Option Investor
Market Wrap

Bull in a China Shop

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      10-20-2004           High     Low     Volume   Adv/Dcl
DJIA     9886.93 - 10.69  9895.70  9804.19 2.12 bln 1520/1269
NASDAQ   1932.97 + 10.07  1934.32  1910.83 1.65 bln 1672/1307
S&P 100   530.72 -  0.27   531.15   526.62   Totals 3192/2576
S&P 500  1103.66 +  0.43  1104.09  1094.25
SOX       393.36 +  5.07   396.70   382.91
RUS 2000  570.13 +  3.46   570.35   562.82
DJ TRANS 3386.74 + 41.40  3387.07  3337.15
VIX        14.85 -  0.28    15.53    14.80
VXO (VIX-O)15.10 -  0.53    16.25    15.05
VXN        20.65 -  0.19    21.36    20.35
Total Volume 3,770M
Total UpVol  2,046M
Total DnVol  1,659M
Total Adv  3192
Total Dcl  2576
52wk Highs  101 
52wk Lows   100
TRIN       0.94

In a twist on the usual version of the bull-in-a-china-shop story, today China delivered a blow to bulls. Fears about China's slowdown, perhaps to be revealed in the GDP number to be released this week, smashed overnight markets. Almost all posted losses. The dollar dropped to new recent lows against both the euro and the yen.

Coming into Wednesday's trading, many must have wondered if China would do the same to U.S. markets, but we had a few plate throwers of our own. U.S. futures showed no sign of reacting as overseas markets had, even climbing off the low reached in after- hours Tuesday night as Motorola lowered its forecast. Whirlpool perhaps cast that first plate at the bulls' muzzles.

The company used the wee hours of the morning to trim its outlook, citing high commodity costs. By the time cash markets opened, JP Morgan (JPM), Pfizer (PFE) and Coca-Cola Bottling Consolidated (COKE) had hurled plates at the bulls, with those missiles taking the form of disappointing earnings or lowered expectations. Citigroup was rumored to be considering a corporate reshuffle, the SEC's probe of Fannie Mae (FNM) had been termed a formal investigation and Spitzer broadened his probe into bidding practices to include the health insurance sector.

By the time the plate-throwing was over, bulls were backing out of the shop, stampeding off before the crude inventories could be released, tiptoeing tentatively back afterwards.

Annotated Five-Minute Chart of the SPX:

When seen on a daily chart, this action produced a bullish hammer, but MACD continued its turn down through the signal line, its bearish outlook unchanged as yet. Horizontal S/R and the 200-ema provide benchmarks by which to assess bullishness and bearishness in this index.

Annotated Daily Chart of the SPX:

While all movements of the SPX Wednesday could not be pegged on crude inventories, the release of those inventories clearly affected the SPX's behavior near 10:30. Those inventories showed declines of 1.9 million barrels in distillates according to the Department of Energy and 1.2 million barrels according to the American Petroleum Institute.

Declines in distillate inventories were expected, but declines in gasoline inventories weren't, and those declined 700,000 barrels according to the DOE and 2.4 million barrels according to the API. That decline sent the average price of regular unleaded gasoline to $2.019 per gallon.

Crude inventories climbed 1.2 million barrels according to the DOE but fell 972,000 barrels according to the API. Market watchers deemed those numbers disappointing. Only a loan from the Strategic Petroleum Reserve saved the DOE from having to report a drop in crude inventories, some mentioned. The disappointment in inventories numbers sent crude costs higher again.

Annotated Weekly Chart of Crude Futures for December Delivery:

Perhaps inventory numbers weren't the only influence on crude prices. Crude futures for November delivery stopped trading today. During the last opex cycle, shorts drove the contract higher as they rushed to cover after it became apparent that the expected pullback wasn't going to occur. After the turnover to the November contract, crude futures did pull back for a few days before shooting higher again. Market watchers should perhaps be on the lookout for similar behavior this cycle.

