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Market Wrap

Hot Potato

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      11-03-2004           High     Low     Volume   Adv/Dcl
DJIA    10137.05 +101.32 10215.51 10037.43 2.13 bln 2165/ 655
NASDAQ   2004.33 + 19.54  2020.03  1992.70 1.93 bln 2048/ 936
S&P 100   546.73 +  6.08   549.47   540.65   Totals 4213/1591
S&P 500  1143.20 + 12.64  1147.60  1130.54
SOX       410.08 -  4.15   424.25   408.51
RUS 2000  595.33 +  9.89   596.59   585.44
DJ TRANS 3494.64 + 45.02  3496.33  3449.89
VIX        14.04 -  2.14    15.18    13.79
VXO (VIX-O)14.18 -  2.67    15.34    14.01
VXN        20.82 -  2.15    22.20    20.45
Total Volume 4,072M
Total UpVol  2,807M
Total DnVol  1,209M
Total Adv  4213
Total Dcl  1591
52wk Highs  415 
52wk Lows    40
TRIN       1.03
PUT/CALL   0.77

Traders in the pits must have had a busy morning Wednesday morning, juggling the implications of election results and then earnings and economic releases. The recent relationships between dollar strength, crude price, and equity behavior weren't holding true just before the cash open, with crude higher, the dollar dropping after its attempt to strengthen against the yen and euro, and equity futures gaining. Pit traders must have been afraid they'd be left holding the hot potato as they tossed around the implications of election outcomes and economic releases.

They dropped that hot potato long enough to send the indices soaring to their day's highs in the first ten minutes of trading, but then picked it up again as they awaited economic releases and Kerry's concession. Tossing it back and forth, they kept the indices trading in symmetrical triangles at the top of their ranges. Those triangles formed, widened, and reformed while the October ISM Non-Manufacturing Index and Factory Orders numbers and crude inventories were released.

Annotated Three-Minute Chart of the OEX at 11:30 EST:

Hot potato issues included an unexpected decline in factory orders for September. Those orders fell 0.4 percent against an expected rise of 0.4 percent. Nondurable goods orders, transportation equipment orders, and factory shipments fell while unfilled orders and inventories rose. Perhaps traders were too busy juggling a better-than-expected service economy ISM number, because indices seemed little affected and continued coiling. October's ISM was 59.8 percent, above the estimated 58.0 and rising from September's 56.7 percent. The employment component gained.

Traders had to juggle information on crude prices, too. Crude prices had risen to $50.00 before the 10:30 release of inventories numbers. Those numbers showed crude and gasoline inventories rising 6.3 million and 500,000 barrels, respectively, according to the Department of Energy. Distillate inventories dropped 900,000 million barrels. Despite an attack on a pipeline in Iraq that could disrupt exports from the north for up to ten days, a potential strike in Nigeria, and a statement from Yukos' chief executive that the company was in danger of insolvency, crude prices plummeted. One market pundit suggested they would fall below $40/barrel by the end of the year. So far, however, nothing too bearish for crude prices has occurred. Crude prices fell to the 50-dma and the 50 percent retracement of its latest climb off the August 30 low before finding support.

Annotated Daily Chart of Crude Futures for December Delivery:

Although the inverse relationship between crude costs and equity performance sometimes disconnects, market bulls do not want crude to continue climbing.

News sources began reporting Kerry's concession, and still the OEX, SPX, Dow, and Nasdaq coiled. The Russell 2000 wasn't going to be a follower, but a leader, and it led to the upside. The SOX was performing a leadership role, too, but to the downside. The SOX was doing a swan dive, closing the morning's gap and diving below the surface into negative territory.

Annotated Daily Chart of the SOX:

QCOM and RIMM were drags on the Nasdaq, too, with QCOM diving ahead of its after-the-close earnings report. When it came after hours, QCOM dropped further, with investors disappointed with the company's outlook. The TRAN was zooming everywhere, its intraday chart defying categorization.

The juggling act finally became too hot for traders to handle. The breakdown out of those symmetrical triangles came as Kerry conceded but also as Nymex closed for the day, with crude closing at $50.90, higher by $1.28. It proved difficult to pinpoint the decline on any one event. As President Bush spoke following Kerry's concession, markets climbed off their lows, perhaps pointing to an election effect after all.

Market pundits predicted a 1 percent rally if Bush won reelection. Tuesday, the Dow closed at 10,035.73, with a 1 percent rally bring the index to 10,136.09. Wednesday's high was 10,215.51. A 1 percent rally on the SPX would bring it up to 1141.87, with Wednesday's high at 1147.60. A 1 percent rally on the Nasdaq would bring it up to 2003.54. Wednesday's high was 2020.03. Those figures and the pullbacks from the day's highs prompt questions about whether the post-Bush-election rally occurred and was finished within ten minutes of Wednesday's open. Let's see what charts have to say.

The SPX presents a confusing picture.

