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Market Wrap

Post-Party Blues Dispelled

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The post-holiday blues hit the markets early this morning, only a day after the Dow hit an all-time high. A blue chip precipitated that mood swing, with giant retailer Wal-Mart (WMT) cutting its forecast for September's same-store sales. Blue chip GM was a party-pooper, too, starting out to the upside, but turning lower by the end of the day.

Few party-goers were ready to give up the celebration, however, urging the Dow forward into a retest of yesterday's high. That move higher was predicted by yesterday's charts, too, with many daily candles showing a spring off support and a potential reversal signal in the making. Such springs off support usually precede further gains the next days. The Dow's daily candle was one of those showing such a spring. By mid-morning, the Dow had already exceeded yesterday's high and advancers had moved well above decliners on both the NYSE and Nasdaq.

Not even the grim future story presented by Fed Chairman Bernanke or sobering economic reports could restrain the party-goers. Crude's bounce off its lows failed to restrain them. Joe Battipaglia, once called as a perma-bull, joined the party, with a MarketWatch.com interview early this morning in which he urged that bulls had the momentum for now.

Listening to that interview, however, it sounded as if Battipaglia was willing to party, but was standing by the door just in case he needed to exit quickly. Battipaglia cautioned that some indicators were showing that breadth had been thinning on the rally, at least going into today's trading. He believes that the Fed "got lucky" as Bernanke got "a pass" with a bet that the softening economy would bring down inflation pressures. Battipaglia noted, as many of us have on this site, that the Russell 2000 was "going backwards" rather than leading, one setup often seen in the end period of a bull run. The Russell 2000 gained along with other indices today, in fact showing a higher percentage gain than many indices, but charts will show that it had been trailing far below other indices in some measures of performance. It's following rather than leading on those measures, if not on percentage gains today. So, it's time to look at those charts.

Annotated Daily Chart of the SPX:

First support is near 1340, with the 10-sma offering support below that. The 1367-1368 resistance should be strong, if touched. Prices do sometimes breakout to the upside out of channels such as these when momentum pushes prices into a parabolic rise, but the top of the channel is joined by a long-term Fib resistance level and such rises often mark the beginning of the end.

The SPX broke out above Keltner channels, up through the 120-minute charts. That's poses a dilemma for both bulls and bears. It means that bullish momentum is (or was today) strong, but from this moment on, the SPX is vulnerable to a pullback without any promises as to when it will occur. On a 15-minute chart, that breakout level was at about 1347.60 on 15-minute closes, at least as of today's close. With momentum this strong, the first thing you have to see to believe that there's even the smallest change in tenor is a close back below that upper Keltner band (Length 120, ema and multiplier, 7.2) and then a rise back to retest it, with that Keltner channel then serving as resistance. Bearish price/RSI divergence would be nice, too, but that's not the end of this warning. Unless you see prices plunge, in reaction to something that Fed speaker Kohn says this evening or due to some other cause, don't presume a big pullback. Intraday Keltner support is closely layered down to 1344, so, that first bounce potential comes in from within that level unless there's a strong whoosh down. Next intraday support is at 1341, but the line will move lower if there is a strong move lower that breaks through the higher band of resistance.

Until and unless such conditions are met, assume that first short-term, intraday support lies along the top of that channel on 15-minute closes.

Those hoping for a pullback have evidence that it's time for one to begin without having any sign yet that it will begin, whether or not "it's time." Strangely enough, that evidence of time for a pullback comes from the Dow, which rose to hit potentially strong resistance today.

Annotated Daily Chart of the Dow:

The resistance that the Dow faces now is another multi-year resistance level, and this may be strong resistance. However, like the SPX, the Dow created a breakout condition on its intraday Keltner charts. As of the close, Keltner support was building for the Dow from 11,810-11,832.50 on 15-minute closes, and it may take a strong whoosh lower to break that support. Until it's broken (and remember, these lines are dynamic, moving with price), the Dow remains in breakout mode, and it's dangerous to assume a rollover will happen, no matter how extended the rally appears or how strong the resistance appears.

