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Market Wrap

Opex Hold Starts Early

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The DOW finished about as flat as it could while the other markets were up marginally. This is of course a bit of a change from the past week couple of weeks where we've seen the DOW outperform the others. We don't like to see the DOW leading the pack since that's usually a defensive posture by many funds as they exit the small high-beta stocks in favor of more liquid large caps. So seeing the slight out performance by the techs and small caps could be considered encouraging. Unfortunately we can't determine that from today's price action since the majority of it looked more like consolidation than anything else.

Considering this is opex week and the large number of important economic reports this week (see table at end of report), the market could be subject to fits and starts rather than any kind of trending move. We might see some early morning reaction to the reports or because of opexantics and then consolidation for the rest of the day. Or we could see an end-of-day move that is strictly opex related and not mean much in the longer term charts. So it's a week to exercise a little more caution than usual and expect false moves. I know, so what else is new.

Part of the reason that was used for the "dampened enthusiasm" of investors today was the $1.80 (+3%) increase in oil's price and concern about interest rates. Yea, whatever. And when the market drops along with the price of oil everyone is mum on the subject. The interest rates did tick up higher today although they're very close to where they were a week ago. But the concern about the 10-year in particular is of concern because of its impact on mortgage rates, especially the adjustable rates. Since we've seen a relatively high number of ARMs over the past couple of years, many homeowners are going to be severely tested by the increases in their mortgage. Most everyone knows that will have a dampening effect on the consumer and our economy.

Company news was also quiet today. Captital One (COF 83.11 -6.82) got creamed this morning, down -7.6% today, on news that COF is going to purchase North Fork Bancorp (NFB 29.21 +3.80) for $14.6B. Investors liked the news for NFB gapping the stock up from Friday's closing price of $25.40 to an opening price of $29.71. It gave a little of that back today but it still closes up +15% on the day. COF investors weren't quite as thrilled with the idea. It's interesting to look at COF's daily chart and see that big green candle closing at a new 52-week high. Today it gapped down huge and left a big red candle. Somebody got fooled and tricked into buying on Friday and obviously they weren't happy about it this morning.

In other merger news, today being Merger Monday, McClatchy (MNI 51.55 -1.51) offered $6.5B to purchase Knight Ridder (KRI 63.92 1.08), Pinnacle Entertainment (PNK 29.00 +1.04) offered about $2.1B in cash to buy Aztar (AZR 37.21 +6.51), and Watson Pharmaceuticals (WPI 29.00 -0.55) offered $1.9B in cash to buy Andrx (ADRX 23.73 +2.14). Many believe that 2006 will be a year of higher than normal M&A activity and this is one reason the banks have been bid up in the past few months. M&A activity is a very lucrative business for these banks and it would seem investors are hoping to see follow through on that activity. I have my doubts about that and it may be another reason we start to see some disappointment in the banks soon.

Nasdaq Stock Market (NDAQ 43.26 -0.26) has been trying to purchase the London Stock Exchange (LSE 10.77 -0.02) and was recently snubbed. But apparently they're planning more discussions. In the meantime the new darling, NYSE (NYX 81.17 +6.75), is also considering bidding for LSE. Need to do something with all that cash they raised; it's burning a hole in their pocket.

Other than that it was a quiet day so let's get right to the charts and see what we can glean from them.

DOW chart, Daily

The DOW has consistently maintained a more bullish looking chart since its January high because of the very overlapping corrective type of pullback. Recently while the other indices were selling off, the DOW continued to hold up. It never even made it down to test its October uptrend line and only barely tested its 50-dma. Its chart looks like it will continue marching higher into April to have a meeting with its upper trend lines around 11,220. Today's candlestick is a shooting star which is typically bearish at the end of a rally so the question is whether or not the current bounce is finished to then be followed by another pullback. Based on the shape of the bounce off the March 8th low, that's they way I'm leaning. It looks like we could get a little more upside tomorrow but then a roll over that could take the DOW back down towards its October uptrend line and 50-dma near 10,930.

SPX chart, Daily

SPX is the one that's been floundering around in the middle, not quite sure whether to follow the DOW to the upside or the techs to the downside. It almost broke down by dropping below its 50-dma and October uptrend line, both near 1277, currently but then recovering on Friday. Unfortunately its bounce since last week's low is not inspiring. It looks like a corrective bounce that will fail and after a new high tomorrow for the bounce that could be it. If it manages to make it much above 1291 I'd be surprised but if it were to rally higher than that then I would think something more bullish is probably going on. Until that happens I'm thinking short after a small push higher tomorrow.

SPX chart, 15-min

Looking at the bounce since last week's low, it could be forming an ascending wedge which would be bearish. I'm counting it as an A-B-C upward correction with price currently hammering the last part of wave-C, which is what I'm depicting on this chart--a little more upside tomorrow followed by a drop to new lows. SPX 1261, 1253 and then 1248 are support levels if we get a drop this week. It might stay pinned around 1275 for opex which would say we'll just chop sideways for a few days.

