I find it more than a little curious that we saw ramped up buying, as a result of some strong buying programs, once it appeared the market was ready to roll over on Friday. Many analysts that I read over the weekend were thinking we'll see a pullback on Monday and early this week. After being propped up for the end of the quarter, many assumed we'd see some window "undressing" today. So, when the market appears ready for a pullback and the bears are lining up who do you call? Bear Busters! The Fed's money along with the mega-banks hitting the buy programs and voila, instant rally. We got the morning spike up just to teach the bears, again, not to mess with this market and then by noon it was finished. By the end of the day practically the whole morning rally was reversed.
Market breadth was somewhat mixed today and was not supportive of the rally. That's why it smelled funny. Even during this morning's strong rally, for example, while the advancing - declining volume continued to climb until just shy of 2:00 PM, the advancing - declining issues started to drop after the 1st hour of trading. This was a heads up that not everyone was participating. It looked like manipulation of the indices in an attempt to keep the buyers coming. The Boyz have an agenda and that is to keep the market propped up as high as possible for as long as possible to give them a chance to unload their inventory. I think that's why we're seeing this run 'em up, sell 'em down as they continue to distribute stock. As long as they can keep retail investors interested in buying the market, and the sellers away, they'll maintain control of the market. When they're finished they'll be glad to let it drop so that they can then start accumulating stock again at a much lower price. The question of course is where that dang top is. I'm still thinking we'll get another rally leg to new market highs and I like the timing window of next week for it. I'll review why later.
The auto sales numbers for today showed relatively flat sales from the previous month although General Motors (GM 20.14 -1.13) suffered a steeper sales decline, -14%, than the other manufacturers. Ford (F 7.79 -0.19) also reported lower sales, down -4.6%, while Chrysler Group (DCX 58.10 +0.71) reported +2%. Most of the foreign car manufacturers' sales were up. It seems pickup and SUV sales were up and I guess the drop in gas prices prompted more people to forget gas mileage again. I'm thinking some will regret that decision this summer.
The losses at GM are considered more company specific rather than industry and consequently their stock got spanked for a -5.3% loss on the day. GM's daily chart is now taking on the look of a sideways triangle since its low in December. It's due one more small bounce to complete the triangle and then it will be bombs away for that stock as it probably heads down towards $15. I wonder how much longer before GM is no longer a member of the DOW 30 and gets replaced by a sexier higher-performing stock. Ford has the same price pattern and will probably be below $5 before the end of the year. Chrysler has a healthier looking chart.
Also making the news on GM, not that it helped their stock price, was that they confirmed plans to sell a 51% stake in it GMAC financing unit for $14B to a team of private equity firms led by Cerberus Capital Management. GM expects $10B in cash at closing, expected to be in the 4th quarter, and then another $4B over the next 3 years.
France's Alcatel and Lucent were in the news, announcing an agreement whereby Alcatel (ALA 16.20 +0.81) would buy Lucent (LU 3.07 +0.03) for $13.45B in stock. The deal values Lucent's shares at $3.01/share. Amazing to think that Lucent was near $65 in 1999 and is one of the most-owned stocks. Ouch. The combined company will be headed by Lucent's President, Patricia Russo and will have a market cap $36B would have had 2005 sales of $25B. This puts it right next to Cisco which had sales of nearly $25B as well. As part of the restructuring, the new company plans to reduce the headcount by about 8,800 over the next 3 years. Since France has lifetime employment (part of the reason for recent demonstrations was an effort by the government to modify that), you can guess where the job losses will come from.
The March ISM manufacturing index came out this morning and showed a slight drop to 55.2% from February's 56.7%. This was lower than expectations for a slight increase to 57.3%. New orders fell to 58.4% from 61.9% in February. The unemployment index also fell to 52.5% from 55.0% and the price index rose to 66.5% from 62.5%. Inventories declined slightly while the backlog of orders rose. The market barely reacted to this news, nor to the Construction Spending number, both out at 10:00 AM. The market had an agenda this morning and that was to rally.
