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Animated Markets

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Anyone tuning into market discussions this morning heard hopes for a third day of gains. Disney's (DIS) acquisition of Pixar (PIXR) animated those early discussions. In addition, SAP's encouraging outlook and upbeat earnings reports from other companies had boosted futures.

Companies deemed to have beat estimates early this morning included Bristol Myers Squibb (BMY), Rockwell International (ROK), Amerada Hess (AHC), General Dynamics (GD) and Colgate Palmolive (CL). Crude dipped ahead of an anticipated build in crude inventories. All the evidence, some concluded, pointed to a lively gain for the day. The real animation came on the downside moves, however. The S&P 500, Dow and Nasdaq all lost ground.

The Dow Jones Transportation Index and Russell 2000 certainly appeared animated in early trading. The Russell 2000 rushed up to a new high, challenging the top trendline of a rising wedge in which it has traded since late 2003. It could not maintain a breakout above the rising trendline of that wedge.

Annotated Daily Chart of the RUT:

Unlike many other indices, the Russell 2000 has mostly maintained the support of its 10-sma on daily closes over the last week. It did pierce that average, dropping down to test the neckline of a confirmed inverse head-and-shoulder before bouncing, continuing that bounce into today's new high. That test and subsequent bounce appears to confirm the support of that neckline, but these continuation-form inverse H&S's aren't as trustworthy as bottoming ones, and particularly not when they form within a rising wedge. This the third such formation the RUT has produced within that rising wedge. None has so far met its upside target before the RUT dropped back to the bottom trendline of the rising wedge, although the first one did come closer than the second to meeting its upside target.

Today's action left the RUT with a near doji at the top of a climb as the index challenges important resistance. The RUT is clearly at a key point as it challenges that upside wedge resistance again. Traders should pay close attention to the RUT, watching for a breakout and also being prepared for a potential move down through that rising wedge again. This is especially true since another market leader, the TRAN, also currently challenges important resistance.

Annotated Weekly Chart of the TRAN:

The TRAN punched higher in early trading today, achieving a high of 4298.16, challenging the December 27 high of 4306.09. The TRAN could not hold that high, however. It closed at 4240.80, well off the day's high, but also well off the 4223.18 low.

The SPX also challenges resistance, but in this case, it's resistance that many thought would be support instead.

Annotated Daily Chart of the SPX:

Rollovers from the 30-sma have provided good scalping opportunities the last several days as the SPX consolidates in what may be a "b" distribution pattern. Markets can and have broken to the upside out of such patterns, but for now, the pattern appears to suggest that the SPX has more downside to go.

The Dow shows a similar possible "b" distribution pattern.

Annotated Daily Chart of the Dow:

In some respects, the Nasdaq shows more strength than the other indices.

Annotated Daily Chart of the Nasdaq:

The SOX, too, shows a different pattern than some of the other indices. The SOX has been coiling throughout most of January, although few knew that the early January climb was only the first part of a coiling action.

Annotated Daily Chart of the SOX:

That well-defined neutral triangle allows traders to observe the direction of the breakout. So far, the usual momentum leaders--the SOX, Russell 2000 and TRAN, are being tentatively held back, but none has given up the quest for higher recent highs yet, either. They're not yet leading to the downside, and that tempers the bearishness seen on some other charts.

The day did see some relief from the dour earnings reports seen recently, but not enough relief to overcome negative economic news. If the Disney/Pixar deal animated television commentators' voices, so did the astonishment that Johnson & Johnson (JNJ) did not do whatever it took to make the Guidant (GDT) deal happen. GDT decided to accept Boston Scientific's (BSX) $80 a share bid and will pay JNJ more than $705 million for terminating its agreement with the company. JNJ dropped 1.44 percent but acquiring company BSX dropped more, 1.91 percent. GDT dropped by an even greater percentage, 2.07 percent.

Ahead of its earnings report tomorrow, Microsoft (MSFT) benefited from rival SAP's earnings report in early trading, although MSFT held onto only a 0.41 percent gain. SAP, a European software company, beat expectations for license revenue, saying that it saw growth in the U.S. MSFT also announced that it would license its Windows source code in compliance with a European antitrust decision, and perhaps there was some relief in that announcement. Oracle (ORCL) and Business Objects (BOBJ) also benefited, with ORCL climbing 2.45 percent and BOBJ, 1.91 percent.

