Are you starting to feel like you're watching a ping pong match up close? And this match is one where each player fails to make a point and the serve goes back to the other player and then back again. Neither side seems to be gaining on the other. Even the internals are swinging back and forth with price action. This is the kind of market the brokers love--they make oodles of money from traders trying to get something going and all they do is get stopped out. Your brokers appreciate your business since that enables them to afford those nice schools for their kids and fancy home out at the Hamptons.
The past week looks like a consolidation pattern and the intraday trading looks the same--trades aren't going anywhere. The only ones happy right now are those who have sold options above or below the market and are happy to see it motor sideways while time premium slip slides away. For those trying to make hay out of intraday moves have had to be quick to take profits and flip around and trade the other direction. That's not easy in a market that whipsaws back and forth. This pattern could continue into early next week and if it does it should set up another rally leg out of this.
The longer term picture from all this is yet unclear. At the end of this report I've updated my two weekly SPX charts that show two different scenarios for the summer, one bullish the other bearish. No resolution yet. Even another leg higher, which I'm currently expecting, will not bring us any answers but it will get us closer to a resolution to the longer term question. I happen to think we won't have an answer to that question for another week or two at the earliest.
In the meantime, welcome to summer time trading. We even had a quiet week of economic reports with today seeing only two--jobless claims and Leading Economic Indicators (LEI). Initial jobless claims increased by 11K to a seasonally adjusted 308K last week from a revised figure for the previous week of 297K (up 2K from 295K). The 4-week moving average of new claims dropped by 5,000 to 311,250. Continuing claims rose by 18K to 2.44M and is the highest level in eight weeks. The 4-week moving average of continuing claims were up 6,250 to 2.42M, the highest since April 29.
The LEI numbers suggest a "slow to moderate growth" rate in the economy. It slipped -0.6% in May which was more than the expected -0.4% and worse than the previous month's -0.1%. The number fell to 137.9 in May after declining to 138.7 in April. It's the first back-to-back decline in the leading index since early 2001. That's not a good comparison since we know what 2001 was like for the market. Since the index is designed to help forecast turning points in the economy six to nine months ahead I think we're seeing the warning shot across the bow of the U.S.S. Economy. Now let's see if the Fed takes notice of the warning or instead sits on the bridge sipping their brandy as they happily motor straight ahead.
What we're seeing of course is the cumulative effect of higher energy prices, a slowing housing market, higher interest rates, lower consumer confidence and higher taxes in some regions. As economists have been noting, the slower pace of the economy will have less ability to absorb another round of strong hurricanes this summer so let's hope for a mild season. With warm gulf temperatures that doesn't appear likely. Seven of the 10 leading indicators were negative in May, the biggest ones being the weekly jobless claims, consumer expectations and money supply (I discuss briefly below how the banks have been part of the reduction in the money supply, and the sell off we've seen in the market). Other negatives were factory work hours, building permits, stock prices and vendor performance. The three positive indicators were core capital goods orders, consumer goods orders and the interest rate spread.
Other than those two reports it was a quiet day, including the trading. With just a sideways day there's not much to glean from the charts but let's see where they might be headed.
DOW chart, Daily
Bully for the DOW and its ability to get back above its 20-dma but it's in danger of slipped back beneath the waves and drowning if it can't hold on here and continue up. Even though it closed marginally below its 20-dma, which is at 11024, it could be just a pullback to test it for support. If it holds then we should see a continuation higher to its 50-dma at 11207.
SPX chart, Daily
The SPX looks like a much weaker sister compared to the DOW. Whereas the DOW has been able to hold above its 200-dma and climbed back above its 20-dma (so far), the SPX has been able to do neither of those two things. In fact it's looking like a failed test of its 200-dma. But the shorter term pattern, as I show in the chart of the futures at the end of this report, looks like it's consolidating for another leg up to match the one off its June low. We might see this test its 50-dma or its late-May high in the next week or so.
Nasdaq chart, Daily
The COMP is looking like the weakest sister here--it is below its 200-dma, it can't recapture its 20-dma and we're days away from seeing the 50-dma cross below the 200-dma (an intermediate sell signal for many funds). Obviously if this drops below the June low that would be bearish. In fact the EW count suggests we'd see a very fast and very hard drop from there. Same with the broader market. But like the SPX, I'm thinking we're going to see another leg up that could see the 50-dma tested. From there we'll just have to watch and see what happens next.
QQQQ chart, Daily
If the COMP is the weak sister, this one is downright sickly and on its death bed. It's 50-dma has already crossed down through its 200-dma. But as I've mentioned above, I'm looking for another leg up to match the one off the June low. That should take the Q's back up for a test of its declining 50-dma, perhaps up to the $40 area. The larger wave count on this chart suggests we'll see the current bounce turn into a longer choppy rally through the summer to new market highs (which is depicted in the 2nd SPX weekly chart at the end of this report). I must admit I'm not confident in that outcome at this time. But until the June lows are taken out, I will not discount that possibility.
