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Market Wrap

Making History

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It's been a history-making week, with the U.S. population hitting 300,000,000 yesterday and the Dow finally hitting 12,000 today. The Dow achieved a 12,049.03 intraday high within the first fifteen minutes of trading.

The U.S. population didn't stay at that 300,000,000 level long and neither did the Dow stay at that intraday high or even above 12,000. Despite the Dow's new record closing high, it and many other indices produced bearish candles that pierced new recent highs and then fell, leaving long candle shadows above. Other indices produced run-of-the-mill candles seen during consolidation. Volume breadth indicators were mixed. It was a day in which the defensive healthcare sector outshone others.

The day had started out on a bright note, with futures climbing from their almost neutral level to much more bullish levels after the CPI was released. Dow futures had been more positive than the Nasdaq futures, and another run at 12,000 seemed assured from early in the pre-market period. Although CPI and housing numbers certainly produced as many troubling signals as they did positive ones and U.S. Secretary of State Condoleezza Rice was trying to calm escalating tensions in the Far East, markets have mostly latched on to any positive news lately, ignoring the bad. That's what they were doing this morning, too. Goldman Sachs supplied some of that news, raising its rating and price target on IBM after the company's earnings report last night. UN, BRO and ITMN also received buy ratings from various brokers.

A pattern soon emerged with some reporting stocks such as NVLS, LLTC and Con-Way (CNW), however. All were punished in early trading due to disappointment in their outlooks, although CNW had additional problems such as lower profits and revenue. Two of these three are SOX components and CNW is a TRAN component, with those two indices being among two that often lead other indices. Both the SOX and the TRAN had produced far more bearish-looking daily candles yesterday than had most other indices, and alert short-term bulls would have known to snug up stops. Any Nasdaq climb without the SOX can be considered somewhat suspect, and the Dow, OEX and SPX don't tend to move far in a direction opposite that of the TRAN. The TRAN did climb in early trading, but it soon ran out of steam and turned over again. So did the other indices, including the SPX.

Annotated Daily Chart of the SPX:

Notice that the SPX is following a pattern we've seen repeatedly in recent months. That pattern includes a strong move higher, followed by a week or more of consolidation. Consolidation usually occurs with small-bodied candles, some often with upper or lower shadows. The consolidation usually continues until the 10-sma is pierced or the bottom of this channel is hit. The 10-sma is near. Bears need to watch for a potential bounce from that (blue) moving average, but if the SPX is driven below that average and closes below it, the months-long pattern has been broken and a retest of the bottom-channel and 30-sma support look likely.

If today's candle had occurred at the top of the SPX's rise and not after several days of consolidation, it would suggest more downside tomorrow. It loses some of its potency, though, coming in a consolidation pattern. An early morning test of 1369.64 or 1359.50 look about equally weighted when I study 15-minute Keltner charts, with neither given preference over the other. The daily candle says the lower test is more likely.

Although seasoned traders know better, much focus has been on the narrower Dow. Today the Dow moved above 12,000 to an intraday high of 12,049.51. In doing so, it nearly touched daily Keltner resistance at 12,063.44. This could be significant. Although Keltner lines are dynamic and this resistance can be shoved higher as the Dow moves higher, too, it's a sign that this run should be due for a pullback. Some indices climb the underside of that resistance, shoving it ever higher before they pull back. Some pull back after hitting this resistance and then retest, but they don't always retest. The Dow didn't on May 10 when it last hit this same Keltner channel line. The pullback began that day with an intraday pullback from that Keltner line, just like today's, and then an immediate tumble that began the next day. I don't often show the Keltner charts that I so prefer because some readers consider them complicated and my Wraps are already longer than I would like, but I'm going to show this one. Just concentrate on the shape of the Dow's daily candle as it hit the upper Keltner line in the two places indicated.

Annotated Keltner Chart of the Dow:

Clearly, the Dow or any other index can violate Keltner channels. It can pull back and then make another charge at the resistance, even if the resistance is eventually going to hold. However, this touching of Keltner resistance and the shape of the candle itself sound an important warning to bulls to keep those stops where you want them to avoid losing too many of your gains.