Those hoping for even a short-term pullback want to see the Dow push below those lines now at 11,810-11,832.50, rise back to test them and then fall again. If that happens, the 11,760 level is currently first support, with the daily first support noted on the daily chart.

The Nasdaq charged toward the top of its rising regression channel today, pushing above the small gap down in May.

Annotated Daily Chart of the Nasdaq:

Like many other indices, the Nasdaq created a breakout signal on its 15-minute Keltner chart, up through longer-term intraday charts. On a 15-minute basis, Keltner support could now be found at the breakout level, at about 2284 as of the close, with this level being important on 15-minute closes. The Nasdaq remains in breakout mode as long as it's finding support on this channel line, but, it, too, is charging up toward next and potentially strong resistance, so it's possible gains could be capped at that next resistance zone. If you're hoping for a turnaround, even over the short-term, you have to see the Nasdaq begin closing 15-minute periods below that Keltner breakout zone near 2284 and then rise to retest it, with resistance holding.

I can't show too many charts or this article would be even longer than it's going to be with all the economic releases today, but if I could show you these 15-minute Keltner charts on all these indices, you would see the breakout first on the 2:45 candles, then a pullback to retest the channel line to see if it holds as support, and then a push back above the channel. It was too clean a test for the significance of the channels to be ignored. Bears, even short-term ones, want to see those channels containing prices again, and bulls may not be in too much trouble even if they do.

If the Nasdaq should pull back within these channels, first Keltner support shows up currently at 2278 and then at 2271, but that will change if price does dive below the breakout levels. The range between those two numbers contains Friday's 2273.30 high, though, so that range seems a good one to watch for first potential support.

If the Dow's rise to test strong resistance might present one possible reason for a downturn, the SOX might present another case. All the charts you've seen above have prices rising through ascending price channels. Until a few days ago, the SOX's chart looked the same, but it quietly broke through its channel's support this week. The SOX might have risen today along with other indices, but it was rising to retest what had formerly been support, and it stopped dead right on that former support.

Annotated Daily Chart of the SOX:

While other indices were creating breakout signals, the SOX traded safely within its Keltner channels, even on the 15-minute chart. As of the close, it had set a potential upside target of 463.53, but it made a lower high into the close rather than the higher high seen on many other 15-minute charts, so I'm not sure about that upside target. That's particularly true with the SOX facing the strong resistance depicted on the daily chart.

The 15-minute Keltner chart showed support first intraday support at about 455 on 15-minute closes, with further support down to 452. If the SOX turns down precipitously, Tuesday's 443.81 low may be important to watch, but many will be watching the 50-sma at 437.69 as the last nail in a bearish coffin for the SOX, should it roll down again.

Resistance will be at that Keltner level at 463.53, with daily resistance at the 50 percent retracement of its decline from May highs, at about 472, and then at its 200-sma at 478.61. The SOX will be important to watch tomorrow.

Many times over the last week, the SOX and RUT have seemed to diverge. Today, both gained, but the RUT remains within its rising price channel, and hasn't broken down like the SOX.

Annotated Daily Chart of the RUT:

Although the RUT looks more like the Dow and SPX than the SOX, as it still climbs through this rising channel, it doesn't look quite like them on the 15-minute Keltner chart. It couldn't break out, as they did, but instead stopped just short of Keltner resistance at about 734.20. It is also not making new recent highs, of course. The RUT could break out, easily, but if so, it's still playing a following role and not a leading one. That 734.20 level should be first resistance on 15-minute closes, with support at 731.54, and then layered down to about 725. It's going to take a strong whoosh lower to break through all that potential support at once, so want-to-be bears shouldn't expect a strong pullback without that whoosh.

The TRAN was not a follower today on the basis of its performance on 15-minute Keltner charts. Its breakout preceded that of other indices. On a Keltner basis, the TRAN needs to drop beneath support that's currently at about 4538.50 and then rise to retest that zone and have it hold as resistance before the breakout status is undone.

To see any real damage done to the TRAN, it has to drop further, back beneath the 200-sma it finally crossed today.

