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Market Wrap

The Morning After

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In the current rate-hike cycle for the Fed, the immediate post-FOMC reaction has typically been reversed the next day. With yesterday's predominate post-FOMC reaction being selling into any rally attempt, a sustained rally would have been the expected counter-reaction today. That wasn't what was delivered.

The early-morning action provided the requisite rally attempt, but several characteristics of the early morning action immediately puzzled watchers. That rally attempt didn't inspire confidence, and that lack of confidence proved telling. In some sectors, the rally wouldn't last long. Even in those that sustained a gain, the afternoon pullback wiped out some of those gains.

While networkers and semiconductors helped lead techs higher from the open this morning, the Russell 2000 soon had trouble sustaining its gain. Techs and the RUT typically have more coherence in their action, so that divergence was troubling. Financials turned lower. Rising yields may have impacted financials, but were yields rising due to an upcoming afternoon auction of 10-year notes or because of further rate-hike fears? Weakness in Dow components CAT, HD and AIG pressured that index, with AIG's weakness coming ahead of its earnings report this afternoon. Their weakness was to percolate through to many other Dow components as the day progressed.

The SPX wasn't immune from that failure at the day's highs, either. Rising crude prices threatened the rally even as it began, with rising energy-related stocks not able to sustain the S&P 500 and rising energy costs pressuring the transports.

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Even crude couldn't maintain its high, falling back off that high of $77.40 a barrel to close the regular session at $76.35. Sometimes internals and index action didn't seem to make much sense, although internals were more in agreement with the market action by the close, when fear accelerated the declines. Earlier, before that fear hit, one might almost have concluded that there was just some rotation into formerly beaten-down sectors such as the semiconductors and out of relatively stronger sectors such as the big caps, but the action of the Russell 2000 didn't support that theory, either. No one would describe the RUT as doing well lately, and it succumbed to weakness early and hard.

Some indices ended higher: the SOX, 0.70 percent; the DDX, the Disk Drive Index, 0.63 percent; the NWX, the networking index, 1.95 percent, and, of course, the various energy-related indices. Gold climbed and the XAU gained. However, even the Nasdaq, holding onto its gains much of the day, closed lower by 0.57 points and 0.02 percent. Bulls stumbled home today, their heads held low.

At the end of the day, kudos should be given to Jim Brown, who said last night that the CSCO-induced bounce wouldn't last. Although CSCO itself closed sharply higher, the bounce it and other reporting stocks engendered didn't last.

Was anything decided today? Unfortunately for swing and position traders, I don't believe so. The SPX continued sliding down a descending trendline that's been in place since late April. It's a judgment call, but I don't believe it definitely broke below its recent choppy consolidation zone.

Annotated Daily Chart of the SPX:

If that choppy consolidation zone is going to be preserved, as I think it could be, the Dow might slide further down that trendline, perhaps to test those averages gathering just below it, but then might bounce back again. Fifteen-minute RSI was showing extremely short-term oversold levels, but also showed a new downside target of 1261.82. If the SPX should gap lower or be driven lower to that level early tomorrow morning, watch carefully for bullish price/RSI divergence as a sign that short-term bearish profits ought to be carefully guarded. It's possible that a bounce could begin.

The Dow's early morning rally drove it right up against resistance that has been turning it back for quite a while. It was turned back at that resistance again.

Annotated Daily Chart of the Dow:

Both the pink 50-sma and the blue-green 72-ema serve some function as support and resistance for the Dow. Today's action drove the Dow down to test their support. If 11139 fails, then the 200-sma and -ema's might be retested. I caution, though, that when prices start a prolonged consolidation, the consolidation zone is sometimes across grouped averages that appear as if they should support or resist prices, but don't. In that case, grouped averages seem to serve as a line across which prices weave back and forth, rather than as firm resistance or support.

Because of its importance in determining sentiment, the Dow may be key to watch tomorrow. As of the close today, it had tested Keltner support at 11066.62 (as of the close), with 15-minute RSI at levels that usually suggest that the decline is about to slow or that a bounce could even appear. The Dow often produces another equal or lower low before bouncing, sliding down a descending Keltner line while it does so, producing bullish price/RSI action. Look for that kind of development tomorrow as a sign to keep stops tight on bearish positions, preparing for a possible bounce. Those who might have dipped a toe into a bullish play on the close should be aware of the possibility of that choppy slide lower before a bounce, even if that bounce might eventually come.

AIG was pegged as contributing to the Dow's slide today and accused of souring sentiment for the big caps, with this occurring ahead of this afternoon's earnings report. AIG has been volatile in the after-hours session, at $58.10 as I type, down from the $58.48 close, but having traded much higher and some lower after its earnings report. With such volatility, it's difficult to predict whether it will help or hinder the Dow tomorrow. As will be noted below, AIG's report proved confusing, and investors don't quite know how to react.

