Welcome to summertime trading patterns, complete with big moves followed by stalls, perhaps followed by another big move. No such pattern would be complete without market pundits searching for reasons for each jit and jot in the market movement. This morning's climb was variously attributed to carryover from the European session, sentiment buoyed by Proctor & Gamble's earnings report and other causes. The midday downturn was blamed on Pfizer after disadvantageous court rulings and a downturn in the energy-related stocks.
In truth, the charts below will show that indices rose until they hit resistance and then they pulled back. Resistance held. The recent ranges held. However markets interpreted today's developments, with a few exceptions, nothing happened that broke indices above important resistance and kept them in a breakout mode into the close. The day's developments left many long upper shadows on indices' charts. The SPX's was one of these.
Annotated Daily Chart of the SPX:
The SPX ended the day with an inverse head and shoulders on the two-minute chart, forming just under the two-minute 100/130-ema's. Those averages were at 1279 and 1278.83, respectively, as of the close. If the SPX leaps above those averages tomorrow morning and can sustain two-minute closes above them, it may make another attempt at today's high. Beware a downturn much past 1277.30 or a prolonged sideways movement, as that will mean that over the short-term, bulls haven't had enough strength to confirm this formation. Keltner charts show resistance at 1278.73 on 15-minute closes, too, echoing the resistance to be found in that region. If the SPX does climb, Keltner's suggest that resistance will be found in the 1281-1281.60 region, at least as of today's close.
The Dow's daily candle also left an upper shadow, although not as pronounced a one as the SPX's. Still, the role and location of resistance was evident on the Dow's daily chart.
Annotated Daily Chart of the Dow:
The Dow's two-minute chart isn't as clear-cut as the SPX's and its potential inverse H&S is skewed by a late-afternoon pop. Still, the two-minute 100/130-ema's do appear to be playing a slight short-term role in resistance, and they were at 11198.65 and 11196.05 as of today's close. Kelner's suggested that other than the resistance currently being faced, next short-term resistance stood at 11217-11222 and next short-term support at 11178-11179, but didn't give any preference to which would be tested first. Fifteen-minute RSI was at 52.96, about as neutral as you can get and of no help at all in making predictions.
The Nasdaq's daily candle also left a long shadow behind, a shadow that had pierced resistance, but eventually was to show that the Nasdaq couldn't hold above that resistance.
Annotated Daily Chart of the Nasdaq:
The Nasdaq's two-minute 100/130-ema's were at 2080.36 and 2080.01 as of the close, with a similar inverse H&S forming beneath those averages. Keltner's suggest that short-term support may be just a little firmer on the Nasdaq than on some other indices, with that support at 2074.70 as of the close, on 15-minute closes, but that doesn't preclude that support being retested or even broached. On the 15-minute chart, an ominous possibility shows up, with a larger regular H&S showing up on that chart, with the neckline roughly along that support. Bulls obviously don't want that support broached on a 15-minute close, but that formation doesn't give good cheer to bulls this evening with the Nasdaq jammed under the resistance shown above. We have the battle of the formations here, some bullish and some bearish. That's common in a choppy trading pattern and just confirms that no one knows yet where markets are headed, not even those with enough money to push the markets around a little.
Similar resistance thwarted the SMH, our proxy for the SOX since our charting service is not providing up-to-date SOX quotes. It's not a perfect proxy, but it's the best we have for now. I'm trying out another charting service, but I'm not yet able to post the charts.
Annotated Daily of the SMH:
With semiconductor billings to be released tomorrow after the close, it may be difficult for the SOX and SMH to push above that resistance, although it's always possible someone knows something about the number that we don't yet know.
Although I'm going to show a weekly chart of the RUT rather than a daily one, the RUT's daily candle also left a long upper shadow.