Nasdaq chart, Daily

The COMP bounced off the trend line along the highs from January 2004, back up to its broken October uptrend line and 50-dma at today's high and then settled just under its old broken January downtrend line. This index is getting ping-ponged around. I don't see anything bullish about this index yet. Like the SPX, this one could get a bounce tomorrow but it looks like it's setting up for a drop to new lows and 2200 would be a logical downside target.

QQQQ, 30-min chart

We looked at the QQQQ chart last Thursday where I showed a parallel down-channel for price action since the January high. We'll keep an eye on this one as the down leg develops (or not) to see how you might adjust your trading expectations for this one. Looking at the drop from March 3rd, that should be the 1st wave down of an expected 5-wave pattern. That means the current bounce from last week's low should be a correction and will be wave-2. I've got a parallel up-channel (bear flag) drawn in and this can help guide your trades. We could see a bounce up to the top of the channel, currently above 41, and a 62% retracement at 41.31 would be typical for a 2nd wave bounce. I don't know if it will make it up there but if it does, watch for resistance to hold before shorting it. A break of its up-channel should be an indication that the next leg down (wave-3) has begun. I'll update this each Monday and Thursday so we can track it together.

One of the things I've been talking about recently is the topping action I'm seeing in the market. I wish I had been as observant in 2000 when the market was topping but I was like most everyone else with the rose-colored glasses on believing that we were truly in a new paradigm and the New Economy was in full swing. The only thing in full swing were my positions and they were hung out to dry. After the disappointing time I had with the market in 2000 I vowed never again to get sucked into the hype of the market, listen to CNBC, or take someone like Jim Cramer seriously. I realized I needed to become a much better student of the market. I can't say that I've always listened well, but like the old days in class, when I drifted off or fell asleep at my desk, the teacher (the market) promptly took a ruler across my knuckles to grab my attention.

So I'm trying to pass along some things I've learned (usually expensively) so that together we can not only avoid the pain of being wrong but also to enjoy the fruits of being on the correct side of the market. Of course lately it's been a difficult task identifying which side of the market we should be on and that's actually an important signal as well--the signal to get out of the market and wait for direction. If that was a good enough tactic for Jesse Livermore it should certainly be good enough for us. But if you're a relatively short term trader--day trader to a swing trader of 2 weeks or less, you can play the swings in the market. If you're trying to trade the market longer than that it's probably been a frustrating ride--just as the market moves far enough to allow you to move your stop, the market reverses and comes flying back to stop you out.

We of course can't know what this market will do in the future but we look for signals to give us some clues. The topping process can last for months (as the current one appears to be doing) but it throws out clues left and right. Bearish divergences at new highs are a great example. These will show up in the oscillators such as MACD and RSI. They'll also show up in the declining number of new 52-week highs vs. lows. They'll show up in the declining tops of the advancing-declining issues. And tops are usually identified by complacency--investors become complacent about the risks associated with stock market investing. They're willing to take greater while accepting lower returns. They throw more money into the market and don't think about put option protection or stop levels (many wouldn't even have a clue what I just said).

I've recently discussed the plethora of sell signals we're seeing on the charts. The other factor that's worth watching, though it's hardly a timing tool, is investor sentiment. The bullish vs. bearish market advisors, the put/call ratio and short interest ratio are some examples. I was recently forwarded some information that was in Bernie Shaeffer's market commentary last week, written by Todd Salamone, and I think it's worth passing along since it fits with what I'm referring to. Here's a quote from the Wall Street Journal, February 23, 2006, "Individual investors are moving into the stock market at a stronger clip than seen in years...The discount firms, which offer lower-priced trades, also report that money flowing into stock mutual funds last month was at a near record level. Charles Schwab Corp., for example, saw $4.5 billion flow into its stock mutual funds last month, the highest amount since February 2000, when net investments hit $4.7 billion."


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I have been making comments about many comparisons to our present situation and 2000 and 2001. For example, the employment numbers are as good as they were in the beginning of 2000. Now we have another comparison about the amount of money people are putting into the market, which of course is a sign that people expect good things out of the stock market. And this is being done at a time when we're seeing classic market topping signals, like we did in 2000. The other comparsion Todd Salamone pointed out was the yield curve inversion back in 2000 and now again in 2006. As he correctly points out, this yield curve inversion does not necessarily predict a recession but it points to the likely slowing of the economy at a minimum.