Construction spending hit an all-time high in February, up 0.8%, thanks to the support from the strong home building during that period. This was higher than expectations for +0.5%. The January number was revised up to +0.4% from +0.2%. Public construction spending dropped 0.5% while private construction spending was up 1.2%, mostly for hotels and office space (spending on manufacturing plants and communications was down). Without home building the private non-residential construction spending was only 0.1% higher. So we'll have to see what kind of numbers come in next month if we see a slowdown in residential construction.
After the DOW'S +130 gain this morning and then giving back 100 of those points, let's see if it makes any sense in the charts.
DOW chart, Daily
It practically doesn't matter which index I look at and they all sport the same pattern--a bearish ascending wedge. This are typically found at the end of a long run up and what's interesting about our current market is how many of these wedges are being found at different time frames. You can see them on weekly charts, formed since the March 2003 low, and on the daily charts, formed since the October 2005 low. Several indexes even have them forming on their hourly charts since recent lows. We are either on the verge of a huge break out on a brand new bull run, or else we're very very close to a major market high. I believe it's the latter but we'll let price tell us for sure.
The DOW could be finished with its rally but the pullback since its March high looks too choppy and suggests another high will be needed before it's finished. Once thing about these wedges, as is true for all triangle patterns, the price action is very choppy in both directions. Lack of follow-through is a hallmark of these patterns and they're ugly to trade. Whipsaws are the name of the game. Today was no exception. If the DOW doesn't find support where it closed today, it will probably drop down to its October uptrend line and 50-dma near 11,030. If we get another rally leg started (expect lots of chop and spiky price action) we could see 11,450-11,500. There's an interesting Gann target at 11,470. But any break down below 11,100 now would start to look bearish.
SPX chart, Daily
Since the low in February the SPX has also been chopping its way higher. Its price pattern since February is actually a little cleaner than the DOW and makes me think we've got another high coming. As long as price holds above its 50-dma just under 1285, and most especially above its March low of 1268, the bullish potential will still exist. Playing with trend lines, Fib projections and Gann levels I get upside potential from about 1325 to 1345. I'm thinking the top will be at the lower end of that range and I'm hoping to see it in the next week.
NYSE chart, Daily
Using the granddaddy of the indices, we can see that the NYSE has a little more room to the upside but by the looks of this chart, only a little more room. There is a parallel up-channel for price action since 2004 with the top parallel line attached to March 2005 high. The shorter term pattern is an ascending wedge from the October 2005 low and the tops of both of these patterns intersect near 8400. Like the SPX, this pattern looks like it could press to a final high within the next week.
Nasdaq chart, Daily
The COMP finally made it to the first Fib target I've had on this chart since last October--2355.66. Today's high was 2357.53. Well ring that bell. After a brief pullback though, which should stay above 2325, I expect another high out of this and I like the upside target 2382, both from a Fib projection standpoint as well as a Gann level there.
QQQQ chart, 240-min
The QQQQ, like the SOX below, gives me more of a bearish feeling than the COMP. In fact that's one of the things that's bearish about this latest market rally--look at the intermarket divergence between the COMP and the NDX. The COMP is making new highs while NDX (and QQQQ) can barely break out of its consolidation range. When the generals are missing from a rally, that's a warning sign you need to pay attention to. Would you fight in a battle if you saw your senior officers high tailing it out of there? Me neither. But short term the troops are still putting up a fight (they haven't turned around to notice yet where their leaders are). This could get a pullback and another push higher within its ascending wedge from the March low. This is a bearish pattern within a larger bearish pattern. I would not want to be long this stock even, and most especially, if it makes a new high after pulling back some. Be thinking about which long term puts you want to buy on this, or sell some bear call spreads soon.
