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Market Wrap

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A wise trader once advised OptionInvestor readers to pay special attention to the way U.S. futures reacted to overnight trading on other bourses. If our futures held steady while other bourses careened lower, a bounce in U.S. markets might be expected.

Last night, Japan's Nikkei suffered a loss of almost 450 points in overnight trading. While 200-point moves have become almost routine in the Nikkei, a 2.68 percent loss captures anyone's attention. European markets turned lower, hit by declines in miners and other commodity-related stocks. Crude had dipped ahead of an expected build in inventories, pressuring European markets, but it was perhaps that dip below $63.00 that helped send our futures higher.

In addition, some theorized that Cisco (CSCO), IBM and Pfizer (PFE) would prove supportive to markets. CSCO reported earnings Tuesday evening and garnered several upgrades. IBM revealed details of its Power6 microprocessor, and PFE was perhaps considering a divestiture of its consumer healthcare unit. Dell (DELL) and Applied Materials (AMAT) both received upgrades, providing further support for techs. McDonald's (MCD) same-store sales and PepsiCo's (PEP) earnings were well received in the pre-market session.

Each of these performed their expected duties in early trading, gapping higher and propelling indices higher, too, although not all retained their gains. It was time for a bounce after some indices had traded down through most of February.

The need for a bounce was apparent in the Wilshire 5000. At the close Tuesday, the Wilshire 5000, our broadest index, had just confirmed a double-top formation by dropping below the trough between the 1/11 high of 13,016.59 and the 1/30 high of 13,008.30. It was time for bulls to put on the brakes if they were going to avoid a deeper decline.

Annotated Daily Chart of the Wilshire 5000:

The bounce in the Wilshire 5000 and other indices occurred despite some hints early during the day that bulls might have difficulty hauling the indices too much higher. The FOMC announced a March 27-28 meeting, reviving worries about rate hikes. The SOX's leap higher moved it further into the huge gap from 11/27, where gap resistance might have been expected. The SOX never did make it over the top of that gap, despite posting a gain for the day. Early morning market-related shows replayed Bush's "America is addicted to oil" statement from last week, and a former Energy Secretary appeared on CNBC to discuss the number of decades it would take the U.S. to move to alternative energy sources.

Crude prices still weigh on traders' minds, but as Europe could testify today, a drop in crude pressures markets, too, when recently strong energy-related stocks drop when crude does. This effect was evidenced when the bounce accelerated after the close of commodities trading, when oil-related issues broke higher after crude trading close. Crude closed at $62.60.

That bounce brought the SPX up to important resistance.

Annotated Weekly Chart of the SPX:

The gain in big caps today pushed the Dow into a triple-digit gain that moved it squarely to the center of a difficult-to-trade pattern.

Annotated Daily Chart of the Dow:

The Nasdaq bounced from support but heads into resistance.

Annotated Daily Chart of the Nasdaq:

Yesterday, the SOX produced a doji at the 10-sma, a sign of indecision. Today, the SOX sprang higher from that 10-sma.

Annotated Daily Chart of the SOX:

Today included few economic releases, so markets were free to react to friendly earnings news and release some oversold pressure. Not all information was market friendly, however. The Mortgage Bankers Association released mortgage applications for the week ending February 3 at 7:00 EST. The component that measures mortgage application activity fell 1.2 percent and the four-week moving average for mortgage volumes fell 1.8 percent. The component measuring purchase mortgage index, a measure of U.S. home sales, dropped 2.4 percent.

This should have been another blow to the housing industry in a week that saw TOL cut its estimates for 2006 home deliveries and Merrill Lynch and Banc of America cut ratings on the company. Refinancing did climb 0.2 percent, but were down as a percentage of overall mortgages. The average rate for a 30-year, fixed-rate mortgage rose to 6.25 percent from the previous week's 5.84 percent.

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The DJUSHB, the Dow Jones U.S. Home Construction Index, was an early downside leader, as were some specific builders such as TOL and KBH. Some other companies in the same food chain dropped. LOW headed lower, although peer HD gapped higher. By the end of the day, the DJUSHB had posted a 1.27 percent gain. TOL had rebounded 3.15 percent, and all the stocks mentioned in this paragraph gained more than 1 percent.

Crude inventories surprised. A 1.0 million barrel build in crude had been expected, but crude inventories dropped 300,000 barrels instead. A positive take on that drop in inventories was that more refinery capacity had come back online, and a build of 4.3 million barrels in gasoline inventories supported that view. However, distillates also dropped 300,000 million barrels. The more positive view was to win favor, sending crude prices lower and driving the TRAN back above the neckline of a head-and-shoulder formation it had just violated that morning. As the TRAN has done so many times in the past immediately after violating a bearish formation's support, it has climbed right back up to the right-shoulder level, ready to invalidate that formation first thing tomorrow morning on any kind of gain. The TRAN certainly can not continue invalidating bearish formations and zooming higher indefinitely, but it should certainly be watched to see if it can do it again tomorrow or if today's gain was just a short-covering bounce that will be reversed. That formation was seen on the 60-minute chart, but the weekly chart gives a longer-term view.

