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Market Wrap

Oil Slicks on the Road

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Equity bulls found few barriers in their way when they shoved prices higher this morning. Prices were still being propelled by yesterday's upside momentum and no barrier was going to stop them. The GDP revision was roughly in line with expectations. An ADP payroll survey hinted at sluggish growth in Friday's upcoming payrolls number. The sluggishness of that growth might have been reassuring to those watching the Fed hawks for signs of more rate hikes and, hey, it was growth. An upside surprise in crude inventories sent crude futures lower this morning.

Both the GDP revision and the ADP payroll survey contained information that might give some bulls pause, but those bulls still had a strong purchase on the road to higher prices during the early part of the session. Not even a profit warning from Costco (COST) was enough of a barrier to stop that early momentum.

Tech and small-cap bulls kept the momentum going much of the day, with the SOX charging up past 450 and closing at 453.77. However, crude futures bounced, and the resulting oil slicks caused SPX and Dow bulls to stumble a bit against a new barrier on the road to higher prices. That new barrier was erected by Richmond Fed President Jeffrey Lacker who spoke on Bloomberg TV. He reiterated his belief that we can't assume yet that inflation has been tamed, and that nothing he has seen since the last FOMC meeting changes his mind. He still believes that further tightening might be needed. Lacker, as you may remember, was the one member who dissented from the vote to pause. Tomorrow's deadline on the Iran matter and the late-week economic reports probably also erected some barriers of their own.

The SPX's daily candle showed the effects of those barriers.

Annotated Daily Chart of the SPX:

The SPX's daily Keltner chart shows that the SPX has been finding support on daily closes at a Keltner line that was at 1297.18 as of yesterday's close. Price action has set a tentative upside target of 1309.01-1314.01, but today's daily candle questions whether that will be reached, or at least whether the SPX will require consolidation or a pullback to support before reaching higher again. RSI signals potential bearish divergence. Until that daily support is breached on a daily close, however, the rally continues.

That's the broad Keltner outlook. Shorter-term, the SPX's prices closed roughly in the middle of nearest support and nearest resistance as often happens when the market is uncertain ahead of the next day's reports. Those support and resistance levels were at 1302.76-1303.20 and 1306.13-1306.67 on 15-minute closes. The SPX looked poised to drop toward support as it closed today, but I expect tomorrow's numbers to be more important than what's seen on this chart. If those reports don't change the setup, a potential early pullback to support is possible but not a given.

A thirty-minute Keltner channel with outer bands at 1295.11 and 1307.01 usually contains most SPX candles, so, barring a breakout, the SPX appears near potentially strong resistance. Bearish divergence is more pronounced on this chart.

The Dow's daily candle was also a small-bodied one with both upper and lower shadows, a potential reversal signal. Anyone who wants to jump on the idea of a potential pullback after seeing that candle should glance across the Dow's chart at the Dow's April 19 candle, also a small-bodied candle with both upper and lower shadows, produced at the top of a climb. That potential reversal candle was followed by a day when the Dow closed higher by almost 70 points. Look for the possibility of a short-term reversal then, as suggested by today's candle, but don't count on it yet, especially in a thin trading environment.

Annotated Daily Chart of the Dow:

The Dow's daily Keltner channels show potentially strong resistance at 11433.84 and then 11505.96, a rather wide span, but traders should be careful if the Dow pierces the first of those levels and then pulls back to any degree.

Like the SPX, the Dow ended the day with the short-term charts showing the possibility of a pullback to support, currently at 11,366.79-11,370.31 on the 15-minute chart, but with prices so nearly balanced between support and resistance that it's difficult to trust that assumption. Nearest resistance on this chart is at 11,398.55-11,403.30.

The 30-minute chart shows that, barring a breakout, the Dow will likely find resistance on 30-minute closes from 11,401.84-11,406.44, so there's a lot of Keltner resistance building near that level. Barring that breakout, then, the Dow appears close to resistance on a short-term basis.

With the techs leading the way, the Nasdaq leaped above several barriers today, but it approaches several others, one a significant 50 percent retracement of its summer decline. Those 50 percent retracements often produce consolidation or a pullback to retest support, so be careful here, following any bullish plays higher with careful stop placement.

Annotated Daily Chart of the Nasdaq:

The Nasdaq's 240-minute Keltner chart shows the most correlation with the Nasdaq's movements. That chart shows the Nasdaq testing an important level at the close, a channel at 2180.80 on 240-minute closes. Support that was at 2161.83 on 240-minute closes has been holding as support, but, barring a new breakout, it may be time for the Nasdaq to pull back and test that still-rising support. The support may have moved higher by the time it's tested. There's tentative bearish divergence on the 240-minute chart.

