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Market Wrap

Looking Back

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      12-29-2004           High     Low     Volume   Adv/Dcl
DJIA    10829.19 - 25.35 10853.72 10795.57 1.14 bln 1533/1277
NASDAQ   2177.00 -  0.19  2182.33  2170.99 1.49 bln 1415/1621
S&P 100   576.53 -  0.63   577.16   575.31   Totals 2948/2898
S&P 500  1213.45 -  0.09  1213.95  1210.95
SOX       430.53 +  3.78   432.29   425.62
RUS 2000  653.34 -  1.23   654.57   651.95
DJ TRANS 3810.29 -  1.33  3814.88  3801.21
VIX        11.62 -  0.38    11.79    11.61
VXO (VIX-O)12.47 +  0.16    12.84    12.46
VXN        17.72 -  0.07    19.31    17.69
Total Volume 2,634M
Total UpVol  1,457M
Total DnVol  1,117M
Total Adv  2948
Total Dcl  2898
52wk Highs  374 
52wk Lows    25
TRIN       0.69
PUT/CALL   0.93

The year's end presents a time appropriate for looking back, for taking stock of the year's developments and projecting those for the next year. Consider looking back further than the beginning of 2004, however. Consider looking all the way back to the beginning of the millennium when ominous signs began appearing on at least one monthly chart. This year's end brings some indices up to test resistance established then.

Annotated Monthly Chart for the Dow:

Annotated Daily Chart for the Dow:

Buying breakouts above the neckline looks dangerous with the Dow so far above its monthly 50-sma. Expected resistance at 11,000 lies just ahead of the breakout, adding to the danger. Let volume help you determine whether to go long on such a breakout, as volume should explode on such an important breakout.

Those considering selling rollovers beneath the red trendlines, perhaps to be confirmed by a drop beneath the blue trendline, should protect profits near 10,600-10,635 if that level is reached and then again at 10,400-10,416. A bounce might be expected from one of those levels.

Rather than a nice directional move, however, these chart conditions may be pointing to dreaded choppy trading conditions ahead, at least for this index. Massive forces seem pitted against each other. Resistance should be presumed at a major congestion zone from which the Dow fell to its bear-market low. A speculative fitted retracement bracket, seen above on the daily chart, and inverse H&S hint at the possibility of much more upside, although neither has been confirmed as valid formations. Bears might be emboldened and bulls cheered by separate chart developments, with both nervously eyeing developments that oppose their views. Unfortunately, that can lead to choppy trading conditions.

Choppy trading conditions certainly prevailed Wednesday. The morning saw many divergences develop, both in indicators and equity index behaviors. Individual stocks varied widely in their performances.

Early in the day, the RLX popped above a descending trendline off the November high and the SOX made initial moves toward its eventual challenge of its 200-sma. The TRAN, often a leading index for the S&P's and Dow, showed no particular strength early in the day, however, and neither did some other former leaders such as the BIX, GSO and GHA.

A component of the Dow as well as other indices, Boeing (BA), fell on news that China is not going to approve aircraft purchases for 2005 since it has all the aircraft needed. Lockheed Martin (LMT) received similar bad news from the Pentagon, with purchases of LMT's F/A-22 fighter being scaled back. Nike (NKE) will take a hit from the tsunami. TXN posted strong gains after positive comments by CSFB. PFE and General Motors gained. And so it went.

Other divergences developed as the morning passed, including mixed breadth indicators. As Jane Fox noted on the Futures Monitor on OptionInvestor, the actions of TRIN, the volatility indices and the advdec line did not always corroborate each other in the usual manner, as should happen if traders are to have confidence in picking a likely direction. Also, advancers pulled ahead on the NYSE, but decliners did on the Nasdaq. By the end of the day, many indices had produced doji, indicative of indecision.

