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Market Wrap

Finding Common Ground

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Ahead of Cisco's (CSCO) earnings report this afternoon, markets brushed off early weakness today and posted gains. Those gains didn't appear to be on the books early this morning, but gains in another big-cap stock, Microsoft (MSFT), helped propel indices higher in the afternoon. The Dow was among those, posting another record close. The Nasdaq posted its best close since February, 2001.

The morning looked bleaker. Our markets reportedly hate uncertainty, and uncertainty was what market participants faced early this morning. The Democrats had won the House, but two key Senate positions--positions that would determine whether Democrats would take control of the Senate, too--were close and undecided. While I don't want to focus too heavily on political matters, options traders understand that such political developments do impact the economy or specific sectors of the economy and so must be recognized.

For example, a key Democrat spoke this morning on CNBC, detailing what the Democrats would like to do to balance the budget, efforts that might be hampered by the President's perceived intention to veto any legislation that would undo his administration's tax cuts. Also, a changing of the guard on key committees can impact businesses directly. For example, a CNBC correspondent pointed out this morning that such a changing of the guard could mean that auto companies could be faced with a push for higher-mileage vehicles, something auto manufacturers do not want to see happen. Tax incentives granted to the energy industry could be undone. The drug manufacturers could be impacted. While one key Democratic Senator stated yesterday that while we have troops on the ground, defense cuts wouldn't be considered, some believe that defense-related companies would eventually see cuts. Some small business owners believe that a push for a higher minimum wage could hurt their bottom lines.

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While some say that it was the prospect of a Democratic-controlled House and Senate that hit futures and then stalled the cash markets for a time this morning, others will point out that it's been widely believed for weeks that this could happen and yet markets have risen. It may be more likely that the uncertainty about election results as well as an unwinding of pre-election positions that led to the pre-market decline and the stall until the afternoon when markets suddenly climbed. Uncertainty about who has control leads to uncertainty as to how a portfolio should be positioned. The country dreads another ugly recount scenario, if one or two should occur in those hotly contested Senate seats.

Apparently, the election resulted in more than a Democratic takeover of the House and a possible one of the Senate. Shortly after noon, the announcement was made that Defense Secretary Donald Rumsfeld had resigned. President Bush tapped ex-CIA chief Robert Gates to replace Rumsfeld. Markets reacted with a brief bounce, but it was just part of the choppy market movement within a confined consolidation pattern that played out until a stronger afternoon push. When President Bush talked about the changeover during an early-afternoon press conference, he was also of course questioned about his ability to work with key Democrats. He talked at length about his intention to find a common ground as well as his belief that such a common ground could be found.

Markets had spent the morning attempting to find a common ground between bulls and bears, too, one where bullish and bearish pressures were equalized. They remained equalized for a time until bulls broke that equilibrium in the afternoon.

With all the attempts to claim that the victory of the Democrats in the House and possibly in the Senate had stalled the markets, it was a company-related announcement that was given the credit for breaking that stalemate, that seeking of common ground in the markets. Microsoft (MSFT) announced that Windows Vista was ready to be shipped. The Fed's Moskow should also perhaps be given some of that credit. He spoke during the afternoon, affirming that the pause in rate hikes was appropriate and had "served us well."

Perhaps we should just look to the charts to see if today's action was in keeping with what shows up there.

Annotated Daily Chart of the SPX:

Despite the day's gain, I consider this action consolidation. The candle speaks of consolidation and so does the action as prices gyrated between support and resistance. This is a hand-drawn channel and not one calculated by regression analysis, so the midline might be slightly off.

On a short-term Keltner basis, the day's trading looked weaker than yesterday's, despite the higher close. Resistance at 1387.55-1389 was trying to firm, although a retest of that zone can't be precluded. Obviously a strong, CSCO-propelled rally such as the type that we've seen in the past could blow past any resistance seen on a 15-minute chart, but the SPX's typical pattern after a strong several-day push is a several-day consolidation period that is sideways or sideways-up and lasts up to a week. The SPX is merely following that pattern. Unless CSCO-inspired enthusiasm blows past that resistance, however, I would expect to see short-term resistance there tomorrow morning if the first push is higher.

