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Market Wrap

Low Volume Bullish Day

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Stocks and bonds gapped up at the open and corrected lower, followed by a slow drift to the highs in the afternoon. It was a surreal, slow day on light volume, with small sudden moves reversing in what proved to be a net sideways-upward drift. Even the most devout bull would be hard-pressed to find a breakout move in it, but the absence of weakness and persistence at Friday's highs was anything but bearish.

The indecision was reflected in volume breadth, with advancing volume swapping leads with declining volume throughout the session. The stronger readings were to the upside, however, as was the indecision in the price action. With price holding unfilled upside gaps, there was the feeling of an impending bearish engulfing to bury the sideways range, such as we've often seen in the past. But with the price trend clearly up and no extreme overbought moves (except at the open), it was very difficult to be a seller. The resulting deadlock scared off the volume and caused a flat tape, but again, bulls held the benefit of the doubt.

Daily Dow Chart

The Dow made a new high for the move at 10593, retested but not touched in the final minutes of the session. The morning bounce took off from a low of 10520, right on steeply rising bear wedge support. The daily chart is cluttered with trendlines at the apex of this wedge, but the bottom line is that 10600 is key trendline, confluence and Bollinger resistance. If the bulls can power above that level tomorrow, I believe that they'll convert a lot of bears in the process. On a cycle basis, the 10 day stochastic continues its doubtful drift higher toward overbought territory. Despite the sharpness of the current price move, the action in the oscillator suggests that a sell signal could be as little as a single down day away. For the day, the Dow gained 55 to close at 10586.

Daily S&P 500 Chart

The SPX added 2.67 to close at 1222.81, bouncing from its 1217.29 low and failing again below the 1225 level, the high 1224.18. The 10-day stochastic left off on a bearish kiss, not the first of this cycle. As with the Dow, the move is growing extended in a steep bear wedge, and in this timeframe, resistance looks strong at 1225 and at 1232. Today's light volume shed no light on the picture, but a break above 1232 or 1218 on a spike in volume could do it.

Daily Nasdaq Chart

A nominal new high for the Nasdaq at 2182 was printed as the price scaled the upper rising resistance line on either a conventional bearish or expanding wedge. Neither pattern is bullish, and nor is the 10-day stochastic which stalled for the second time in this upphase, only this time in overbought territory. A break below the 2165 low should be enough for a new sell signal, while bulls need a close above 2185 to set up a retest of the year high at 2220.

Daily TNX Chart

The Fed announced a coupon pass on Friday, resulting in the delivery of $800 million in new cash to the Fed's dealers today. This morning, that addition was supplemented by a generous $6 billion via overnight repo, and with no expirations this morning, the Fed's dealers were treated to a total of $6.8 billion in new cash. Treasuries were firm from Friday's bounce, and the ten year note yield held a 3 basis point decline for most of the morning.

The financial press reported that Treasuries were strong because the higher yield (resulting from bonds falling to a one year low) was expected to attract heavier participation at the afternoon's and tomorrow's Treasury bill auctions. In other words, Treasuries were strong because they have been weak. Foreign central banks have been pulling back from Treasury auctions recently, and that headline, in addition to being circular, appeared dubious ahead of the 13- and 26-week T-bill auctions.

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Central banks purchased $9.2 billion of that $36 billion auctioned this afternoon, a respectable showing. The $19 billion of 13-week bills sold for 3.87% yielding 3.963%, with 2.3 bids tendered for each accepted. The $17 billion in 26-week bills set a high-rate of 4.155% yielding 4.303%, with a 2.01 bid to cover ratio.

Tomorrow's 4-week Treasury bill auction will refund $10 billion in maturing 4-week bills and raise an additional $12 billion in a large $22 billion auction. An additional $18 billion in 3 year notes will be auctioned as well, but net new borrowing of this longer-dated debt will be a minor $5.277 billion when combined with the 5- and 10 year note auctions later this week. Nevertheless, the Treasury will be a big net borrower this week, which could weigh on the treasury and equity markets as that liquidity is diverted.

Ten year notes held their gains for the duration of the session within Friday's range, the ten year note yield (TNX) never breaking 4.65%. For the day, TNX closed lower by 1.8 bps at 4.639%, above 4.6% support and the unfilled gap from last month above 4.52%. The daily cycle is very extended and trending within the uptrend from the September low, but remains bullish above 4.6% confluence.

Daily Chart of Crude oil

The International Energy Agency released its 2005 World Energy Outlook, in which it estimated that world energy demand will increase 50% by 2030, and that prices will rise if capacity remains at current levels. The IEA cited new demand from growing economies such as China and India, and predicted that carbon dioxide emissions will increase 52%. They expect that there are sufficient reserves to meet this demand, but that additional capacity is needed to bring it to market. The IEA sees these projected as being unsustainable both environmentally and security-wise: "We must change these outcomes and get the planet onto a sustainable energy path."

