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Market Wrap

Ding, Dong Dell

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The Dell bell rang for the markets this morning, sending futures and enthusiasm for equities higher. The University of Michigan's sentiment figure was to dampen the bell's peals, however, if not muffle the bell entirely.

Introduction

Dell's preliminary earnings and Alcoa's decision to lay off five percent of its workforce and spin off one of its businesses as part of a restructuring effort rang in a positive sentiment during the overnight and pre-market sessions. Dell's (DELL) preliminary results, released Tuesday, had shown a 12-percent increase in Q3 profit as the company beat expectations. DELL gapped higher, with today's huge DELL volume producing higher up volume than down on the Nasdaq although Nasdaq decliners outnumbered advancers. Although that's not an indication of strong breadth for the Nasdaq, Dell was to help carry the Nasdaq into positive territory and close it there.

Positive performances had been the norm during the overnight session. Hong Kong's bourse had hit a new high. The Nikkei had rebounded Wednesday night, although it still has far to go to erase its almost 700-point tumble from last Thursday's intraday high to last night's intraday low, with that low produced soon after the open. The rebound from that point had occurred after the government said that Japan's economy had grown for the 58th consecutive month, the longest period of growth since World War II. However, the government also cited recent weak private consumption figures as a worry, downgrading its assessment of the economy. It was into that climate, one of growing concern about the consumer, that the University of Michigan's sentiment number was released.

The University of Michigan's sentiment number slipped against expectations that it would rise. That dampened the early enthusiasm. In addition, jobless claims had risen, and the TRAN was dropping ahead of the crude inventories. Although the early gains were erased by mid-morning on many indices, they didn't slip far past Tuesday's close, either, setting indices up for an end-of-day run into positive territory for most. Some stayed positive all day. The SOX chopped higher almost all day, climbing into a retest of Monday's high.

Mostly, however, ennui had set in as traders headed out early for the Thanksgiving holidays. The rest of the day was to produce small-bodied candles like musical notes, trailing sideways to sideways-up across the intraday charts.

Charts

The SPX continued in its typical consolidation pattern after a rise, the same pattern that has been followed by upside breakouts so many times.

Annotated Daily Chart of the SPX:

Whether or not the SPX will bounce again and rise to another new recent high is unclear. The SPX, if following recent patterns, does begin to look overdue for a pullback to test its 10-sma. If breadth measurements support such a tactic--and only if--that's the place to test the waters with a new bullish entry if you're so inclined. Be careful, though, and absolutely step right back out if the SPX rolls over again. While the VIX can stay low for longer than bears can stay solvent, it's at least signaling caution.

The SPX is going to pull back one of these days and it's not going to send out invitations to exit your bullish plays at a profit before it does. Absolutely do not step in with a new bullish entry automatically at the 10-sma if breadth indicators don't support such a play as the bullish side grows more extended, particularly if the SPX is plunging. Assess the water's conditions first.

As the SPX and other indices have been climbing in recent months, I've been urging nothing more bearish than protecting your bullish profits, if some judge that as bearish. I haven't been suggesting bearish entries and have been pointing out the continuations of patterns that have resulted in bullish behavior. Yet, I'm growing more cautious about suggesting new bullish entries as the rally extends and as the VIX dips.

The choppy pattern from this week has scrambled many intraday charts. They and their indicators are not particularly useful in a light-volume environment anyway, so I wouldn't want to mislead any by suggesting levels to watch from an intraday chart.

That's even truer of the Dow than of the SPX.

Annotated Daily Chart of the Dow:

RSI doesn't look strong in relationship to its former rising trendline, but the RSI has a limited upside level and it can't rise above that level. It couldn't climb that trendline indefinitely. Still, its empirical level, while not a sure-fire sign of an imminent retreat, does signal to bulls that they need to have their profit-protecting plans in place, just in case.