Annotated Weekly Chart of the RUT:
At the close, the RUT appeared to have confirmed its version of an inverse H&S on the two-minute chart, and it also closed above the two-minute 100/130-ema's. Those were at 696.74 and 696.69 as of the close. The 15-minute chart sports that same ominous potential regular H&S seen on the Nasdaq's intraday chart, though. This is typical of chop, with one formation combating with another, and with little evidence to guide traders to trust one more than another. If the RUT climbs tomorrow morning, Keltner's suggest that short-term resistance will be found at 698.65-699.76, at least as of the close, and this weekly chart suggests that resistance extends up to 702.86 on a weekly close.
Resistance held today. That's the most definitive thing that I can say about the markets.
Some believe that before-the-bell earnings releases brightened sentiment this morning, but Jim Brown is probably right on target when he blames summertime trading patterns and before-the-Fed churning for the recent market moves. That churning behavior meant that markets were ready for a bounce today if they were to continue churning within their pre-FOMC ranges, and so they did.
Proctor & Gamble (PG) was one of the companies providing a reason for an early bounce, if any other reason was needed. PG reported that Gillette products and new products resulted in stronger-than-predicted sales growth, leading the company to beat EPS expectations by a penny and to see Q4 income rise by 36 percent. PG closed higher by 4.21 percent.
Ford (F) closed above its 72-ema for the first time since March. It stopped beneath resistance at $7.00 and its 100-sma at $7.07, however. The company reported that it's considering such steps as alliances with other car manufacturers and selling off some of its less lucrative operations. The stock gained 5.77 percent, closing at $6.96.
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In addition, although Cigna's (CI) Q2 net income dropped, that $2.33 per share figure still handily beat analysts' expectations of $1.94 a share. CI closed higher by 10.18 percent. In addition, before the bell, Merrill Lynch upgraded Microsoft (MSFT) to a buy rating, up from the previous neutral rating, adding to the early positive sentiment. MSFT posted a gain of 1.29 percent.
Techs received a boost from Electronic Arts (ERTS), with that company's Q1 loss not as wide as expected. ERTS also raised guidance for full-year 2007. ERTS gained 7.73 percent.
GM detracted from that bullish sentiment, though. Last night, Jim discussed GM's loss of market share to Toyota and the company also revised Q2 results to reflect a wider loss than had been reported. GM still managed a 0.99 percent gain.
Although Pfizer (PFE) initially gained with other equities, legal developments later in the day soured some investors on the stock. PFE has an infringement case against Ranbaxy Labs, an Indian drug maker, and a federal appeals court sent the case back to a lower court. In addition, the federal appeals court overturned part of its patents for Lipitor. PFE closed with a 1.45 percent loss.
Other big news this morning was Time Warner's (TWX) decision that AOL would offer free email, software and other products to TWX's broadband users, with the decision announced on the day TWX also reported earnings. Other free services will include instant messaging and a local phone number with unlimited incoming calls. The company said that it did not expect this decision to materially impact its outlook for 2006, as it counts on this move to send AOL users to its broadband Internet connection, resulting in more online ad revenues, already a fast-rising part of TWX's business. Investors liked the news, and the stock gained 2.58 percent.
The 40 percent climb in ad revenue took analysts aback. Total revenues dropped less than expected due to the increase in ad revenues. The company earned $0.24 a share, up from the year-ago loss of $0.09 a share. Without discontinued operations, TWX would have earned $0.20. Most analysts had expected $0.19 a share.
A couple of key economic reports did appear this morning. Mortgage applications declined in the latest weekly survey by the Mortgage Bankers Association. The MBA's headline number showed a decrease of 1.2 percent on a seasonally adjusted basis from the previous week, with application volume the lowest since May, 2002. Volume dropped 29 percent from the year-ago level. The component measuring government loans increased 0.9 percent, but other types all fell. Four-week moving averages also declined. With average contract interest rates for fixed-rate thirty-year mortgages declining to 6.62 percent, the refinance share of mortgage activity rose to 37.0 percent. The DJUSHB, the Dow Jones U.S. Home Construction Index, gained 0.77 percent, but was stopped cold by its 30-sma at 613.58. Bulls need to see a daily close above that average as a first step.
