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Market Wrap

Delayed Reaction?

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Most market watchers have become accustomed to seeing the initial post-FOMC reaction sharply reversed by the end of the day. That didn't happen yesterday, so some questioned whether the other FOMC-related pattern--a down day the day after the meeting's conclusion--would also fail to appear. It certainly did fail to appear.

As some print articles noted, overseas markets didn't share the pessimism seen yesterday on U.S. bourses. Despite trading in negative territory most of the morning session, the Nikkei 225 broke sharply higher just before the end of the morning session and managed a 248-point gain by the close of the afternoon session. Despite protests that have sprung up across the globe--protesting possible immigration changes in the U.S. and a youth jobs law in France, and campaigning for better conditions among the metal workers in Germany--markets in Europe performed well, too.

Those other bourses foretold gains in the U.S. bourses. The SPX shot higher again, having yesterday hit the bottom of a short-term descending regression channel forming since March 16. The form of that two-week pullback looks like a bull flag. Yesterday's dip retraced between 38.2 and 50 percent of the last rally off the March 8 low, so the pullback has fit that parameter of a bull flag, too. However, RSI highs have been turning down at a descending trendline since November, and that certainly makes technical traders wary when viewing the SPX's current retest of rising wedge resistance.

Annotated Weekly Chart of the SPX:

Strongest resistance appears to be at 1310-1311 with nearest resistance a little lower, at about 1308-1309. Strongest support is at the 72-ema, currently at 1278.08, but nearest support lies at about 1299.50-1302.78 and then at 1294. If the SPX tests one of those resistance levels tomorrow, and the TRAN drops as the SPX tests resistance and rolls down, then cautious short positions might be tried, but only if the TRAN cooperates. Be ready to take profits quickly if there's a rollover, as bulls have not yet been vanquished.

As long as the TRAN climbs or even holds its position near recent highs, the SPX, OEX and Dow are probably not going to retreat far and may even attempt a breakout instead. If the TRAN continues to climb or hold near recent highs, then bulls might try cautious new longs on any dips to the 30-sma, if they're offered.

Annotated Daily Chart of the Dow:

The Dow today faced considerable resistance that lies in the 11,232-11,235 zone and succumbed to that resistance. It still looks strong, with next resistance at 11,299-11,302 and then near 11,305. Nearest support is near 12,220.71 on 30-minute closes, with that support tested near the close. The Dow closed just below that support, but not far enough below to say definitively that it had been broken or to suggest that down looks more likely than up over the very short term. Nearest significant support lies at about 11,165. Below that is support at the 30-sma and then at 11,075. On a Keltner basis, the Dow ended at a neutral level.

Annotated Daily Chart of the Nasdaq:

Nested Keltner channels suggest closest support at 2334.50-2336.45. Other support proves more difficult to define, as the Nasdaq then falls into a congestion zone that should at least slow its descent if not stop it while the Keltner channels show the opposite impression--thinning support after that 2334.50-2336.45 zone. The 2315-2320 zone might offer support, as might the 2307-2308 zone, but with strongest support currently near 2304.63.

Until the Nasdaq closes a 30-minute period below nearest support at 2334.50-2336.45, further climbs might be possible. If the Nasdaq keeps climbing, bouncing from that nearest support, the current Keltner setup suggests 2345-2350 may be next strong resistance. Bulls want bounces confirmed by strong performance on the SOX, and bears want rollovers confirmed by SOX and RUT rollovers, too.

Annotated Daily Chart of the SOX:

Keltner evidence suggests gathering support for the SOX at 501.80-503.64, but the resistance that usually holds it back is currently near 508.73, and the SOX turned down ahead of that resistance this afternoon. The nested Keltner channels do nothing more to clear up the next direction for the SOX than does the traditional charting types.

The day's economic releases began with the Mortgage Bankers Association releasing mortgage applications for the week ending March 10, at 7:00 EST. The headline for that release announced that 30-year fixed-rate mortgages had bumped up to their highest rate in almost four years. That rate was 6.42 percent, having risen from the previous week's 6.31 percent. Points decreased.

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The mortgage loan application volume also decreased, by 0.2 percent on a seasonally adjusted basis. On an unadjusted basis, it was down 20.4 percent when compared to the year-ago level. Some components of the index rose and some fell, as was true of the four-week moving averages, too. Those averages rose 0.1 percent for the Market Index, rose 0.5 percent for the Purchase Index and fell 0.3 percent for the Refinance Index.

Crude inventories were released as usual at about 10:30 EST. Experts expected a build of 950,000 to 1.3 million barrels in crude inventories, and a drop of 1.5 and 1.2 million barrels in gasoline and distillates, respectively. The Department of Energy announced a build of 2.1 million barrels in crude inventories, a drop of 5.4 million barrels in gasoline--the biggest in more than two and a half years--and a drop of 2.5 million barrels in distillates.

None of the numbers matched expectations, with the crude inventories rising more than expected, and the gasoline and distillate inventories dropping far more than expected. Gasoline supplies now move into the area of primary concern with the summer driving season approaching. Crude pumped higher, with equities continuing the drive higher than had begun at the open. Crude closed up $0.38, at $66.45. Whether or not that gain moved it above the latest rising regression channel off the February low remains questionable, but it did break above the January gap.

Despite higher crude costs and the World Organization for Animal Health's revelation of its expectation that avian flu would hit the U.S. this spring, equities moved higher. Not all equities did, however. In its ongoing battle with Microsoft (MSFT), the European Union cautioned the company not to bundle certain search features into Windows Vista, the company's new operating system. If that feature is prepackaged with Vista, the company won't be allowed to sell it in Europe, the E.U. warned. The E.U. also doesn't want the company to include some software-security functions in prepackaged versions. MSFT still managed a 0.44 percent gain.

