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Two Strikes

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Two Strikes

"Two Strikes against US Q1 GDP" reads the title on an article discussing Wednesday's March retail sales figures. March's advance retail sales disappointed, with the ex-autos figure rising 0.1 percent against expectations of a 0.6 percent rise. If both auto and gas sales are backed out of the headline number, retail sales fell 0.1 percent.

That's the first decline in a year in that number, one source notes. Many had expected auto and gas sales to produce a gain, plumping up the headline number, and they did gain, rising 0.7 and 2.1 percent, respectively. That wasn't enough to keep the headline number from disappointing. February's figures were revised slightly higher, however.

The fear, of course, is that rising energy costs will cut into consumer spending, and that a reduction in spending in the U.S. will have global implications. An ECB member spoke discouragingly of Europe's recovery today, for example. Some speculate that energy costs could reduce U.S. consumer spending by a full percentage point during the first half of the year. Although perhaps not a bellwether of consumer spending, Harley Davidson (HDI) beat earnings, but warned for 2005, sending that stock sharply lower and echoing the concern among retailers. HDI also said it would cut production.

Digging into the retail sales figure revealed that clothing store sales dropped 1.9 percent, general merchandise store sales fell 0.7 percent, and department store sales declined 2 percent. Durable goods sales were broken down to show furniture store sales declining 0.6 percent and electronic and appliance stores sales slipping 0.3 percent, but building supply and gardening store sales climbing 1.5 percent. Some forecasters had already trimmed their Q1 GDP estimates yesterday, based on the U.S. trade data, and some feel that the weak retail sales figures could lead to a further trimming of estimates.

The RLX, the retail sector, has spent several weeks consolidating beneath the resistance of the 30- and 50-sma's and above the support of the 200-ema and -sma's, and the RLX headed down immediately to retest those supporting averages. This occurred despite a Prudential Equity Group upgrade of WMT based on valuation. The RLX has proven to be an important index to watch to gauge market performance over recent months.

Annotated Daily Chart of the RLX:

Annotated Daily Chart of the SPX:

The SPX's erasing of Tuesday's gains makes Tuesday's break of the likely bear flag look real, although the SPX did find support at a last-ditch rising trendline off the March low. The possibility exists that it could just be broadening that bear flag. On a breakdown below Tuesday's low, the flag breakdown should be confirmed. Support approaches at the 38.2% retracement of last year's rally, a historical horizontal support level, and the 200-ema and -sma's. On a test of that support, protect bearish profits if in bearish positions, deciding ahead of time whether you'll keep a partial position to follow the SPX lower, if it does go lower, or exit and watch as the 200-sma and -ema are tested. That second choice might be the wisest choice, as some consolidation might be expected at those averages, even if the SPX eventually heads lower. Consolidation means leaking options premium. Head-and-shoulder formations can also be rejected, forcefully, at the neckline. Until that support is tested, selling rallies may be the best tactic.

If the SPX should instead bounce from the last-ditch support reached Wednesday, an upside breakout would not occur until a break above the 30- and 50-sma's, confirmed by a move above the 19.1 percent Fib level on this chart. On that break the SPX might run up into a higher right-shoulder level for its possible H&S, but such a climb could be short lived before another period of consolidation. Expect a flattening from 1213-1220 before final decision is decided. Protect bullish profits there as that's another area where consolidation might be expected.

Annotated Daily Chart of the Dow:

The Dow's 60-minute 100/130-ema's have been capping upside movements, so they might be used to determine an upside breakout level, confirmed by a move above the 4/07 high. The 50 percent Fib level is an easy marker for a downside breakdown.

Annotated Daily Chart of the Nasdaq:

The Nasdaq verged on a breakdown below its 50 percent retracement level as trading closed, perhaps lending the Apple and AMD results special significance. As this report was prepared soon after the close, those results were not available, but Thursday morning, pay special attention to how NQ futures have reacted to overnight developments. This will help assess whether the Nasdaq might be likely to open lower and head down toward next support or bounce from this support that has been holding for a month. The Nasdaq will not have stopped its trend of lower highs and lower lows, though, until a new high is formed, so bullish plays should be considered countertrend and not good risks until there's an upside breakout. If entering a bearish play on a possible breakdown, be ready to jump back out of any apparent breakdown if there's a drop-and-pop type open.

