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Market Wrap

General Electric Brightened Pre-Market Sentiment

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Before the sun had fully risen Friday morning, GE turned on the electricity, brightening the picture for early market action on an option-expiration day. Sunlight dimmed that GE-shed light, however, resulting in a quick pullback that was never fully retraced on some indices. At the end of the day, many indices again sported doji or small-bodied candles at the top of a steep climb.

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the SPX:

Annotated Daily Chart of the Nasdaq:

Annotated Daily Chart of the SOX:

Many developments contributed to the rise in the markets, including strong gains in bourses across the globe, but GE was often mentioned. Early Friday morning, GE raised earnings estimates for fiscal year 2006, increased dividends and its planned spending on its share buyback plan, and announced that it would sell most of its losing Insurance Solutions reinsurance division to Swiss Re, collecting $8.5 billion. Within the first forty-five minutes of trading, GE had zoomed up to a four-month high, pulled back and gathered energy for a last-minute punch up to a new high of $35.80, with a four-month closing high of $35.75.

Hewlett-Packard (HPQ) also brightened sentiment in the pre-market period, beating expectations and raising its profit outlook. Thursday, HPQ had broken to the upside out of a two-month long coiling formation on its daily chart. Friday's open brought an attack on $30.00, with a day's high of $30.71, a high HPQ hadn't tested since mid-2001. HPQ's early high was quickly reversed, however, with the day's strong volume and steep pullback off the high indicating that many have been waiting a long time to break even on their HPQ holdings. They'd been waiting since 2001, to be exact. HPQ will have to work through a lot of supply at that level, as the day's trading action clearly depicted. Before traders believe it can rise further, they want to see any pullbacks be accomplished through small-bodied candles with low volume, to indicate that demand is beginning to overwhelm supply. On Friday, the story was the opposite: supply overwhelmed demand. For an example of what should be seen, note February 9's action, comparable to Friday's, and then note the immediate decrease in volume as HPQ fell back and consolidated before another move higher.


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Other companies in the news included Walt Disney Co. (DIS), beating expectations on per-share profit but reporting fourth-quarter net income that fell more than 25 percent. The company blamed films that disappointed. On CNBC this morning, discussion centered on whether Disney's CHICKEN LITTLE release will help the company regain its status among makers of animated films. DIS shares were marked down in Friday's trading, but closed off their low on high volume, a possible sign of accumulation. Downward momentum can continue even when accumulation occurs. The stock perhaps still looks vulnerable to a test of its 100-sma, but if that's accumulation going on, there may be hope of that level holding.

Cisco Systems (CSCO) reported a deal to buy Scientific Atlanta Inc. (SFA), a cable television set-top manufacturer. CSCO dropped, but volume patterns (high volume on downdrafts into support and a spring off the low) may be indicating accumulation each time CSCO approaches the $16.80-17.00 region. Next week will tell.

Another deal in the works was Liz Claiborne Inc.'s (LIZ) offer to acquire J. Jill Group Inc. (JILL) for $18.00 a share, a premium to Jill's Thursday $12.79 closing price. JILL's stock opened near $18.00 and climbed strongly, holding most of its gains into the close. That high volume indicated some were taking the opportunity to unload positions they had acquired way back in the summer.

Telecoms helped lead the markets higher. On Friday, "Baby Bell" SBC Communications completed its acquisition of its former parent company AT&T, after the California Public Utility Commission removed the last roadblock in that deal. The new entity will have the stock-trading symbol of "T" and will assume the AT&T name, but California officials wrangled a deal that requires SBC to stop requiring DSL customers to use SBC's local phone service, too. Although SBC head Edward Whitacre argues that his company has the right to charge rivals to use SBC's lines to deliver their services to customers, California said that the company could not hinder the free flow of Internet traffic on their networks. California officials also cleared the way for Verizon Communications to purchase MCI Inc., with Verizon and MCI still waiting for approval from other states. California will require Verizon to meet some of those concessions, too.

Marvell's (MRVL) rise after earnings led to an improvement in the semi-related issues, with the SOX climbing 2.5 percent. GM rebounded, with car manufacturers across the globe performing well after yesterday's five-month low in crude. As crude drops, the Dow Jones Transports (TRAN) zooms, and Friday was no exception. Since October 19, the TRAN has risen from 3550.55 to Friday's closing high of 4027.52, almost 500 points in a month as crude continued its drop from August's high. Markets won't pause while the TRAN drives them higher.

As Jim Brown has mentioned, the TRAN's climb should not be attributed only to the decline of crude, although a clear correlation with crude exists, as an improving economy also benefits the transports. UPS, although not a TRAN component, probably contributed to the TRAN's climb on Friday, for example. UPS announced that it will initiate higher shipping prices in 2006. Still, some have worried that the Dow is not following quickly enough in its sister index's path, however, leaving some of speculate about the implications of the divergence.

Late last week, the TRAN showed no indication of pausing. It confirmed a continuation-form inverse H&S with an upside target of about 4290-4320, depending on how it's drawn. A long-term envelope that the TRAN has never violated for more than a few points intra-week has resistance just above 4200. It was this resistance that turned the TRAN back late in 2004 and then again in late February, and it may well do so again, if tested. Target and resistance, it indicates that the TRAN may still have upside, but limited upside that may be met this week. Traders should keep the TRAN on their radar screen.

AAnnotated Weekly Chart of the TRAN:

It's been my contention for a while that the indices are going to keep going north as long as the TRAN drives them there.br>
Earnings slow further next week, but include Albertson's Tuesday report, with that view of consumer's habits. Next week's economic releases are light on the holiday-shortened week, including October's leading indicators on Monday; FOMC minutes from the November 1 meeting on Tuesday; and the revised October Michigan sentiment, October help-wanted index, and crude inventories on Wednesday. Thursday will be a market holiday, with Friday's closing an early one, at 1:00 EST. Volume will be light all week, with many taking the entire week for travel. Such light volume typically produces two types of market action: choppy, unpredictable movements or a slow sideways movement. Either can be deadly to trade. This would be a good time to let the TRAN complete its upward drive, if it hasn't already done so, and wait for pullbacks on other indices to the 10-sma's, watching how those pullbacks occur and judging whether it's safe to make new bullish entries at those averages or whether it's time for bulls to step aside.

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