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Market Wrap

The Day After

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The Day After

$60+ oil and negative equities dominated the headlines this morning. While crude oil closed positive at a record high and the equity indices finished negative, there was surprisingly little drama in the markets. Volume was light and the range no wider than usual as the markets attempted to consolidate in the wake of last week's decline.

Volume breadth was negative 1.33:1 on the NYSE and 2.01:1 on the Nasdaq as of the cash close. Volatility rose for all indices except the OEX, with the VXO (the old VIX) finishing lower by .27 at 11.5. 

Daily Dow Chart

The Dow declined 7.06 to finish at 10290.78, bouncing from a low of 10253. The close came within the middle of the daily range, resulting in a doji star at the bottom of last week's sharp drop. If the break was indeed a bear wedge failure, then the implied target would be in the 10100 area. The break confirmed a bearish stochastic divergence, with the 10-day stochastic rolling over from a lower high against the higher price high. That signal reversed the daily cycle upphase that had launched the previous week, closing the door on a bull trap. The daily cycle should remain in a downphase below 10430. 1st resistance is at 10360, a break above which would be the first sign of trouble for bears. 

Note that today's candle printed almost entirely below the lower 20-day Bollinger support at 10328. A Bollinger violation is usually reversed quickly in all but the strongest trending moves, and so we can expect a corrective bounce or sideways drift from here. A failure to hold today's range tomorrow would be the less likely outcome, and would be a very bearish development.

Daily S&P 500 Chart

The SPX lost less than one point, also printing a doji at the bottom of Friday's drop. The oscillator signals are similar to those on the Dow, but the drop less dramatic, with the lower Bollinger band not even touched. Below 1196, this remains a bearish chart in the heels of last week's bull trap closure, and the implied bear wedge target is in the 1150 area. Bears will be looking for a break of 1184 support, below today's 1188 low, for acceleration of the new daily downphase.

Daily Nasdaq Chart

The Nasdaq lost 8.07 to close at 2045, just above confluence support at the 50 day EMA. The bearish divergence noted above is steepest here, and a drop below 2040 support should see a quick trip to stronger support at 2020-2025. 2055-2060 is confluence immediately overhead, below which the bears control the daily cycle.

Chart of QQQQ with $QQV overlay

Last Monday's high wasn't "the" QQQQ high for the week, but it came close, as did the low in the NDX volatility index (QQV), which got down to near 12.25, a record low for the young index. On this chart, the QQQQ price candles are overlaid with the QQV in blue. As discussed in last week's Market Wrap, it appears as if the indicator was giving us a heads-up for the QQQQ decline that kicked off on Thursday.

Daily TNX Chart

The Treasury auctioned $30 billion in debt today, comprised of $16 billion in 13-week Bills and $14 billion in 26-week Bills. The 13 week auction had a high-rate of 2.965%, in line with this month's 3 previous auctions, and bid-to-cover ratio of 2.27, the highest since the April 25th auction. The 26-week bills set a high-rate of 3.175, the highest this year, and a bid-to-cover ratio of 2.1, the lowest since the May 31 auction. Indirect bidders (foreign central banks) took $8.5 billion of the $30 billion total.

Ten year treasuries traded in light positive territory all day, the ten year note yield (TNX) finishing lower by 1.2 bps at 3.902%. On the daily chart, we see support at 3.88% in play at current levels, below which next support is down at 3.80%.

Daily Chart of Crude oil

Crude oil made the top headlines today as traders awoke to find the front-month August crude contract bidding above 60.50, trading a high of 60.64 in the early morning. This represented only a minor rise from last week's levels, but the round-number attracted mainstream attention. OPEC's comments in recent weeks about high prices being the result of a lack of refining capacity remain as puzzling as the day they were uttered, as crude prices continue their climb. Reuters referred to the 500,000 bpd output increases as "symbolic," and the market clearly agreed as prices rose despite Sheikh Ahmad al-Fahd al-Sabah's weekend statement to the effect that OPEC is considering another such increase.

While the 6-month daily chart shows backing and filling to higher highs, the 3-year weekly chart is less ambiguous, with prices nearly tripling during that time. While demand continues to increase, it has not tripled. Nor has "refining capacity" been reduced threefold. Incidentally, I continue to be unable to understand how a lack of refining capacity would cause the price of crude oil to rise. If anything, one would expct a lack of refining capacity to cause demand for crude to fall, as the barrels sit idle awaiting processing.

Weekly Chart of Crude oil

In any event, aside from purely technical factors, I believe it noteworthy that the media aren't correlating recent comments from Chairman Greenspan and Secretary Snow concerning the effects of China's currency peg. As Snow put it last week, "China's rigid currency regime has become highly distortionary. We know that it poses risks to the health of the Chinese economy, such as sowing the seeds for excess liquidity creation, asset price inflation, large speculative capital flows, and over-investment." 