Annotated Weekly Chart of the TRAN:

Many sectors gained. Airlines benefited with the XAL gaining 2.18 percent. PFE led the healthcare sector into gains. The DRG, the Pharmaceutical Index, gained 1.51 percent. Telecoms also gained. Time Warner's (TWX) Carl Icahn may be planning to split the company, and Univision (UVN) may be for sale, some report. Other communications-related news included Vonage Holdings' plan to raise $250 million in a public offering, the first major Internet telephony company to go public. Citigroup, Deutsche Bank and UBS will serve as underwriters.

CSCO rallied the networkers. The NWX, the Networking Index was to gain 3.38 percent. Other tech-related indices climbed. The GHA, the GSTI Hardware Index, rose 2.19 percent.

The RLX, the S&P Retail Index, also bounced. The index found resistance most of the day at its 200-sma but finally bouncing into a 0.89 percent gain. Wal-Mart (WMT) had announced plans to spiff up its stores and make other changes. WMT's gain at first appeared similarly unimpressive, although some conditions related to the volume and price patterns suggested that WMT's stock could continue attempts to bounce, and it did by the end of the day. The bounce sent the stock's price just below a gappy, choppy consolidation area for WMT.

After-hours reporting companies included Whole Foods (WFMI) and Electronic Data Systems (EDS). As this report was prepared, WFMI was off its after-hours low, but trading at $70.20 after closing at $72.05. EDS was trading at $25.75, up from its close of $25.51.

Economics releases will be light tomorrow, too. They will include only initial claims for the week ending February 4, released at 8:30; December's wholesale inventories, released at 10:00; and natural gas inventories, released at 10:30. Wholesale trade numbers seldom move the markets. If they changed enough that they might be deemed to be impacting the inventories across all spectrums--manufacturing, wholesale and retail--they could conceivably impact the GDP forecast and could then be market moving, but the expectation is for a flat number.

Natural-gas inventories may prove more important, although the mild winter has alleviated some concerns about natural-gas supplies. Earnings reports may take center state in this climate. Reporting companies include AET, AYE, BECN, BRO, CSK, FFH, GY, GXP, HCC, GSI, JJZ, LUFK, MLM, MDTH, NFS, OCAS, OSIS, PNRA, RR.L, SKYW, SLF, TSCM and UN. These and many other companies will provide further insight into consumer products, retail, energy, insurance and other sectors.

Even more important may be a sale of 30-year bonds tomorrow afternoon. Traders should be aware of that event at 1:00 EST, watching how bond prices react and their impact on equities.

If this report had been wrapped up and emailed to readers at about 1:30, its title might have been something such as "Marking Time," as the bounce appeared to be a run-of-the-mill oversold bounce up to test resistance. The advice would have been to watch for rollovers and levels of potential support might have been emphasized, so readers could watch for those on any rollover. That run-of-the-mill oversold bounce might still be the right term to apply to today's action, but that action extended prices a little further than feels comfortable for that theory. A bounce was expected and not out of the ordinary, but the magnitude of the bounce perhaps was.

Still the SOX remained below its open on 1/27, the morning that it gapped so high. The RUT ended the day snugged right beneath a rising wedge's resistance, with that wedge building since late 2003 and with the RUT's breakout above that wedge being reversed a couple of weeks ago. The TRAN still works on a possible reversal signal on its weekly chart. And the Dow still has that broadening formation that any seasoned trader dreads seeing.

As I closed last Wednesday's Wrap, I commented that the "TRAN tests long-term resistance, as it seems to have been doing interminably . . . and the SOX [stopped] just below the top of the last huge gap." Nothing much has changed with those two indices. My advice last week was to trade carefully in the choppy environment, and that's advice I would now give even more emphasis with the Dow in that broadening formation.

I liken trading in the absence of economic news to that of trading during light-volume summers or holidays. The volume might not be as light as it is during summertime trading, but the patterns can be similar: hours of stunning boredom punctuated by quick moves that come out of nowhere. Reactions to news are often exaggerated and then sometimes quickly reversed.

If long, continue to protect long profits. Be watchful for the possibility of rollovers, but if downside develops, bears should make plans ahead of time as to how you'll protect profits near the support levels mentioned. This advice should not be deemed the lack of an ability to make a decision, but rather as a decision that market action does not prove particularly predictable according to standard technical analysis tools during this period. Special care is needed.

For specific guidance, rollover potential remains on the SPX below 1269-1271. Between 1271-1273.20 or so looks like a particularly choppy zone, but I wouldn't consider the SPX more bullish until a close above 1273-1273.20.
 

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