Annotated Daily Chart of the RUT:

The day started out with a negative bias, with futures down despite seeing gains in many Asian and European bourses, excluding the Nikkei which lost again. Other morning developments impacting sentiment and the financials included a wee-hours-of-the-morning announcement that Morgan Stanley investment bankers Joseph Perella and Terry Meguid would leave the company as of Wednesday. Discussion on CNBC noted the popularity of these two bankers and speculated about the effect on Morgan Stanley. After the upheaval a couple of weeks ago when CEO Philip Purcell named Zoe Cruz and Stephen Crawford co-presidents and the resultant resignations of several top executives, rumors had swirled that Perella and Meguid would also leave. That speculation was squashed, by Perella and Meguid, if CNBC correspondents were to be believed, so that Wednesday's announcement came as a surprise. MWD plummeted 2.48 percent.

Other developments included the Mortgage Bankers Association mortgage applications numbers for the week ending April 8 at 7:00 EST, with those figures showing a 6.1 percent increase from the previous week on a seasonally adjusted basis. The purchase index increased by a similar 6.4 percent and the refinance index rose 5.6 percent. Refinancing activity took a smaller share of total activity, however, slipping to 38.1 percent of total applications from the previous 38.3 percent. The conventional index climbed 6.3 percent, and the government index rose a smaller 2.9 percent. The average interest rate for a 30-year, fixed-rate mortgage climbed to 59.95 percent from the previous week's 5.91 percent. Points also increased. For more than a month, the DJUSHB, the Dow Jones U.S. Home Construction Index, has been doing battle with its 30- and 50-sma's, and the index declined from them again Wednesday, falling 2.18 percent.

At 10:30, both the API and Department of Energy reported crude and gasoline inventories climbing and distillate inventories falling, but they differed in their accounting of those inventories. The API said crude supplies rose 4.0 million barrels, and the DOE, 3.6 million barrels. The API said gasoline supplies, of primary interest after the refinery fire in Texas and with the prime season for gasoline usage approaching, rose 2.9 million barrels, and the DOE, 800,000 barrels. The API said distillate supplies fell 1.5 million barrels, and the DOE, 100,000 barrels.

The results on crude and gasoline supplies were better than expected, and led some to speculate that crude prices might drop below the $50/barrel level. Equities popped higher, but reversed within minutes and headed down to a morning low. Crude prices had already gapped below some key trendlines just before the announcement, and then consolidated at a key Fib level after dropping, giving mixed evidence that was weighted toward the bearish side.

Annotated 60-Minute Chart for Crude:

Early in the afternoon, Merck (MRK) and Eli Lilly (LLY) tried to perk up the markets, with MRK saying that Q1 EPS would likely come in above previous estimates. Traders hoped that LLY would prevail in the patent trial in a U.S. District Court, with the decision expected Thursday. Drug stocks rose, but by mid-afternoon, traders were focusing on the U.S. five-year bond auction and the after-the-close earnings reports due by Apple and AMD. The five-year auction did not go well, with foreign buyers failing to show up at the hoped-for levels, representing only 28.2 percent of the bids. Equities tumbled, breaking through expected support.

Overnight, ASML, supplier to semiconductor giant Taiwan Semiconductor, a SOX component, dampened hopes for a sharp recovery in the industry this year, saying that semiconductor fab capacity utilization was showing a slow improvement, but not a sharp recovery. The company expected to see lower order intake in the current quarter than it had in the just-ended-in-March quarter. The SOX ended the day above 400, but the day was a bearish one. AMD is a SOX component, of course, as is Taiwan Semiconductor. Again, watching NQ reactions to overnight developments might provide a clue as to how the SOX might trade Thursday. Although neither Compuware (CPWR) or Foundry Networks (FDRY) is a component of the SOX, downside guidance from those companies also dampened enthusiasm for tech stocks Wednesday.

Thursday's economic releases begin with the usual 8:30 release of jobless claims, but also include February's business inventories. Most notable ahead of Friday's economic numbers, however, will be the slew of earnings expected tomorrow, with DJ, FDC, NYC, PEP, LUV, SUNW, UIS and UNH all reporting Thursday.

Markets perch on breakdown levels, and the day was a bearish one for most sectors. This reporter believes that many of the consolidation patterns seen on the indices could be bear flags or "b" distribution patterns, but even a casual examination of the month-long consolidation patterns discovers a lot of zooming around. Wildly bullish days often follow discouragingly bearish ones, and vice versa. Although indices verge on breakdowns, those breakdowns haven't quite occurred, and indices have been here before during the last month. Until traders see decided breakouts one direction or the other, anything is possible despite those possible bearish formations. Trade with care, especially during this opex week.


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