You'll read about the Dow's record close, as you have already in the opening paragraph, but the chart displays consolidation rather than new strength.

Annotated Daily Chart of the Dow:

The Dow might have eked out a new record close, but the day's intraday high was below yesterday's, and the day's candle speaks of consolidation rather than strength. The bulls and bears are still caught in a short-term stalemate.

The 15-minute Keltner charts also show resistance firming on the Dow, at about 12,195-12,204 as of today's close. If there's an early pop tomorrow, watch for potential resistance there on 15-minute closes unless a CSCO-induced rally pushes the Dow right through that resistance.

The Nasdaq also eked out a new recent closing high, although not a new record closing high. Its daily candle was a stronger one than the Dow's, but the Nasdaq also could not top yesterday's intraday high and also stopped at the midline of its rising regression channel.

Annotated Daily Chart of the Nasdaq:

Unlike the SPX and Dow, the last push on the Nasdaq created a breakout scenario on the Nasdaq's 15-minute Keltner channel chart. Next light Keltner resistance crossed at 2391.19 as of the close, with that resistance important on a 15-minute close and not on a move within the first 15-minute period. Historical resistance exists just above, too, at yesterday's 2391.34 intraday high. Further Keltner resistance, on 30 minute closes, crosses at 2394.20. I would watch for potential short-term resistance at those levels if there's an early push higher tomorrow morning, but the approaching 2400 round-number level might prove a strong price magnet to bulls.

The Nasdaq might have produced a stronger candle than some other indices, but that wasn't due to the influence of the SOX. The SOX's daily candle was within a recent consolidation zone and below the 200-sma, and its shape was clearly indicative of indecision or consolidation.

Annotated Daily Chart of the SOX:

The SOX's chart has proved puzzling for a while. After falling out of the same rising channel that many indices produced when climbing off the summer lows, this index fell slightly, rose up in a classic manner to retest the former support, which did hold as resistance, but then failed to act as expected and dive further. It has consolidated since. While I see nothing particularly bullish about this chart, other than the fact that bears were not able to drive prices lower when they might have been expected to do so, I don't yet see confirmation of the bearishness, either. This indicator index has failed to participate in the rally seen on other indices, and that's certainly more on the bearish than the bullish side of the ledger. It may or may not be forming a potential head-and-shoulders formation, as the possible formation is rather roughly formed, but these formations have not been reliably bearish for quite some time. Bears probably need to see a sustained break below the October low to get anything going to the downside and bulls need to see a sustained break of the 200-sma as a first step, although further resistance awaits the SOX above that level.

On a 15-minute nestled Keltner chart, the SOX had attempted an afternoon breakout, but had fallen back below the breakout level by the close. Resistance and support were thickly layered above and below the SOX as of the close, but strongest resistance appeared to be just above, at 466.34, and then at 469.58, with this resistance important on 15-minute closes, and strongest support was from 460.15-461.44, also important on 15-minute closes.

Annotated Daily Chart of the RUT:

The RUT, like so many other indices, could not breach yesterday's intraday high, despite a close today that was higher than yesterday's close. The body of today's candle was within yesterday's range. Despite the relatively strong candle, this speaks to me of consolidation more than new strength. Yesterday's stalemate on the RUT has not yet been resolved, in my opinion.

At the close, the RUT was rising to retest Keltner resistance just under 770, with further resistance at 771.64-772.30, with all of those numbers important on 15-minute closes. Resistance appeared to be firming a bit, but not yet enough to guarantee that it would hold, especially if there were a strong rally tomorrow morning.

With CNBC and most other networks more concerned with election news than economic developments and with economic releases few and far between, little attention was paid to those releases. The first was at 7:00, when the Mortgage Bankers Association released its weekly mortgage application volume survey for the previous week, with that volume showing an 8.8-percent increase. The increase was driven higher by an 11 percent rise in refinance application volume. These are week-over-week comparisons, however. Year over year, the total volume fell 5 percent.

