Throughout the years, various global markets have taken their turns leading the rest of the globe's bourses. At times, Asian and European bourses have followed U.S. performances. At times the U.S. markets have followed either the Asian or European performances.
This morning, U.S. investors had two distinct patterns to observe during overnight trading. The Nikkei had started in positive territory, plunged deep into negative territory and then bounced into that V-shaped recovery that U.S. market bulls have longed to see. The Nikkei managed a more-than-300-points-higher close, up almost 400 points from its low of the day. European bourses, however, were in trouble, with the CAC, DAX and FTSE all down at least 1.5 percent at 8:00 EST. If U.S. bourses were going to play follow-the-leader, which example would they follow?
Although our indices could not emulate the Nikkei's spectacular almost-400-point climb off the low of the day, they produced a version of its performance by climbing, dipping to a new low, and then springing up again. The day's action left many indices with doji with long lower shadows springing up from new recent lows. Breadth measurements were mixed, however, with down volume and decliners swamping up volume and advancers on the NYSE, but with the Nasdaq and AMEX showing different patterns. On both, decliners were higher than advancers, but up volume turned higher than down.
Our futures had held up relatively well during overnight trading, not violating the immediate post-close dip from Tuesday afternoon and leading some to hope for a bounce. April's durable goods number was weaker than forecast, sending bond yields and metals lower as fears of an inflationary period and subsequent June rate hike lessened. New home sales were not as weak as anticipated.
The numbers proved equity positive, but only until some market participants had time to digest the fact that the economy might be slowing more than was desirable and for others to experience confusion about what those stronger-than-expected homes numbers might portend. Fed futures rates did some jumping around.
By the end of the afternoon's drop, the Wilshire 5000 had temporarily violated its 200-sma; the TRAN had again violated its 72-ema, something it did this week for the first time since October of last year. The Dow had temporarily dropped below the January swing high of 11,047.76. The Nasdaq had dropped below gap and historical support at 2144, and many other support levels were either breached or tested. All that occurred just before indices sprang higher. The Dow was to close about 87 points off its low; the TRAN, about 64 points; and the Wilshire, almost 148 points. While none of these matched the Nikkei's gains off its low, the gains should be respected.
Although the 10-dma's on many indices are now beginning to drop quickly, the indices' prices had become dangerously extended below those averages, perhaps contributing to the fact that indices have tended to chop lower over the last week rather than cascade lower, as they had been doing. For days, however, we've seen a series of potentially bullish inverse H&S's set up on the short-term intraday charts, only to prices fail again just as the right shoulder begins to set up. Some brave bulls have tried to step in, but sellers have always overcome them until today.
Annotated Weekly Chart of the SPX:
The potential for a rollover again tomorrow at the daily 200-sma, where the SPX ended its bounce, can't be ignored. Such a rollover, particularly if levels below today's lows are sustained for any time, will suggest that the 1234 zone might be tested.
Annotated Daily Chart of the Dow:
If the Dow fall through recent support on a daily close rather than bounces, then 10,940 might be next to be tested.
Annotated Daily Chart of the Nasdaq:
Annotated Weekly Chart of the SOX:
If the SOX's 200-ema support holds, watch for rollover potential near 475.85 and up to the 10-sma, the linked daily 200-sma and -ema's, and 504-505.
Some blame today's volatility on economic numbers, but technicians will point to the possibility of today's bounce from the low as being the expected oversold bounce. A look at the day's economic reports is still valid. At 7:00, the Mortgage Bankers Association released its weekly mortgage application volume survey for the week ending May 19, with that survey again showing declines in the volume. The component that measures that volume fell 6.00 percent week over week on a seasonally adjusted basis. Unadjusted, it plunged 23.0 percent compared to the year-ago level. Other components also fell. Four-week moving averages continue to be influenced by more positive numbers a month ago. Some inched higher, but the one measuring refinance activity dropped 0.1 percent. Refinance's share of mortgage activity increased as the average contract interest rate for 30-year, fixed-rate mortgages dropped to 6.61 percent from the previous week's 6.66 percent. By day's end, the DJUSHB, the Dow Jones U.S. Home Construction Index, had bounced to a 0.96 percent gain, but the day's action showed that the 10-sma was still serving as resistance for this index.
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One forex news source expected to see a split in the durable goods and new homes figures that were released today, with that source expecting the numbers to show that growth was being handed off from the housing sector to the factory sector. Expectations for new homes sales centered around a 4 percent drop, while the same source forecast that durable goods would drop 1.5 percent, leaving year-over-year figures at a 8.3 percent drop new homes sales and a 14.9 percent climb for durable goods. Other economists predicted a 0.6 percent drop in durable goods orders and a decline in new home sales to 1.11-1.135 million, down from the previous 1.213 million.