Annotated Daily Chart of the TRAN:

A number of economic releases or events occurred today, seemingly without much impact on the markets, since several should have dampened the party spirits, but didn't. One aberration in the party-dampening releases was the MBAA's weekly mortgage application survey information. At 7:00, the Mortgage Bankers Association released its survey for the week ending September 29, and that volume rose sharply when compared to the previous week. It was up 11.9 percent on a seasonally adjusted basis and 11.5 percent on an unadjusted basis. Remember the year-over-year comparison, however, with that comparison revealing that application volume was down 10.9 percent.

Other components reached double-digit gains when compared to their week-ago levels, too, with the refinance component gaining 17.5 percent and increasing to 46.7 percent of total applications. This was the highest percentage of total volume seen in more than 18 months. Thirty-year, fixed-rate mortgages increased to 6.24 percent, up from the previous week's 6.18 percent.

Later in the day, Fed Chairman Bernanke was asked about the housing market during the Q&A session after a scheduled speech on savings. He said that the housing sector was undergoing a substantial correction, that would-be investors and homebuyers were waiting for clarity, and that the housing slump was expected to subtract about a percentage point from economic growth. Bernanke believes that the housing slowdown is mitigated by other economic forces, but affirms that questions remain as to how much of that slowdown will spill over into other sectors. The DJUSHB, the Dow Jones Home Construction Index, gained today, but its open and close were roughly within the consolidation zone formed this week.

Other early morning releases gave a possible heads-up about Friday's jobs number. The ADP index showed an anemic gain of 78,000 private-sector jobs. If this number realistically predicts Friday's September jobs number, that number will show the weakest growth since Katrina pushed jobs growth lower.

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In a typical month, another 10,000 jobs would be added, accounting for government-sector jobs, positing a number of about 88,000 for Friday's September jobs number. That's far less than the 125,000 previously predicted. By midmorning, some forecasters were already revising lower their prediction for Friday, with Action Economics analysts now predicting a gain of 115,000. The ADP Index is comprised so that it hopefully predicts the jobs number, but many will remember the spectacular miss early this summer. However, another number, the Hudson Employment Index, was softer than expected, at 100.5 and its lowest level this year. Markets have presumably been rising on the "Goldilocks scenario," a belief that economic conditions would soften to the just-right combination that prevents inflation pressures from building but doesn't crater the economy. If jobs soften too much, that might make that porridge representing the economy a bit too cold for most Goldilocks investors.

Next on the day's full roster of economic releases and Fed speakers was the Commerce Department's report on orders for factory-made goods for August. That number was flat, with components for both durable and nondurable goods also flat. July's headline number had dropped 1 percent month over month, one article notes, and the expectation had been that factor orders would decline 0.1-0.2 percent. Market watchers should note, however, that July's number was previously reported at a 0.6-percent drop, then revised lower to a 1.0 percent drop.

September's services or non-manufacturing ISM dropped to 52.9, a big downside surprise from the anticipated 56.2. August's number had been 57, with 50 the expansion-or-contraction benchmark. Jim had predicted a weak number, and this one was the weakest in more than three years. The price index that is part of this report plummeted to 56.7 percent, down from its previous 72.4 percent, and it was this component of this report that reassured investors that the Fed is done with rate hikes and, some think, allowed the party to proceed today. However, keep that Goldilocks scenario in mind, but this porridge threatens to cool too much for the just-right state investors want. Worry should perhaps have been stronger today than it appeared to be.

Speculation abounds about when OPEC members might decide to step in and cut production, but little attention appeared to be paid to the crude inventories number. As Jim mentioned last night in his Wrap, crude had dropped to an after-hours low of $58.43 a barrel yesterday, the lowest price since July, 2005. That drop was at least partly attributed to an expectation that crude supplies might increase today. According to an online Bloomberg article yesterday, experts expected distillate supplies to rise about 1.5 million barrels, and gasoline supplies, 1.5 million barrels. Crude inventories were expected to drop, but by less than a million barrels.

Instead, crude supplies rose 3.3 million barrels last week, according to the Energy Department. Distillates were up only 200,000 barrels, however, far less than the expected number. Gasoline supplies rose 1.2 million barrels, in line with some predictions.

