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Bull Tackles Bear

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Bull Tackles Bear

A strong decline was caught and partially reversed by bears at mid-afternoon in a session that saw higher than average volume across the major indices. Breadth remained negative, however, with declining volume more than doubling advancing volume on the NYSE. On the Nasdaq, the number of declining shares was just over 50% higher than advancing.

The intraday reversal was dramatic because it started just below Friday's lows- at a level where conservative traders were most likely to jump on the Breakdown-bandwagon. While the bounce failed below the session highs, the key daily cycle direction remains up-for-grabs.

Dow Chart - Daily


There was something for everyone today, with the Dow's decline kicking off straight out of the gate and making good on the bearish 30 minute cycle setup from Friday's close. That decline had completely reversed Friday's gains by 2PM at the 10730 low, following which a bounce kicked off, reversing most of the session's loss. That reversal was sharp enough to leave a long lower doji shadow on the daily candle print. Had the Dow closed in positive territory, this would have been a bullish doji hammer. It did not, and today's was clearly gratifying for bears. However, the swift rejection at the lows, bullish hammer or not, is a bullish affirmation of support at 10730.

Last week's bounce stalled the strong daily cycle downphase and left daily cycle direction up for grabs. On the one hand, there's a bearish triple top in place below 10875. On the other, the higher lows from January to February could be construed as the beginning of a bullish triangle. Price is the final arbiter, and the break either above 10875, a mere 33 points north of today's high, or below 10720 should be enough to generate a fresh signal on the daily cycle oscillators. For bears, the goal will be to break south of 10580 to invalidate the rising trend off the October low.

Daily S&P 500 Chart


SPX bears broke Friday's low, printing an intraday low of 1198 before the afternoon bounce kicked in. The bounce never reached the opening 1210 high, but the same almost-bullish-hammer printed for the day. Bears will want to see a break of the 1198 level, coincident with the 22 day EMA, on the way to a test of the lower rising support line at 1188-89, while bulls are looking for a pennant break above 1210 on the way to triangle resistance of 1218 at the year high. As on the Dow, the SPX's daily cycle setup is entirely ambiguous and will follow the price whichever way it breaks. For the day, the SPX lost 7.77 to close at 1203.6.

Daily Nasdaq Chart


The Nasdaq remains significantly farther from its 52 week high than either the Dow or the SPX. Today's high of 2067 remains 125 points shy of the Jan 3rd 2192 print. Last week's closing strength was less substantial than that of its peers, and as a result the daily cycle oscillators maintained a bearish edge to their ambiguous setup. In this case, a range break either above 2075 or below 2025 should resolve the deadlock, but a break below 2040 (today's low 2039) will be enough to restore the daily cycle downphase in the meantime. For the day, the Nasdaq lost .66% to close at 2051.7.

Daily TNX Chart


Ten year treasury yields (TNX) advanced further within this month's rally, with TNX adding 8.7 bps to close at 4.359%, a 2.04% gain for the day. These losses for the ten year bond occurred despite a large 9B injection of funds from the Fed's open market desk announced this morning. At 1 PM, the treasury announced the results of its 13 week and 26 week bill auctions. The bid-to-cover ratio for the 21B 13 week treasury bill auction was 2.06, of which indirect bidders (ie foreign central banks) took 4.9B of the total. For the 18B 26 week bill auction, the bid-to-cover ratio was 1.94, with indirect bidders taking 3.5B of the total.

Ten year treasuries have been weak since the TNX's brief move below the 4% line earlier this month. The TNX rally that followed blew quickly past the 4.14%-4.16% confluence and broke the upper descending resistance line off the 2004 high. The 10-day stochastic has entered overbought territory, and while a bullish trending move is possible, particularly on an impulsive upphase such as we've seen during the past 3 weeks, the more likely scenario will be some sort of corrective pullback. A close above 4.4% resistance would likely set off a bullish trending move, while a failure either at the 4.35% or 4.4% level should coincide with a daily cycle top.