Google (GOOG) and Symantec (SYMC) were poised to benefit from any decision adverse to MSFT, or at least not suffer any setbacks from a decision that would have allowed MSFT to bundle some functions into Vista. IBM, SUNW and ORCL have also issued formal complaints asking that other functions aren't bundled into Vista. In other action, the European Commission begins closed-door sessions tomorrow, considering whether MSFT has met their March 2004 antitrust order concerning Windows XP.

Other developments included the filing of General Motors' (GM) delayed annual report. The company noted that GMAC's financial results would be restated from 2003 through the third quarter of 2005, and said that a possibility existed that it wouldn't be able to sell the financing arm as it hoped to do. Rumors also surfaced that the company might sell part of its stake in Isuzu. GM closed lower by 2.63 percent.

Other company-related news included a Merrill Lynch upgrade of 3M (MMM) to a buy rating from its previous neutral rating and a Morgan Stanley upgrade of Sun Micro (SUNW) to overweight from its previous underweight rating. UBS downgraded Caterpillar (CAT) to a neutral rating from its previous buy rating. UBS also downgraded Intersoll-Rand (IR). Merrill Lynch noted that MMM's international presence would position it to gain from faster global expansion. Morgan Stanley thought SUNW's cost-cutting efforts would create financial benefits. UBS noted that CAT's stock price was approaching what the firm perceived as fair value for the stock and thought end-market growth was decelerating. Together, CAT and GM contributed to the Dow's underperformance of some other indices while MMM helped it to gain, even if those gains underperformed. CAT dropped 1.60 percent, and MMM climbed 1.65 percent.

In other company-related developments, Boeing benefited from news that it had won an order from GE's Commercial Aviation Services for 30 airplanes. The stock rose 2.15 percent. MEL and AEOS reportedly were also upgraded, and TD Ameritrade (AMTD) raised its guidance. Investors greeted Accenture's (ACN) second-quarter profit decline by sending the stock's price lower.

Other developments were political ones. Reports resurfaced that the U.N. Council would demand that Iran halt its program to enrich uranium.

Tomorrow's economic releases will include Initial Claims, final GDP and the Chain Deflator for the fourth quarter, all released at 8:30 EST. February's Help-Wanted Index will be released at 10:00, with the number expected to inch up to 38 from the prior 37. At 10:30, natural gas inventories should be released. Earnings include those from ACN, BBY, KMX, GLBC and TXI.

Markets were positioned for breakouts tomorrow, having moved right up to next resistance and retaining most of the day's gains. The Nasdaq even managed such a breakout, to a five-year intraday high. It led the pack after some weeks of following, held back as it had been by the SOX. The Nasdaq's breakout today was accompanied by a strong SOX gain, but not a SOX breakout. The SOX remained within a congestion zone it's been building for more than a month. The SOX shows little evidence of which way it will break out of that choppy congestion zone, and the Nasdaq still needs it to maintain breakouts.

Whether the markets break out or roll over will depend not only on the GDP, but the market's reaction to it. Expectations are for 1.6-1.7 percent growth, steady with the prior 1.6 percent, and for a 3.3 percent number for the chain deflator.

The GDP should be important to the markets, but this may be a case when very good news is bad news and very bad news is also bad news. After Tuesday's FOMC decision and the unrevised wording on future rate hikes, bonds dropped and yields moved higher. Today, yields dipped in the morning but then rose strongly again, with some nervousness apparent ahead of tomorrow's GDP number. Yields on the ten-year note rose to 4.81 percent, their highest levels since the fall of 2004. Some interest-rate sensitive indices such as the BIX, BKX and DJUSHB produced doji, clearly in a wait-and-see mode ahead of the end-of-week economic reports.

It's my personal opinion that markets were dealt at least a short-term blow yesterday with the prospect of more rate hikes than had been hoped, but that the known seasonal window-dressing pattern has blunted some of the reaction to that short-term concern. That reaction might be blunted the rest of the week, too, depending on how strong the GDP number might be. If it's too strong or too weak, window-dressing might not be able to prop up the markets, but if it's just right, they might be propped up long enough for bulls to feel that former resistance has been confirmed as support, and it's time to charge higher again. With the SPX right at long-term rising wedge resistance, a pullback seems at least possible, but in the eternal tub-sloshing efforts to push first one and then another index higher, the RUT and Nasdaq now suggest that breakouts are more likely.

There's confusion between the indices and in the kind of technical indicators often studied. Watch the future's reaction overnight and then after the GDP announcement for information as to whether the markets are rolling over under the tested resistance today or gapping higher above it. With several forces producing crosswinds on the markets, be ready to take either bullish or bearish profits too early. This impression is also confirmed by chart setups, with some showing the possibility for chop, as mentioned earlier.

If you're watching the TRAN as an indicator index, as I would suggest doing if trading the SPX, OEX or Dow, note that for much of March, the TRAN has been bouncing off the 60-minute 100/130-ema's. Those averages might be watched for clues as to the TRAN's strength or weakness. If the SPX, OEX and Dow do appear to roll over again tomorrow morning on an adverse reaction to the GDP and the TRAN is also punching lower, watch the TRAN again near those averages. If it bounces again, those other indices are likely to do so, also, and it might be wise to lessen bearish exposure.

If you're counting on a continued bounce or rollover in the Nasdaq, watch both the RUT and the SOX. You want them pulling the same direction.
 

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