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Market Wrap


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Writers and television commentators attached the word "unexpected" to a couple of economic releases this morning. One was August's PPI and the other, August's New Residential Construction. Later, some traders would attach the same word to the market reaction. Not our readers, though. They knew where to expect resistance.

The tame inflation picture revealed in that PPI number also garnered such adjectives as "remarkable" and was credited with bouncing equity futures and dropping bond yields in the pre-market session. Both PPI and housing starts fell to levels last seen in the spring of 2003, results that most considered Fed friendly.

Treasuries reacted immediately, with yields moving sharply lower. Those watching yields drop and index futures jump from their prior low levels might have found the cash market session's reaction surprising, bringing up that "unexpected" word again. The original pre-market weakness resumed as soon as the cash markets opened.

It turns out that some of the bond strength might have been due to another unexpected development: a potential military coup in Bangkok. Some market pundits believe that there was a flight-to-quality reaction, with global participants fleeing to U.S. treasuries. I haven't been able to verify time stamps on the news reports of the coup, however, and can't verify that the news was known as soon as treasuries began climbing.

If market participants had been reading OIN Wraps and Market Monitor commentary, however, the cash market reaction wouldn't have been as unexpected. Several writers have been warning that markets are primed for perfection as they stretch ever higher, anticipating a post-FOMC rally that may or may not occur. Some market participants obviously decided to take some of their profits off the table ahead of that FOMC decision. I don't blame them.

Many sectors were hit in the morning period, with most then seeing a bounce in the afternoon. The SPX's price action showed the results.

Annotated Daily Chart of the SPX:

Like many other indices, the SPX approached its 10-sma today, falling heavily, and then sprang higher again, but it couldn't spring up above that building resistance near 1325. The daily Keltner chart shows that resistance at 1323.74-1325.20 on daily closes.

From the afternoon of Monday, September 11 through this morning, the SPX and many other indices had been finding support at their 10-minute 100/130-ema's. The SPX fell heavily through that level today, but then bounced back just above those averages on the close, with the move above them again perhaps being an overrunning of new resistance. Those averages were at 1317.56 and 1317.31 at the close, and perhaps should be watched for guidance tomorrow morning. While the spring up from the 10-sma and the resulting long tail indicates that there could be some upside follow-through tomorrow morning, an opening back below those 10-minute 100/130-ema's may indicate that the afternoon move just overran resistance. Today's low may need to be retested before we see ultimate direction. Remember that those -ema's are dynamic and will move when prices do, but your charting service should tell you where they are.

The Dow tested its 10-sma more completely than did the SPX. Like the SPX, however, the Dow also shows a tendency to trade in the lower and less bullish half of its rising regression channel.

Annotated Daily Chart of the Dow:

That strong spring from MA support would normally indicate that there should be some upside follow-through tomorrow, but I don't completely trust the afternoon action just ahead of the Iranian president's address to the U.N. tonight and the FOMC decision tomorrow.

Bulls don't want to see a sustained break of the Dow's rising channel support, with that at about 11,435, but if it should break, watch for support at the 30-sma at 11,352.56 or the midline of the larger rising regression channel at about 11,330. Unless markets plunge through resistance, watch for a possible bounce attempt from those levels, if tested.

Look for first strong resistance on daily closes at about 11,600-11,650, with the midline of the newest rising regression channel in that area.

The Dow also overran potential resistance at the 10-minute 100/130-ema's after spending most of the day below them today, but it stopped at a 50 percent retracement of the drop from Friday's high to today's low. If the Dow should open below the 10-minute 100/130-ema's tomorrow, suspect that it just overran their resistance into the close. It happens, especially when bears get scared. Those averages were at 11,530.90 and 11,530.15, respectively, as of the close.

YHOO's drop, with the reasons discussed below, hit the Nasdaq hard. The Nasdaq also dropped to its 10-sma, falling back below the important 200-sma, but managed to climb right back to that average by the close.

Annotated Daily Chart of the Nasdaq:

The Nasdaq close right at the 200-sma looks a bit suspicious, but would-be bears must keep in mind that the Nasdaq's pullback from Friday's high still looks corrective and still occurs within a rising regression channel. As with other indices, the long lower tail on the daily candle usually predicts some follow-through to the upside, but I wouldn't put too much trust in this afternoon's action, given the geopolitical risks and the impending FOMC decision and statement.

The Nasdaq ended the day just below its 10-minute 100/130-ema's. Like the other indices mentioned, it also ended below the 50-percent retracement of the decline off Friday's high into today's low. Those averages are at 2224.19 and 2224, respectively, and I would watch for first resistance at those levels, on 10-minute closes. Remember that the averages are dynamic and will move in the direction of a price move.