When today's new homes sales and durable goods figures were released, that anticipated handover had not occurred. April's durable goods orders plunged 4.8 percent against a revised higher 6.6-percent gain for March, with the decline termed a broad-based one. Ex-defense goods, durable goods decreased 3.8 percent. Orders for core capital goods fell 1.7 percent. Shipments of those goods rose 0.9 percent.
Aircraft orders have been propping up this headline number for a time, but even those orders dropped. As reported on CNBC, some economists question this component of the durable goods orders number, since Boeing again reported strong figures and that didn't show up in the durable goods number. Orders for transportation goods fell 12.76 percent, with aircraft orders dropping a hefty 32.2 percent. Shipments of transportation goods dropped 3.2 percent. Computer orders dropped 1.3 percent; communications equipment, 27.4 percent; and electronics excluding semiconductors, 10.4 percent. Electronics' shipments declined 0.5 percent. The only components of this number that gained were metals and electrical equipment, with orders for fabricated metals rising 1.9 percent; primary metals, 3.2 percent; and electrical equipment, 5.2 percent. Shipments on all rose.
The durable goods number fueled hopes that the Fed would pause in June. Bond yields dropped, with the Fed funds futures indicating a lower probability of a hike in rates at the June meeting than they had Tuesday.
April's new home sales were expected to drop to 1.15 million, but instead were reported at 1.20 million, reportedly the strongest level this year. Keene Little noted on Option Investor's Futures Monitor that the figure was actually a little lower than March's original 1.213 million sales number, but March's was subsequently revised lower to 1.142 million. That allows the new home sales figure to show the reported 4.9 percent increase in this convoluted accounting. CNBC noted that there's an 11.5 percent margin of error on this figure.
Year-over-year, sales have dropped 5.7 percent. A sector analyst on CNBC reported that sales are dropping into the 2003 levels, but that, in 2003, those levels were record highs, so that the softening is not terrible yet. Inventories indicate a 5.8-month supply, easing slightly below March's 6.0-month supply. House prices rose 2.8 percent, 0.9 percent year over year. While a Lehman Brothers' analyst pointed to rising prices as a sign that demand remains strong, another commentator noted that prices typically continued rising for a while even after demand had begun dropping.
Forecasts for crude inventories proved wrong, with a bigger drawdown in crude inventories than expected and a bigger build in gasoline inventories than anticipated. The EIA reported that crude inventories fell by 3 million barrels, gasoline inventories rose by 2.1 million barrels and distillates climbed by 2.5 million barrels. Some interpret the figures as suggesting that refineries have built up their production of gasoline for summer driving needs faster than expected, with the gasoline figure being of primary importance this time of year. Crude costs were to drop 0.44 percent, to $69.55.
We've been hearing scattered comments that crude prices were impacting demand, and yesterday an IEA official reiterated that view. That official expects crude prices to remain near current levels for a couple of years.
In addition to the contribution of the various economic numbers and old-fashioned oversold conditions to the bounce, some credited a Merrill Lynch upgrade of GM to a buy rating with improving market sentiment, too. Others, not so favorably disposed toward the company, might have suggested that the upgrade spurred some short covering. GM was to gain 8.29 percent and $2.03. Traders tend to have strong opinions about GM.
Merrill Lynch's analyst said that he expects about 30,000 to accept the company's buyout program. There's been evidence for some time that big-money people have been accumulating GM stock, however, and new bulls may be somewhat late to the trough as GM's price approaches a downtrend established off the January 2004 high. It appears that the big-money people may have already picked up the best of the prices a while ago. The drop on the week of December 18 was on huge volume, with GM closing off the low of that week. That kind of pattern is often indicative of accumulation, although it's often dangerous to buy on that evidence alone since the downward momentum can carry a stock's price lower even while accumulation is occurring. The weekly chart shows that subsequent tests of an ascending trendline established off that December 18 low were on much lower volume, indicating that sellers were being exhausted as GM was building a base.
While I'm sure that Merrill Lynch's analyst was basing his new buy rating on the survey of workers who intend to take the buyout and other factors he discovered, I'm not entirely sure that buying just before a test of a descending trendline established in 2004 and not tested since last summer is the best place to buy. May be, but this writer would suggest being very careful near the descending trendline, currently near $28.00. For a discussion of how such accumulation can be discovered, see the Trader's Corner article from April 22, 2006, "Should Volume Confirm?"
Other positive stock-specific news came from Medtronic (MDT) with the company raising its full-year EPS outlooks for 2007 and 2008. The stock gained 4.62 percent. Some healthcare stocks have benefited from their position in a defensive sector. Although the HMO, the Morgan Stanley Healthcare Index, turned down 1.34 percent in today's trading, it had spent recent weeks climbing from its April 27 low of 1510.95 into yesterday's high of 1712.61 as there was rotation out of the previous momentum stocks and sectors into more defensive ones.