SOX index, Daily chart
The mighty SOX is still not so mighty. It got a strong rally this morning but then like the general market gave most of it back. The continued choppy bounce since its March low makes it look like this is just consolidating before making a new low, in which case it will probably head for its 200-dma now at 482. If I've got the larger market pattern correct, in thinking we have a major high right around the corner, that would say the SOX has already seen its high, possibly for the year. This index continues to look like distribution going on--the Boyz distributing stock to the masses. I would follow their example.
SOX index, 60-min chart
A closer view of the consolidation since the March low shows a nice bear flag. Today price jumped up to the parallel line which is the top of the flag, practically to the penny, and then got slapped silly for even thinking about breaking out. From a short term perspective I could see another attempt at breaking above this pattern to give us an over-throw above it. If that were to happen, and then drop back down below the top of the flag, that would be a sell signal and it would likely be followed by a drop to new lows.
BIX banking index, Daily chart
Note that I made a switch over to the BIX index from BKX that I had been following. My BKX did not update today and I thought it might be better to follow the BIX anyway. The two indexes have the same ascending wedge pattern and price continues to be supported at the October uptrend line and 50-dma at 368. As long as this holds I expect to see another push higher to give us a final new high. If it instead breaks down it should head for its 200-dma at 359.
I had mentioned last Thursday that I'd cover the concept of the Gann Square of Nine chart. This is also referred to as the Gann Wheel. To introduce the concept of this wheel, think of a spiral, such as a galaxy or a sea shell. These spirals follow the Fibonacci sequence as the lines spiral out from the center. Now take a look at this matrix and note that it starts with the number 1 in the center and then it starts counting out from there in a clockwise direction. Each time it finishes a revolution it creates another ring and continues to "spiral" out.
When you listen to people talking about these charts they'll say something like "19 is 90 degrees from 15" or "38 is 360 degrees from 17". Look for the relationship of each of those numbers to each other and you can see those angular relationships. In the case of 38 and 17, 38 is a complete revolution around the square and one ring out. If I look at the relationship between 5 and 39 I would say 39 is 720 degrees from 5 because it is two rings out. In a sense we're squaring the circle which is part of where it gets its name.
What's interesting about this chart is that it's also a way to show the relationship between the square roots of numbers and its other name is a square root calculator, hence the derivation of the name Square of Nine chart. For example, the square root of 15 is 3.87. Add 2 to the square root of 15 and we get 5.87. Square 5.87 and we get 34.49 which rounds to 34, and 34 is 360 degrees from 15. So adding 2 to the square root of a number and squaring that sum is the same thing as a 360 degree rotation up on the Gann Wheel. If "2" represents a 360 degree rotation then "1" represents a 180 degree rotation, "0.5" a 90 degree rotation, and so on.
W.D. Gann studied these mathematical relationships and applied them to movements in the stock market. He was a real genius in many ways and his observations give us a powerful insight into the market's moves. What we think are just random and chaotic movements are often instead controlled by patterns that one can only assume is part of the natural order of the universe. But that's getting too deep for this article. Gann told us 90 degrees in very important in the stock market. What he observed is that adding and subtracting .5 (and exact multiples or proportions of .5) to the square root of a stock price and then squaring the result is very important. There is another school of Gann thought that will say that Gann's reference to 90 degrees relates to the movement of celestial bodies but again we can acknowledge that possibility without having to study it more in depth. For those of you who know of or follow Archie Crawford, much of his work is based on this work.
Some variation of the Gann Wheel has been in use for about 100 years now. In an interview given to Richard D. Wyckoff in 1909, Gann attributed market movements to some undefined "law of vibration." While we might not know exactly what Gann meant by that statement, you will often hear people refer to a certain level as "vibrating" off another. What they're referring to is the relationship of a number to another one on the Gann Wheel and is the principle of the Square of Nine. The Square of Nine is unique because unlike every other method of technical analysis, the Square of Nine is totally indifferent to whether the input variable is a price, a range of prices, or a number of trading days or calendar days. They are all the same and completely interchangeable. That can be a little hard to comprehend after spending years studying chart patterns, moving averages, oscillators, pitch forks and Bollinger Bands.