Maxim Integrated Products (MXIM) lowered its estimate for its first-quarter EPS and revenue, and an analyst downgraded Micron Technology (MU), with both announcements weighing on the semi-conductor sector. This evening's impending SEMI Book-to-Bill number may also have weighed on the sector.

The SOX performed similarly to other indices, however, dropping down to test its 10-sma and bouncing after a minor piercing of that average. That piercing and the SOX's more moderate bounce relative to some other indices, with all this action occurring below a 50-percent retracement of the SOX's drop from the year's high into the year's low, make its bounce look less convincing. This chart is crowded, but I wanted you to see the FIB levels.

Annotated Daily Chart of the SOX:

As you might expect, giving the SOX's relatively weaker performance and bounce, the SOX ended well below its 10-minute 100/130-ema's. Today's drop confirmed a H&S on the SOX's 10-minute chart and the SOX hit its downside target before bouncing. That bounce ended well below the neckline resistance and those averages, so it doesn't look as potentially short-term bullish as that seen on other charts.

The Russell 2000 also tested its 10-sma today, but it was testing its 200-sma at the same time.

Annotated Daily Chart of the RUT:

The resistance is obvious.

The RUT's performance also mimicked that seen on other indices, with the RUT dropping today below the 10-minute 100/130-ema's that had proven to be support for a week, then inching back above them by the close in a possible overrunning of short-term resistance. They're at 724.32 and 724.54, respectively. The RUT was also stopped by the 50-percent retracement of that decline off the May high.

It proved to be another day when indices appeared to act almost in tandem: dips to their 10-sma's and springs up from those averages. That smacks of program, institutional or PPT buying at those averages and I wouldn't argue against big-money action until big-money people are ready for the markets to move. Hopefully, that will occur soon.

The most important of the day's economic releases was August's producer prices or PPI. Although expectations for this release focused around a 0.3-0.4 percent gain for the headline number, that headline number actually rose a much smaller-than-expected 0.1 percent. The core rate dropped 0.4 percent, with most market watchers paying more attention to that core rate more than the headline number. The core rate hasn't seen a one-month drop that big since the spring of 2003, and it's been about a year longer since there's been a two-consecutive-month decline in the core rate, as there has now been.

The smaller 0.3 percent rise in energy prices moderated the headline number, of course, but the core rate excludes those costs, other than as they filter through to intermediate or finished goods. Food prices rose 1.4 percent, but those are excluded in the core rate, too. Prices for dry and fresh vegetables soared 20.7 percent, well above the previous month's 6.5 percent.

Excluding food, consumer goods fell 0.5 percent. Capital-equipment prices dropped 0.3 percent.


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The core rate was driven lower by a 3.4 percent decline in light motor trucks and a 2.6 percent decrease in new car prices. The government's report also mentions drops in prices for pharmaceutical preparations, alcoholic beverages, tires, and periodical circulation. Some clothing items increased. Prices for electronic computers and communication and related equipment fell, while those for civilian aircraft, industrial material-handling equipment, transformers and power regulators, truck trailers, and heavy motor trucks increased.

From August 2005 to August 2006, the PPI has rise 3.7 percent, moderating from last month's 4.2 percent. Within today's report is the notation that finished energy goods have risen 13.2 percent and finished consumer foods, 2.8 percent, during that twelve-month period. Core PPI has risen 0.9 percent in the last twelve months, moderating from the last month's 1.3 percent.

Although the immediate reaction in treasuries was to suggest a market-friendly Fed stance, market watchers cautioned that the FOMC pays much more attention to the core consumer prices than to the PPI. The PPI is broken down into three levels: crude, intermediate and finished goods. The intermediate and finished components tend to be more important to watch, with finished the most important of the three levels. The overall and core numbers for finished goods are the ones quoted on the PPI number. Intermediate-level goods rose 0.4 percent.

Another early morning release was August's New Residential Construction. The word "unexpected" was applied to this release, too, with housing starts falling 6 percent to a seasonally adjusted annual rate of 1.665 million. Like the headline PPI, this dip was to numbers last seen in April 2003. Market expectations had been for a 2.5-percent decline to 1.70-1.75 million, depending on the source.

The Commerce Department also reported that building permits fell 2.3 percent, to a seasonally adjusted annual rate of 1.722 million. Like the core CPI, this number was last seen in 2002. This was the seventh month in a row of falling permits. Industry expects predicted a drop of 1.6 percent to 1.74 million.

Company-related news produced winners and losers today. One of those was in the housing-related sector, with Meritage Homes (MTH) citing a "further deteriorating in market conditions" when the company said that it would have difficulty achieving its prior outlook for the rest of the year.