Greenspan stated that, "Rapid accumulation of foreign, largely dollar, reserve holdings by the People's Bank of China, China's central bank, as a consequence of support for the RMB could boost the growth of the money stock, with the accompanying risk of triggering upward pressure on inflation and a general overheating of the Chinese economy. The Chinese central bank's issuance of liquidity management bonds to lessen potential increases in the money supply created by foreign asset accumulation has accelerated since regular issuance began in April 2003. Nonetheless, only about one-half of the increase in reserves over the past two years has been offset, with the remainder showing through as money growth." It's worth considering that if the Fed wasn't printing new dollars, the Bank of China wouldn't be printing new RMB to absorb them.

My point here is that while demand for oil is probably not even capable of tripling in a three year period absent some kind of worldwide catastrophe, the supply of dollars or other foreign currencies is. If you were the owner of 30 million barrels of crude oil (per day, in the case of OPEC), and your largest customers were paying you with printed paper (or account credits) that could be and were being created by them at will, perhaps you too might demand more of that paper or those credits in return.

On the weekly chart, there are potential bearish divergences shaping up in the Macd and stochastic oscillators. While price remains in a strong uptrend, traders who are long will want to keep stops close to protect profits in the event of a weekly downturn. The daily cycle indicators are also looking toppy, but until price turns, both charts remain clearly bullish and the daily cycle appears to be trending. The first sign of trouble for bulls will be a break below rising support at 59, with next confluence at 57.70-58.00. For the day, August crude oil closed at a record high, +.775 at 60.575, off a high of 60.95 and a low of 59.875.

In corporate news, Nike (NKE) announced fiscal Q4 earnings that rose 15% from $305 million or $1.13 per share to $349 million or $1.30 per share on revenue of $3.72 billion, up 7% from last year's Q4. Estimates were for EPS of $1.27 per share and revenue of $3.69 billion. The company attributed the gains to strong demand across all regions and cited the weak dollar for a boost in overseas sales. NKE lost 4.01% to close at 85.77.

Walgreen (WAG) reported fiscal Q3 earnings that rose from $342.3 million or 33 cents per share to $411 million or 40 cents on sales that rose 13.1% to $10.83 billion. Estimates were for 38 cents EPS on sales of $10.88 billion. Same-store sales grew 8.7%, and the company cited a longer flu season for an increase of 8.8% in prescriptions filled. WAG finished higher by 3.31% at 45.85.

Creative Technologies (CREAF) reduced its expected Q4 sales forecast to $300 million from earlier projections of $330-$360 million. The company, which makes audio cards, speakers and portable mp3 players, expects gross margins to come in below 20%, down from earlier forecasts of 24%. The company blamed softer than expected demand for mp3 players. AAPL got pulled down in the undertoe from this announcement, recovering later in the morning but fading back to a lower low in the afternoon. CREAF got smoked for 10.51% loss, while AAPL lost 1.65% to close at 37.10.

After the bell, Paychex (PAYX) announced fiscal Q4 earnings that rose 65% from $61.4 million or 16 cents in last year's Q4 to 27 cents or $101.5 million on revenue that rose from $330.4 million to $379 million. PAYX was up 2.93% in afterhours trading to 30.90 after closing at 30.02.

Although there were no economic reports released today, it's scheduled to be a heavy week. Tomorrow we get Consumer Confidence at 10AM, then on Wednesday the GDP report. On Thursday, it's Initial Claims, Personal Income and Personal Spending, Chicago PMI and the Help-Wanted Index, as well as the FOMC policy announcement. On Friday we'll get Michigan Sentiment, Construction Spending and the ISM Index. Note that the FOMC policy meetings usually commence on Tuesday and finish on Wednesday, but the current meeting only commences on Wednesday, no doubt due to scheduling conflicts.

For tomorrow, the question is whether the indices will continue lower or bounce. The very light volume today was all the more dramatic in the wake of Friday's big numbers. Some speculated that the markets are waiting for the FOMC's policy announcement- an unpleasant prospect, given that it comes on Thursday afternoon. Despite the higher highs in oil, equities did not decline dramatically. This is less surprising in light of the fact that the intraday cycles were bottomy and due for a corrective bounce. The greater surprise was that the bounce was so weak, and in fact non-existent on the Nasdaq. It appeared as if traders were watching so closely for bounces to sell that none could even get started.

While the put to call ratios indicate plenty of put volume and, presumably, bearish index speculation, price remains the primary indicator. The daily cycle upphases whipsawed, confirming the bearish price action, and volatility rose again today. Friday's decline had huge volume, well above the thin days we endured week after week in the upper range. To sum up a confusing picture, the markets are primed for a corrective bounce within a broader (daily cycle) downphase, with the possibility of choppy, narrow action ahead of the FOMC announcement. Below the resistance levels discussed above, the benefit of the doubt goes to the bears except in the shorter and intraday timeframes. 


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