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Market Wrap

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No Decision Yet

OK, this is getting tiring--this was written two weeks ago and repeated last week--"For over a week now we've been in a relatively tight range that has worked its way slowly higher. Whenever we see price action chop its way lower or higher it's usually a sign that the move is running out of steam." Change the above to read three weeks now instead of one week. One look at the daily candles and it's like a blinking green and red light for go-stop-go-stop. There's been no follow through on an intraday basis as well as on a daily basis. This too shall pass and we'll get a couple of session's worth of a trend. In the meantime there's obviously a major battle between the bulls and the bears and I suspect whichever side blinks first will be a result to stops getting tripped and the move will likely be fast. Catch that move correctly and you'll probably get a good ride. On the other hand, if you're positioned wrong and you don't take the stop, you might feel some pain. Making it a little more difficult is the fact that different indices are giving very different pictures. It's a good time to lighten up your positions, trade lightly and quickly and don't get yourself caught stalled on the train tracks with a freight train barreling down on you.

Most of us have heard that when the mainstream media picks up on a trend, the trend is over. Typically magazines for example will publish a story about a trend after it is well recognized because that's what sells magazines. So by the time it's published, the trend has already reversed or is about to. Google (GOOG) has been on a tear and recently Bubblevision added a little "bug" on the screen in order to keep track of GOOG's price. This is highly reminiscent of the dot.com era and the result for GOOG might be the same. This is one powerhouse of a company but the hype around it is over the top, as is its valuation. Maybe it really is different this time but I have my doubts about that. Burn me once shame on you, burn me twice shame on me. Another area is the housing market. Have you noticed how everyone, and I mean everyone, is talking about the housing market. It has made prime time news. Time magazine ran an article titled "Home $weet Home: Why We're Going Gaga Over Real Estate." All of this attention almost always identifies the end of the trend, maybe not this week, but probably soon. The housing market needs to correct and wring out the total frenzy we're seeing around it and we can only hope that the air is let out of the balloon slowly but I'm afraid history is not kind in this regard. All bubbles pop, they don't fizzle.

So let's take a look at the charts and see what they say to us. As I mentioned, there's some confusion between the charts but we've got some pretty good levels to watch for confirmation which direction this market will head. Trade the direction of the break and in the meantime know that we're trapped in a relatively small range and it's making trading difficult.

DOW chart, Daily

It seems each time the bears or the bulls have the opportunity to run with the ball they decide instead to toss it to the other side. We're in the market's version of hot potato. Price continues to bounce up and down between resistance near the top of its down-channel and the April highs and support at its 200-dma. So again, support 10427) and resistance (10600) is easily identified (if not a little wide) and a break of either could get the market moving in that direction. The fact that stochastics is working its way down to oversold while price consolidates sideways is bullish.

SPX chart, Daily

The SPX has been slightly stronger than the DOW in that it has worked its way higher, versus sideways, while consolidating underneath its broken uptrend line. Like the DOW, the fact that stochastics is moving down towards oversold while price consolidates is typically bullish. Support is actually a little closer as far as signaling something bearish is starting--if SPX breaks below 1191, we could be starting something bigger to the downside. The upside is not quite as clear as far as identifying a break goes. The 60-min chart below shows the shape of the consolidation pattern and it's typically bearish.

SPX chart, 60-min

Drawing trend lines off the May 5th high has marked the highs and lows since that date. The last bounce failed to make it back up to the top trend line and that may be telling us something. But price did bounce off the lower line this morning and that's the support line to watch now--if we break below today's l191 low it could be good for a short trade that lasts more than a day.

Nasdaq chart, Daily

I have a headache after looking at this chart. The sellers certainly knew where to sell this index! The daily oscillators are hard over so we'll have to see how far this drops. The first support level is the uptrend line from October 2002 that price was able to recapture after falling below it in April. The 50% retracement of the March-April decline crosses this uptrend line at 2040 so watch this area for potential support.

SOX index, weekly chart

Sticking with the weekly chart of the SOX to give us a little longer term perspective also raises a warning flag for bulls since price has rallied up to the downtrend line from November 2004 which is the top of a potential flag pattern, and currently just above at 443 so only 5 points above today's closing price. The weekly stochastics is also hitting the top of its coiling pattern. The good news for this index is that it got back above its uptrend line (currently at 408) and its 200-wma (427) so support is fairly close.

BKX banking index, daily chart

The banking sector has been doing the same thing as the broader market by consolidating above support, in this case the broken downtrend line from December 2004. However, it's been struggling underneath its 200-dma so we know what resistance level this index needs to break through.

This morning started with all eyes and ears on what Greenspan had to say before the Joint Economic Committee, with investors hoping to get a clearer picture on the outlook for long-term yields, inflation trends and whether the current round of Fed tightening is nearing an end. While waiting with baited breath for Greenspans words of wisdom the Labor Dept. showed that initial claims fell 21K to 330K (consensus was 335K). This was a level consistent with gains of 175K per month in nonfarm payrolls and roughly in line with the White House's recent estimate of 178K.

As the morning wore on, there was some volatility depending on how Greenspan's remarks were evaluated. He said it is difficult to forecast what the "so-called neutral rate is," implying that it may be premature to set a deadline for an eventual end to Fed tightening. Greenspan has said that we may be close--all part of his doublespeak. While the Fed Chairman has said that the economy is on a "firm footing," he has also reaffirmed that benchmark interest rates may keep rising at a "measured pace," challenging the hopes of many that Fed tightening is nearing an end. He also stated a "bubble" in home prices for the nation as a whole does not appear likely. I want me a pair of them rose-colored glasses he's wearing.