DaimlerChrysler (DCX) detailed concerns about Chrysler, saying that the company expected Chrysler's retail market share to be 10.6 percent in the third quarter and 11.7 percent in the second half. Both figures were lower than prior predictions of 11.2 percent and 12.6 percent, respectively. The company expects to ship 90,000 and 135,000 fewer vehicles in the third quarter and second half, respectively. Those lowered shipments will also be from high-margin truck and sport-utility-vehicles, the company said. DCX ended the day up $0.11.

Also from the auto sector came news that Standard & Poors had cuts its rating on Ford (F) and Ford Motor Credit again, sending them further into the depths to junk territory. The firm cited uncertainty about the company's turnaround plan. F dropped to its merging 200-sma and 72-ema, both important moving averages for the stock's prices. F dropped $0.16 today.

In addition to the MU downgrade, Cheesecake Factory (CAKE), CSX Corp. (CSX) Akamai Technologies (AKAM) and Norfolk Southern (NSC) were downgraded. All closed lower today although CAKE and AKAM bounced strongly off their day's lows. NSC also bounced, but not quite as strongly.

Weekly chain store sales figures were also released. Target (TGT) announced same-store sales that increased by five percent, at the high end of its previous guidance. The stock gapped higher and gained $0.81 at the close, but TGT wasn't able to support the consumer discretionary sector by itself, and many stocks in the sector declined.

Yahoo (YHOO) spoke at a Goldman Sachs conference, and traders weren't pleased with the company's guidance. That guidance was to the bottom half of the company's previous guidance. A company spokesperson said that auto and finance ad revenues were slowing. YHOO lost $3.25 or 11.21 percent today.

Hewlett-Packard (HPQ) will extend to seven years its information technology outsourcing agreement with DirecTV (DTV), HPQ announced. DTV gained. Motorola (MOT) will acquire Symbol Technologies (SBL), with the deal to be completed either late this year or early next year. SBL's stockholders still have to agree. The stock posted another small gain today after yesterday's huge gap, but that's a scary gap waiting below for a partial retracement, if that should occur. Both acquiring companies, HPQ and MOT, closed slightly lower, but only by a few cents.

A federal judge ruled against ImClone (IMCL) in a patent dispute related to Erbitux, an anti-cancer drug. The federal judge ruled that three scientists with Israel's Yeda Research and Development Co. were sole inventors. IMCL disputes the judge's findings and intends to appeal the ruling. The stock opened and dipped below $28.00 again, but then rose strongly on strong volume, closing at $29.16. It's dropped back again to $28.40 in after-hours trading, as of this writing.

Geopolitical concerns also hit the market during the early and middle part of the day, as news was being released. While Thailand's caretaker Prime Minister Thaksin Shinawatra attended the U.N. General Assembly in New York, he declared a state of emergency as rumors rose that a military coup was taking place in Bangkok. News came later that a Thai military official had declared martial law.

Other geo-economic and geopolitical developments occurred today. President Bush addressed the U.N., with Iran's president also scheduled to deliver an address, but tonight. President Bush noted that the EU will continue its negotiations with Iran concerning that country's uranium-enrichment program. The slight softening of tensions over the last few days, and possibly the dollar's rise against Asian currencies, contributed to a softening of crude prices ahead of tomorrow's inventories numbers and tonight's U.N. address by the Iranian president.

Other developments included a statement from OPEC's president, denying that the cartel would be likely to cut production to keep prices supported. The president mentioned the delay in beginning production again at BP's Thunder Horse oil rig, now projected not to come online until 2008. That's three years behind the original schedule. The Energy Department said today that it had calculated its 2007 oil supply forecast with some projected production from Thunder Horse, and would now have to revise that its non-OPEC supply forecast. Several brokers downgraded BP as a result of this news, but the bounce in crude that was originally attributed to this news didn't last. Crude closed at $61.77 (QCharts, daily chart).

Treasury Secretary Paulson visits China, with the Chinese press praising him for his knowledge of the Chinese economy. He urged the country to revalue the yuan and accelerate the move from an exporting country to a consumer-driven one, while some senators here on home turf say he's not being forceful enough. They're calling for tariffs on Chinese imported goods. According to CNBC, U.S. manufacturers aren't happy, either.

In after-hours developments, Oracle (ORCL) reported first-quarter earnings, beating estimates of $0.16 a share by a couple of pennies. Revenue beat expectations, too. As this Wrap was prepared, the stock had climbed to $17.58, up from its $16.13 close, but remember that such after-hours action does not always carry through the next day. Another software stock, Agile Software (AGIL) said its net loss widened in the first quarter, however, when giving preliminary results. AGIL had dropped $0.33 from its close, as of the time this article was prepared. Applied Micro Circuits (AMCC) delayed its September 22 special stockholder meeting until October 20 so that the company could continue its review of its stock-option-granting practices. AMCC had dropped a couple of pennies in after-hours trading.

