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Market Wrap

We Can't Get No Market Action

HAVING TROUBLE PRINTING?
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Perhaps thanks to Bo Bice's cover of the Rolling Stone's song on an American Idol episode, even our younger readers will recognize the reference being made in that title. That old Rolling Stone's song could have served as the anthem for both bulls and bears as Friday's session opened. They could have gone right along singing it all day.

One aberration occurred in the Russell 2000. Just after the bond market close, the RUT and MID zoomed up.

Annotated Daily Chart of the RUT:

The RUT might be watched closely next week because either a rollover at the top of that channel or a breakout above it could lead the way for other indices. As noted on the chart, the RUT saw a strong surge in buying about the time of the bond-market close, although big-cap indices did not seem to participate.

The RUT seemed to take over for the SOX, with the SOX waning a bit Friday in its efforts to lead indices higher.

Annotated Weekly Chart of the SOX:

These two indices might be watched carefully next week for market guidance. Not all traders follow nested Keltner channels, but it might also be noted that Thursday ended with the SOX up against the upper boundary of a channel that it rarely violates for more than a couple of days on the daily chart. Friday, it turned down from that channel line. Further challenges might be possible, but so might a downturn toward central channel support. That central channel support is currently at about 409.80-412.70, although Keltner support also exists at a Keltner line currently at 422.81.

SOX bulls might have been taken aback by the lack of follow through on Friday. Although tech-related indices had performed well Thursday and did so in overnight sessions, U.S. futures showed little reaction to the Nikkei's strong climb. Perhaps China's Shanghai Composite's descent to almost eight-year lows tempered what might have been a positive reaction. After some initial volatility near the European open, U.S. futures showed little reaction to the early declines in the U.K., France and Germany, either.

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Big currency moves, expected by some to be a possible driver of markets next week and so on the radar screen pre-market, had not made an appearance overnight. Asian currencies are expected to strengthen against the dollar as the result of any Chinese move to un-peg the Chinese currency from our currency, but hopes of an imminent move by China have been waning. The euro was expected to weaken against the dollar as the result of a possible no vote on this weekend's referendum in France on the EU constitution, but the euro had already declined for a month. Ahead of the vote, euro shorts covered. During the overnight session, the euro continued its perhaps-technical bounce against the dollar, a bounce that continued throughout the trading day.

Those who had hoped that pre-market economic announcements would move the markets were to be disappointed, too. March's personal spending was revised higher to 0.9 percent against the previous 0.6 percent. April's personal spending rose a less-than-expected 0.6 percent as incomes climbed 0.7 percent. Perhaps more closely watched was the core PCE deflator, rising 0.1 percent and 1.6 percent year over year, showing tame inflation pressures. One key measure had shown gasoline prices pushing an inflation measure up 0.4 percent, but that core number excludes gasoline. I'm not so certain that most consumers would exclude it.

However, as one article noted, bonds barely budged after the announcements, and neither did equities. Most market watchers were reassured by the numbers, feeling that the threatened softness from March had been safely negotiated. Futures improved slightly, but only slightly and not for long.

Little note was made by television commentators of J.P. Morgan's reiteration of an underweight rating on stocks in the U.S. and globally. The firm reportedly feels that the earnings environment has deteriorated. The firm's analysts predicted 0.0 percent earnings growth for SPX stocks this year.

The open might have hinted at some movement as markets dipped ahead of the 10:00 release of the U.S. Michigan consumer sentiment index. That index fell to 86.9, down from April's 87.7, to the lowest number in more than two years, but still higher than the expected 85.3-86.0. Gasoline prices weighed on sentiment, as well as some statements from Fed members, including Greenspan's mention of froth in the housing market, one article concluded. The prospect of rising interest rates may also have been a factor. The current conditions component rose to 104.9 versus April's 104.4 and expectations fell to 75.3 from 77.

All in all, nothing prevailed to move the markets on a day that promised and delivered light volume. Action has been choppy or nonexistent lately, confusing traders. Perhaps it's time to step back and take a long-term view, one that will start with the Dow's monthly chart.

Annotated Monthly Chart of the Dow:

This chart makes evident some of the reasons for confusion in the markets. Bears might point to the strong resistance that will likely be encountered near the apex of that diamond formed at the Dow's all-time high. That resistance now coincides with the light red rising trendline that's been providing resistance, too. Bulls might point out, however, that the light red rising trendline might be the neckline for a large inverse H&S and that the Dow might be in the right-shoulder-building process. Bears might then counter that instead of a right shoulder, the Dow could be forming a small regular H&S beneath that bold red line.

When I see competing bullish and bearish formations like these, I know that bulls and bears might not yet have worked out which group is going to prevail. Whether that's the right shoulder for an inverse H&S or entire regular H&S, the monthly view shows that the Dow still chops around within that formation. The outcome--either bullish or bearish--has not been decided and neither has final direction.