With the Dow pushing to a new high and falling back as it did, some discussion of a key reversal day becomes necessary. Elements of a key reversal day include an early push so fast and hard that a full day's range is often accomplished in the first few moments of trading. Check. That happened. Then prices have to be pushed back. That happened, too. Another element, however, is a huge explosion of volume. Using the Diamonds, I checked that, too. There was big volume on that first move higher this morning. During the first fifteen minutes, the volume was the largest seen since a late-day move on Monday. The first sixty minutes had the biggest volume seen since last Wednesday after the Dow hit support and then bounced. However, was it big enough to qualify as huge volume? It just wasn't quite the explosion that I'd hoped to see, so I just don't know, not having watched the Diamonds long enough.

There's the potential then that the Dow created a key reversal signal. A key reversal signal is a time-honored signal that old-time traders watch as a sign that a reversal may be near, but I'm just not sure about that volume, and I've learned that volume is an important confirmation that's needed. Given the Keltner chart I just showed you, I'd give this possibility some consideration, balancing it against the bullish fervor that still exists, the proximity to the siren call of Dow 12,000 and the likely desire of those-in-power to support markets into the elections.

On the more traditional daily chart, the Dow's punch higher this morning was seen to punch through resistance, but the close was below that resistance, showing that resistance held once again. The Dow may be moving higher, but it's still having difficulty with the midline seen below.

Annotated Daily Chart of the Dow:

Yesterday's test of the 10-sma and the spring up from there gave Dow bulls enough incentive to try for 12,000 again. The failure to close above it or above this long-term resistance seen here may empower bears, at least temporarily. The Dow may need another test of the 10-sma over the short term. Look for potential support at that 10-sma and the red line with which it converges. A break below that sees next support at the channel line.

The Nasdaq did retest its 10-sma today, just a day after yesterday's test. Today, the Nasdaq was snagged between that support and the top of its channel. Either that support or that resistance needs to break before we have a clearer picture. Look for next support below the 10-sma at the midline of this rising channel and then at the bottom of the channel.

Annotated Daily Chart of the Nasdaq:

The Nasdaq is going to need more help from the semiconductors if it's going to succeed in pushing higher. For a couple of weeks, I've been pointing out that the SOX was showing more technical signs of weakness than other indices, having broken down out of a rising price channel that was similar to the ones in which other indices still traded. Reports by SOX components Novellus Systems (NVLS) and Linear Technology (LLTC) showed some positives but disappointed when offering guidance, and both were hit today, sending the SOX sharply lower, jamming it into next support. That support is composed of the moving averages seen below as well as the Fib level near 448.80.

Annotated Daily Chart of the SOX:

Normally a test of the massed potential support seen here would suggest a bounce attempt should be next, but the bounce attempt today was feeble and the SOX closed near its day's low. That suggests that sellers weren't quite through and the SOX is in danger of producing lower prices. A doji or small-bodied candle could be produced, but if it's a strong red candle that closes below this support, the SOX's weakness is further confirmed. This is not a bullish chart.

The RUT's chart proves much more bullish, at least so far. The SOX and RUT have been moving opposite each other, action that has been confounding many predictions of what might happen next.

Annotated Daily Chart of the RUT:

Momentum players have been running the RUT and the Dow higher. Some of them got their hands slapped with the Dow and the RUT today, but the sting shouldn't yet be too painful. We'll need to watch these two indices tomorrow to see if the pain gets worse or improves.

Economic reports today proved mixed, and reactions to them from point to point during the day appeared mixed, too.

The downturn in mortgage application volume seen last week continued this week, too. At 7:00, the Mortgage Bankers Association released its weekly mortgage application volume survey for the week ending October 13, and numbers fell on a week-over-week basis, seasonally adjusted and unadjusted, and were down 11.4 percent when compared to the year-ago level. The refinance component fell 5.3 percent from the previous week and also fell as a percentage of total applications. The four-week moving average for the refinance component inched up 0.1 percent, still under the influence of a temporary pickup seen in refinancing activity over a few previous weeks. That pickup has disappeared with average contract interest rates for 30-year fixed-rate mortgages climbing again. That rate increased to 6.33 percent this week, up from the previous week's 6.27 percent, and points increased, too. All other components of the report fell along with the refinance and headline numbers.