Market participants were not initially as thrilled with GE's affirmation of its former EPS guidance for 2006. GE managed a 0.73-percent gain by the close of the day.
Neither were market participants thrilled with Vonage's (VG) IPO. One news source speculated that the company's IPO performance might be the worst in two years. Although some sources said that Vonage opened at $17.00 a share, QChart recorded the first trade at only $15.60, and the close at $14.85. Jim Brown had predicted trouble with this IPO, and his prediction played out.
In other developments, South Korea's financial minister opined that gradual changes in Asian forex reserves should be made, moving away from investments in Wall Street and U.S. treasures, although he cautioned that such changes should be gradual. One forex news source believed that such sentiments were already baked into the USD/JPY pair. Today, the dollar gained against the yen, moving up to challenge Monday's high against that currency.
Other concerns today included the bird flu developments. Although, as Jim Brown reported last night, the World Health Organization reported yesterday that initial tests rule out a virus mutation in the form of bird flu that killed human victims in Sumatra, air waves today continued to discuss the possibility that a father had contracted the illness from his infected son. The possibility of human-to-human transmission was admitted by the WHO, but one scientist with the organization denies that the transmission was yet "efficient," and the sequencing of the virus' genes do not indicate genetic reassortment with pig or human flu viruses. The family members who caught the illness lived in extremely close conditions, and there's no evidence that casual contact could yet transmit the illness from one human to another. No evidence exists that anyone outside that close extended family appears to have contracted the illness from them. WHO doctors remain confused about the original source of the illness since none of the poultry in the area had the virus.
Many influences may be found to describe today's market action, but "oversold" describes it fairly well, too. After-hours developments included reports by TIVO, NTAP and PETC. As this report was prepared, TIVO was a penny below its $7.11 close. NTAP was at $32.80, down from its $33.48 close. PETC was at $21.29, down from its $21.83 close.
Economic releases for tomorrow include initial claims, the first quarter's preliminary GDP and chain deflators, all released at 8:30. GDP expectations are for a gain of 5.8 percent, up from the prior 4.8 percent, with the chain deflator expected to be 3.3 percent, as was the prior number. Since it's a key inflation measure, the deflator number will be closely watched and might be capable of moving the markets. Market watchers will not want that number to be too hot. Watch the bond markets to gauge reaction. In his Tuesday night Wrap, Jim Brown discussed the outlook for GDP for this quarter and beyond, noting that growth expectations for the second quarter are declining.
At 10:00, April's existing home sales and help-wanted index are to be released. Existing home sales are expected to drop to 6.60-6.75 million from the previous 6.92 million.
Tomorrow's earnings include those from BLI, HRL, LSE, NDSN, PDCO, PDC, SAFM, SLTC and WSTF.
For those unfamiliar with candlestick theory, those doji on today's daily charts serve as potential reversal signals. They need confirmation by a strong day tomorrow, but their presence perhaps gains weight by the severely oversold nature of the indices, the possibility that some profitable bears might want to take profits ahead of Friday's economic numbers and the upcoming long weekend, and the testing of support levels. Tomorrow morning's economic numbers could undo all of that.
Despite the spring off the day's lows, some ambiguity remained at the close. Monday morning, many indices opened at or just below their five-minute 100/130-ema's and fell from there. Tuesday, some indices--not all--managed to move back above those averages, but spent the early part of the day building H&S's with neckline at or near those averages. Yesterday afternoon's plunge began after the averages were violated and then retested, with prices falling from those averages again in many cases. Since then, they had served as resistance when tested.
I note all this because many indices popped back above those averages late in the day, but then dropped back to test their support as the day ended. This was true of the Wilshire 5000, SPX, OEX, SOX, Dow and Russell 2000, among others. The TRAN ended the day just below these averages.
The strange correspondence across so many indices indicated some basket buying to me, but I'm not sure whether the buying will hold or not. There wasn't time to ascertain if this is to be another failed test of those averages or whether their support will hold, but that correspondence leads me to think that some big-money people might think it will. However, let performance around those five-minute 100/130-ema's be your first guide tomorrow to how the indices are performing at the open. Short-term bulls want to see those averages hold and would prefer to see indices climbing straight from their support. If you're in bullish plays, keep those stops tight and watch the possible rollover levels listed on the chart. I expect markets to be parked somewhere tomorrow ahead of Friday's economic numbers, and they might well be parked at resistance, so that you'll have a decision to make late tomorrow afternoon as to whether you'll hold overnight. It looks to me as markets are due for a several day bounce, but that several-day bounce may not begin until next week, after markets roll down again and retest these lows. Perhaps all but the most aggressive traders might want to lock in at least some bullish profits tomorrow afternoon if the indices have climbed and nudged up under strong resistance to wait out Friday's numbers.