Otherwise, the chart setup is similar to the SPX's. The Dow looks overdue for a test of its 10-sma and maybe even the bottom of its rising channel. "Overdue" and "coming right away" are not synonymous, but the Dow's RSI behavior does urge bulls to be cautious. Keep ratcheting those stops higher with each Dow move higher.

I'm not sure when a pullback will occur. RSI has reached its current level many times during the Dow's climb without anything more serious than a test of support in store before another climb. There's nothing here to indicate that this time is any different. As was said with the SPX, it will happen sometime, and I'm not sure whether it will begin after a sideways correction fails to resolve to the upside, as has been the pattern, or whether it will begin after sellers capitulate in a wild buying frenzy. If you're in long-term bullish positions, you're in luck, however. You don't even have a decision to make. Let those ratcheted-higher stops take you out when they're hit and happily pocket all the money you've made.

The Nasdaq reached again for the top of its rising price channel, breaking above the resistance of its latest consolidation pattern. It did not, however, break above this resistance with a strong daily candle, but rather one that is a potential reversal signal.

Annotated Daily Chart of the Nasdaq:

Unlike some other indices this year, the Nasdaq's RSI doesn't tend to trend at its current level. If in bullish positions, know where your account-appropriate stops should be and adhere to them. You don't want to see the Nasdaq close beneath its 30-sma.

Although the 10-sma offers light support for the Nasdaq, that 30-sma is stronger and more important support. If you want a new bullish entry and the internals are good on a test of the channel's midline and the 10-sma, a partial entry might be okay, but be aware that a bottom-of-the-channel test might be needed. I don't like a new bullish entry with the RSI at this level, either, so I wouldn't suggest such an entry.

There's nothing confirming that potential reversal signal on the Nasdaq yet, not enough in this bullish environment to test new bearish positions. There's just enough to prepare trading plans if in bullish positions.

The SOX attempted a breakout of a recent bullish right triangle, but the RSI wasn't fully convinced.

Annotated Daily Chart of the SOX:

This was a breakout, if a minimal one, but there's still that pesky RSI level to worry about because of the importance of that level in the SOX's trading pattern. If there's a pullback, bulls would like to see support maintained at 489.40-490. Failing that, they want to see support at the 10-sma.

Obviously, a break out of a bullish formation is a bullish event. My hesitation, however, proceeds from that RSI level and the fact that the SOX has been acting strangely, counter to technical signals, for a couple of months. I didn't trust that we'd see downside follow-through and now I don't trust that we'll see too much upside follow-through, although technicals suggest that a retest of that former supporting rising trendline is in store.

The RUT, too, maintains a bullish stance if traders consider the fact that it's holding support at a trendline that was formerly resistance.

Annotated Daily Chart of the RUT:

Nothing appears on this chart to suggest a bearish entry, at least not yet, although the RSI level does urge protection of bullish profits. This advice comes both because of the RSI's level and because of the bearish price/RSI divergence. Remember, however, that RSI can climb only so high, unlike MACD, so a strongly trending market is going to produce some price/RSI divergences.

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Today's Developments

A number of economic releases were scattered throughout the day, some a day ahead of schedule.

After its survey results showed another strong improvement last week, today the Mortgage Bankers Association said that its weekly mortgage application volume survey revealed a 3.7-percent decline in volume, with this figure on a seasonally adjusted basis. On an unadjusted basis, the volume increased 5.1 percent week over week but eased 0.1 percent year over year.

Other components fell on a seasonally adjusted basis, with the refinance component producing the biggest decline, a 4.3-percent decline. Refinancing volume did increase as a percentage of total volume, however, perhaps due to last week's decrease in the 30-year, fixed-rate mortgages' rate to 6.13 percent. Rates for ARMS increased, a combination that probably also furthered some refinancing activity. Influenced by recent gains for several weeks, the four-week moving averages still rose for all components. The DJUSHB, the Dow Jones U.S. Home Construction Index, jumped today into a retest of its 200-ema. The 200-sma is just ahead at 713.11. With the index approaching the top of the channel in which it has climbed off its July low as well as those important averages, this is an important level for the index. The bounce off the summer's low looks like a bear flag, but it hasn't broken down and so we can't assume that's what it is. RSI has reached levels that have indicated that a downturn through the channel is approaching, but no sign of such a downturn has occurred, and there's of a bullish formation setting up over the last couple of months. I would guard bullish profits in homebuilders right now, nevertheless.