News on the home-sale front was mixed. Last night, Centex (CTX) had reported earnings that were better than expected. This morning, the Mortgage Bankers Association released mortgage applications for the week ending January 13 at 7:00 EST. The headline number, the Market Composite Index increased 2.2 percent on a seasonally adjusted basis when compared to the week-earlier figure, and 31.4 percent on an unadjusted basis, but was 10.9 percent lower than the year-ago level. Other components showed mixed results. The Purchase Index fell 3.00 percent, the Refinance Index rose 9.9 percent, the Conventional Index rose 1.2 percent and the Government Index climbed 18.9 percent. The Refinance Index fell 19.7 percent when compared to the year-ago level, however.

With the improvements seen in recent weeks after a five-week decline, the four-week moving averages have risen 0.8 percent for the seasonally adjusted Market Index, down 0.05 percent for the Purchase Index, and up 4.1 percent for the Refinance Index. Refinance activity has increased as a share of total applications, to 42.2 percent. The average contract interest rate for a 30-year fixed-rate mortgage eased to 6.07 percent from the previous week's 6.08 percent, and points remained the same as the previous week's number.

Although home prices rose 10.5 percent year over year, according to the National Association of Realtors, other figures did not prove encouraging. The NAR reported another record year of sales, the fifth year in a row of record sales. However, the trend has been down the last three months, with the chief economist for NAR reporting that speculators are pulling out of the housing market. December's existing home sales fell 5.7 percent, to a 6.6 million rate. With expectations of a more modest decline to 6.89 million, the number disappointed. Inventory stands at a 5.1-month supply.

The news hit homebuilders hard, with at least two more due to report tomorrow. One source tagged the homebuilders as leading to the downside in today's decline. The DJUSHB, the Dow Jones Home Construction Index, dropped 2.37 percent.

Many indices had just hit the tops of their flag-shaped climbs off Monday's lows when the housing news hit, and they dived to the bottom of those flags ahead of crude inventories numbers. Ultimately, after another tepid bounce attempt from the flags' support, markets were to hit lower lows in the afternoon.

Although many market watchers had expected a build of 1.4-1.5 million barrels in crude stocks, crude inventories dropped 2.3 million barrels last week. According to the EIA, those inventories still remain higher than the upper end of the average range for this time of year, however, and distillate and gasoline inventories rose, more than compensating for the drop in crude inventories. Distillate inventories rose 1.8 million barrels, and gasoline inventories rose 3.2 million barrels. Distillates also remain above the upper end of the average range for this time of year, and gasoline inventories rose into the upper half of the average range.

Crude prices had already dropped before the inventories number, dropping below their 100/130-ema's. After a brief pop higher due to the unexpected drop in crude inventories, crude dove to a new low for the day of 65.45, dropping into level not seen since the breakout on January 17. Crude bounced off that low, however. With inventories above the average range for this time of year in crude, gasoline and distillates, and with warmer-than-usual weather in many parts of the country, traders who sent crude down into the low of the day had discounted concerns about Iran and Nigeria. As this report is prepared, crude futures were again at $65.46.

Equity prices at first bounced as crude dropped, trying to reestablish the old crude down/equity up paradigm, but that paradigm no longer consistently works. Heavy drops in energy companies such as COP and XOM dragged equity indices down, too. ConocoPhillips (COP) had today joined Amerada Hess (AMH) in reporting earnings that some deemed stellar, but COP dropped as crude did, bouncing as it did in the afternoon. Despite what some called stellar earnings, expectations were that COP would earn $2.62 a share on revenue of $49.8 billion, and the company reported $2.61 but with revenue at $52.2 billion. AMH reported Q4 earnings of $4.31 a share on revenue of $7.15 billion, above expectations for $3.26 a share. COP was to close 1.45 percent lower, while AMH held onto a 1.18 percent gain. Refiners and oil-and-gas-equipment companies also had a tough day.

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Materials performed well. Morgan Stanley upped its price targets for copper, zinc, gold and aluminum. Both the BIX and the BKX, the S&P Banks Index and the Kbw Bank Index, gained. Other sectors posting gains included the DRG, the Pharmaceutical Index; the SOX; the XTC, the North American Telecoms Index; the NWX, the Networking Index, and the HMO, the Morgan Stanley Healthcare Index.

Underpinning specific developments in the U.S. was the meeting among the globe's economists. Economists meeting at Davos issued reassuring statements about global developments in 2006. Admitting that 2007 could see economic growth slow to 3.5 percent and acknowledging the risks in the U.S. economy, the forecasters at the Centre for Economics and Business Research think 2006 will see steady growth. The risks include a new FOMC chairman, a growing U.S. budget deficit, higher energy costs, a softening U.S. housing market, and tightening interest rates. Growth for this year is expected to ease, the forecasters say, but the real danger occurs if France, Germany and China slow down as they project in 2007.

