Shake, Rattle and Roll
The market is doing a fine job of shaking the trees, rattling traders, and rolling over their stops. There has been little follow through in the market day to day and even intraday. Today was no exception. After gapping lower this morning, the market immediately rallied from the open, lifting the DOW almost 100 points off its low, making a new annual high in the process. Much of the rally was attributed to Greenspan's testimony in front of Congress and his statements about the economy growing at a reasonably good pace, that capital spending was also showing signs of growth, and that there was little evidence of foreigners baling out of our Treasury market. The strange thing about this was that the rally was in the face of rising oil prices and falling bond prices and seemed more like money managers simply took advantage of a dip and continued to put to work the money that's been flowing into the mutual funds. But they must have finished before lunch because the market then proceeded to stall and sell off for most of the rest of the day. This may have been aggravated as oil prices continued to climb which topped out just above $53 (+$1.37), quickly approaching its previous high just above $55. Gasoline futures hit a record high above $1.47/gallon. It looks like they're getting us ready for a very expensive summer travel season.
SPX chart, Daily
The SPX chart shows that the up-channel containing price since last August continues to hold. This is our uptrend and all the chopping around that price is doing doesn't really matter in the slightly longer term. This uptrend isn't violated until price drops below 1180, which granted is giving up a lot of profit in any current long positions, but the choppiness of current price action makes it difficult to determine a better support level. Stay long above 1180, short below it.
DOW chart, Daily
The DOW is in the same pattern as the previous SPX chart. As shown on the SPX chart, there is a possibility that the upside from here will be limited. If SPX manages to reach its initial fib target of about 1233, the DOW should get a little over 11,000, though I suspect that round number will offer quite a bit of resistance. Stay long above 10,600, short below it.
Nasdaq chart, Daily
The Nasdaq continues to languish as compared to the other indices. It looks more like it's consolidating and waiting for the others to finish doing their thing to the upside. This looks negative for the overall market--without the participation of the techs, the upside appears limited. If the Naz breaks below 2000, this would be a signal to get short.
There were no major economic reports today but some information on mortgage applications may have depressed the housing market a bit. Mortgage applications fell for the 3rd week in a row with the Mortgage Index dropping 2.4% to 710.1. The Refi Index dropped even more--down 9.9% to 2281.1.
U.S. Home Construction Index chart, DJUSHB, Daily
The Home Construction index shows how price has risen in a steeper and steeper angle, in other words it's gone parabolic. Think of past parabolic rises and almost every one of them has not ended well. They usually come crashing down. That's not a prediction that the housing market will come crashing down, but this chart says be careful.
One of the things that was blamed for this afternoon's sell off was the large increase in oil prices, especially gasoline prices. The worry of course is the "hidden tax" on consumers. With less money to spend on things other than energy costs, there could be less growth in other businesses. In fact today's winners were led by gold indices and oil/energy indices. Pulling up the rear were airlines (higher fuel costs), the SOX, high tech industries, banks and retail. These are the industries that will feel the impact of slower economic growth from higher energy costs.
Oil Index chart, OIX.X, Daily
Like the housing chart above, this oil index shows price has been rising in a parabolic fashion. Price has risen above its up-channel and now we'll watch to see if price remains supported by the top of its channel or if it comes crashing back down inside the channel, heading for the bottom of it. Lower energy costs could improve the picture for the rest of the market so the linkage between the two is worth watching. One of the key sectors to watch is the banking sector--as go the banks, so goes the economy.
Bank Index chart, BKX.X, Daily
The bank index chart shows price broke its steeper uptrend line from October 2004 but found support at its longer term uptrend from May 2004. It's now bouncing around between these two uptrend lines, having found the steeper one acting as resistance now. Any break back below the longer term uptrend line would also be another break of its 200-dma's and would be bearish for the market. The other index to watch is the TRAN. The correlation of this index with the DOW is what the DOW Theory is all about. New highs or lows in one without confirmation of the other is divergence and gives a heads up (long term) that we could be near a reversal in the market. So far the Trannies have made a new high (in December) which was not confirmed by the DOW.
DJ Transportation Index chart, TRAN, 60-min
The chart of the Trannies shows that the up-channel is still holding, although it broke below it twice this year. There is an upside Fib target of about 3882 before it could top out.
The DOW hit a new intraday high for the year today while SPX came within 2 points of doing the same. It seems hard to believe we'd do that without making another attempt to close above Jan 3rd's highs. Obviously that would make for good press, especially since January was such an ugly month. The charts shown above are showing the up trends are still intact and therefore trade with your friend--buy the dips until we have a trend change. We may not be far from a high for the run up from January's lows, but we'll worry about that when the time comes. Trying to call a top is always risky business. But in case we're getting close to at least a more significant pullback, if not the start of a run to new lows, don't get married to your long positions--keep trailing those stops below the uptrend lines and protect those profits!