Four-week-moving averages moved higher, too, reacting to this week's big jump. The four-week averages of the market, purchase and refinance components jumped 0.9 percent, 1.2 percent and 0.6 percent, respectively. The average contract interest rate for a fixed-rate, 30-year mortgage was unchanged from the previous week's 6.24 percent, but points decreased.

Today, Centex Corporation's (CTX) Chief Executive addressed an investor conference that was sponsored by UBS. The Chief Executive said that historical patterns suggested that the housing industry downturn might have a bit further today in its decline from the July, 2005 boom. He believes that difficulty in selling existing homes is still leading to cancellations in new homes, driving inventory higher and prices lower. Whether as a result of his words or a reaction to other developments, the DJUSHB, the Dow Jones U.S. Home Construction Index, dropped beneath recent consolidation, ending at a best-fit trendline off the summer's low. A trendline that encompasses all candle shadows, too, is lower and has not yet been violated or tested, but there was no participation by this index in the afternoon rally, despite a drop in bond yields today and this afternoon, in particular.

Crude inventories were reported mid-morning. If only minimal on-air commentary was allotted to a discussion of crude's price actions, the TRAN was still showing some short-term reactions, dropping when crude rose immediately after the announcement, rising when crude prices retreated, then dropping again when the crude price climbed. The TRAN has looked weaker by some measures than some other indices lately.

Annotated Daily Chart of the TRAN:

Although I did not draw the trendline because I wanted the blue 10-sma to be clearly visible, the TRAN's prices have dropped below a best-fit rising trendline off the September low and now have risen to retest that trendline. The TRAN's prices are showing some hesitancy at that former supporting trendline, but that hesitancy is so far in the form of a sideways consolidation. Neither bulls nor bears have prevailed yet.

While the TRAN struggles with resistance, the current crude futures contract does, too, struggling with the 30-sma.

Annotated Daily Chart of Crude Futures:

A sustained push above that 30-sma might negatively impact the TRAN as well as other indices. Crude costs should be watched tomorrow and the TRAN's reaction or non-reaction to its movements should be watched, too. Today, the OIX and XOI gained, helping to propel the SPX higher.

The Department of Energy's survey showed that crude inventories climbed 400,000 barrels last week. Both distillates--important as the winter season approaches--and gasoline inventories fell. Distillates fell by 2.7 million barrels, the DOE reported, while gasoline supplies dropped 600,000. The draw downs were larger than expected, with the decline in distillate supplies about three times what was expected, according to CNBC. Refinery capacity also dropped, by 0.8 percent.

As you may already know, yesterday the Energy Department released its forecasts for crude and natural-gas costs and demand. Those forecasts included an increase in demand for crude across the globe of 1 million barrels a day for the full year. It expects WTI crude to average $66 a barrel in 2006 and $65 a barrel in 2007.

Some company-related developments also impacted markets, with several companies of note reporting or announcing news today or late yesterday. Those included Federated Department Stores (FD), reportedly missing expectations, but climbing sharply in early trading. Sirius Satellite Radio (SIRI) reported higher subscriber additions and a narrower third-quarter loss and climbed in early trading, too. Late yesterday, National Semiconductor (NSM) had blamed slow shipments to cell-phone manufacturers for the company's decision to cut its targets, but even NSM rose in early trading.

In addition, late yesterday Merck (MRK) reported four tax disputes in Canada and the U.S. MRK wasn't as lucky as some of the other companies missing expectations, lowering forecasts or reporting bad news, however. It dropped from the get-go this morning, with the drop perhaps exacerbated by uncertainty over how drug manufacturers would be impacted by a Democratic-led House and gridlock in the Senate or even a Democratic-led Senate.

CNBC characterized CSCO's after-hours report as "very good news," with the company beating expectations. Earnings were $0.31, above the $0.29 expected. The revenue was reported as being $300,000 above expectations. Gross margins were 64.8 percent, a little below the 65 percent that the company had guided and a little below the expectations of at least one analyst, but the stock soared in the after-hours period immediately after the release. I caution that this activity was shortly after the report and before the conference call. The conference call can change the reaction, especially as the analyst mentioned above was anxious to get a look at the company's book-to-bill report.