There's been a breakout on the 15-minute chart, with the breakout support now at 2183.31-2184.50 on 15-minute closes. That's still rising, too, so will be higher tomorrow morning if the Nasdaq opens higher. If the Nasdaq gaps down, that support might convert to resistance, and should be slightly lower. There's pronounced bearish divergence on this chart, but the rally mode continues as long as the Nasdaq continues finding support at the breakout channel lines. The Nasdaq's short-term rally may be living on borrowed time, but it was still alive and well into the close.

The Nasdaq had not broken out on the 30-minute Keltner channel, and instead kept ending 30-minute periods jammed up against Keltner resistance that it was shoving slightly higher. That resistance was at 2186.35 on 30-minute closes, as of yesterday's close. Usually that's not a good sign for short-term bearish plays, but the fast-moving Nasdaq sometimes shoves to a last new high before it retreats to any degree after it's been pushing against this barrier for a while, as it has now.

Tech-related indices can and do breakout and extend their breakouts while bearish divergences continue. The SOX is one example, having broken out of its 30-minute Keltner channels yesterday and maintaining the breakout today while RSI levels off.

Annotated Daily of the SOX:

I wouldn't be surprised to see the SOX reach for that next resistance, a potential price magnet, but, if so, the 50 percent retracement and weekly 200-ema will likely serve as enough of a barrier to require some sideways consolidation if not a pullback. It looks as if there's some historical support building in the 445-446 region, so look for first support there, and then of course watch the weekly 200-sma at 432.10.

There was nothing bearish about the RUT's daily candle, despite the slight pullback off the day's high.

Annotated Daily Chart of the RUT:

However, the RUT also approaches an important 50 percent retracement of its decline, too, with that at 727.10 for the RUT. The 30-week sma is just ahead at 725.19, and there's some historical support/resistance in the 724.50-730.80 zone. Those are joined by 240-minute Keltner resistance at 722.86 as of the close. These suggest that the RUT could be close to resistance that will cause it to pause if not retreat.

For those not familiar with Keltner resistance, the following 240-minute chart shows the channel resistance I mentioned. The various channel lines can be confusing to the uninitiated, but just concentrate on the black channel and note how the RUT tends to trade in comparison to that channel.

Annotated 240-Minute Chart of the RUT:

Not all indicator indices were jammed up against resistance on their 240-minute or daily Keltner charts. The DJUSHB, the Dow Jones U.S. Home Construction Index, dropped today, but dropped within a triangle it's been forming most of the month. After last week's disappointing results from the National Association of Realtors and the Mortgage Bankers Association, the MBAA again reported a decline in weekly mortgage application volume survey. This was for the week ending August 25. The component that measures mortgage loan application volume fell 0.9 percent on a seasonally adjusted basis from the week-ago level, 2.3 percent on an unadjusted basis, and 22.4 percent from the year-ago level.

Most other components fell, too, with the refinance component being an exception. That inched slightly higher. Refinancing activity climbed as a percentage of total application activity, too. Four-week moving averages are still reacting to increases a few weeks ago, and remain mixed, with only the purchase component lower. Average contract interest rates for fixed-rate thirty-year mortgages climbed from the previous week's 6.38 percent to 6.39 percent with points increasing, too.

Jim mentioned in last night's Wrap that the sentiment figures yesterday could be forecasting a weak jobs number on Friday. Today, the ADP payroll survey showed growth that one adviser termed "sluggish." The ADP survey said that private payroll-sector payrolls increased by only 107,000 for August, with government jobs then likely to add another 10,000 jobs. The forecast for Friday's payroll figures is currently 130,000 jobs, but the ADP figure, if accurate, would predict a slightly lower payroll number of about 117,000. This ADP figure supposedly has a strong correlation with the payrolls number, but there was a big miss a couple of months ago, back in June.

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The big economic report for today was the second-quarter revision of the GDP. The general impression among television and print commentators and economists after the report was that the economy might be pulling back a little, but it really isn't doing too badly. Expectations had been for a revision to 3.0 percent growth, up from the previous 2.5 percent estimate, with the actual reported number at 2.9 percent. For reference, the first-quarter growth had been 5.6 percent.

A slightly higher final sales figure, up 2.3 percent rather than 2.1 percent, contributed to the revision, as did higher investments in nonresidential structures and higher exports. Also contributing, however, was a rise in inventory building, which could be due either to sluggish sales or resulting from a deliberate buildup ahead of an anticipated rise in sales.

Another potentially troubling component when we know the FOMC is watching closely for signs of wage pressure is that wage and salary growth were revised higher by nearly a third, according to one report. However, the key inflation data within the report were revised slightly lower, to an increase in core prices of 2.8 percent, down from the previous 2.9 percent. Unfortunately, that inching lower on the revised number did nothing to lower the year-over-year rise of 2.3 percent, which remains above the Fed's reputed target of 1-2 percent. A Marketwatch.com article noted that this increase in core prices is the largest in eleven years. Although the market interpreted the headline number as Fed friendly, all the data might not have been.