After the close, QCOM reported Q1 profit that climbed 21 percent. Low-cost cell phones sold well in developing countries and high-end handsets sold well in wealthier countries. Excluding one-time items and investment results, the company reported earnings of $667 million or $0.39 a share, against expectations of $0.38. The company's forecast included an expectation that normal seasonal patterns would assert themselves and result in a softening in the first three months of 2006. It forecast $0.35-0.37 on revenue of $1.63-1.73 billion. Expectations had been for profit of $0.36 on sales of $1.73 billion. The outlook for the year remained the same. As this report was prepared, QCOM last traded at $46.84, down from its $47.58 close.

Juniper Networks announced a fourth-quarter profit of $105.5 million or $0.17 a share on revenue of $575.5 million. Excluding charges, the company met expectations for $0.10 a share, but revenue expectations had been for $579 million. As this report was prepared, JNPR last traded at $20.32, down from its $21.52 close.

InfoSpace (INSP) last traded at $23.69 after closing at $24.34. The company reported fourth-quarter net profit of $37.9 million or $1.13 a share on revenue of $86.5 million. If a tax benefit was excluded, the earnings were $0.39 a share against expectations of $0.27 and revenue of $85.4 million.

Other reporting companies included Novellus (NVLS), Altera (ALTR), and LSI Logic (LSI). NVLS last traded at 29.60 after closing at $27.92, ALTR last traded at $19.50 after closing at $18.92, and LSI last traded at $9.39 after closing at $9.04.

The reaction to earnings during after hours has been mixed. There's not a clear downward or upward bias to be gleaned from that information.

In other news, Teva Pharmaceuticals announced a plan to offer $2.75 billion of debt securities. The company will use the funds to refinance debt that it incurred when acquiring Ivax Corporation. In addition, a bulletin announced that the injunction hearing on RIM's Blackberry had been set for February 24.

Tomorrow, initial claims and natural gas inventories will be released as usual, at 8:30 and 10:30, respectively. December's Durable Orders and Help-Wanted Index will also be released tomorrow, at 8:30 and 10:00, respectively. The Census Bureau of the Department of Commerce releases the Durable Goods Orders, and they often do catch the market's attention since they serve as a leading indicator of manufacturing activity. Lately, Boeing's (BA) big orders have sometimes skewed the number, so it's important to look beyond the headline number as big-money market participants will be doing. The market wants gains, if any, to occur across all sectors. This time, the forecast is for a gain of 1-2 percent, down from the prior 4.4 percent.

Earnings will be flooding the market, too, with reporting companies as diverse as Alaska Airlines (ALK) and Frontier Airlines (FRNT), Alberto-Culver Co. (ACV), a number of mortgage-related and other financials, Amgen (AMGN), AT&T (T), Broadcom (BRCM), Cardinal Health (CAH), Caterpillar Inc. (CAT), Chartered Semiconductor (CHRT) and Cypress Semiconductor (CY), Eli Lilly (LLY), Foundry Networks (FDRY), Halliburton Company (HAL), Honeywell (HON), KLA-Tencor (KLAC), Lockheed Martin (LMT), Microsoft (MSFT), Newell Rubbermaid (NWL), a number of energy-related companies, Sherwin-Williams (SHW), Sony Corporation (SNE), Stryker (SYK), Dow Chemical Company (DOW) and Verizon (VZ). This list is by no means exhaustive, so be sure to check reporting days for the stocks that interest you or are in the same sector as the ones that interest you.

However, this list does show that, just as the Durable Goods number should give some indication of how various manufacturing sectors perform, the reporting companies include sectors diverse enough to provide an idea of how the economy performs. Energy, tech, pharmaceutical and chemical, consumer goods, medical devices and other sectors are included in that list.

The charts of the SPX and Dow appear bearish, complete with potential "b" distribution patterns. If those charts were the only ones reviewed tonight, I would have a clear statement to give: sell rallies up toward the averages that have been providing resistance this week. Protect profit at the bottom of the consolidation zones from this week. Watch for a potential breakdown.

However, it's not that easy, because the usual market leaders are trying to lead to the upside, and haven't given up the fight yet. The TRAN's resistance should hold and the RUT's might, but the SOX's consolidation looks neutral. Any or all of these could lead markets either direction. Keep these three on the radar screen no matter what you're trading. You want to know the direction they're headed. Believe only half of what you see and maybe trade with only half a usual position until there's a clear direction and you know that you haven't just been caught in a trap on that trade setup that had looked so beautiful. Positioning ahead of next week's FOMC meeting is going to take precedence over technical developments on the chart soon, maybe as soon as tomorrow.
 

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