As the day ended today, the Nasdaq was already showing tentative bullish price/RSI divergence on a 15-minute chart, but that tentative divergence could be erased if the Nasdaq were to fall substantially below Tuesday's 2054.13 low. As of the close, it looked possible that the Nasdaq could attempt a bounce soon. The daily chart does not inspire confidence, however.

Annotated Daily Chart of the Nasdaq:

Support at 2050-2052 looks important, but beware of the possibility of a stop run below that, followed by a bounce. Watch what the SOX (or SMH or $DJUSSC, if you can't get real-time SOX quotes) is doing, because if it's climbing or holding up well, you don't want to bet too heavily on a continued Nasdaq decline. If the SOX is cratering, you conversely don't want to bet too heavily on a Nasdaq bounce.

For now, we're using the SMH as the proxy for the SOX in our reports.

Annotated Daily of the SMH:

Although we're using the SMH as our proxy for the SOX due to charting difficulties from the provider, they're not an exact proxy for either other. The SOX's red candle body is smaller today, but it does also have an upper shadow. The SOX also closed above yesterday's close, although well off its high of the day and into the gap higher from this morning. At the close, it was approaching 15-minute Keltner support at 407.16 (as of the close), with the SMH having hit its similar Keltner support at 31 (as of the close). The SMH's 15-minute RSI was at levels that indicated that declines might slow while it produced bullish price/RSI divergence or even that the SMH could begin a bounce, so watch for that possibility. The SOX might need to slide a little lower, but, barring an all-out debacle, it looked ready to bounce soon after it tests that support, if not right off the bat.

Many commented on the Russell 2000's slide today, with this index diverging from the typical behavior on a day when techs had been performing well. The RUT lost 6.42 points or 0.93 percent, but was down more than 14 points off the day's high. A look at the weekly chart, however, confirms that the RUT, too, has not broken out of recent consolidation. Although it may eventually break down, it so far holds inside a roughly triangular consolidation pattern and above a long-term ascending trendline.

Annotated Weekly Chart of the Russell 2000:

Crude inventories were probably more important than any other economic release today, but the housing-related developments probably played a role in today's declines and certainly in the souring of this morning's buoyant sentiment. Mortgage application volume increased in the week ending August 4, the Mortgage Bankers Association noted. The weekly survey pegged the increase at 4.9 percent on a seasonally adjusted basis, but that still leaves the volume 24.9 percent lower than the year-ago level. In order to keep last week's gain in context, remember that last week's survey resulted in a four-year low for the application volume. As many may already know, yesterday Toll Brothers (TOL) blamed the deceleration in the housing market on a lack of consumer confidence rather than economic conditions. Consumers read about and see evidence of reductions in home prices and hesitate, a spokesperson said. TOL lowered its estimate of the homes it will deliver in the fourth quarter. The company also noted that some of its land options represent deals that won't be viable in today's market, and the company will take write-downs for the value of those options. Countrywide Financial (CFC) also weighed in on the subject of loans, saying that loan fundings dropped hard in July. The MBAA's report of an increase from the four-year low didn't do much to improve sentiment and the DJUSHB, the Dow Jones U.S. Home Construction Index, dropped 4.47 percent today.

Most other components of the MBAA's survey also increased, with the exception of the government index, which fell 3.7 percent from the week-earlier level. Four-week moving averages for some components fell, but that for the refinance index climbed 2.1 percent, with the refinance share of mortgage activity also increasing. As would be expected from what is seen on the refinance figures, the average contract interest rate for a fixed-rate thirty-year mortgage decreased, to 6.45 percent from the previous 6.62 percent. Points inched higher, however.

At 10:00, June's wholesale inventories were reported to have risen 0.8 percent while the inventory-to-sales ratio fell to 1.14. Economists had expected a 0.9-percent rise in inventories, one source reported. May's were revised higher to 0.9 percent, up from the previous 0.8 percent. Year-over-year, inventories have risen 8.1 percent, with a 13.5-percent sales growth outpacing the inventory growth.

Some components showed inventory growth outpacing sales growth, however. That was true of wholesale inventories of durable goods and drugs. Automotive inventories fell, but sales fell more.

Those hoping for a bounding economy want to see inventories falling and sales increasing, but this number rarely proves market-moving. Economists do use it to fine-tune their GDP estimates.

The crude inventories attained exaggerated importance after this week's announcement by BP that its Alaskan Prudhoe Bay field production would be impacted to the tune of as much as 400,000 barrels a day. Crude inventories fell 1.1 million barrels; gasoline, a whopping 3.2 million barrels; and distillates, 0.2 million barrels. Utilization climbed 0.80 with refinery capacity up to 91.63. The drawdown was worse than expected, with expectations for the drawdown in gasoline supplies ranging from 400,000 to 850,000 barrels. Crude had climbed into its high of the day ahead of and then after the report, but fell sharply in the afternoon.

