Option Investor
Market Wrap

Oil Slick

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      10-13-2004           High     Low     Volume   Adv/Dcl
DJIA    10002.33 - 74.85 10127.17  9957.79 1.89 bln  821/1997
NASDAQ   1920.53 -  4.64  1948.01  1914.46 1.77 bln 1156/1838
S&P 100   535.48 -  3.74   541.94   533.55   Totals 1977/3835
S&P 500  1113.65 -  8.19  1127.01  1109.63
SOX       393.25 +  6.89   399.67   386.36
RUS 2000  569.42 -  7.29   580.74   568.51
DJ TRANS 3282.43 - 56.55  3359.80  3272.60
VIX        15.42 +  0.37    15.63    13.92
VXO (VIX-O)16.25 +  1.08    16.70    14.99
VXN        22.13 +  1.20    22.94    20.52
Total Volume 3,660M
Total UpVol  1,393M
Total DnVol  2,174M
Total Adv  1977
Total Dcl  3835
52wk Highs   80 
52wk Lows    62
TRIN       0.97
PUT/CALL   1.07

Bulls lost their footing as oil staged a dramatic intraday reversal from lows below the 52 level, giving up gains across the indices and diving to mid-afternoon lows. A hesitant rangebound bounce ensued, with equities finishing the day in light negative territory.

The rejections at both the day highs and lows lined up with solid volume on the indices, as the market delivered enough to confound bulls and bears alike. Volatility increased overall, with the NDX volatility index (QQV) rising 4.75% to close at 21.15, while the OEX equivalent (VXO) tacked on a whopping 21.27%. While it's tempting to ignore external factors such as options expiration week and just focus on the charts, I don't believe that this factor can be safely ignored in assessing the volatility data. With op-ex week nearing its crescendo, I'm inclined to take not just the volatility indices but even the index price charts with a grain of salt.

Daily Dow Chart

The Dow managed to close above 10,002.33 after keeping traders on the edge of their seats until the final second. While the headline number may have closed above the 10K line, there's simply nothing bullish about the day's candle print. The rejection at the high left an upper doji shadow, and what followed was the first daily close below the rising pennant support line since the August lows. The bounce from above 9950 left a bullish lower shadow as well, but the close below the rising support line on strong volume has all the makings of a downside breakout. Below 9990, next support is at 9940-50, below which there's light support at 9860 before the stronger line at 9800.

Daily S&P 500 Chart

The SPX went out at 1113.64%. Like the Dow, it too printed the first sell signals of a daily cycle downphase. This downphase launched from lower oscillator highs as indicated on the chart, which, combined with the higher price high gives bears a confirmed bearish divergence. It closed below the rising support line at 1119, and if bulls fail to regain the line tomorrow, we should see a retest of 1110 on the way to 1104 and 1096 support.

Daily Nasdaq Chart

Relative to its peers, the Nasdaq is a beacon of strength on the daily chart, with both the rising support line from August and even yesterday's lows holding firm. I suspect that the widespread angst over the oil rally is sparing the tech-centric Nasdaq, though I don't expect to see the Naz diverge from its peers for long. It too is sporting a bearish oscillator divergence and fresh sell signals today. Below its closing support line at 1920, there's trendline support at 1912 and confluence support at 1895, followed by 1880 and 1840-45.

Weekly TNX Chart

Bonds traded in a world of their own again today, with ten year treasuries gapping lower at the open and then rising for the remainder of the day to take out yesterday's high. For the day, ten year note yields (TNX) declined 2.4 bps or .59% to close at 4.078%. On the weekly chart, this week's TNX decline occurs in the context of an attempted weekly cycle upphase from a higher price low. However, the rise off the 2003 yield low/treasury high is taking the shape of a broad bearish rising wedge which, if 3.9% support fails, projects back to the 3.05% lows. Traders will be watching the 3.9%-4.25% range. While the weekly cycle favors an upside move, a break of either level should be directional.

Weekly chart of Crude oil

Crude oil opened very weak, extending yesterday's key downside reversal and breaking below 52 after posting a record high at $54.45 yesterday. This reversal followed the International Energy Agency's comments yesterday to the effect that oil demand will grow by 2.71M bpd this year, the largest increase in 24 years, but that demand should slow to a 1.45M bpd increase in 2005. The IEA also noted that China is seeking to reduce its consumption of oil via conservation and alternative sources of energy. The fact that oil has become overbought on multiple timeframes following the nearly vertical price climbs in recent sessions no doubt contributed to the morning weakness as well.