As seen in the above chart for the SOX, chip stocks got a lift today, helped by the earnings report from National Semiconductor (NSM 21.67 +1.77). Despite an 18.2% year-over-year decline in Q4 revenues to $467M as well as forecasts that Q1 revenues will be flat to down 2% from Q4 levels, investors liked the 40% increase in NSM's net income and the declaration of a $0.02 cash dividend. SOX was also helped from a 2.2% surge in shares of Intel ahead of its mid-quarter update. Broad-based strength in Internet stocks, after Smith Barney initiated coverage on Yahoo (YHOO 37.45 +0.82) and Google (GOOG 286.31 +6.75) with Buy ratings, also contributed to technology's solid advance.

With regard to sector strength and weakness, Energy paced the way higher, taking full advantage of a surge in oil prices. Crude oil futures ($54.28/bbl +$1.74) soared 3.3% amid news that the first tropical storm of the 2005 Atlantic hurricane season forced some large oil companies to remove personnel from oil platforms. The sector was helped by reports that ChevronTexaco (CVX 56.04 +1.21) and Unocal (UCL 60.19 +1.72) have reached a proposed settlement with the FTC to clear the way for their proposed $16.4B merger. After a strong bounce last week, oil pulled back this week but it looks like only a correction to last week's strong rally. Today's rally may be part of the back and forth it will do for a little while but it looks like bullish price action.

Oil chart, June contract, Daily

Oil had bounced from just above its uptrend line from early 2004 and stalled at the midline of the up-channel that has contained price the past year and a half. We may see some back and forth consolidation to work off the overbought indicators, but the pullback looks corrective and the rally in oil is expected to continue once it's finished correcting.

Oil Index chart, Daily

As mentioned above, the increase in oil's price today gave the oil index a shot in the arm and boosted it up to the top of its longer term up-channel. This index looks ready for a rest so I would expect a pullback from here. The 50-dma at 459 should act as support now that it's been able to get back above it.

Transportation Index chart, TRAN, Daily

The Trannies have been a big disappointment this week. After giving a buy signal on its P&F chart at 3650, and climbing up to 3670, it's been all downhill since then. This now looks like it was a bull trap (suck in the bulls on a buy signal and then drop hard, trapping those who don't use appropriate stop loss control). After stopping at its 200-sma yesterday, price dropped further and bounced off its 200-ema but closed below its 200-sma.

Shipping Rates chart, Daily

This is a copy of a chart that shows shipping rates and how theyre collapsing. Of course as shipping rates collapse so will the Transports. And Transports gives us a heads up as to how the broader economy is doing. This is not the picture of economic health and is a reason why following the Trannies is important.

U.S. Home Construction Index chart, DJUSHB, Daily

As discussed at the opening, the housing market has been on fire--hot enough to fry shorts. But it needs to hold near its highs in any consolidation otherwise we might have another bull trap in the making. The daily oscillators are bending over so the depth of any pullback will be telling. In the meantime, this is clearly in an uptrend.

U.S. Dollar chart, Daily

The US dollar is hugging the top of its parallel up-channel and it looks like it's headed higher. The recent pullback was corrective and the recent rally looks like it might reverse the daily oscillators. There's also a likely chance that the dollar will consolidate further before heading up again but any consolidation would also be a strong indication that another rally leg is coming. The upside Fib target is just above $89 before it could see a more significant pullback.

Gold chart, June contract, Daily

As the US dollar pulled back, gold rallied. It rallied up to its downtrend line from March and got close to retesting its broken uptrend line from early 2004. That was also the location of its 50-dma. Like the dollar we could see gold consolidate a little while before an attempt at its 200-sma, currently at 430.35 so about +$7 from its current position. We'll be switching to the August contract next week which closed at 426 today.

Sector action was mostly green today, led by the oil service index and the other energy indexes. The Financial sector also finished on a strong note. Health Care was also a bright spot for investors, getting a boost from continued momentum in HMOs (i.e. UNH, WLP, AET, CI and HUM) and strength in Biotech, after a Phase II clinical trial showed Rituxan was effective in treating rheumatoid arthritis (i.e. BIIB and DNA). The Materials sector, however, was the worst performing sector, as a strong dollar weighed on dollar-denominated commodities across the board.

Overcapacity concerns at Louisiana Pacific (LPX 23.56 -1.38), which prompted Smith Barney to downgrade LPX to Hold from Buy, also weighed on the sector. The Industrials sector also struggled on the day, after Morgan Stanley downgraded United Parcel Service (UPS 71.25 -1.11) and lowered its earnings estimates for FedEx Corp. (FDX 87.60 -2.10), citing higher fuel costs and competitive domestic parcel pricing.

Tomorrow will be relatively quiet as far as economic numbers go. We'll get Export and Import prices and Trade Balance numbers at 8:30 and then the Treasury Budget at 2:00, none of which should appreciably move the market. We'll have to see how the cash market reacts to the INTC earnings news. The reported that their Q2 gross margin is expected to be about 57% versus prior guidance of 56%, and Q2 revenue will be in the $9.1B-$9.3B range versus prior guidance in the $8.6-9.2B range. Both of these new estimates are better than previous estimates which is good news, right? That's why INTC sold off from its closing price of $27.68 down to $27.29 at its after-market close. It was a sell the new event since INTC had rallied into its earning's report. But equity futures are essentially flat in after hours so we'll have to see if the cash market has anything to say about INTC's news.

The market continues to be very challenging to trade on a short term basis because there's no follow through. Traders need to take profits quickly otherwise they've been giving them back. One look at the daily chart shows you that we've gone essentially nowhere for 3 weeks now. That will change but for the time being definitely take profits quickly!


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