Company-related developments did appear to impact trading today, with the CSCO bounce appearing to help techs. Today, Deutsche Bank reiterated its buy rating of CSCO, with the firm's price target at $22.50. Cisco's (CSCO) Chief Executive John Chambers said what investors wanted to hear with Chambers predicting revenue growth of 15-20 percent for the fiscal year ending next July. Analysts had forecast 15-percent growth in revenue, so Chambers' prediction beat theirs. Quarterly profit was flat at $0.25 a share, with a higher-than-expected sales number balancing the expenses related to employee stock options and its acquisition of Scientific-Atlanta. A year ago, when the company did not yet include stock-option expenses in its results, the earnings were $0.24 a share. Without those costs, the company would have earned $0.30 a share, above the predicted $0.28 a share. The Scientific-Atlanta acquisition has helped the company move from the slow-growing areas of its business into more quickly growing areas related to high-speed Internet. Excluding Scientific-Atlanta's equipment's contribution, sales climbed 23 percent from the year-ago level, but including them, they climbed 65 percent.

Investors should note, however, that the better-than-expected EPS was also helped by the company's share buy-back plan, and gross margins fell to 64.4 percent, down from the year-ago level of 67.9 percent. To end on a good note, revenue of $7.98 billion also inched above expectations of $7.92 billion.

Not all events were upbeat in the tech world, however, with Infineon Technologies (IFX) announcing that it would trim both the price and size of its Qimonda (QI) memory chip IPO, to $13 each and 42 million, respectively. One article termed this a sign of trouble in the IPO and semiconductor markets.

In other company-related news, Morgan Stanley & Co. (MS) announced that it was acquiring Saxon Capital Inc. (SAX) for $14.10 a share. SAX services and originates residential mortgages. MS is paying a premium for the company's stock, which went out at $10.97 yesterday. Disney (DIS) weighed in with an earnings report, beating expectations.

Tomorrow's economic releases include initial claims for the week ending August 5 and June's trade balance, both to be released at 8:30. Expectations for initial claims are above the benchmark 300,000 level, from 310,000-315,000. June's trade balance is expected to widen to a deficit of $64.5-64.8 billion, up from the previous $63.8 billion. At 2:00, July's Treasury budget will be released, with expectations of a deficit of $33-35 billion, much narrower than the previous $53.4 billion deficit.

Earnings include those from AAP, UHAL, ADI, BVF, CRZO, BAP, CREE, DT, DISH, EXPE, FS, GG, IMGN, KSS, JCP, KSS, PSUN, RPB, SNS, TGT, and URBN, with a number of retailers among that group.

As this report was prepared, AIG had just reported earnings, with CNBC terming the company as beating expectations, although the numbers proved confusing because of various charges included or not included. AIG pressured the Dow today, as has already been noted, but its impact tomorrow is not yet decided, with traders sending prices all over the place after its earnings report.

So, what happens tomorrow? Unless there's going to be a cascade lower, many indices look to be approaching short-term support, with RSI on short-term charts showing oversold conditions. RSI tends to be an early indicator, so many times prices chop or slide lower while RSI then signals bullish divergence. The SMH, Nasdaq and RUT currently look most ready to bounce, with the Dow nearly there, too. The Nasdaq and RUT often overrun support and this is short-term Keltner support, so it can't be trusted to give long-term views. The Dow often slides or chops lower and provides that bullish price/RSI divergence before it bounces, so its testing of support can't be trusted as definitive, either. Not yet.

What I see is the possibility for a slowing of declines or a bounce, but that bounce could then hit a steel wall and be repelled back to retest the bottoms of consolidation zones. Sorry, but when markets have been chopping around as long as these have, resistance and support can be found everywhere, and trendlines, too. Which is important and which not? Wish I knew. Unless any bounce is hard and fast, the Keltner channels will align to suggest that a bounce would be followed rather quickly by a retest, perhaps then producing that higher low or lower low with bullish divergence.

The longer indices chop, however, the more energy they're building for a breakdown or breakout, and tomorrow would be an ideal time for a big move because of its position in the opex cycle. The Thursday before opex week has often produced big moves. In typical situations, I would think that the positioning of the indices and the Keltner channel configurations suggest the possibility of a consolidation day tomorrow, with support perhaps pierced, but that Thursday tendency toward wildness shouldn't be ignored, either. Watch the support levels marked above. Protect bearish profits. If you think you're seeing a breakdown, be even more vigilant of bearish profits since some short-term charts suggest that such a breakdown could be a trap. For example, the VIX ended the day at Keltner resistance, with its 15-minute RSI showing "overbought" conditions. If there's a breakdown with supporting internals, then it may be more trustworthy, but those internals should include a VIX that's moving sharply higher above resistance currently at 15.27 on a 15-minute close (as of the close). Remember that internals have switched sides intraday lately, too, so keep a close watch to make sure you and they are still on the same side.

I want to leave you with one more chart, a weekly TRAN chart.

Annotated Weekly Chart of the TRAN:

If the TRAN steadies now and climbs again, then it has violated neither its long-term support nor the previous swing high. Much is resting on the TRAN, however, and if it drops much below the weekly 72-ema and then doesn't bounce by the end of the week, then matters look much more bearish. So far, the bearish case has not yet been proven, but watch the TRAN.
 

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