The weakness was not to last, however, and the bearish arguments sound hollow. Supply remains tight and the market sensitive to supply disruptions. Currently, more than a quarter of production from the Gulf of Mexico is still trying to recover from Hurricane Ivan, and the Nigerian labor disputes have yet to be resolved. Perhaps more significantly, however, the steep weekly uptrend on the 3 year chart, with the price of crude nearly tripling during this period, has yet to be seriously tested by this week's pullback.

These bullish factors reasserted themselves in the early afternoon, with Nymex crude bouncing from a session low of 51.475 to close at 53.625. Oil traders will be watching the tomorrow's releases of this week's inventory updates from the Energy Department and the American Petroleum Institute, delayed because of the Columbus Day holiday.

The API released its "October Monthly Statistical Report" today, notably reporting that US production in September is 15% below its September 2003 level to 4.85M bpd, its lowest monthly level in 50 years. The report attributed the drop to Hurricane Ivan, with refinery activity on the Louisiana Gulf Coast falling to 65% of capacity. This was exacerbated by the utilization rate holding above 90%. This remains the "story" for oil- high inelastic demand causing prices to remain vulnerable to any disruption in supply.

It was a quiet day for economic reports, with the real action commencing tomorrow with the August trade balance, September export prices ex-agriculture and import price ex-oil, as well as initial claims for the week ending October 9th. The most significant data released today was from the Mortgage Bankers Association, which announced that overall demand for US Mortgages fell, with applications dropping 9.2% last week. The Purchase Index, which measures mortgage applications for new homes, fell 4.9%. The Refi Index dropped 14.2%. This is generally volatile data from week to week, but the decline in mortgage activity occurred alongside a decline in rates- usually, we would expect to see the reverse.

Blue chips got a boost in the premarket from MCD, which reported that Q3 earnings rose 42% on a pro forma basis. The company reported earnings of 61 cents per share, blowing away analyst forecasts of 49 cents per share, with sales at namesake restaurants rising 7.3% in September and 5.8% for the quarter. MCD supersized its gains, closing higher by 4.61% to close at 28.82.

HDI announced record quarterly earnings, with Q3 net income up more than 20% to 77 cents per share, beating average analyst expectations by 2 cents. Revenue rose nearly 15% from 1.13B to 1.3B in Q3 on sales of $996.6M. The company cited higher gross margins resulting from US Dollar weakness and improved operational efficiency. However, projections for slower sales and a drop in US retail sales of motorcycles dominated, with the stock getting hit for a 1.71% loss to close at 58.72. The company noted that 2003 saw a surge in sales for Harley Davidson's Centennial anniversary, which contributed to this year's relative drop.

HMT came in with good news, reporting a reduction of its quarterly net loss from 35 cents per share in Q3 2003 to 17 cents per share or $47M. The hotel owner cited increased revenues resulting from a hike in room rates. The stock bucked the broader market, rising .41% to close at 14.54.

After the bell, NVLS announced Q3 earnings of 45 cents per share on sales of 415.9M which amounted to 38 cents per share net of one-time benefits, meeting analyst expectations. NVLS got clocked on the announcement, dropping 3.24% afterhours from its close of 26.88 (an intraday gain of 1.28% preceding the news). This amounted to a paragon of strength compared with SNDK, which was down 16.03% as of this writing at 23.68 after the company announced a 5 cent miss for Q3, with net earnings of 29 cents on sales of 408M from 281M one year ago. QLGC was lower by 1.06% at 29.80 afterhours after beating expectations of 36 cents by 4 cents, while AAPL was up 7.99% at 41.35 after blowing away expectations for 18 cents on 2.15B revenue with earnings of 27 cents on 2.35B in revenue.

For tomorrow, as if the technical picture wasn't cloudy enough, there's the array of economic data noted above, scheduled for release at 8:30. While the financial press correlated the sudden dollar drop in the afternoon with the spike higher in oil, I'm far from convinced that the oil move prompted the dollar's dive. In fact, the forex market is by far the larger market. Whether it was speculation or sudden inspiration as to the contents of tomorrow morning's economic data, we can only guess. The indicators are pointing south, but they were yesterday morning before the enormous runup that reversed today. With op-ex week in full-swing, technical signals are less reliable than usual. For the time being, however, the bears appear to be in control of the Dow and SPX with the Nasdaq trailing behind, while the bulls remain in control of crude oil.


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