SOX index, Daily chart
The poor SOX is fighting all kinds of resistance whether it's moving averages or trend lines. As pointed out on the chart, whenever I see stochastics moving from one side to the other, in this case up, but price marches in place, that's normally a sign the price move (the bounce in this case) will be short-lived and be ready to reverse and head in the original direction (down in this case). MACD hanging below zero does not help the bullish cause here. Seeing nothing else, I'd be shorting this chart. But like the others, and based on the short term charts, I'm thinking we'll see another leg up to the bounce and see the declining 50-dma (which has also crossed the 200-dma) tested.
The banks, the mega-banks that is, continue to show that their trading teams are keeping their companies afloat by being on the right side of the trades, whether the market moves up or down. If anything they may behind the increased volatility we're seeing. The more volatility the merrier for them since a large daily swing helps their trades immensely. The earnings reports from the mega-banks continue to blow away past results and the majority of their gains have come from trading their capital. Why not. I'd cash in all the equity in my home and trade it if I knew I was able to "remove risk from the market" as they say they've been able to do. We're not playing in a fair world but really when has it ever been fair? The difference now of course is that it seems as though it's sanctioned stealing by the Fed, SEC and major bank heads. Who knows if it'll ever come out in the wash.
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Bear Stearns' (BSC) earnings report mentioned that their "principle transactions trading unit" showed a 52.2% increase in revenues year over year and 29.7% increase over last quarter (and last quarter was up huge). But their commission revenues were down 2.7% year over year. As a reader passed along to me (thanks Joe), "I guess they were making so much money for themselves that they did not let their clients in on their success." Not only is their commission revenue down, the amount of money that they're making for their customers is also down. From their report, "Asset Management net revenues were $22 million for the second quarter of 2006 a decrease of 56% from $50 million in the prior year's quarter mainly due to a decline in performance fees on proprietary hedge funds. Assets under management increased 20% to $48 billion on May 31, 2006, from $40 billion on May 31, 2005."
They have increased their asset management base and yet they've given their customers worse returns. But their internal trading teams are making money at a rate that is 52.2% better than a year ago. Take a guess where they're focusing all their trading efforts. Or worse they're betting against their customers' positions (as in selling the market when the bank is in short positions) so that they can make more money. Do you think I'd have a dime with this company? Not on your life. Goldman Sachs (GS) and Morgan Stanley (MS) have all reported similar results and it's clearly a pattern amongst these mega-banks.
As I've shared with you in past reports, program trading is coming primarily from these mega-banks who are the primary dealers for the Fed. If the Fed wants money injected into the system they hand it to their primary dealers. If they need to pull money out of the system (and it seems all central banks world wide have been doing this lately), the have the primary dealers withdraw the money (therefore the stronger selling the past month was likely driven by these banks). One of the negative components of the leading indicators was money supply, as in shrinking money supply. There are six banks that account for the bulk of the program trading and as Joe informed me, program Trading last week was 69.7% of ALL shares traded on the NYSE.
Joe dug into the numbers and found that just six mega-banks accounted for 64.2% of ALL the program trading. Their program trades accounted for 44.7% of ALL shares traded on the NYSE. When you think about the size of the market, to have that much controlled by so few institutions, I don't see how one can not call it control of the market. Those banks were in order of volume:
Lehman Brothers, Inc.
These are the same banks reporting huge increases in their trading profits. It continues to sound very fishy to me and collusion comes to mind. We of course have to live with it and be knowledgeable that we can't fight it. How we trade with this knowledge is not easy but it does tell us to never sit in a losing position hoping it'll return to us. Trading must be more nimble and profits need to be taken more quickly. If you're doing longer term trades then much of the daily noise is of no consequence. Hopefully we here at OIN can help you identify major longer term support and resistance to enable you to make those longer term trades. Shorter term traders--be quick to get in and out and take your profits or small losses.
So how are the banks doing after such stellar returns? Not terribly exciting actually. It could be they're setting up their own trap--continue to produce 50% increases or you're going to be toast. And if their trading teams are forced to take greater risks to continue to improve their returns, well I think we all know how well that could turn out. The first major bank failure that comes as a result of trading gone bad could be the time the door gets busted wide open and we get to see the shenanigans going on under the sheets.
BIX banking index, Daily chart
The banking index bounced hard off its 200-dma but has done nothing since. It hasn't been able to reach up to its 20 or 50-dma and instead just consolidating sideways. But that consolidation looks corrective and just like a bull flag. I think this is getting ready for another blast higher which should at least test its 50-dma. If it gets there that's when the true test will be on.
Securities broker index, Daily chart
I'm keeping an eye on this index to see if we get any heads up that's not provided by the banks. It managed to recover its 200-dma so that's positive. Now we'll get to see if it retests its broken uptrend line from May 2005. If it results in the same action as the retest back in May of this year, sell that retest and hold on.
U.S. Home Construction Index chart, DJUSHB, Daily
So far it looks like the consolidation at the lows is going to lead to lower prices. But we could first see a retest of the bottom of the larger down-channel, currently near 670.
