the economic recovery in the US. He cited the creation of 1.7M jobs in the past 12 months as evidence of better times to come. He added that the President remains committed to cutting the federal deficit in half by the end of a second term should he be reelected. The IMF's managing director Rodrigo Rato touched on these themes as well, saying that the US should seize the moment to begin reducing both its fiscal and balance of trades deficits. Addressing the Council of Foreign Relations in New York, Rato said, "This relatively benign global outlook provides an important window of opportunity for further progress in addressing global imbalances and reinforcing the basis for more balanced and sustainable global growth."

In other news, the National Association of Home Builders announced that its housing index fell from 71 in August to 68 in September to July's levels. The Wall Street Journal reported news of a report due to be released by the Office of Federal Housing Enterprise Oversight that will allegedly reveal evidence of FNM's executives decisions to manipulate earnings. FNM closed lower by 1.59% at 75.98.

Weekly chart of Crude oil

Crude oil marched higher today on news of Russian YUKOS' suspension of 100,000 bpd worth of oil exports to China, closing higher by 70 cents or 1.54% at 46.30. The financial press also noted that Hurricane Ivan has disrupted an estimated 1.2M bpd's worth of production in the Gulf of Mexico. However, the YUKOS story received the most attention, as the suspension of rail deliveries to China constitutes the first supply disruptions arising from its ongoing financial woes. The company has been warning of such risks in the wake of bank account seizures pursuant to the Russian government's efforts to recover more than 7B in taxes from the company. Analyst David Thurtell noted that "The YUKOS volume isn't much in the scheme of things but in today's market, which is as tight as a drum, it's crucial."

The move broke last week's high, closing above the 46 level and confirming the doji reversals from the lower rising channel on the past 3 tests over the past month. While the bearish stochastic divergence continues, it will whipsaw to the upside on a return to the prior highs. 45.50-.75 is now support, and above the session high of 46.475 there's resistance at 46.75-47, following which the year highs will come into view above 48.

It was a quiet newsday, with no major economic reports released. In corporate news, CL was out with an earnings warning this AM, saying that Q3 and Q4 earnings will be light. The company cited higher marketing costs that exceeded better-than-expected growth in unit volume and market share. While consensus estimates were for earnings of .67 per share for Q3 and .68 for Q4, the company expects earnings from .57-.59. CL got smoked for 11.23% to close at 48.23, -6.10, and the warning from the consumer products company helped keep the Dow and SPX in the red for the duration of the session.

PMCS also warned in the morning, reducing its Q3 revenue expectations from 86M to 71M-73M. The company cited reduced demand for DSL equipment from Asian ISPs in Q2 2004. Consensus estimates were for earnings of 89.2M. PMCS, like the Nasdaq, managed to rise on the news, adding 39 cents or 4.12% to close at 9.86 for the session.

After the bell, ADBE announced earnings for Q3 of 42 cents per share, beating estimates by 3 cents on sales of 403.7M. ADBE was up 3.86% at 50 as of this writing. RHAT announced Q2 net income of 11.8M or 6 cents per share, beating estimates by 5 cents. RHAT was higher by 1.51% at 15.46 as of this writing.

For tomorrow, all eyes will be on the Fed's 2:15 rate announcement and it accompanying bias statement. The bond market is poised for a breakout using last week's price high/yield low as the reference. Strength in bonds today suggests that the Fed will emphasize the "disinflationary" risks facing the economy, which in the recent past has see declines in the dollar and rallies in all other asset classes. As the intermarket relationships have been cloudier than usual, however, it's safer to follow the individual charts you're trading than to guess at an intermarket reaction to moves in the dollar.

The daily cycle in the Dow has rolled decisively to the downside, while the Nasdaq continues its bullish trending move. Today's bearish gravestone doji suggests possible trouble tomorrow for Nasdaq bulls, but it will take a move below 1890-1900 to get the ball rolling. The bullish cycle picture would have a corrective daily cycle downphase bottom at a higher low before resuming a renewed charge against descending bull flag resistance on the weekly charts. Nasdaq bulls today were hoping to dispense with the downside altogether and get to the good part, which they nearly accomplished. With the pending announcement at 2:15PM, there's the possibility that the market will try to bore us for the first part of the session and then make up for lost time in the final 2 hours.


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