Investments in housing moved lower, no surprise, but the 9.8 percent drop in residential investment certainly didn't reassure those who believe that the housing market remains important to consumer sentiment and spending. Corporate profits rose 3.2 percent from the previous quarter, with this figure having risen 12.6 percent in the first quarter. We've been hearing a lot about stock buyback programs, with FLIR being the latest company to report on one, and one analyst noted that companies have major stockpiles of cash. That analyst expects higher energy and labor costs to burn through some of those stockpiles, however, perhaps rapidly. That might help explain why bullish sentiment turned sour on some indices when crude turned higher.

Jim Brown spent some time this weekend and last night discussing the outlook for crude, so I won't go into any depth in this report, except to note that crude inventories rose against expectations for a decline. Crude futures had been dropping ahead of the report and dropped further afterwards. Crude inventories rose 2.4 million barrels for the week ending August 25, the Energy Department reported. Gasoline inventories rose 400,000 barrels, and distillates increased by 136.8 million. Crude futures added to their losses immediately after the report to an intraday low of $68.60, reaching below the 200-sma and down to the 200-ema at $68.59. After almost touching that 200-ema, they bounced back above the 200-sma at $69.68 by the close, closing at $70.10 (QCharts, intraday) or $70.03 (QCharts, daily). The strong spring off the day's low suggested a potential short-term reversal but remember that some of the volatility could be due to the rollover of the new contract this week.

Other writers as well as television commentators have been noting the number of buyback programs impacting earnings this quarter, and the GDP revision revived talk about that trend. Flir Systems (FLIR) joined the ranks of other companies, with FLIR noting today that since June 30, it had bought back 4.1 million shares of its common stocks.

In another development, a judge ordered that the $50 million compensatory damage award in a federal Vioxx case was so excessive that it required a new trial.

Negative news came from various sources and industries. Retailer Costco (COST) lowered guidance today. COST said that fourth-quarter earnings would be $0.68-0.71. Analysts' actions today included downgrades of homebuilder Hovnanian (HOV) by JPMorgan Chase and Lockheed Martin (LMT) by Prudential. JPMorgan Chase downgraded HOV to a neutral rating from its previous overweight one and Prudential downgraded LMT to an underweight rating from its former neutral rating.

Tomorrow's economic releases will prove numerous, but perhaps not quite as important as today's GDP or Friday's non-farm payrolls and ISM index. One exception might be the core deflator that's part of July's personal income, one of the two reports issued at 8:30 tomorrow morning. Jim pointed out this weekend that this is a key indicator watched by the Fed. The other 8:30 release is the usual jobless claims, this one for the week ending August 26.

Releases will continue throughout most of the day, however, with August's chain store sales among them. At 9:00 the August NY NAPM will be released, followed at 10:00 by August's Chicago PMI and July's factory orders and help-wanted index. The NAPM and Chicago PMI might also garner a bit of attention. Natural gas inventories for the week ending August 25 come next, at 10:30, with August's Kansas Fed Manufacturing Survey appearing thirty minutes later. August's agricultural prices will not appear until 3:30.

What may prove more important than those economic reports is a speech by FOMC chairman Ben Bernanke. The speech will include a question-and-answer session, so there is more potential to impact markets. The speech begins at 12:30 EST, I believe.

Earnings are dwindling, but tomorrow's lot includes CIEN, DLM, DG, HRB, HNZ, TIF and ZLC.

I heard a CNBC correspondent argue today that markets are counting too much on an end to rate hikes, and that, if tomorrow's PCE deflator indicates a too-hot number and especially if Bernanke says anything too hawkish, markets could be set up for a pullback. I wouldn't argue with that conclusion, not with the SPX producing a small-bodied candle with both upper and lower shadows at the top of the rally. Someone was undecided ahead of tomorrow's numbers.

Techs and small-caps are driving this rally, though, performing the leadership role they often provide. Few of the other typical indicator indices--the RLX, TRAN and BIX, for example--agree with the techs, however, and that's a bit troublesome to those nourishing bullish hopes. Until they begin to do so, we have a bifurcated market, and it's unclear whether techs and small caps will pull other indices higher or those others will pull techs and small caps lower again. The techs and small caps are telling us that the early momentum players are betting on a rally, but the RLX, TRAN and BIX just don't agree as yet.

Techs and small caps need to provide continued momentum to the markets, so watch them closely. The RUT and COMPX ended the day jammed up against 240-minute Keltner resistance, so they're ready to either pull back or initiate another breakout. Which direction they go will prove particularly important without other leadership and with the SPX and Dow showing some hesitation and potential reversal signals.

Tonight, JDSU had fallen in after-hours trading after it reported a loss of $0.03 a share, a narrowing of its year-ago loss of $0.10 a share. As I type, it was trading at $2.23, down $0.40 from its $2.63 regular-hours close. The Nasdaq-100 After Hours Indicator had dropped, too. For guidance, watch how the Nikkei and DAX react, with those more indicative than the tech-light FTSE 100 would be of tech weakness and strength.
 

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