Annotated Daily Chart of the SPX:

The SPX punched above the October and June highs, breaking the trend of lower highs, but it trades within a broadening formation. Those are notoriously difficult to trade because they broaden. Where's the upside breakout point? Where's the downside one? When coming at the top of a climb, these are typically bearish, and usually see two touches of the top trendline and a third attempt before failing. However, this climb was not pronounced in relationship to the size of the broadening formation, and chart patterns such as H&S's, wedges, and broadening formations fail to follow through on expected outcomes as more market participants recognize them. They lose some of their predictive abilities.

Still, the upside trendline's resistance coincides with the 50 percent retracement of the decline from the March 2000 high to the October 2002 low. A breakout above these trendlines appears to be a bullish signal while a rollover from them appears to be a possible site for a bearish entry. Between the SPX's current level and 1160 is a minefield because of the bearish nature of such broadening formations and the bearish price/MACD divergence on the daily chart. It's possible that the SPX will never see the 1160 level and will roll down soon, perhaps beginning a rollover Wednesday morning.

One benchmark for a potential rollover might be found on the SPX's 15-minute chart.

Annotated 15-Minute Chart of the SPX:

The Dow also pulled back from its day's high.

Annotated Daily Chart of the Dow:

Like the SPX, however, it's possible that the Dow will not see the resistance pinpointed here. Those looking for a breakdown entry might watch the same averages pinpointed on the SPX's 15- minute chart, as those averages also correspond to a rising trendline on the Dow's chart.

Annotated 15-minute Chart of the Dow:

Using these averages as a benchmark for a breakdown entry on the Dow ensures that the DOW has dropped below the 50-dma and 200- ema, at 10,108 and 10,077, respectively, but it's an entry just above known historical S/R on the Dow, presenting its own difficulties. This is particularly true since the 60-minute chart shows the potential for a H&S to form with a neckline just above 10,000. An entry on a breakdown below the trendline and the 15-minute 100/130-ema's might constitute a trap as the Dow rises immediately into a right shoulder, so any considering such a breakdown entry should be aware of the dangers.

Because of the same possibility of a H&S, any entering on a bounce from those 15-minute averages should have profit- protecting plans in mind for the potential right-shoulder area, near 10,130.

The Nasdaq did reach down to test those 15-minute averages, but its action offers a caution for those considering buying other indices on bounces from their 15-minute 100/130-ema's and latest rising trendlines.

Annotated 15-Minute Chart of the Nasdaq:

Watch for the possibility that the Nasdaq could be turned back at gap resistance, into a lower high.

As with the Dow, using those benchmarks presents a special difficulty for those entering a bearish play. That may constitute an entry just ahead of a descending trendline off the year's high, with that trendline perhaps crossing at about 1980, depending on how thickly it's drawn. A bearish entry on a roll down from the top of the ascending regression channel, at today's high, made a safer entry, but should have had profit protecting plans in place as those 15-minute averages were approached.

Annotated Daily Chart of the Nasdaq:

One other index bears watching tomorrow because of its relationship to trading patterns in recent weeks. That's the IUX, the S&P Insurance Index.

Annotated Daily Chart of the IUX:

The SPX's broadening formation is echoed on the Wilshire 5000 (DWC), the broadest of our markets. If some traders are confused, they should at least feel consoled by the difficulties of trading such formations or determining their implications. Breakouts are bought or sold, only to see the index reverse course soon afterwards.

Trade carefully. Remain aware that such formations traditionally had bearish implications and traditionally saw only two touches of the upper, rising trendline, with the third attempt failing to touch that trendline. Multiple ugly daily candles on the Wilshire, SPX, Dow and OEX should not be ignored when the two broadest of our markets, the SPX and Wilshire 5000, trade within potentially bearish broadening formations. Perhaps a further warning occurred when the TRAN did not follow the example of other indices and print a new high today.

Ugly daily candles or not, bearish divergences or not, indices have climbed. We've seen potential reversal signal after reversal signal followed by higher prices. Remain open to the possibility that an unexpected upside break could occur instead, as has happened multiple times over the last year. Points in the bulls' favor include the OEX's close above its 200-sma, the SPX's and Wilshire 5000's closes above their October highs and the Nasdaq's close above 2000. Bulls have much to cheer, too, and will not easily give up.

After the bell, retailers began releasing same-store sales figures, with retailers to continue releasing numbers Thursday morning. J. Jill Group (JILL) reported SSS higher by 4.7 percent, Starbucks (SBUX) by 11 percent and Men's Wearhouse (MW) by 12.5 percent. BOBJ, QCOM and SONS released earnings, with all three falling in after-hours trade as this report was prepared. EDS delayed the release of its results for the third quarter, dropping more than 4 percent after investors grew discouraged with this second delay.

Thursday's economic releases begin with the usual 8:30 release of jobless claims along with the third quarter's Preliminary Non- farm Productivity and Unit Labor Costs. Natural gas inventories have been gaining more attention and will be released at 10:30, but looming Friday's nonfarm payrolls may assume more importance than any of those numbers.


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