Another economic report had the potential to move markets, but a snafu last month might have left some wondering how reliable the report was. Friday's nonfarm payrolls figure certainly will have the ability to move the markets, and this morning a precursor, formerly deemed the most reliable forecast of that number, was released. The Automatic Data Processing (ADP) said that in July, U.S. nonfarm private-sector payrolls increased by 99,000. Government jobs are estimated to add 15,000 to the payrolls each month, so the ADP report suggests that Friday's July's nonfarm payrolls number might weigh in around 143,000. If you remember back to last month, however, the ADP's supposed close correlation with the government figures just didn't work out. They were worlds apart.
Jim discussed the payrolls expectations last night, so I won't go into detail here except to repeat his information that while the whisper numbers range from an add of 50,000 to 180,000 jobs, the consensus leading into today's number was an add of 150,000 jobs. The ADP figure, with government jobs added, was near that expectation.
In addition to releasing this report, ADP said that it would spin off its Brokerage Services and Securities Clearing and Outsourcing Services businesses into an IPO and increase its stock buyback program. It named a new CFO and announced Q4 net income that more than doubled from the previous years. Earnings were $0.45 a share. ADP gained 3.96 percent.
Analysts had expected drawdowns when the crude inventories were reported, but the gasoline drawdown was not as steep as expected while the crude drawdown appeared to be steeper. Gasoline inventories fell 100,000 barrels, crude inventories declined by 1.8 million barrels, and distillates increased by 700,000 barrels. Marketwatch.com pegged expectations at a drop of 1.1-2.0 million in gasoline inventories and a drop of 1 million to a gain of 980,000 in crude inventories. Distillate inventories came in above most estimates.
Crude futures had been rising into the report, with worries about tropical storm Chris' strength and trajectory, those expected inventory drawdowns and continuing violence in the Middle East sending crude futures back above $76.00. With crude's and natural gas' strength, some theorized that market participants again looked to the energy sector to provide leadership, and leadership to the upside. This was yet-another supposed reason for the move higher this morning, if one was needed. Devon Energy (DVN) perhaps helped that sentiment, with the company reported Q2 earnings that included a 39 percent rise in net income. DVN gained 1.52 percent, but the day's trading produced a long-legged doji at the top of a climb, not a bullish-looking candle.
Crude futures left that same long upper shadow seen on many charts, and the OIX and OIX both left doji at the top of climbs, with both indices closing slightly lower. As I type, crude was at $76.05, up slightly from its daily close, but the XOI and OIX look as if they may be running out of steam and may need to trade sideways or retrace soon. With a hurricane watch being issued this morning as Chris strengthened, the chart characteristics seen here may not be as important as what happens overnight and over the next couple of days with Chris. The watch was for the southeastern Bahamas and the Turks and Caicos Islands. Such a watch is issued when it is believed that the storm can sustain winds of at least 74 mph within 36 hours. Chris' sustained winds have so far been clocked at 65 mph. Forecasters still were suggesting this afternoon that Chris could hit anywhere from Florida to the south of Cuba late this weekend. As Jim said last night, any indication that the storm might strengthen and then hit the rigs in the Gulf of Mexico will likely send crude costs higher.
In other economic developments, the Treasury Department announced that it will begin issuing 30-year bonds on a quarterly basis beginning in February 2007, with this schedule more frequent that the former one. The Treasury also announced a $44 billion offering of treasures next week, with those to be auctioned including $21 billion in 3-year notes on Monday, $13 billion in 10-year notes on Wednesday, and $10 billion in 30-year notes on Thursday.
Although bonds initially dropped on the news of more supply, they eventually climbed while yields dropped. If there's fear of the Fed, it's not showing up in the recent movement of bond yields. The yield on the ten-year ended at 4.961 percent this afternoon, having dropped down to test the June 13 low of 4.949 percent and that day's close at the identical 4.961 percent. Tomorrow, yields should be watched since they're testing this key support level while many equities test key resistance levels.