The Labor Department released initial claims a day early due to tomorrow's U.S. holiday. The Labor Department reported that those claims rose to their highest in several weeks, increasing by 12,000 to 321,000, above expectations. The four-week moving average also rose. Continuing claims rose to their highest reading in more than two months, increasing to 2.45 million. The four-week moving average of continuing claims also rose. The numbers remain broadly within the year's results, but at least one economist predicts that jobless claims should start trending higher.

The University of Michigan November sentiment was next. It eased to 92.1 from the earlier 92.3 and from October's 93.6. Economists had expected a rise to 93.3. Although there was a decline, the decline was nominal, perhaps too nominal to account for the halt in upward momentum that it seemed to produce. Perhaps some of that loss of early momentum and midday stall should also have been attributed to a decline in crude futures and energy-related stocks that were only to be exacerbated by the release of inventories numbers a few minutes later.

Late yesterday, tankers were loaded with crude oil from the Trans-Alaska pipeline's Valdez port. The process was begun with two vessels. However, it wasn't clear whether the weather-related problems that had caused a 75-percent reduction of its capacity had eased enough to allow a flow nearer the port's capacity. The port facility had been nearing its 7-million barrel inventory limit in crude due to the problems loading tankers.

Today Marathon Oil (MRO) said that it had partially restarted its North Sea Brae Alpha platform off the coast of Scotland. That platform had been shut down Monday after it had developed a minor gas leak. MRO and some other energy-related stocks rose in early trading, but that rise wasn't to last long, and particularly not past the release of crude and natural-gas inventories. Natural-gas inventories were released a day ahead of schedule because of tomorrow's U.S. holiday. MRO dropped heavily after the crude release. When other indices bounced later in the day, it did, too, although it never achieved the intraday high again and closed in negative territory.

Industry experts expected crude inventories to increase, gasoline inventories to fall, and natural-gas inventories to decline by 7 billion cubic feet. The Department of Energy reported, however, a big increase of 5.1 million barrels in crude supply, way out of line with expectations. The DOE said that motor gasoline inventories rose 1.4 million barrels and distillates fell 1.2 million barrels.

The American Petroleum Institute's figures always differ from the Department of Energy's, but this time there was a huge difference in one component. The API said that crude supplies declined by 1.7 million barrels, motor gasoline inventories fell 766,000 barrels, and distillates declined 1.4 million barrels. The difference in the DOE's estimate of the change in crude supplies and the API's is 6.8 million barrels.

Crude futures for January delivery dropped, taking many stocks in related sectors down with it. Without the leadership of those stocks, indices such as the SPX stalled. Not the TRAN, however. The TRAN had begun dropping sooner than had many other indices, but it was to bounce after the inventories numbers had been released. It wasn't to beat out the early morning high until mid-afternoon, however, after the Nymex's close. The CL contract was to close at $59.20 a barrel according to one quote source, down nearly a point from the previous day's $60.17 close.

Natural-gas inventories also surprised. They did decline, but only by 1 billion cubic feet, rather than the much higher predicted number. NG futures also dropped, although they stayed above the ascending trendline off the late-September low.

In company-related developments, the United Steelworkers Union late Tuesday announced its support for Russia's Evraz's bid to buy out Oregon Steel (OS). The union believes the deal would increase members' job security. Oregon Steel's board has also endorsed the deal.