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But that's the beauty and simplicity of it. Price and time become interchangeable by converting them to degrees of a circle. Squares and square roots are part of that process. Once price and time are conceptualized only as degrees of concentric circles we could care less about their actual magnitude. At that point we care only about their orbital relationship. Are they in opposition, conjunction or square? You will find that almost every significant high or low pivot point is indeed in opposition, conjunction or square to a previous price, range or time.
You can build a Gann Wheel easily enough in a spreadsheet but the tricky part is adding the angular measurements around the circle. I've built a spreadsheet that includes the angles and the calendar dates around the outside (365 days in the 360 degrees). By changing the starting date at 0 degrees, the rest of the dates update around the circle. Here's a link to show just the top half of what it looks like (it's too big to insert a picture here): http://keene.little.googlepages.com/gannwheel It's a little cut off on the sides but you'll get the idea from it. In the chart at the above link I have October 13, 2005 at 0 degrees. Around the circle, 90 degrees from it is January 12, 2006. If you'll remember, January 11th was the turning point in January to the February low. Continuing around we come to 180 degrees which is April 13, 2006, so that date theoretically is the next important date from a Gann Wheel perspective. Remember that date because we'll come back to it.
I'll pick this up and wrap up the discussion on Thursday with some actual uses of the Gann Wheel to show how we could have "predicted" some of the price turns we've seen. If you have a way to print out a copy of the Gann Wheel at the above link it might help to follow some examples that I'll provide on Thursday. For example, if you find 1309 on the chart you'll see that it is 360 degrees from 1168, the low on October 13, 2005. As we know SPX recently stalled at 1310 and has been struggling with this level since mid-March. Using the Gann Wheel we can see that April 13, 2006 is a potentially important turn date (we don't know yet whether it will be a low or a high) since it is 180 degrees from October 13, 2005. And price levels not far above could be significant highs if we rally into them next week. It could be an interesting two weeks ahead of us.
U.S. Home Construction Index chart, DJUSHB, Daily
The home builders are losing the battle with the 50-dma as that important moving average continues to bend down and push price ahead of it. It's looking like another test of 840 is just ahead. Any break below its last low of 821 in March will be bearish.
Oil chart, May contract, Daily
The little bear flag pattern that I had been thinking was playing out is looking less and less likely. What I'm now thinking is playing out is a larger sideways consolidation pattern since the high back in August 2005. It appears we could have an ascending triangle (rising bottom, flat top) in play and it would also explain why we're seeing a lot of corrective price action. It says we'll probably consolidate between $60 and $70 into the early summer before rallying to new highs. That's not a given at this point but it's the way I'm starting to lean. The current pattern calls for a little more upside, a pullback to around $63 and then a rally. If the pullback were to drop below the November low then all bullish bets are off.
Oil Index chart, Daily
The oil stocks still have me scratching my head. This doesn't look quite as bullish as oil and perhaps it has to do with the market getting ready to top out (I believe). But like oil, this could be consolidating since its September 2005 high (the rally from October is only a 3-wave move and therefore has to be part of a larger correction and not the end of the rally) and needs only a minor new pullback before rallying to new highs. I just have trouble believing that will happen if the broader market is not participating. But that may be my bias getting in the way. I think you need to be cautious with the oil stocks. Any break below the March low could be serious.