Traders at first considered the inventories numbers bearish for crude prices, and they dipped immediately afterwards, prompting mid-morning headlines that read "Oil Falls Under $58." Those headlines weren't to tell the last story, however, as crude rebounded, and closed at $59.45 according to my feed source.

One news source attributed the bounce to news of an explosion at a refinery in Texas, but the only news I located was that there had been a chemical release at a Valero refinery in East Houston. While I'm not minimizing the release of sulfur that apparently sent at least seven people to the hospital, I grew up in a refinery town and have personally had hose melted off my legs from a sulfur release while I was attending college. I don't think that sulfur release was a big enough event to bounce crude futures. Some also attributed the bounce to an announcement by a Nigerian militant group claiming that it would hit oil installations today, but it may have just been time for crude to bounce. I don't have access to volume comparisons on the daily chart, but there appeared to be a surge in volume at the day's low. If daily volume was particularly high in comparison to recent trading, then you may have seen a key reversal day. "Key reversal day" is a technical term that requires that high volume, a punch to a new recent low, and a strong rebound, and I've learned not to trust such apparent reversals that do not include the strong volume component.

At noon, the Fed speakers began lining up, with Geithner appearing first, at noon. Several minutes later, snippets of his talk began trickling into news reports. Geithner said that he believed a 1997-1998-style financial crisis was unlikely, but that emerging markets had much work still to do. Geithner's talk was titled "Progress toward Financial Stability in Emerging Market Economies." He pinned his belief about that unlikelihood on accumulations of current account surpluses and currency reserves among emerging economies.

Fed Chairman Bernanke was slated to speak on savings. He spoke next, but did not address current economics or monetary policy. He did warn about that there was no "silver bullet" that would increase personal savings and that if the problems caused by the aging of the baby boomers were not addressed, we could expect a lowering of living standards. The first wave of baby boomers will begin collecting Social Security payments in 2008, headlines noted, and Bernanke believes it's critical that U.S. consumers begin saving more right now. He spoke of the rapid changes leading into 2030, when the number of working younger persons per person over 65 will fall from 5 to about 3, and the percentage of the population 65 and older will rise from 12 percent to 19 percent. (CNBC quoted 30 percent, but I thought I heard him say 19.) Without changes to ameliorate the effects, spending on Federal programs for the aged will increase from about 7 percent of the GDP to 13 percent by 2030, he believes. That would presume a slashing of budgets for other programs that benefit society. Questions of inter-generational fairness will arise, he warns, as debt is shifted into the future. To insulate future generations from this grim effect, Bernanke says economic models require an immediate four-percent reduction in consumer consumption or a three-point rise in savings. The speech was grim.

Thomas Kohn was the last FOMC member scheduled to speak. One source said he would be speaking at 6:30 EST, and he is slated to speak on the economy. Given today's weak numbers, that talk may be important to the markets.

Company developments, particularly negative ones, appeared to be ignored today. WMT's trimmed September same-store sales forecast turned futures negative, at least if CNBC commentators were to be believed, but that was about the only effect this retailer had on markets. The time stamps of the information and the downturn do seem to coincide. WMT had previously predicted a gain of 1.8 percent in those same-store sales, but now says that the official sales release, slated to be released before the bell tomorrow, should measure a gain of about 1.3 percent. The retailer said that the monthly reconciliation process prompted the change in outlook for those sales.

Other companies in the news included automakers General Motors (GM) and Ford Motor Co. (F). Bear Stearns upgraded GM to a peer-perform rating, up from its previous under-perform rating, and downgraded F to a peer-perform rating, down from its previous out-perform one. Both stocks reacted in the pre-market session, with GM jumping and F rolling lower. GM wasn't to retain its gains, however. Later in the morning, news surfaced that GM and Nissan-Renault had terminated alliance talks, and the stock's price turned lower.

Bear Stearns also downgraded TiVo Inc. (TIVO) to an under-perform rating. This occurred after an appeals court ruled that EchoStar Communications Corp. (DISH) could continue to sell its brand of digital-video recorders as the companies' patent dispute was appealed.