As this Wrap was completed, the Semi Book-to-Bill numbers were not yet available, but those are due this evening and will certainly impact the important SOX.

Earnings for tomorrow remain slow, but include BBBY, KMX, CC, DRI, and MS, giving a view of several sectors of the economy. Tomorrow's economic releases include the 7:00 release of the Mortgage Banker's Association's weekly survey of application volume, the 10:30 crude inventories numbers from the Department of Energy, and the all-important 2:15 statement and results of the FOMC meeting.

All the charts above show similarities, as noted. Indices dipped to test their 10-sma's and sprang up from them. However, that spring is countered by the fact that they couldn't breach important resistance they've been testing and, in some cases, couldn't get back above a 50-percent retracement of the decline off highs reached over the last few days. However, it should be clear that there's been some effort to hold indices at those resistance levels into the FOMC decision.

Ordinarily, such strong springs off the 10-sma's would indicate some follow-through tomorrow morning, but several factors must be weighed against that possibility. First, we may have just been seeing some short-covering into the close when the day's first strong drop was not followed by another leg down. Second, the SOX felt heavy and looked it when compared to other indices, and it may be impacted by tonight's Book-to-Bill number. Third, as Jim pointed out in the Market Monitor this week, October's CL crude contract expires tomorrow, and some of crude's drop might be attributed to the rolling over into new contracts. Third, as I've mentioned above and as others have mentioned, the Iranian president speaks tonight. There has recently been a softening of Iran's stance, and that's softened crude prices. As Jim points out, those who had been hanging on and hanging on, hoping for a bounce, didn't get that bounce, and they may have been bailing ahead of the expiration. And last, the choppy behavior seen over the last few days is just the kind of behavior that might be expected going into an FOMC meeting and it just might continue until and shortly after the announcement.

I don't day trade any longer, preferring different types of trades, but I wouldn't be day trading tomorrow ahead of the FOMC decision anyway because such days tend to be ones when technical setups will not see the usual follow-through. A strong trend could begin ahead of the decision, but, if so, and if you miss it, there will be other trends to catch.

If you're inclined to trade, here's what I think. Barring something really negative tonight--and this Thailand situation or the Iranian president's address tonight could be just that--there is likely to be an attempt at some follow-through to the upside tomorrow morning. My best guess is that such an attempt wouldn't get far, but that's a guess only and I'm not prescient.

This is going to sound like prevarication, but I also wouldn't be surprised to see markets turn down immediately and retest today's lows. I think there's every reason to believe that they just overran that short-term resistance, with some shorts covering into the close.

Watch those 10-minute 100/130-ema's for first direction. If that first direction is higher, keep your stops tight, remembering that resistance just overhead. For those day-trading the SPX, 30-minute Keltner channels showed first resistance at 1319.03 on 30-minute closes and then at 1324.07 on 30-minute closes, with those numbers dynamic and subject to change as the markets move. I'd keep my stops tight, whether betting on upside follow-through or on a downturn from that resistance, if tested again.

Markets typically show some volatility after that FOMC statement, and this time may be no exception. The equities are pricing in steady rates, and that's what this month's Fed fund futures are saying, too, but equities also appear to be pricing in a less hawkish stance in the Fed's accompanying statement. They also appear to be pricing in good news about the economy: a softening where it is needed but still moderate growth. They're pricing in the best of everything. They may get it, but that doesn't mean that there won't be a sell-the-fact effect.

I've heard people say that it's not the first reaction but the second or third that matters. Here's what I find, however. As markets are soaring up and screaming down immediately after the announcement, or vice versa, they often start setting up the parameters of some sort of consolidation pattern. It's most often a triangle. As the volatility is tamped down, the narrowing triangle forms on the intraday charts. It's often the break of that triangle that signals the actual direction. While that triangle is forming, market participants are studying the Fed's statement and analyzing what they think it means. Only then is next direction usually revealed. Even then, I'd keep my stops tight.

Bottom line? Most indices are within rising regression channels and we have to acknowledge that. Some are beginning to look a little weak within those channels, not able to rise above the midline resistance into the bullish half, and that should be acknowledged, too. That alerts me to be on the watch for potential breakdowns of those channels. Bulls should keep their stops tight or begin stepping out of positions if you're conservative. I'm certainly alert to the possibility of a downturn, but I don't see conclusive evidence that it's going to occur as yet and so can't counsel automatic bearish entries here as this next resistance band is tested. We have seasonal patterns that suggest the possibility of a downturn and geopolitical concerns to get it started, but no conclusive evidence as yet, and those indices are all still trading higher within those channels. Watch them.

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