Daily chart of Crude oil


Crude oil rose strongly to an intraday high of 52.20 on the Nymex amid weekend violence in the Middle East and a storm on the Northeast. Whatever the external facts, crude oil has been in a strong daily cycle upphase similar to that discussed on the ten year treasury yield above. The upphase launched from a higher low above 45 and continued for the latter half of February. That upphase has reached overbought territory on the 10-day stochastic, and like the TNX, is at levels at which it would be prudent to cinch up bullish stops. With upper channel resistance at 53.10 and the upper Bollinger band at 52.28, the benefit of the doubt on a daily cycle basis should begin to shift from the bulls to the bears this week. For the day, crude oil gained .5% to close at 51.75.

At 8:30AM, the Commerce Department reported that US Consumer Spending came in flat for the month of January, with nominal Personal Income falling 2.3% for the month. The 2.3% decline came on the heels of December's record 3.7% gain from the MSFT dividend payment, and resulted in the steepest drop in 11 years. Expectations were for a .1% increase in personal spending and a 2.6% drop in personal income. The Personal Consumption Expenditure price index rose .2% for the month, with the core PCE rising .3%, the largest gain since October 2001.

At 10AM, the Commerce Department reported that US new home sales declined 9.2% to an annual rate of 1.106M in January, a 4.2% decline from January 2004. This reading missed expectations of 1.13M. December's reading was revised up to 1.218M from its reported 1.098M level. Inventory rose to a record 438,000, which is a 4.7 month supply of new homes and the highest inventory-to-sales ratio in over 4 years, and the median sales price fell from $229,700 to $199,400, which is the lowest since December 2003.

Also at 10AM, the February Chicago Purchasing managers index was released, coming in higher than the expected 60% reading at 62.7%, and showing economic expansion for the 22nd consecutive month.

There were several big mergers and acquisitions announced today. Two years after their last set of failed negotiations, Federated (FD) announced this morning its agreement to purchase rival May (MAY) for 17B in a deal that will create the largest chain of department stores in the US. The deal values May at its 10-day average price ending Friday, $35.50 per share, and is expected to incur approximately 1B in merger-related costs for FD over the next 3 years. It will yield estimated cost savings of $450M and is expected to increase FD's earnings by 2007. MAY shareholders are to receive $17.75 in cash and .3115 of an FD share for each share of MAY stock. As well, FD will assume 6B of MAY's debt and announced that it would increase its annual dividend to $1 per share.

Following the announcement, S&P placed both FD and MAY on Creditwatch negative. FD's longterm debt is currently rated "BBB+," while MAY's is rated "BBB." For the day, FD lost .6% to close at 56.45, while MAY declined 2.32% to close at 34.53.

Trucker YELL announced that it will buy USFC for $1.47B comprised of $639M in cash, $731M in YELL stock and the assumption of $99M worth of USFC's debt. USF shareholders will be offered $45 or .9024 YELL shares for each USF share. Under the deal, YELL's business will reportedly grow to more than 9B in annual revenue and employ more than 70,000 workers with 1000 service locations. YELL expects the deal to increase earnings within 12 months of closing. YELL got clocked for a 5.81% loss at 57.75, while USFC rocketed to a 23.13% gain at 47.80.

In other merger news, Dow Chemical (DOW) announced that it will purchase up to 19.9% of MCEL and collaborate with the latter to develop and market portable fuel-cells for consumer and military use. Under the deal, DOW will take an initial 3% preferred equity position in MCEL, and, pending certain development goals, will have the option to acquire an additional share in MCEL to a maximum of 19.9% for $5M in cash. MCEL will seek shareholder approval for the issuance of the new stock. DOW lost 2.58% for the day to close at 54.79, MCEL gaining 37.57% to close at 2.38%.

After the bell, Continental Airlines (CAL) announced that it has reached a tentative agreement with its employees which, if ratified by the various unions, would save the company an estimated 500M annually. The company also announced that it has reached a deal with Boeing (BA) to delay aircraft acquisition for one month to permit the unions to finalize these new contracts. CAL finished the day lower by 1.65% at 10.71.

Tomorrow the market will get Auto Sales and Truck Sales throughout the day, as well as Construction Spending and the ISM Index at 10AM. With today's ambiguous action, there's a good chance of sideways chop as traders wait for the other guy to make the first move. Today's high and low can be treated as preliminary benchmarks, and a break of either will provide the first clue as to the outcome of the more significant daily cycle direction discussed above.


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