The bulls worked so hard yesterday during that sprint higher that they needed to take today off and rest a while. Actually I think the bears rested--they're the ones who were doing the scrambling yesterday to cover their shorts. The big debate today is whether yesterday's rally was just a flash in the pan, just another bear market rally, or whether it was the start of something bigger to the upside. The jury of course is still out on that question but so far it's looking like the bulls have some more upside work to do (and shorts have some more covering to do.
As I've been doing each week I'll update the SPX weekly charts at the end of this report since we had an important bounce this week. Had the market not rallied when it did the SPX would have broken down from long term support and the bears would have been slobbering all over themselves while feeding on fresh steaks. As it is the bears got pushed back by angry bulls and it's looking so far like they just might get that choppy summer rally going. I'll explain more later. I'll also explain, using the current daily chart, what the bulls need to do now otherwise we could have a very bearish setup in place.
Today's pullback looks like a typical overlapping corrective move against the Tuesday/Wednesday rally. So far that's bullish since it looks like a bull flag formed today and the prices heading into the close could be it for the pullback. If prices continue lower tomorrow then they'll probably accelerate lower (think of the looks of a waterfall and that's what price will look like if the decline continues). But if the bottoms of today's bull flags hold then we should see a continuation of the rally start tomorrow.
Fridays tend to be quiet days, especially opex Fridays and most especially opex summer Fridays. Therefore I don't expect we'll see another powerful rally like Wednesday's but we could see the market methodically work its way higher, but that's only if today's lows hold (other than perhaps a minor morning dip). The setup is there so we'll have to see if the bulls return after digesting their Wednesday meal.
There were a couple of economic reports today. The unemployment numbers showed initial claims came in at 304K, lower than the expected 320K, which was a drop of 28K from last week's revised 332K (revised down from 334K). The Labor Dept reported that the bulk of the drop was due to the auto industry after last week's increase in claims because of their annual temporary shutdown as car makers prepared for their model-year changeover. The 4-week average dropped by 1,250 to 316,750. Continuing claims rose by 85K to 2.5M.
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Leading indicators was released at 10:00 and showed June came in at +0.1% vs. forecast for +0.2%. This was the first increase in 3 months and was an improvement from May's -0.6% but is down -0.3% in the past 6 months. This is further evidence of our economy cooling off as this measure usually shows what the economy will do over the next 6 months. But not to worry, we all know that the Fed will know when to stop so as not to force us into a recession (cough).
Bernanke has been stating that the economy is slowing down and of course the market treats that as good news (in its perverse way) since that means the Fed will soon stop raising interest rates. To which I'll say it again--the facts shows that the market is consistently down 6 and 12 months AFTER the Fed stops raising rates. Why the market is excited about this I'll never know.
The Philly Fed number for July was released at 12:00 and at 6.0 was less than the expected 12.5 and less than half of June's 13.1. Any number above zero shows expansion but obviously at a slower rate in July. This averaged 12.4 for all of 2005. The Prices Paid index was 50.3 vs. June's 48.7 and Prices Received was also up, rising to 17.1 from June's 14.0. But New Orders dropped from June's 17.7 to 10.1. Employment nearly doubled from June's 6.8 to 12.8 this month.
The bigger news for the day was the FOMC minutes released at 2:00. The market went on hold and then dropped after the release (I guess there weren't enough "we'll pause next time" comments by the Fed governors. The minutes revealed that the FOMC is aware of the risk of a sharp slowdown in the housing market but they were universally concerned about the core inflation in June. They were split on the inflation outlook but most felt it was moving lower. This made for a split on whether rate policy was too restrictive vs. too loose and one member called the June rate hike a "close call".
But there was nothing in there that said a pause in rate hikes is likely. As usual they're sticking to their policy of letting the numbers tell them what to do next. Unfortunately for us their numbers are usually a day late and a dollar short. The market sniffs it out long before they do and that's why the market is consistently lower after the Fed stops raising rates. While we will probably get a big rally after the Fed pauses (maybe even surprises with a rate reduction), it will be a rally that you'll want to short for the long run.
Today's internals were a reversal of yesterdays but not to the same extreme. Total volume was normal but lighter which is what bulls want to see for a correction of yesterday's rally. Down volume was nearly 4:1 over up volume while declining issues were a little more than twice the advancing issues. New 52-week lows outnumbered new highs again, almost by a 2.5:1 ratio.
