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Market Wrap

Pipeline Worries

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Pipeline worries captured attention as the market day dawned. CPI was due at 7:30 EST, and economists worried that inflation pressures might be working their way through the economic pipeline. A hostage-taking incident and previous attacks by militants in Nigeria had forced Shell to stop the flow of about 455,000 barrels a day through their pipelines. In Ecuador, protestors took Sardinas Station, and the country's private OCP pipeline suspended operations, demanding that the government provide security. At least temporarily, the decision stopped the flow of about 130,000 barrels a day.

Although the core CPI increased 0.2 percent, as was expected, the headline number jumped even higher than the anticipated 0.5 percent climb: to a 0.7 percent increase. Energy costs leaped higher by 5 percent, with electricity costs 5.5 percent higher, a record climb. In the last 12 months, the headline number has climbed 4 percent while core CPI increased 2.1 percent.

Commentators couldn't decide how to interpret that data, with some headlines touting the "benign" or "tame" inflation data and others emphasizing "surging" energy costs and inflation "anxiety" and "worries." Despite the opinion by some that FOMC inflation hawks might push for more rate hikes than had been previously hoped and those crude pipeline worries, equities bounced and crude dropped ahead of tomorrow's delayed release of crude inventories numbers.

The strong day sent indices up to test rising wedge or other resistance. For the Wilshire 5000, today's test was a retest of January's record high.

Annotated Weekly Chart of the Wilshire 5000:

The SPX tested the rising trendline resistance on its rising wedge, attempting a breakout. A glance at the weekly chart shows that it didn't quite complete that breakout.

Annotated Weekly Chart of the SPX:

The Dow has been trading in a broadening formation within its own rising wedge. Last week, I mentioned that in a traditional broadening formation, prices would not touch the top trendline of the broadening formation for a third time, but that the Dow seemed to be impelled toward 11,117-11,156. That won't-touch-the-top-again theory didn't appear as if it would hold, and it didn't. I mentioned that as long as the TRAN was strong, the SPX, OEX and Dow were unlikely to dip or dip far. Today, the Dow reached a high of 11,159.18, a few points above the possible target mentioned last week. By the end of the day, however, the Dow had closed back at the broadening formation's resistance.

Annotated Weekly Chart of the Dow:

While other indices were at least piercing resistance lines, even if they couldn't close above them, the Nasdaq bounced up toward the resistance of its triangle formation, but neither pierced it nor close above it.

Annotated Daily Chart of the Nasdaq:

Some credited the SOX's bounce from its 50-sma with the strong day seen on other indices.

Annotated Daily Chart of the SOX:

In addition to bouncing from the 50-sma, some may not have noticed that the SOX also bounced from the former resistance line of an even longer-term rising regression channel, in place since September 2004. The SOX broke out of this channel to the upside in December, and the current choppy zone is forming right on top of that channel. While bears don't want to see the SOX move back inside the channel that's shown on the daily chart just shown, bulls don't want to see the SOX close a week back inside that longer-term rising channel on the weekly chart, with the top of that channel now at about 517.75.

Today, the Mortgage Bankers Association released mortgage applications for the week ending February 17 at 7:00 EST. For the first time in four weeks, mortgage activity increased, with the seasonally adjusted purchase mortgage index rising 4.3 percent from the previous week's number, with that previous number being the lowest seen in more than two years. Rates on 30-year fixed-rate mortgages dipped, averaging 6.22 percent. After that data and ahead of Toll's earnings report tomorrow, the homebuilding group and mortgage-related financial stocks tended to perform well. The DJUSHB, the Dow Jones Home Construction Index, added 3.96 percent today.

Redbook U.S. Chain Store data for the week ending February 18 was also released. That data showed sales flat for the month through that February 18 date. According to one source, Redbook anticipates that sales will rise only 0.2 percent for all of February. Gap, the Limited and several other retailers report tomorrow, and much attention may focus on their sales figures. Ahead of those earnings report, the RLX, the S&P Retail Index, gained 0.48 percent.