Tomorrow's economic releases include initial claims at 8:30 and June's factory orders and July's ISM services at 10:00. Factory orders are expected to rise 1.6-1.7 percent, after a prior gain of 0.7 percent. ISM services are expected to remain above the benchmark 50, with predictions ranging rather widely from 56.5-58.0. The prior number was 57.0. At 10:30, natural-gas inventories will be reported and June's semiconductor billings come after the close, so the SOX should be watched, too, going into Friday, since it's been part of the recent leadership of the techs.
July's chain store sales will be reported, with Wal-Mart already having sparked interest in the retailers earlier in the week. Other less-watched numbers to be reported tomorrow include July's Monster Employment Index at 6:00 and July's Risk of Recession at 10:00.
Important companies reporting tomorrow include CAH, GTW, MMC, OMX, RIG, SU, and SFY. Other companies reporting earnings tomorrow include ATVI, LNT, AIZ, ATPG, BCS, BWNG, CEGE, CEPH, CSK, COB, CWEI, CTB, CVTX, CVS, DWA, DUK, EE, ECPG, FACT, GLBL, HBIO, ITWO, IMO, LINC, MGM, MAA, MDS, MORN, NCT, NTT, NBL, OII, OPWV, PPX, PTEN, PDC, TWY, REV, TSG, SKYW, UVN, WMG, WBMD, OATS, and WMB. As Jim Brown mentioned in this weekend's Wrap, many of the reporting companies this week are in the energy sector, and they can impact trading, as Devon's might have done today. Some financials are also reporting this week.
Although the energy sector helped send indices higher earlier in the day, their daily candles did not promote bullish hopes. Those candles left long upper shadows. When those types of candles appear at the top of a climb, they're not considered bullish, and often indicate the need for some retracement or sideways movement, at least. The RUT posted a strong gain, but the gain isn't as encouraging if you look at the day's candle, printed almost entirely within the range of yesterday's open and close and leaving a long upper shadow of its own. That's just continuation of the recent tightening range rather than a particularly bullish development. Those who are advocates of the inside-day candle theory will likely be watching for a break outside of today's range as a signal to go long or short, but I've never been a great fan of the inside-day theory.
Neither the BKX nor BIX are providing much leadership, either. Neither the RLX nor the DJUSHB have stepped up to the plate. I had warned a couple of weeks ago that the homebuilders were showing some signs that their declines might slow, if they didn't bounce, and that slowing has happened, but the bounce is so far tepid and into a downside gap. The TRAN this week tested horizontal support near 4265, but today's candle was nearly a classic inside-day candle and the 200-sma and -ema's wait overhead at possible horizontal resistance at 4400-4410.
These indicator indices are not participating in rallies as strongly as might be hoped. Perhaps leadership roles are changing, with the GSO and HMO indices being strong gainers today. However, with the SOX's leadership role in question ahead of the billings number tomorrow after the close and other indices not participating as strongly as desired, the sustainability of the rally remains in question, particularly ahead of Friday's numbers.
If this weren't the summer, I'd suggest that tomorrow was likely to produce either an indecision-type candle at resistance, perhaps piercing it, or an actual downturn, with some preference given to the indecision-type candle. That could be a small-bodied candle, with or without an upper shadow, or a doji. However, it would be unwise to ignore or counsel anyone else to ignore the vagaries of light-volume summertime trading, when prices can get pushed around quite a bit. Resistance held today, and my best guess is that it will hold tomorrow, but perhaps not until after a retest and even that possibility of temporarily piercing it, but that's a guess only. With daily RSI's about as neutral as they can get and indices churning away, anything is just a guess. If you sign on the Market Monitor, you'll get great advice from the commentators on short-term direction, but anything other than that is unknown as yet. In my opinion.
Traders used to keying off the European market should be aware that the ECB will announce its rate-hike decision tomorrow morning U.S. time, so those markets may clamp down in a range ahead of that report tomorrow morning.