Tomorrow's economic reports are more numerous than those for the rest of the week. They include the usual jobless claims at 8:30 tomorrow morning, but that time slot will also see the release of September's International Trade and Import/Export Prices. The market expects a deficit of $66.1 billion in international trade, with that being a narrower deficit than the previous $69.9 billion deficit. Import/Export Prices are expected to drop 1.1 percent, with the previous drop at 2.1 percent. That release will be followed by November's Consumer Sentiment at 10:00. Consumer Sentiment is expected to remain relatively flat, at 93.7, after November's 93.6. Wholesale Trade figures appear at the same time, with an increase of 0.6 percent expected, down from the previous month's 1.1-percent increase. Natural gas inventories will bring up the rear, at 10:30.

Earnings releases are winding down, but tomorrow's reporting companies include AEG, AMCC, BVF, CPKI, CPST, CWEI, DAR, DSCO, EPEX, FMR, GT, HLS, IVAN, JCP, KSS, LR, PSUN, QBAK, BID, SCON, TXU, USHS, URBN, VIA and DIS.

What happens tomorrow? Nothing on the charts predicts that unless one considers the recent tendency of a week-long consolidation period to follow a few days of gains to be predictive enough to suggest that tomorrow will be another consolidation day. Another pattern argues against that consolidation, however: recently, the Thursday before opex week has often proven volatile.

With all honesty, as I began writing this Wrap and annotating the charts, I expected to project a more bullish tone than I found myself projecting after viewing the charts. Prices had bounced from the bottoms of rising price channels, bouncing more strongly than I had expected last week since I'd thought there might be consolidation nearer the bottom of the channels than the midlines of those channels ahead of the elections. However, other than the TRAN's struggle with its 10-sma, the potentially bearish formation seen on its chart and the SOX's puzzling behavior, I see nothing that warrants my less-bullish-than-expected tone, but the TRAN's chart does bother me, perhaps more than it should.

The SPX, Dow and OEX are just doing what they've done so many times before, posting a strong gain and then consolidating sideways for a few days before they continue their journey up through those rising channels. So, my advice remains the same as it has so many times before when the markets consolidate as they're doing now. If you're in long-term bullish positions, you've hopefully been ratcheting up your stops as the markets climb, and will continue to do so, watching those price channels in which the indices have been climbing. If you're in short-term bullish positions, you'll want to be a little more careful tomorrow morning if there's an early push toward yesterday's highs and Keltner resistance, as there might be a pullback from those zones, particularly if there's any sell-the-fact effect in CSCO. Beware such a reaction, which has occurred in the past and could occur again.

If you're a want-to-be bear, you might be gazing at the midlines of those rising price channels and the resistance they've been offering the last couple of days, wondering if now is the time to try a bearish position. Who knows? It could be: the Thursday before an opex week is an ideal day to expect some strange price antics, and something about the charts tonight makes me less bullish than I would expect to be when the typical punch-higher-consolidate-sideways pattern has appeared once again. However, there's just no confirmation tonight that such action will occur tomorrow. I've studied all kinds of MA's on all kinds of intraday charts to see if there's "the" moving average or "the" trendline or "the" price level that I can give you to show that markets were in the process of rolling over, if there should be any decline tomorrow, but the last two days have produced chop that's chopped up the charts, too. Half of today, the SPX was finding resistance under its 30-minute 9-ema on 30-minute closes: the other half it was finding support on that average.

All I can suggest is that, if you're inclined to look for a bearish entry, make sure that the bearish ducks all line up, and that the VIX and TRIN are climbing, the advance/decline line is dropping and that they stay that way. Changes in breadth indicators have been fairly good predictors the last couple of days that bulls were gaining ground again.

Bulls and bears should both be aware of the sentiment number expected at 10:00, as, in this jittery time, that number could reverse any early-morning movement, particularly if it's much lower than expected. If there's an early-morning bounce, short-term bulls need to evaluate whether they'll hold on through that release. You've been told tonight, so you have time to consider your choices and make up a game plan tonight.
 

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