The daily chart view provides no more clarity, with the two horizontal red lines on this chart representing the apex zone of that diamond visible on the monthly chart.

Annotated Daily Chart of the Dow:

The SPX's weekly chart shows a possible bullish interpretation of the SPX's action, but also points out that the SPX ended the week jammed against potential strong resistance.

Annotated Weekly Chart of the SPX:

The top of that channel is near 1201 on a weekly closing basis. The daily Keltner chart (not shown) reveals upside resistance at about 1210, but Keltner-style bearish divergence has been showing up on the last several swing highs. If that's to continue, the SPX will only graze that upper level or perhaps not touch it. If that 1210-ish upper line is breached, the bearish divergence is erased. If in bullish positions, traders should have profit-protecting plans in place at the current level, up to that 1210 level, and remain on guard for a potential rollover.

The daily Keltner chart suggests about equal possibility for the SPX to drop back toward 1188 or charge up toward 1210, with a slight weighting toward a pullback first. The range-bound trading late last week neutralized the information to be obtained on intraday Keltner charts, so that they don't augment the picture on the daily chart, not giving a preference for a climb or a decline. As long as the SPX maintains daily closes above 1188, it might still be presumed to be moving up toward an eventual test of that channel line now at 1210, but a close below the line currently at 1188 suggests a pullback toward Keltner support now at 1177.

The SPX faces resistance at the top of its descending regression channel, but the Nasdaq broke out of a descending regression channel.

Annotated Daily Chart for the Nasdaq:

The Nasdaq attempts a breakout from daily Keltner resistance, the analogous configuration that the SOX currently tests. A daily close back below the Keltner line currently at 2067.74 suggests a possible pullback toward support currently at 2043.24 and a daily close below that support suggests a deeper pullback, to 2000.50-2018.20. Support at that lower level looks strong enough to hold on the first test, at least as currently configured. No rollover has yet occurred and may not, of course, but it's natural to see a retest of broken long-term resistance, to see if it holds as support. As long as support holds, that's not a bearish development, but instead a necessary one.

The Nasdaq was to gain only 0.21 percent Friday and other indices made similarly small moves. One index moving more than 1 percent was the XOI, the Amex Oil Index. Pre-market news included a Financial Times report that China National Offshore Oil's non-executive directors have hired independent advisors to scrutinize management's contemplation of bidding against ChevronTexaco for Unocal (UCL), to the tune of more than $16 billion. UCL was to post a gain of 2.25 percent Friday.

Pharmaceuticals also came under scrutiny pre-market after Caremark RX and the Justice Department were reported as being close to reaching a settlement that would require Caremark Rx to pay more than $100 million, in a case that might have broader implications for other PBMs, or pharmacy benefit managers. Investigations have centered on whether the PBMs have aided manufacturers in encouraging the use of higher-priced drugs.

Pharmaceuticals were to stay in the news all day. In other news related to the sector, the FDA has begun looking into reports that about 50 men suffered permanent blindness after taking Viagra. Some information suggested that the blindness occurred in men who were suffered from diabetes or heart disease. The company acknowledged that it was discussing changing the label with U.S. regulators. The company also reiterated the drug's safety. Viagra accounts for three percent of Pfizer's (PFE) sales, accounting to a CNBC report. PFE was to drop 1.90 percent in Friday's trading.

Merrill Lynch did its best to provide a further boost to the semiconductor sector pre-market by upgrading LSI. Baird initiated coverage of TXN with a neutral rating. LSI climbed 2.52 percent, and TXN dropped 0.71 percent.

While some indices might have moved glacially if at all on Friday, individual stocks sometimes showed stronger moves. Telecommunications equipment company Ditech Communications Corp. (DITC) saw its stock lose more than a third of its value, 38.12 percent, after Thursday's earnings report beat expectations for earnings but lowered expectations for Q1 revenue to less than half what analysts expected. The company's president and CEO blamed a decline in orders from Nextel as a result of Nextel's merger with Sprint. The company collected several downgrades Friday morning. TiVo (TIVO) beat expectations by narrowing its Q2 loss more than expected, but received a downgrade and dropped 3.02 percent. Chico's FAS (CHS) achieved an all-time high after it also beat forecasts in its Thursday-night report, closing higher by 8.42 percent. Esterline Technologies (ESL) jointed the list of those companies beating expectations, soaring higher by 10.01 percent.

Markets will remain closed for the holiday Monday. Tuesday's economic releases are light, but Wednesday's and Thursday's calendars prove heavy, with much information on the manufacturing sector, housing sector, retailers and the employment situation all due. With Greenspan's "froth" statement about the housing market still bubbling through the markets and Fed Vice Chairman Roger Ferguson admitting Friday that housing prices in many U.S. markets might be "relatively high" and subject to a slowing, information about the housing sector might be closely watched. Many of next week's announcements will be.