Speaking of new highs vs. new lows, I came across this chart today in a newsletter put out by bigtrends.com which I thought was very interesting and worth passing along.
SPX vs. NYSE New Highs and New Lows chart, Weekly, courtesy BigTrends.com
The chart says NASDAQ new highs and lows but it should state NYSE new highs and new lows. The point of the chart is that when we see new highs drop to 15 or fewer and new lows increase to 200 or more, it's signaling that the market is oversold and watch out for a reversal. Based on this chart and a double-bottom at the June lows we could say the market is ripe for a rally. The short term pattern is also set up that way so it's for the bulls to lose at this point.
DOW chart, Daily
The DOW looks reasonably bullish here, having left a bullish divergence at a double-bottom against the June low. This is a reliable signal to try the long side. At least you know where your stop belongs--just below this week's low. Obviously the DOW needs to recapture its 50-dma in order to allow the bulls to breathe a little easier.
SPX chart, Daily
The SPX also sports the potential to make this a double-bottom, right cheek up. But it clearly needs to recapture its 50-dma and 200-dma, both of which acted as resistance to yesterday's rally. Another push above today's high should set off more short covering. Until that happens I've got a very bearish EW count developing on this chart. It's labeled currently as a 1-2, (i)-(ii), i-ii which means the bottom is getting ready to drop away. This count says we're about to enter the 3rd of a 3rd of a 3rd wave down and those are screamers. This is a low odds scenario so I'm reluctant to trust it but if it follows through this way we could be looking at a mini market crash coming up. The season is not right for this and that's another reason not to trust this count. But I'll leave it on there until the July 3rd high is taken out thus negating this count. In the meantime realize the potential for a wicked sell off from here. (But I'm actually leaning bullishly here).
Nasdaq chart, Daily
Same for the COMP as for SPX--if this week's low is taken out then the selling flood gates could open up. But the bullish divergences at the new lows, along with the test of the October 2005 low, tell me that long is the place to be. Certainly I'd try a long here and then stop and reverse if price drops below 2012.
QQQQ chart, Daily
More bullish divergences at new lows. It doesn't mean we can't see more new lows but I would expect the bullish divergences to continue and I'd be reluctant to chase this chart lower. I'm thinking we'll the Q's bounce back up to at least 39 over the next month or two.
QQQQ chart, Weekly
Following up on last week's weekly chart of the Q's we can see the importance of 36 holding. If it breaks we could see the 200-weekly average at 35 and then a 38% Fib retracement at 34.68 come into play but I'd be careful chasing this one to the short side.
SMH index, Weekly chart
The semiconductors looks ready for a bounce also. Between reaching the January and April 2005 lows and a Fib projection for the leg down from this past April, I'm thinking the semis are ready for a bounce.
BIX banking index, Daily chart
The banks look like they might have hit their ceiling but the short term pattern would look better with another push higher. The pullback from the December 2004 high looks to be just some profit taking.
Securities brokers index, Daily chart
The banks look potentially bullish but the securities broker index looks potentially bearish. Each test of support-turned-resistance has resulted in further selling. With the 50-dma about to come down and cross through the 200-dma, and the index pulling back from the a test of the 200-dma, one has to wonder if this will result in another sell off. Each failed test, and subsequent sell off in this index has been followed by the broader market. Watch this one.
U.S. Home Construction Index chart, DJUSHB, Daily
The home builders should finally be nearing some stronger support which should result in a larger bounce to correct the hard decline in this index. Watch the 500-530 area for support.
Oil chart, August contract, Daily
Bernanke has stated that he sees a lessening in demand for oil and this chart says we could see a significant lessening of demand (and a consequent drop in the price of oil). This would be telling us that the economy is slowing significantly. While these ascending wedges can go on and on, there is the possibility that we just saw the last high in oil for quite a while. The negative divergence at the last high fits against the 5th wave in this pattern. That interpretation says the ascending wedge is finished and when these wedges finish they usually correct quickly back down to the beginning of the wedge. That would be a drop back down to near $60 in relatively short order (a few months perhaps). But first it needs to get through its 50-dma at 73.25 and then its uptrend line near 71.40.
Oil Index chart, Daily
While oil looks like it has topped I'm thinking the oil stocks haven't quite hit their high yet and that could forecast another push higher for oil too. If this index pushes up near 660 I'd consider lightening up on my oil stocks and put some money in the bank. As for oil, a new high could be the last one for quite a while, especially if the broader market looks to be losing it.