Other numbers related to the housing market were released today, and both proved surprising. Housing starts for September had been expected to fall two percent to 1.64 million annualized starts. Instead, they rose a higher-than-expected 5.9 percent, rising to 1.772 million. This is the first time since May that the number of housing starts has climbed. In addition, August's number was revised higher. As part of that release, however, the Commerce Department also reported that building permits declined 6.3 percent, putting the 1.619 million annualized permits at a five-year low, and maintaining an eight-month trend of lower numbers of permits. This is important because building permits are a leading indicator of the health of the industry and also, somewhat, of the economy. In addition, building permits data are considered less subject to vagaries of the weather, and so more credible. The margin of error is so large for the housing starts data, according to some, that it's possible that housing starts actually fell, too.


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Market participants appeared to be more focused on that important CPI, however, also released pre-market. Core CPI, in particular, was closely watched. Here, too, there was good news and not-so-good news. Core CPI came in at a tame and expected 0.2-percent rise. This expected rise was the third month in a row of increases, however, and the annual rate inched higher to 2.9 percent, above August's 2.8 percent. The yearly change has not been this high since February 1996, and that means that core CPI year-to-date has risen 3.0 percent. That's not good news, since that's above the perceived comfort level for the Feds. Bonds dropped at the news, with yields rising, an indication that bond traders did not consider the number a Fed-friendly one. Ultimately, that first bond-market action was to be reversed and reversed again in what one article called a "churning session."

Equity traders during the pre-market appeared to focus on the headline number this time as well as the in-line core month-to-month number. The headline number dropped a seasonally adjusted 0.5 percent, a bigger than expected amount. Lower energy costs had been expected to drive the headline number lower, but the amplitude was a surprise. Year-over-year, the headline number has now increased 2.1 percent, much lower than the 3.8 percent seen in August, but the year-to-date number stands at 3.4 percent.

Components included a 7.2 percent drop in energy prices and a 1.7 percent decrease in commodity prices. Transportation costs fell 4.1 percent, with air fares declining. However, service prices, food and beverage prices, medical care prices, apparel prices and housing costs all increased.

Crude inventories delivered mixed results, too. Crude inventories themselves rose 5.1 million barrels, a much higher-than-expected build, but gasoline supplies fell 5.2 million and distillates, 4.5 million. The drop in gasoline supplies had been the first in nine weeks. Utilization dropped 2.9 percent. Amid much speculation about what OPEC will do tomorrow and some contending commentary out of oil-producing nations, crude at first gained after the inventories results but then dropped through the day, taking the OIX and XOI down with it. Energy stocks such as XOM could provide little support for the markets. The front-month CL contract expires this week, too, and some market action may have been related to expiration. Both the front-month contract and the December contract were driven down to retest recent lows, perhaps plumbing for support again.

A Dow Jones article published in the afternoon suggested that the OPEC nations were close to deciding how to allocate the purported 1-million-barrel-a-day production cut. Although CNBC and other sources speculated that OPEC might need to cut production by more than a million barrels to support price, the Dow Jones article said that acting Secretary General Mohamed Barkindo did not give a specific answer when asked about a deeper production cut. As Jim noted last night and as was repeated today, OPEC members have appeared to differ in their opinions of whether there should be a production cut or a quota cut.

Company-specific news today included an earnings report by J.P. Morgan Chase & Co. Investment-banking fees pushed the company's profit 32 percent higher. However, I heard a Bloomberg commentator noting that its trading revenues were lower than expected and a Marketwatch.com article commented on weak mortgage banking results.

Automaker General Motors (GM) was in the news, with some news services reporting that it was preparing to fight Kirk Kerkorian if the minority shareholder should initiate a proxy fight or other hostile action. Goldman Sachs and Morgan Stanley had reportedly been retained to advise GM.

Apple Computer (AAPL), eBay Inc. (EBAY) and Advanced Micro Devices (AMD) reported after the bell. As this report was prepared shortly after the close and before the initial volatility had subsided or conference calls been completed, AAPL shares were sharply higher in after-hours trading, last scrolling across the screen at $78.80 after the company reported and beat estimates. EBAY was also higher in after-hours trading, with sales driven higher by PayPal payment revenue. Higher employee-related costs were offset by a lower tax rate, too. EBAY reportedly beat on EPS and sales. As this report was prepared, CNBC was reporting that management did concede that revenue would be under some pressure in the next quarter, but the stock was still trading above $29.00, with its close today at $28.49. AMD traded lower in after-hours trading, with sales that dipped from the year-ago level but that appeared to be roughly in line with analysts' expectations.