Tuesday's numbers include the National Association of Purchasing Management-Chicago May survey results, to be released at 10:00 am. This survey measures business conditions in the Chicago area in both the manufacturing and non-manufacturing sectors. Some consider it a leading indicator for the ISM manufacturing index to be released the next day. Reportedly, the FOMC committee members watch this Chicago number. Also, US-Farm Prices will be released Tuesday afternoon, at 3:00. The Department of Agriculture releases this index of prices received by farmers.

Wednesday's releases begin early with the usual 7:00 release of the MBA's figures for loan applications, this covering the week of 5/27. ICSC-UBS store sales for the week of 5/28 will follow shortly, released at 7:45. At 8:55, the Redbook survey will provide additional insight into sales at chain stores, discounters, and department stores. Together with the more consistent ICSC-UBS indicator, the Redbook survey helps economists gauge consumer spending habits. The RLX has been on a tear lately, but slowed to a 0.19 percent gain Friday. It faces January's huge gap lower, as yet unable to move into that gap last week. A downturn here might be important, but if the RLX climbs, gains might be tempered by gap resistance.

Investors may brush aside many of those releases to get a better look at the May ISM Manufacturing Index to be released at 10:00. This number can be market moving and is also one that the Federal Reserve watches closely. Motor vehicle sales for May will begin being released about 4:00.

Thursday will be another full day of economic releases. At 6:00 am, Monster releases its employment index for May. The Thursday release of jobless claims will come as usual at 8:30 along with Q1 productivity and unit labor costs. Because of this release's importance in measuring inflationary pressures, it, too, will be closely watched. The April job report surprised to the upside, so this report should garner attention. The 10:00 release of the Challenger Job-cut Report for May will provide further insight into the employment situation, but it's likely to be overshadowed by the coincident release of April's factory orders.

At 10:30, the Department of Energy give updates on crude, gasoline and distillate inventories. The day's releases conclude with the 4:30 update on the U.S. Money Supply for the week of May 23.

Friday rounds up the week, with the U.S. employment situation for May released at 8:30, a potentially market-moving release. Termed the most comprehensive report on the employment situation, this report is also one that Greenspan watches. By that point, market watchers might be exhausted, but the week finishes up with a bang, with the May ISM non-manufacturing index, expected at 10:00.

Market action might have lulled traders this week, but some predict that it won't do so next week. I've pointed out many indices breaking out or attempting to break out over long-term resistance, but still subject to a downturn beneath that resistance. Some indices consolidate in broadening or other consolidation patterns. The choppy action has chopped up chart signals, too. Longer-term charts harbor signs of impending breakouts but also include warnings of strong resistance.

Not to be ignored is Sunday's referendum in France on the EU constitution and its possible impact on currencies and equities. A no vote, likely according to some polls, might crater the euro against the dollar, although some speculate that "crater" might be too strong a word, especially since the euro has already trended down against the dollar for the last month in anticipation of a negative outcome. Friday's move higher was either a validation of the sentiment that the euro has been oversold this month or else just a technical bounce that relieved some of the pressure. Some feel the euro has enough support to withstand such an action, but U.S. multinational companies who do business in Europe might not benefit from a surge in the dollar against the euro if that occurs.

The dollar's move might be choppy as the U.S. ratchets up pressure on China to un-peg its currency from the U.S.'s, perhaps leading to a strengthening of that currency against the dollar. Like a see-saw, one event might send the dollar higher and another, lower, with the relative effects difficult to weigh from this vantage point. No one knows whether or when China will take that action. Will the U.S. economy suffer more from paying higher prices for imports from China if our dollar slips against the yuan or from seeing our multinational companies' earnings fall due to the effect of a falling euro against the dollar? Will our interest rates rise if China dumps U.S. assets that it had held to keep its currency undervalued against ours, and will those rising rates blow all that froth off the housing market?

Although Treasury Secretary John Snow assured senators this week that a revaluation of China's currency would not lead to a dumping of U.S. securities, or that such a dumping wouldn't affect large U.S. capital markets much if China did just that, others differ. Some speculate that large currency moves could impact our markets and could be one of the biggest market movers next week, if such moves occur.

It would be nice to predict as this report is prepared how the referendum will turn out in France, how the euro and dollar will react, what secret plans China makes for its currency and how the dollar would react to that, but those predictions are impossible to make. It might be important to watch how the dollar reacts Sunday night and then how our futures react to a dollar move, if there is any. If there's a strong surge one direction or the other in the markets, that might get some equity movement going. Otherwise, I'm not sure that the bulls and bears have yet settled who is going to win the sweepstakes as we head into summer trading conditions.

Be particularly careful and remain aware of undercurrents that might impact market action next week. Watch the SOX and RUT for clues as to whether rollovers or breakouts have begun. Watch that CCI ghost on the Nasdaq to see if it confirms or is invalidated. If rollovers begin, watch carefully the breakout levels for potential strong support on a pullback.
 

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