Oil chart, August contract, Daily
Oil looks to be headed to the top of its descending wedge, which is also where its 50-dma is located. This pattern, if that's what's playing out, should get another leg down before it's ready to rally out of this. I can see a test of the $68 area or so once the current bounce completes.
Oil Index chart, Daily
Like the broader market this index appears to be consolidating in preparation for another leg up in its bounce from the June low. Also like many of the other indexes, we could see a push up to test the 50-dma.
Transportation Index chart, TRAN, Daily
The Trannies are showing some strength here--it has broken out of its down-channel and back above its 50-dma and is therefore relatively stronger than the others. It's testing the top of its old parallel up-channel and I wouldn't be surprised to see it fail here. But if the broader market is getting ready for another leg up in its bounce, it's possible we'll see the Transports head higher as well. New market high for this index? That would certainly light the bulls' fire.
U.S. Dollar chart, Daily
The consolidation for the past week or so looks to be resolving to the upside. I continue to believe it will fail below $87 and then head towards firmer support near $83. From there we could then see a multi-month bounce/consolidation.
Gold chart, August contract, Daily
Gold is still trying to hold above its 200-dma and the jury is still out as to whether the bounce will become impulsive (meaning a lot more upside is left) or is just a corrective bounce that will lead to another low. I'm leaning towards the new low scenario and thing we'll see at least a test of its uptrend line, at 554 now, or its Fib projection at 531.
Results of today's economic reports and tomorrow's reports include the following:
As you can see it's going to very quiet tomorrow as far as economic reports go--just the Durable Goods number for May. It's expected we'll see an improvement from April but with a negative number I don't think the market will be jumping for joy on "less bad news".
Sector action mirrored today's prices--mostly bearish but not excessively so. The only green sectors were the oil indexes XOI and OIX. Healthcare (HMO) broke even. The leaders to the downside today were networkers, SOX, most other tech indexes, biotechs and gold and silver.
The internals were also negative but with relatively light volume again. Unless we're getting a stealth move, the whole thing looks like indecision day-to-day. Today we saw decliners handily beat advancers and the new 52-week lows continue to beat out new highs. This all looks like distribution to me and unless we start to see some more improvement in these internals, even another rally leg higher is going to be suspect. Before showing a very short term chart for possible action over the next couple of days, I wanted to take a look at updated SPX weekly charts that depict two different price paths to see if we're getting any closer to an answer (not yet).
SPX chart, Weekly, More Immediately Bearish
This price depiction is more immediately bearish because it considers the current small bounce just part of the 3rd wave down (wave-3 on the chart) that takes us to the October 2005 low of 1168. From there we'd see a consolidation and then continue lower into the Sept/October time frame followed by a multi-month upward correction before the bottom falls out in early 2007. If the current bounce off the June low is just a correction, we'll be set up for a very strong decline in a 3rd of a 3rd wave down and we would likely reach 1168 in a heartbeat of a move. A break of the June low says look out below.
SPX chart, Weekly, Intermediate Bullish
This is of course the same chart but with different EW labeling and price depiction for this summer. The small hammer candlestick (hard to see) at support last week is bullish but needs follow through this week and so far its a small red doji, not what the bulls want to see. But if the bounce can get some traction to the upside, and climb above 1295 then this one could still work. Based on the price action I'm seeing so far I'd have to say this is my alternate wave count and the more immediately bearish chart above is my preferred wave count. But I'm not throwing this bullish-summer pattern away yet.
Looking a little closer for some clues, I'll use the ES (S&P 500 emini futures contract) chart I posted near the end of the day on the Futures Monitor. Most immediately, for tomorrow, the combination of not much in the way of market moving news or reports, a summer Friday and a sideways consolidation pattern that will probably continue and I think you'll do yourself a favor by not turning on your computer and instead go enjoy something else tomorrow. I suspect we'll see another day like today. A sideways triangle like the one shown below is full of corrective wave structures and they're horrible to trade. I see the need for another relatively small bounce and pullback before it's set up for another rally leg.
ES chart, 60-min
This short term sideways coil could continue into Monday so if you're looking for an opportunity for a swing trade to the long side, I think we've got one coming. We could see SPX tag 1290 out of this and then I'd think seriously about getting flat or short depending on how you like to play the market. Based on the two scenarios I have for the SPX, we won't know until SPX breaks below 1220 if the more immediately bearish scenario is playing out (although a break below 1230 would have my antenna up). But once SPX hits 1290, assuming it will, and it looks ready to roll back over, I'd want to be out and at least watching to see what the next pullback looked like. If it gets choppy and we see a sideways/down kind of pullback then I'd say we should be heading higher in that choppy sloppy summertime rally (as per the "intermediate bullish" SPX chart above). If we start dropping sharply, put on your bear fur because it's going to be a cold and nasty summer.
Let's see if we can't get that rally leg up next week and by this time next Thursday I'll have a better update on what we might be able to expect. In the meantime, scalping is the name of the game since we don't have enough clues yet for the longer term picture. Good luck and I'll see you here in a week. For those on the Monitor I'll be checking in with you tomorrow for what could be a very slow trading day. I for one will probably be finding other activities to keep me busy.