Transportation Index chart, TRAN, Daily
The Trannies were leaders to the downside today and even took out yesterday's low. The bulls are hoping this index is not leading the way. This index looks headed for a quick test of its 200-dma and a first Fib projection target near 4375.
U.S. Dollar chart, Daily
Such a glutten. The US dollar loves to get slapped. It liked it so much at the last test of the broken uptrend line that it had to go for another. And the result was the same--a quick pullback after touching it. I didn't expect another push higher in the dollar and I'm wondering if it will continue to push a little higher along that uptrend line. But if it rolls back over here it will leave a negative divergence in its wake. I'll then continue to look for a drop to the $83 area.
Gold chart, August contract, Daily
The test is on for the gold bulls. After retracing a perfect 62% of the May-June drop, gold sold off sharply. But it's finding support at its old uptrend line and around its 50-dma. With daily oscillators in full dive mode though, it doesn't look like that will hold. At that point I'd watch for a Fib retracement of the bounce to see if we're going to get another leg up otherwise we may be looking at the start of another leg down to match the May-June decline. In that case we're probably looking at $495 as the first downside target.
Results of today's economic reports (no major reports tomorrow):
It will be a quiet day tomorrow morning as far as economic reports go. The market will be more concerned with the reaction to Microsoft's (MSFT 22.87 -0.55) earnings which were strong--record Q4 revenue of $11.8B for a 16% increase over prior year. Operating income was up 30% over year-ago $2.99B, coming in at $3.88B, with a net income of $2.83B for a diluted EPS of 28 cents per share, down from 34 cents a year ago. Mr. Softee also announced that it had completed a $30B share buy-back. MSFT's price jumped on the news, closing at 24.11 after hours, for a gain of 1.24 from its 4:00 close. We'll have to see how that translates to tomorrow's open.
Google (GOOG 387.23 -11.88) also reported earnings for Q2 and at $721.1M on revenue of $2.46B it beat analysts' expectations. But the stock barely registered a reaction and closed up only $1.67 in after hours.
Looking at sector action for the day, most of my list was red today. QCharts is still not updating the Philly index sectors so I'm not sure where they fit in today. But substituting SMH for SOX and HUI for XAU I see that both of these were leaders to the downside today along with the Trannies, airlines, cyclicals and networkers. Computer hardware and pharmaceuticals were the green sectors today.
Let's review the big picture with the SPX weekly charts. The uptrend line from August 2004, which is the bottom of an ascending wedge, held the latest test, at least for now. At about 1240 SPX has very little wiggle room here. Any drop back below this week's low could be nasty for the bulls.
SPX chart, Weekly, More Immediately Bearish
As I had shown on the daily chart at the beginning of this report, the EW count is potentially very bearish here. That's why a break below this week's low would likely trigger a flood of selling. If we're in a 3rd of a 3rd wave down, we're about to enter the strongest leg of it to the downside. I would not want to be long any stocks if that happens. Get short and wait for the April 2005 low (near 1140) to take your money off the table. That would be a 1000 point drop in the DOW and it's likely it would happen by September.
SPX chart, Weekly, Intermediate Bullish
Until that lower trend line breaks, with a drop back below this week's low, the bulls have a good chance of getting their summer rally. Certainly from a risk:reward standpoint this is an excellent place to try a swing play to the long side. Keep your stop below this week's low, give yourself a few months for the rally to materialize (it will be choppy and take a while) and then take profits at the top of the wedge pattern, up near 1350.
We're dancing on the edge right here and for those of you who are long without stop orders in or put protection, you're on the high wire without a net below you. If you're short and stayed short through yesterday's bounce you could be facing another strong rally leg tomorrow or next week. This market is teetering and either way it goes it could go quickly as the other side scrambles to cover. Maybe a strangle play?
Tomorrow being Friday it could be a real snoozer. The price pattern is set up for another rally leg and that's the way I called it for an end-of-day play in the Market Monitor. But any further break down tomorrow could result in some quick selling and that would then endanger yesterday's rally (and make it look like yet another bear market rally that was Fed induced to help their main man in front of Congress). Whichever direction you're playing right now, keep your stops tight. A rally above today's high or a drop through this week's low will then allow you to relax your stop and then let it run because it should have a good run in that direction. Good luck and I'll see you on the Monitor or back here next week.