Crude oil lost 1.125 to close at 59.45, off a low of 58.60, while natural gas gained +.455 to close at 11.87, off a low of 10.965. Crude's close was the lowest since July. On the daily chart, crude oil's move today gapped it down to back below 60, while the low held last week's low. While support has been stabilizing above the 58 level, the failure at last week's high sets up a possible bearish triangle above that support. This is shaping up to be a key week, and a break below horizontal support would target the 56 level at confluence and linear regression support.

It was a quiet news day as earnings continued to wind down. The lone economic report was Consumer Credit, announced at 3PM. Tomorrow, there will be none, followed by Wednesday's release of the weekly Mortgage Bankers report, the EIA petroleum report and Wholesale Inventories, followed on Thursday by Export Prices ex-ag. and Import prices ex-oil, the Trade Balance, Initial Claims, Michigan Sentiment and the Treasury Budget.

A situation that most in North America have successfully ignored continues to worsen in France, as the wire services reported that 36 police officers were injured and 1400 vehicles burned in Grigny as the French riots continued for an 11th night. Rioters fired on police with pellet guns, with the police union referring to the altercation as a "civil war" between the government and the youth, many of Arab or African descent. The conflict is being depicted as race riots, with the rioters mostly disenfranchised youth in poor neighbourhoods complaining of racial discrimination, touched off by the electrocution of two youths by police. The police union stated that the violence is unprecedented "since the Second World War." The first fatality, a 61 year old man who was beaten when he went outside to put out a fire in a garbage can, died of his wounds today.

The euro was weak again against this backdrop, setting a new 18 month low against the dollar at $1.1786 in Germany. The ECB's failure to raise rates at the last meeting and the Fed's ongoing rate hike campaign are no doubt contributing as well to the move in EUR:USD.

In corporate news, El Paso (EP) reported a Q3 loss that worsened from -$214 million or -33 cents to -$321 million or -50 cents per share, due principally to failed gas and oil hedges. Revenues fell 43% from the year-ago quarter to $810 million. Estimates were for earnings of +15 cents on $1.07 billion revenue. CEO Doug Foshee said, "While a sharp rise in natural gas and oil prices created non-cash losses during the quarter, we have significant earnings and cash flow upside as the percentage of our hedged production declines going forward. As we approach next year, our core pipeline and production businesses are performing well, and we are confident that 2006 will be a breakout year for the company." EP closed lower by 5.83% at 11.31.

Guidant (GDT) reported Q3 sales that declined 14% to $795 million, with earnings of 20 cents or $65 million, down from $161 million or 50 cents. GDT also announced that it is suing JNJ to require the latter to complete its acquisition of GDT pursuant to their $25.4 billion merger agreement. JNJ has stated that it may no longer wish to complete the takeover, following GDT's withdrawal of some defibrillators from the market. Later in the morning, JNJ said that it would "vigorously" context the lawsuit based on the fact that GDT's recalls provided it an out under the terms of the merger agreement, as do the various inquiries to which GDT is currently subject. GDT closed -2.38% at 57.52, while JNJ added .55 to close at 61.43.

GDT also announced that the SEC has launched a probe into its product safety disclosures and the trading of its shares, with which the company is cooperating. This follows last week's suit by New York A-G Eliot Spitzer, who accused the company of failing to inform doctors of a design flaw in one of its defibrillators. Moody's placed the cherry on the sundae, adding that they're considering a downgrade for GDT in view of the failed merger.

In other news, the Fed reported that 5 out of 57 commercial banks surveyed eased lending standards and terms "somewhat" during the past quarter, for loans to small and medium-sized enterprises. 15% of domestic banks reported increased demand during the quarter for commercial and industrial loans, down from a 40% gain in the prior quarter.

At 3PM, the Fed reported that Consumer Credit, the amount of outstanding debt owed by consumers, was unchanged in September compared with expectations of a $5.3 billion increase. The weakness was attributed to slowing auto sales as revolving credit (ie credit card debt) rose 4.7% to a $3.1 billion rate, while nonrevolving credit (ie car loans) fell 2.8% or a $3.2 billion rate. August's $4.9 billion reading was revised up to $7.9 billion.

After the bell, NetEase (NTES) announced Q3 revenues that increased 11% from the year-ago quarter to $57.2 million (RMB 462.2 million). The company earned $45.8 million or 89 cents per diluted share, a 13.5% quarter-on-quarter gain but missing expectations by 2 cents. The stock traded -15.13% at 69 as of this writing.

For tomorrow, there will be no major economic reports, and the markets will be left to consider today's decisionless range. This has been the third consecutive session above Thursday's unfilled gap, either a true breakaway or an island top in the making. Because of the rising wedge formations on the daily chart, there remains downside risk in the absence of a decisive high volume breakout. But in the meantime, it's still a rising market, and still bullish. Bulls can help address the risk by following their stops behind rising support, while bears need to exercise patience and wait for entries either at the top trendline, or just below rising support. In either case, we should see a resolution either way, soon as the wedge continues to tighten.
 

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