Annotated Daily Chart for the SPX:

Annotated Daily Chart for the Nasdaq:

Annotated Daily Chart for the Russell 2000:

Economic releases continued to be light on this week spanning two holiday weekends, and that might have been part of the difficulty with determining a market bias. Commentators mentioned that few catalysts existed to drive markets one direction or another. Yet markets failed to react even when potential catalysts did appear. Two were pre-market moves in the currency markets and during-the- market moves in crude and heating oil prices, but not even those developments could produce anything but chop between resistance and support.

In economic releases, the usual Mortgage Bankers Association information on mortgages and crude inventories numbers were joined by the November Existing Home Sales. The MBA reported that mortgage applications fell a seasonally adjusted 1.7 percent, with a drop in refinancing activity appearing to be the primary cause. Refinancing applications fell 7.9 percent, erasing all last week's gains and more. Refi's have been responsible for providing cash to consumers to spiff up homes and increase consumer spending, so assume strong importance. They fell to 46.2 percent of all mortgage applications from last week's 48.9 percent.

The component of the MBA numbers that measures loan requests, the purchase index, rose 2.7 percent but not enough to make up for last week's loss. Fixed 30-year mortgage rates rose three basis points from the last week's number, to 5.72 percent from the previous 5.69 percent.

Later in the morning, the National Association of Realtors reported on the November sales of existing homes, with those sales rising a seasonally adjusted record annualized rate of 6.94 million. Home inventories rose, too, however, with inventories at a 4.3-month supply. The DJUSHB, the Dow Jones U.S. Home Construction Index, bounced after the release of that number but couldn't break out of its recent consolidation pattern. After touching 800 again, it fell back, joining other indices that produced doji for the day.

Most attention focused on the crude inventories number to be released near 10:30, however, with many expecting a dip in inventories. The Department of Energy's numbers proved disappointing with crude oil supplies dropping 800,000 barrels and distillates falling 800,000 barrels against expectations for drops of 200,000 and 500,000 barrels, respectively. These results peg crude supplies at eight percent above year-ago levels but distillate supplies thirteen percent below those year-ago levels. The American Petroleum Institute, the API, said distillate inventories climbed, however. Gasoline supplies rose 900,000 barrels, the DOE reported.

Oil prices popped, with heating oil prices following shortly, but both sank back again until an afternoon report of an explosion near the Interior Ministry in central Riyadh sent them higher into the Nymex close. Equities showed little reaction, perhaps because winter weather continues to be mild enough to head off worries about tight heating-oil supplies. Perhaps a chart- related development reassured market-watchers that crude prices might not rise far.

Annotated Daily Chart for Crude for February Delivery:

Volume should grow lighter as the week proceeds, making trading a riskier endeavor than usual. For those who want to trade, easy benchmarks might be discovered by studying the five-minute 100/130-ema's. For many indices, bounces from the five-minute 100/130-ema's have proven to be sound entries into new bullish positions and bounces down from them have proven to be okay for day-trading bearish positions. The OEX was an exception today, crisscrossing those averages all day, and anyone risking trading in a light-volume environment might expect at least some such whippy behavior until indices and indicators line up in some kind of accord. For the RLX, the two-minute averages have been needed because it hasn't been retreating to the five-minute versions.

Wednesday, many indices moved back below those averages, but many stayed above, perhaps leading to the choppy trading behavior, with some indices retaining bullish behavior and some not. Some indices, such as the Dow, infrequently stay below those averages for more than a day, so that a continued bouncing back from them might be leading into a more prolonged dip. Perhaps watch behavior relating to these averages on your preferred index, using them as short-term bearish and bullish indicators. Experiment, as stronger indices such as the RLX have needed to be watched on shorter-time intervals with respect to these averages, but the five-minute interval works well for most. If other indices show the same lack of correlation seen today, perhaps continue to expect choppy trading behavior in all indices and trade only if you enjoy being frequently stopped out of positions.

Thursday's economic releases pick up speed a little, with the usual 8:30 release of jobless claims, the 10:00 release of November's Help Wanted Index and December's Chicago Purchasing Manager, the 10:30 peek at Natural Gas Inventories and a 4:00 release of Money Supply.

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