A pullback in crude futures might lift some pressure from the equities, but damage may already have been done, as was apparent by the SPX's drop below 1100 and close at resistance after the rebound Wednesday. Some reporting companies cite higher commodity costs when they list their concerns about the next quarter or pressures during the just-concluded one. The XAL, the Airline Index, has been in a tailspin through the summer, and may now be forming an ominous bearish right triangle at the bottom of its decline.

Annotated Daily Chart of the XAL:

While there's nothing yet to encourage bulls in that sector, one beaten-down sector does offer hope of at least an oversold bounce, if only New York Attorney General Eliot Spitzer would give his plate-throwing arm a little rest and allow sector bulls to venture forward again.

Annotated Daily Chart of the IUX:

Another beaten-down sector showed promise, too, or did it?

Annotated Daily Chart of the SOX:

These diamond formations typically form at market tops rather than market bottoms, but can occasionally serve as continuation rather than reversal patterns. Be forewarned that the formation suggests weakness rather than strength, but as always wait for price to tell you what direction the breakout will occur. Be prepared to be whipsawed by a false breakout.

The Nasdaq sports a similar formation. Although the Nasdaq's version isn't as cleanly formed, it's somewhat ominous that the diamond forms under the 200-sma's resistance.

Annotated Daily Chart of the Nasdaq:

The Russell 2000 also sports a diamond shape at the top of its climb.

Annotated Daily Chart of the Russell 2000:

Although the Russell 2000, SOX, Nasdaq, and SPX, were able to post gains, minimal in the case of the SPX, the Dow may have suffered the biggest blow. Dow bulls spent the day dodging all those plates lobbed their direction. Dow blue chips JPM and PFE dropped 1.92 and 2.41 percent, respectively. The Dow did not manage a climb into positive territory, nor was it able to regain 9900. The Dow did manage a bullish hammer, however.

Annotated Daily Chart of the Dow:

Many indices posted small gains or potential reversal signals, but bulls stumble around with tender muzzles, perhaps made gun- or plate-shy, especially with earnings season getting into full gear amid signs of a global slowdown in demand. Today, Bear Sterns downgraded McDonald's (MCD) on fears that Europe's turnaround had stalled. One report speculated that the Bank of Japan would be unable to undo its accommodative status and begin raising rates due to a feared slowdown in the markets to which Japan exports. Don't forget that all the plate-throwing today began with fears about China's GDP growth, too.

Despite some bullish signs on the charts, selling rallies may still be the preferred tactic, but you don't have to take my word for that. Charts set up beautiful bullish/bearish benchmarks. Watch those diamond shapes in the SOX, Russell 2000, and Nasdaq for bullish or bearish breakouts. Watch 3389-3400 on the TRAN for signs of an upside breakout or a continued rolling down from the potential double top. Watch 9,500-10,000 in the Dow, with breaks above that zone bullish and rollovers beneath it bearish. Watch 1100-1104 on the SPX, with a break above that zone tentatively bullish and a rollover beneath it bearish. Whatever position taken, be prepared to be whipsawed and change sides if markets prove that the original breakout or breakdown was a false one.

Futures stayed steady after the cash close. After-hours developments included raised guidance from eBay (EBAY) with sales up 52 percent. Chiron (CHIR), the company unable to deliver flu vaccine this season, was due to report, but had not done so as this report was prepared. Software manufacturer Siebel Systems (SEBL), biotechnology company Amgen (AMGN), Capital One Financial (COF), chip manufacturer STMicrolectronics (STM), and insurer Allstate (ALL) all reported or were due to report, representing a variety of industries and a variety of results. SEBL missed, and AMGN and COF beat expectations.

Other companies reporting after the bell included AFFX, ALTR, CRUS, CTXS, CA, ERES, SYMC and VRSN. Thursday morning continues the reports, with T, COCO, GDT and STMP reporting before the bell.

Also being announced before the bell are the initial jobless claims. Last week's number was 352 thousand, above the benchmark 350 thousand. Economic reports trickle in through the rest of the day, with September's leading indicators and the DJ/BTM Business Barometer released at 10:00, natural gas inventories at 10:30, the October Philly Fed Index at noon and the Money Supply figure after the close at 4:30.


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