Transportation Index chart, Daily
Ah the mighty Transports. And yet another new high. If the NYSE could just dump a few more doggy airlines and stuff this with some more high performers I'm sure they can keep a rally going in this index. Now why won't the DOW participate by going to new all-time highs with this one? Maybe some day it will, but I doubt it. In the meantime, the negative divergence continues at the new highs, the bearish ascending wedge is still in play, and price is pushed up against the top of its long term parallel up-channel. Now the leg up from its last pullback has overlapping highs and low and this choppy rise is a sign of an ending pattern. This index is within days of topping I believe. It could go finish with a blow-off top and give us an over-throw to 4700 or it could die right here. There's very little question in my mind that this one is finishing up its rally but as I've been saying, we need to see its October uptrend line break.
U.S. Dollar chart, Daily
The US dollar is consolidating in a tighter and tighter coil and will break very soon. Very rarely do these go much beyond this point into the apex of the triangle. Whichever way it breaks should be the move that goes for weeks. If it breaks down, commodities (including gold and oil) should do well. If it breaks to the upside I would expect just the opposite so keep an eye on the dollar if you're trading anything related to either the black or yellow gold.
Gold chart, April contract, Daily
There's a bad tick to the upside on this chart which skews the indicators but basically this would look best with a small pullback and then another push higher. That would give us a 5-wave move from its March low and could quite possibly finish the rally from July 2005 and set up a multi-month pullback. Just about everyone expects to see $600 gold and that actually worries me--anytime everyone expects something it almost never happens. It takes a break below 560 to indicate a top could be in. If we get a pullback and a small 5th wave up to a new high, I'd be interesting in shorting gold again at that point. It's too close to the end (I think) to interest me in the long side. A correction in the price of gold could happen quickly and at any time.
Results of today's economic reports and the rest of this week's reports include the following:
Note that tomorrow we have no major economic reports. On Wednesday we have the potentially influential ISM Services report and then Friday we get the Payroll number, always a potential mover. Expect the market to get a little jittery in front of that number. The market will still be looking for signs from the economy, knowing that the Fed's next move will be "data dependent", for what the next step will be for the Fed in their inflation-fighting modus operandi.
As mentioned at the beginning, market breadth was mixed. Sector action showed the leaders to the upside to be the Transports, SOX, cyclicals, gold and silver, oil (OIX) and natural gas (XNG). Leaders to the downside today were biotechs, airlines, healthcare and retail.
Obviously, with a strong morning rally and then an equally strong afternoon decline, we would expect to see mixed results. Except for Friday, new 52-week lows on the NYSE continue to trend higher and have been doing so since the February low. The NYSE made new highs last Thursday and today but new 52-week highs continue to come in at lower levels than previous price highs in January, February and earlier in March. There is a distinct lack of participation in these new price highs. Meanwhile we're seeing new 52-week lows exceeding the levels we saw at the February and March price lows. These are just more warning signs that the market is close to making a top and not starting a new bull leg as many TV pundits would like you to believe. Trust your money to them at your own peril.
These negative internals, ascending wedges, bearish divergences and prices near the tops of their patterns tell me to be very careful here. The market has been topping for a long while now and I don't see a lot of upside potential (famous last words). It means the reward:risk ratio for new long plays simply isn't there unless you can watch the market intraday and scalp some moves. But I haven't seen the sign of a top to indicate that now is the time to get short. So for many you should be flat and waiting. You should either be taking profits in long positions or have stop up tight just under March lows for example. If you like the idea of some longer term bearish plays, think about some of the bear funds out there. They're easy to get in and out of and more forgiving if you're early or late. But being in a large cash position is a great place to be right now.
If you can play the market intraday, being in cash is still a good place to be. This market is very difficult to trade right now and it has to do with these ending patterns that we're in. They're full of whipsaws and no follow-through. If you're struggling to make trades work, trust me, you're not alone. It's a signal to scale way back in your trading and wait for the fat pitch before taking a swing. If that means you trade less than once per day, good. It means you're being picky which is the way you want to be right now. Save your gunpowder for days that will be easier to trade. Tomorrow we could see more of a pullback but then get ready for the program buyers to ramp it up again just so they can sell into it again. Good luck and I'll see you on the Monitor.