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      10-11-2004           High     Low     Volume   Adv/Dcl
DJIA    10081.97 + 26.77 10098.78 10056.09 1.16 bln 1403/1345
NASDAQ   1928.76 +  8.79  1930.66  1920.76 1.15 bln 1789/1185
S&P 100   539.92 +  1.45   540.91   538.47   Totals 3192/2530
S&P 500  1124.39 +  2.25  1126.20  1122.14
SOX       391.53 +  2.01   392.89   384.63
RUS 2000  577.56 +  1.91   577.56   574.61
DJ TRANS 3336.17 +  0.17  3342.63  3322.63
VIX        14.71 -  0.34    15.27    14.28
VXO (VIX-O)14.99 +  0.04    15.54    14.70
VXN        20.05 -  0.64    20.46    19.94
Total Volume 2,316M
Total UpVol  1,282M
Total DnVol  1,002M
Total Adv  3192
Total Dcl  2530
52wk Highs  103 
52wk Lows    41
TRIN       0.93
PUT/CALL   0.81

With the Nikkei dark in overnight trading and bond markets closed for Columbus Day, Monday proved to be a set-up day for trades that might materialize later in the week. Our Canadian neighbors likely spent the day celebrating their Thanksgiving rather than participating in our markets. Closed government offices meant that no economic releases were scheduled, and the holiday produced light volume. Total volume on the NYSE remained under 1 billion shares, at 944 million shares, while volume on the Nasdaq was a stronger 1.2 billion.

Those explanations could be embraced by fundamental traders, while technical analysts would point to the need for a consolidation day after several large-range declines late last week. On the SPX, the consolidation took the form of a possible bear flag, seen here on the SPX's 60-minute chart.

Annotated 60-Minute Chart of the SPX:

This chart points out the potential role that Monday's tepid trading action played in setting up a trade for later in the week. Bears would like to see the SPX move a bit higher into resistance before rolling down again so that they'll have some distance away from the 200-sma.

A move above 1132-1133.50 suggests that something more bullish occurs, however. If that move occurs, bears would do well to step aside and watch for a retest of the October high.

That potential bear flag on the 60-minute chart shows up as an inside-day candle on the daily one.

Annotated Daily Chart of the SPX:

Like the SPX, the Dow produced an inside-day candle. Proponents of inside-day theory would go long these indices on a move above Monday's high with a stop below Friday's low. Especially with the Dow, that appears to be a risky move. Much resistance gathers above the Dow's closing position in the form of gathered moving averages and historical resistance. With the Dow still in a downtrend, selling rallies appears to be a better approach.

Annotated Daily Chart of the Dow:

Merrill Lynch (MER) and Dow component Johnson & Johnson (JNJ) report before the bell, with component Intel (INCT) reporting after the close, so there's a possibility that reactions to earnings or anticipation of earnings could get a directional move started. As long as the Dow remains within its descending regression channel, any bounces should probably be watched for potential bounce-and-rollover bearish entries rather than for bullish ones.

With rising crude costs in the overnight market, techs had generally shown weakness before the open on Asian and European markets. Rising crude costs also raised the specter of weakened demand. Deutsche Bank's downgrade of Texas Instruments (TXN) and Micron Technology (MU) to sell ratings from their previous buy and hold ratings didn't improve early sentiment toward techs. When downgrading TXN, Deutsche Bank cited the company's commodity product exposure, saying that exposure could cause a decline in gross margins. In a pre-market note, Lehman mentioned continued cautiousness toward analog semis MCRL, LLTC and MXIM.

In that climate, INTC earnings will assume extra importance. INTC printed a doji Monday and both TXN and MU sprang up from their day's lows, with such action allowing the SOX to spring from its day's low, too. All three are components of the SOX. Among the SOX components, strongest gains were seen in AMD (3.33 percent), BRCM (2.19 percent) and ALTR (0.92 percent), however.

Annotated Daily Chart of the SOX:

Together with YHOO, also reporting after the bell tomorrow, INTC may also hold the short-term fate of the Nasdaq in its grasp.

Annotated Daily Chart for Intel:

Although standard technical analysis suggests that a breakdown entry on the Nasdaq occurs on a move below Monday's inside-day low, the converging 100-sma and 200-sma just below make that a problematic entry. Bears instead might hope for a bounce-and- rollover entry.

Both the TRAN, the Dow Jones Transportation Index, and the Russell 2000 may offer arguments against the sell-the-rally conclusion, and both should be watched. After the close, a CNBC commentator noted that crude prices have escalated 65 percent year to date. In a move that seems counterintuitive to some, the TRAN has been climbing along with crude costs, from its 2365.36 year opening level to today's 3336.17 closing level. For most of the year, it's been climbing within an ascending regression channel. Although the TRAN produced a tweezer-top reversal signal at the top of its ascending regression channel last week, it has not retreated far and remains within striking distance of the top of its regression channel.

Annotated Daily Chart for the TRAN:

Annotated Daily Chart for the Russell 2000:

MER and JNJ report before the open, but influences on our markets begin this evening by the time the newsletter arrives at your email address. That's when the Nikkei will seize its first opportunity to react to the drubbing U.S. markets received Friday and further gains in crude. Fighting and a strike in Nigeria, difficulties ramping up production again in the Gulf of Mexico, and worries about Yukos after a Russian court ruled that the company must pay $1.34 billion in fines and penalties supported crude prices Monday.

Watch how the Nikkei reacts and then how our markets react in response to gauge strength or weakness. A strong Nikkei decline met with steady futures prices indicates strength. A strong Nikkei climb met with weakness in futures prices indicates weakness. At tomorrow's open, watch for breakouts above yesterday's highs or lows on the SPX, OEX, Dow, NDX, and Nasdaq, indices that all produced inside-day candles Monday. For all but the most adept scalpers, upside breaks should be treated as opportunities for a new bounce-and-rollover entries, with the rollover perhaps provided as soon as late tomorrow or Wednesday.

Tuesday's economic releases begin at 8:55, with Redbook Retail Sales. The RLX, the S&P retail index, gained 1.01 percent Monday, posting one of the strongest index gains behind the BTK, the biotechnology index. The BTK gained 1.19 percent.

Economic releases continue at 10:00, with the September Richmond Fed Manufacturing Index, followed at one-hour intervals by the September Kansas City Fed Manufacturing Index and the August Chicago Fed Manufacturing Index. Those had last shown a gain of 18 and 15, and a drop of 0.6, respectively.

Drawing at least as much attention as those economic releases will be the after-the-close earnings reports of Intel (INTC) and Yahoo (YHOO), of course, and all who consider taking positions Tuesday should know before entering new positions whether they intend to hold overnight. Volume might continue to be light ahead of those releases, so continue to be careful about new entries.


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