Another deal appears to be in the works. Kirk Kerkorian's Tracinda Corp. reportedly plans a $55.00-a-share bid for 15 million of MGM Mirage's shares. Tracinda already owns 56 percent of MGM's stock. MGM gapped higher and closed at $54.21, up from Tuesday's $49.00 close.

The news hits GM, however. Some speculated that Tracinda was trimming its position in GM in order to obtain the money for an increased position in MGM, a speculation that was confirmed by Tracinda's SEC filing. Tracinda has reduced its position in GM's stock to 7.4 percent, down from the previous 9.9 percent. There was something behind GM's decline this week, and that something was Tracinda's unloading of stock. Investors who had hoped that the effect was priced into GM's stock already were to be disappointed. GM closed at $30.81, down from Tuesday's $32.61 close.

In other news, U.S. District Court Judge Eldon Fallon decided that the litigants saying that Vioxx caused heart attacks and other conditions can't be joined together in a Federal class action suit to be tried in New Jersey. He did not rule on whether the litigants in each state could band together in a class-action suit for each state and the District of Columbia, however. Some viewed this as a victory of sorts for Merck, as the company has wanted to try each case separately. However, Merck (MRK) couldn't hold onto its post-decision-announcement gains, although it did close in positive territory. It closed at $44.38, up from its Tuesday close of $44.21.

In early trading at least, the stock to watch was Dell's, although if you weren't in the stock ahead of Tuesday's announcement, there wasn't much opportunity to capitalize on a day trade today unless one was an adept scalper who got in and out at just the right time. After the first 30 minutes' volatility, DELL's price settled into a tight range. DELL closed at $27.13, up from Tuesday's $24.82 close.

Needham upgraded Dell's (DELL) stock to a buy rating after the company reported preliminary earnings yesterday. Reportedly, markets hate uncertainty, but that reaction must have been pass for the day at least. Investors were ready to gap Dell's stock higher despite the company's admission that results could be changed depending on the outcome of the federal securities regulator's probe into its accounting practices. With volume as high as it was today and with DELL's pullback from the day's high, I'd suspect that there was some selling into the day's bounce. That's not necessarily a sign that DELL's stock will collapse since the overhead supply could be exhausted at some point, allowing the stock to climb higher, but that combination of high volume and a pullback near a recent market top does urge bulls to plan their strategies in case sellers eventually prevail. The pattern could resolve just as it did after August 16 produced a similar volume/price-action pattern, so bulls should plan how they want to react to such a development.

Friday's Economic and Earnings Releases

No economic releases are scheduled for Friday according to a published schedule. Only seven companies are scheduled to report earnings Friday, too.

What about Thursday and Friday?

Tomorrow, equity futures close at 11:30 am EST, Eurodollar interest rate futures and currency futures close at 1:00 pm EST, and energy futures close at 1:15. Reportedly all futures re-open at their regular evening opening times.

Friday? Unless traders love turning the roulette wheel and taking their chances, it's not a day for day trades. Both bond markets and the Nymex will be closed Friday, leaving equities mostly on their own and perhaps directionless, although some energy futures will trade electronically. The U.S. Equities markets will be open only until 1:00 EST.

Volume will be low, which can result in odd and unpredictable market behavior. Sometimes light holiday volume results in narrow-range behavior, sometimes it results in big swings, and sometimes it results in narrow-range behavior that explodes out of its range and runs wildly. Whatever tact is taken by the markets, the behavior is often not amenable to technical analysis. Some little hedge fund can upturn everything technical analysis has been showing so that traders are relegated to trading on faith that their guesses will result in a profitable trade. I've spent this week paper trading a new type of combination option play I want to try. I suggest that unless you're already in the market and watching to protect your position, you do something similar. For what it's worth, the Friday after Thanksgiving tends to have a bullish tenor, but if you want to trade on that thin evidence, I won't be joining you.

As I did this weekend, I want to wish our U.S. readers a Happy Thanksgiving.
 

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