Remember that after-hours trading can be misleading. Comments made during the conference calls or analyst action the next morning can change the tenor of trading. Regular market action can, too, which will be evident if you take a look at IBM's chart, with IBM selling off all day today after its first 30-minutes of trading.

Geopolitical concerns continue to heat up, with U.S. Secretary of State Condoleezza Rice journeying to Japan to drum up support for the quick initiation of sanctions that the U.N. imposed on North Korea after its first nuclear test. Meeting with Japan's foreign minister, she will discuss inspections of North Korean ships as she also reassures Japan that the U.S. is committed to defending Japan. China has not been clear as to whether or how much support it will offer in inspecting North Korean ships, and the secretary of state will need to deal skillfully with that country in order to avoid raising tension, news sources speculate.

Tomorrow's economic reports include jobless claims at 8:30, September's Conference Board Leading Indicators at 10:00, and natural-gas inventories at 10:30. The most important report is the last, October's Philly Fed Survey, due at noon. As Jim explained in this weekend's edition of the newsletter, last month's Philly Fed Survey shocked the markets with a big drop to -0.4. Expectations for October are for a rebound to 6.2. A strong rebound is needed since last month's plummet created fear that the economic slowdown could be more than a mere softening.

Companies reporting tomorrow include GOOG, as well as BRCM, FSL, LLY, MCD, BTU, RMBS, SNDK, KO, BAC and HON.

Last Wednesday, I had noted that the ten-year yields were forming a potential inverse H&S under the 200-ema's and -sma's, with a right shoulder still to be formed. I had suggested that if bulls held any hope of pushing higher, it was because yields were due to stall and form that right shoulder. Yields have done just that. They are maintaining the support of both the 10-sma and 30-sma, but haven't been able to push above the 200-sma or the 72- and 200-ema's, which I personally believe are just as important. While these types of formations haven't been the most predictive of price action, or yield action in this case, they still give some insight into who is winning the battle, so watch yields and this formation to see if it's confirmed or invalidated. Bond traders are going to be positioning their trades ahead of next week's FOMC meeting, and you want to know what they're thinking. If symmetry is going to be preserved, the formation suggests that they may just keep those yields within that right-shoulder level until the FOMC decision, but you'll want to know if something different happens.

To recap, there's the potential that the Dow saw a key reversal day today, with the only question being whether the volume was high enough during that initial push to qualify it as a key reversal. It hit important Keltner resistance and tried to pierce important resistance on the more traditional chart, but fell back. Its sister index, the TRAN, dropped even more heavily, closing beneath the 10-sma, and closing more than 100 points below its intraday high. The SOX's candle was ugly, but neither the RUT not the SPX looks too ugly yet. The SPX simply follows a pattern that it's produced after every push higher in recent months and before the next push, and the RUT, too, simply looks like its consolidating recent gains.

Evidence still suggests that we should see lower prices tomorrow, at least to plumb the 10-sma's on some indices. Evidence suggests a lot of things that haven't occurred lately, however. Watch the action of the futures for some guidance. This week, they've been a fairly good guide. They dropped along with the Nikkei Monday night and dropped further in the pre-market session, indicating a lower opening that did occur. Last night, the Nikkei was negative during the first part of the session, strongly so before it bounced, but our futures did not move to the downside, but instead stayed relatively flat, indicating some strength building.

Whatever happens in early trading, make your decision about whether to hold on through the release of the Philly Fed Survey at noon. I have no idea what the Philly Fed will say, but if markets have shown early weakness, but are sitting on strong support as that release nears, you bears are going to need to decide whether you want to risk your gains. If the markets have bounced early and are sitting near resistance, you bulls have the same decision to make. There's no right or wrong since none of us has a crystal ball or access to leaks of this data, but there is account management, and you need to adhere to your account-management style. Make your decision tonight, setting up several scenarios.

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