On Thursday I'll get into more of a discussion about some additional signals that are pointing to a high probability of a recession on the way. It has to do with the changes the Fed is demanding of the banks and their currency reserves. It's also a repeat of the action taken in 2000. But for now it's enough to know that we're probably seeing signs of a pending slowdown in the economy and it's at a time when investors are pouring huge sums of money into the stock market. The handoff of stock inventory from the Boyz to the sheep is right on cue. Baaaa. The fact that we hear near unanimous agreement on the health of the economy and that nearly all are bullish is a setup for disappointment. It won't take many negative surprises to get an "uh-oh" reaction and memories of 2000 will come flooding back.

I've also mentioned in the past that mutual funds have been carrying record low amounts of cash in the drawer. Cash levels are at their lowest that they've been since early 2000. Again, coincidence? I think not. Without cash to drive the market higher, one has to wonder where the power will come from. A major difference this time around is tha amount of short interest and put options out there. This was not true heading into 2000 as nearly everyone was bullish. The number of hedge funds now is multiples of thousands more than in 2000 and their short positions give the market a lift every time some buying comes in. The Fed's PPT depends on these shorts.

Another point that Salamone made is that the hedge funds are essentially hedged for any market declines and that should alleviate some of the panic selling typically seen during sell offs. So the bottom line is that it's different this time but not different enough to prevent a slowdown in the economy and a resultant correction in the market. It's been over 3 years since we've seen even a 10% correction and I think we're due. That by the way would take the DOW down to about 10K which obviously wouldn't freak the bulls out but it would still be a 1000 point decline on the DOW. I don't think it will stop there but it should certainly be good for a strong bounce.

But that's all longer term stuff so let's get back to the short term picture where it looks like the bulls are still beating up on the bears. They're teasing the bears by letting them take a few swings but then bopping them on the head again. But the bulls are getting tired and the bears are starting to snort. They're looking for the weaker sector and have identified the SOX as the one to beat up on. That index continues to get pummeled relative to the rest of the market. But the SOX actually looks like it might be getting ready to fight back.

SOX index, Daily chart

It looks like the SOX is in space at the moment with not much in the way of support around it. A 50% retracement of its Oct-Jan rally is at 486, still nearly 14 points below. The Aug/Sept 2005 highs and January 3rd low near 480, and its 200-dma just below that, would be the next logical place to look for support. So by the looks of this chart, if you're short the semis, that's a good place to be. But the shorter term chart says you might want to pull your stops down tight.

SOX index, 60-min chart

The price action over the past few days shows a loss of momentum to the downside. It's forming a bullish descending wedge and the bullish divergence on MACD supports this interpretation. Whether it will be good for anything more than a bounce back up to 515-520 is hard to say but these patterns typically retrace quickly. I'd place my stop just above that upper trend line identifying this pattern.

BKX banking index, Daily chart

I had mentioned above that banks may have been recipients of some bullish speculation that the expected M&A activity in 2006 will make for some profitable times for the banks. It's certainly not because they're bullish the yield curve But there's a battle going on and the short term pattern mirrors the larger indices in that the bounce from last week's low looks corrective and it should lead to another leg down. The 50-dma at 104.58 and its October uptrend line may coincide by the time price gets there and I would look for it to hold and set up another rally leg to a new high to finish off the rally from October.

U.S. Home Construction Index chart, DJUSHB, Daily

Think of the cat holding onto the rope with the sign above it "Hang in there baby". The home builders are holding onto the H&S neckline and March 2003 uptrend line at 835 and if it can keep from breaking down here it might be able to bounce back up to its downtrend line from January, currently up near 885. If this index were able to rally back above 900 I'd say something more bullish is going on but until then I would rather be short the home builders.

Oil chart, April contract, Daily

Similar to the housing chart, oil is fighting to stay above its H&S neckline at $60. Oil got a good bounce today, stronger than I had expected, getting up near $62. It's possible oil will bounce back up to its broken uptrend line from December 2004 and continue to build up its right shoulder. That's not what I'm expecting but it's possible. Any rally above $64 would suggest something more bullish is going on for oil (or the fear premium is back in). Today the bounce stopped at its 200-dma. Any break below $59 should have it heading for $56-57 for its next support level.

Oil chart, April contract, 60-min

I showed this chart last week so I thought it would be worth updating. The bounce took price back up inside its previous channel (bear flag) and that move surprised me today since I expected to see price fail at or below $61. The 62% retracement of the decline from March 3rd is at $62.06 and makes a natural place for this bounce to find resistance. I'm expecting the decline to continue once this completes.

Oil Index chart, Daily

Everyone's holding on for dear life it seems. The oil stocks didn't quite make it down to their 200-dma and long term uptrend line near 532 and they've bounced back up to, and just above, the broken October uptrend line. If the bounce continues higher than the 50-dma just under 561 then something more bullish is going on but until that happens I'm expecting this to roll back over along with the price of oil.