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While market participants ignored an annual CPI figure approaching or slightly exceeding the FOMC's preferred level, crude traders also ignored geopolitical developments to some degree. Crude prices dropped. Transports climbed, with the TRAN driving up into and beyond a test of last week's 4446.96 high, propelled higher with the help of the airlines. The TRAN's high was 4456.44, with the close at 4449.17. The XAL, the airline index continued the bounce off the Tuesday morning low, gaining 2.28 percent today.

While the transports climbed, some crude-related stocks and indices such as the OIX fell, capping gains on some indices. XOM dropped in early trading, with OIN's Market Monitor commentator Jeff Bailey noting that XOM is now the S&P 100's number one company in market capitalization.

Intel, a component of many indices, also capped gains. ThinkEquity downgraded Intel (INTC) to a sell rating and cut the company's price target to $16 from its previous target of $26. INTC closed lower by $0.47, but bounced $0.07 in after-hours trading. Sprint Nextel (S) and Dell (DELL) also headed lower during early trading, with S investors reacting negatively the company's earnings miss and Dell investors cautious after the company delayed its planned April analyst meeting until September. S closed lower by $1.13, but DELL had dropped only $0.06 by the day's end, climbing well off its $29.37 low of the day. In addition, in news related to RIMM, today a federal judge denied the government's request for a separate hearing that would explore how an injunction against Blackberry service would impact the government. RIMM closed lower by 1.01 points and was last down another nickel in after-hours trading.

In other news, Federal Reserve Vice Chairman Roger Ferguson tendered his resignation, effective April 28, with reports further indicating that he will not attend the March FOMC meeting. Some speculate that he may be considering another position, perhaps at a university.

Tomorrow's economic releases include initial claims at 8:30, January's Help-Wanted Index at 10:30 and natural gas inventories at 10:30. Crude inventories will be released tomorrow, too, delayed a day because of Monday's holiday. Earnings reports include those from BEA Systems (BEAS); retailers Gap Inc. (GPS), Kohl's (KSS), Limited Brands (LTD) and Nordstrom (JWN); some construction industry names such as Hanson (HAN) and Lafarge (LR); homebuilder Toll Brothers (TOL) and a smattering of companies from other groups.

Some who have been reading my Wednesday Wraps have probably tagged my continued insistence that indices were in choppy formations might have felt frustrated by that insistence. Some may have tagged those statement indecision or a waffling, but they were always clear statements, derived from long study of charts, that nothing on the charts yet indicated future direction and that care was needed when entering positions. I've advocated smaller positions than normal during this choppy period for those who felt they had to trade, and a glance at the charts in this Wrap shows that the behavior has been choppy and has not yet proven future direction.

I continue to advocate smaller positions than normal until markets prove themselves. They need a breakout, either direction. There will be a breakout at some point, and your job as traders is to preserve a trading account so that you can benefit when it occurs. I've long been suggesting that the SOX was showing behavior typical of a topping-out process, and it did eventually break down out of its rising regression channel, but it still maintains the support above a former and longer-term rising regression channel.

We will soon, perhaps as soon as this week, get a SOX retest of the bottom of the just-broken-through rising regression channel, to see if it now holds as resistance. Perhaps today's climb up to the 30-sma was enough of a retest, but I'm not convinced that's true. I think there are likely to be further tests of resistance on the SOX before SOX bulls give up, if they're going to do so. The 50-sma's support held in late 2005 and it has so far held this week, and so there's as yet no strong reason for them to give up.

In addition, the TRAN still tests the upper resistance of that long-term envelope resistance on its weekly chart. Last week, for the first time in the almost nine years of data that QCharts carries, the TRAN closed a week just above the envelope that's been topping rallies since mid-1997. Today, the TRAN continued its climb, and it's going to be more difficult for any to ignore the bullishness of a second week's close above that envelope, if that should happen. A steep fall after tomorrow's inventories or due to some as yet unknown geopolitical development this week, and a close back inside that envelope, however, will question last week's minimal breakout. That envelope is currently at about 4393.50. Pronounced bearish price/MACD divergence continues on that weekly TRAN chart.

So far, indices refuse to fall far. The SPX, OEX and Dow are not going to fall too far as long as the TRAN shows such strength, but that doesn't mean that the picture is clear as yet. Perhaps by next week, we'll have more answers.
 

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