Geopolitical tensions remain. South Korean, China and Japan have all now urged North Korea not to continue with its plans to test a nuclear bomb and to instead continue six-nation talks. The U.S. and Russia of course are the other two countries previously involved in six-nation talks with North Korea. Former U.N. chief weapons inspector Hans Blix today said that the world should assume that North Korea intends to go through with this test, and that this isn't just another case of saber rattling. North Korea is believed to have produced up to six nuclear weapons, with material on hand to produce as many as thirteen more. A South Korean official believes it may be a threat, however, with a goal to exert further pressure on the U.S.

Other tensions that may impact the markets are internal political pressures. Articles now mention the "anti-incumbent" trend, and some financial websites now include charts comparing support for various Republican incumbents and their opponents in upcoming elections.

Late-day developments included an apology from Apple (AAPL) Chief Executive Steve Jobs. He said that while he did not receive any backdated stock options and didn't understand the accounting implications, he did know that some had been backdated. The company also announced the resignation of its CFO from its board of directors. No misconduct was found among current or former management, the internal study concluded, but the company might need to restate several of its financial reports. As this report was edited, AAPL was at $74.85, down from its $75.38 close.

Tomorrow's economic reports start with September's Monster Employment number at 6:00, followed by the weekly Jobless Claims number at 8:30. Shortly before the open, we should also hear about the European Central Bank's rate decision. Natural gas inventories come at 10:30. Chain store sales figures will be reported during the day. Many traders will spend the day positioning their portfolios for the Friday morning September jobs report.

Earnings tomorrow remain light, but include STZ, MAR, and SLR.

Tonight's speech by Kohn and tomorrow's chain store sales may be the only factors impacting the markets, barring a company or two warning about earnings. So, what should we expect tomorrow on the markets?

First, we should expect to pay attention to both the Dow and the SOX. I know the Dow has been at one key level or another the last week, with each termed important resistance. Now it's at another, and it's hit that key resistance level after a strong one-day gain and a breakout signal on intraday Keltner channels. While such gains can be followed by another day of gains, it's often instead followed by a small-bodied candle with long or short shadows and sometimes even by an actual downturn. I would look at the possibility that the Dow could produce a doji-type day, if not a downturn, with any push higher likely part of an upper shadow that pierces but doesn't close above or much above next resistance. The TRAN, too, stopped short on next resistance after hitting it nearly exactly, and, it, too, could produce a doji-type day after perhaps first trying to punch through that resistance.

And the SOX, of course, rose to retest former support, a possible "kiss goodbye" for the SOX or a possible prelude to a move back into its channel and proof that the downturn had been a trap for bears.

I see potential for a pause at least tomorrow, at least on the Dow, TRAN and SOX. Delving deeper into the RUT's chart showed that it stopped at a descending trendline off the lower highs since September 20.

My suggestion? If you're long, just keep following the moves higher with your stops, remaining aware that some indices stopped today at next resistance, and so may need to recharge. Those breakouts on intraday Keltner charts are times of danger for both bulls and bears, because they show that momentum has become excessive. As long as that momentum continues, bulls are doing fine, but it will eventually collapse.

If you're interested in bearish positions, go back and study all those other presumed resistance levels and see how easily they were eventually snapped before you decide ahead of time that they're going to hold. Watch those Keltner levels if you have them available on your charts, and, unless there's a strong whoosh lower, you want to see a retest that holds as resistance before you even begin to believe the short-term tenor has changed. If you don't have those Keltner channels, you can substitute other intraday charts. For example, today, the SPX was mostly skipping along the three-minute 21-ema. Put that on your chart. If the SPX continues skipping along that ema, then the momentum remains, no matter what you personally believe that it should be doing. If the SPX violates it, then you want to see it rise to retest it, and then begin falling back again before you believe that there's even the slightest change in tenor. Keep your stops tight if you're tempted into a bearish play. One of these days, they're going to work, but make sure you have some funds left to take part in any downturn.

If doji are produced tomorrow, bulls will have a decision to make. Such doji at the top of a climb can hint that a downturn is next. Other potential reversal signals would occur if indices tomorrow were to close more than midway below today's ranges.
 

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