Transportation Index chart, Daily

How many bullets does it take with this index? This thing just won't die. But like the broader indices, this one looks like its in a corrective bounce from last week's low and just waiting to roll over. It could get another small leg up above 4500 tomorrow and that's getting it awfully close to making another new high. But the daily chart shows a bearish shooting star reversal candle today and that would be confirmed with a red candle tomorrow. Price closed at its uptrend line from the March 8th low so any drop early tomorrow will be a break of its short term uptrend line and suggest the bounce is finished. That could also be a signal for the broader market as well.

U.S. Dollar chart, Daily

The US dollar pulled back and closed just below its broken November downtrend line. It has pulled back to its 20-dma at $90.45 which should provide support if a new leg up has started. If the dollar were to pull all the way back to close its Mar 7th gap at $89.89, which is also where its 50-dma is located, I'd be thinking we've got some more sideways consolidation going on, or more bearishly that we've started the next leg down. The dollar pretty much needs to continue its rally right away to avoid the impression that something more bearish is going on.

One of the primary reasons I'm watching the US dollar so intently right now is because of the coming changes this month. With the Fed canceling the reporting of M-3 money supply (which is the element that adds the Fed's activities and Euro deposits to the total money supply equation) towards the end of this month, and at the same time Iran beginning to sell their oil in Euros, the US dollar stands to take a big hit. If the Fed begins to mass produce cash (more than they've already been doing--M-3 is up huge again in the past few months) to monetize our debt, it could deflate the value of the dollar. If foreign central banks feel they will need fewer dollars and more Euros to purchase their oil, that too could have a depressive effect on the dollar. That in turn could lift gold. So watching the dollar may give us a heads up as to what the rest of the world is thinking about our currency.

Gold chart, April contract, Daily

While the US dollar is threatening to rally, gold is threatening to break down. It has already broken below its 50-dma and November uptrend line, currently up at around 556 so that's strike one. Strike two was a break below the February low last Friday. It has since recovered and could bounce back up to the 556 area where its 20-dma is also located. A failure there (kiss goodbye) would be strike three and could set up a swift decline. Any bounce back above 560 could be an indication that gold is going to do more of a sideways consolidation for many more weeks. That would end up being more bullish as well. It could bounce up and down for a little bit as it works off its daily oversold condition.

Results of today's economic reports and tomorrow's reports include the following:

From the list of economic reports you can see it's going to be a busy week. Along with opex activities we could see some jumping around as the market reacts to these reports. Tomorrow's retail sales could obviously influence the retail sector and may even affect the general market if the report is much different than what's expected. On Wednesday the potential movers are the NY Empire State Index and the Fed's Beige Book. On Thursday we'll get another peak at how the housing market is doing, inflation and jobless claims data and then the Philly Fed Index in the afternoon. Each of these has the potential to move the market (except claims). Friday will be a big day as the Capacity Utilization and Industrial Production numbers will be important to the Fed's inflation fighting efforts, and then of course the Michigan Sentiment will reflect whether the consumer is feeling any better or not. So you can see it'll be an important week.

Today's sector action looked more bullish than the larger indices might have had us believing. They were mostly green today, led by the energy indexes, computer hardware, networkers, drugs, pharmaceuticals and gold and silver. The few red sectors were led by the airlines, healthcare, SOX and cyclicals. The Trannies and securities broker index were holding the center today. The internals looked marginally bullish and matched the combined performance of the indices so no divergences there. New lows continue to climb higher and this indicates some underlying weakening in the rally. Volume today was lighter than normal.

Indicators such as VIX may be less useful this week since the opex activities tend to skew the measure. Same thing for the put/call ratios and what they mean. So take those readings with a grain of salt this week. Opex weeks have tended to be tighter in their trading ranges lately since it seems much of the squaring of positions is taking place during the Thursday and Friday of the previous week. We saw last Thursday and Friday as certainly more volatile than today. Tuesday may not be much different. Wednesdays are many times the most volatile day of the week. So the bottom line is to exercise caution if you're trying to day trade the market this week. Wait for more solid setups than you might normally otherwise and if you end up not trading just think of all the money you saved by not getting stopped out! Brokers make a lot of money during these weeks whereas traders usually struggle to keep what they make.

My best guess for tomorrow is that we're going to get a pop higher tomorrow so as to complete the upside pattern for the bounce from last week's low. That doesn't have to happen since we could see an immediate drop instead. Trying to play an immediate drop could be more difficult (watch the whipsaws) than shorting a new high tomorrow. If you're a little longer term trader, I think we're in a tough spot here. The kind of pattern I see on the daily chart suggests possible swings of 150 points on the DOW without meaning anything. I'm anxious to see this market top out if only because we'll have better trade setups. This chopping higher and lower since last November is getting very old. Hang in there and don't force the trades now since you'll want to be ready and able to trade when it gets a lot easier than this. Good luck and I'll see you on the Monitor.

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