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Market Wrap

Calm on the Surface, but What's Going on Underneath?

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Look at the SPX, Dow, OEX, RLX and Nasdaq daily charts, and you'll find indices that have been going mostly sideways throughout December. Today, the OEX reached a new intraday high not seen since 2001, but these "records" being reached lately have not resulted in the same upside breakouts that they did in previous months.

Extend that study to the BIX and you'll find a chart that shows steady gains throughout December, but gains within a broadening formation at the top of a rise. Extend the study to the Russell 2000 and SOX, and you'll find indices have been losing ground throughout December, but losing ground within consolidation patterns.

What's going on underneath all this consolidation?

Introduction

Some believe that distribution is what's going on underneath. Certainly some degree of distribution has been accomplished. That's what consolidation at the top of a rise entails: some bulls are locking in profits while some bears attempt to short markets. Will demand ultimately overcome that supply, sending indices higher again? Or will supply swamp the willing buyers, sending prices lower?

I've been concerned enough about some charts to warn bulls to be particularly careful about protecting profits for the last couple of weeks, but not convinced enough by the evidence to advise bears to plunge into the fray. Last week, I noted that if the SPX and some other indices were to follow their typical patterns since the summer, the time for them to break higher again was approaching, but that my gut impression from chart study was that traders could be in for a continued period of choppy consolidation instead.

Yesterday's FOMC meeting didn't break the indices out of their choppy consolidation. Today's stronger-than-expected retail sales, disturbing business inventory-to-sales figures and surprising downdraft in crude inventories couldn't do it, either. Bulls and bears remained equally matched. At least, that's what most charts showed.

Charts

Annotated Daily Chart of the SPX:

The SPX's range narrows as it repeatedly tests resistance and the 10-sma's support. The SPX looks about the same on a daily nested Keltner channel chart, trapped between Keltner support and resistance.

On a 15-minute chart, it's maintaining support at a Keltner line about 1411.50, but finding resistance at one at about 1414.38 as of the close. The intraday pattern appears to be a bearish right triangle, but it hasn't been confirmed, and a breakdown beneath that Keltner support on a 15-minute close would be needed to confirm the bearish right triangle. If that confirmation should happen, a new short-term target of about 1406.70 is set. Remember that all these Keltner lines are dynamic.

If the SPX should break above the descending trendline formed off today's series of lower highs and confirm that break by a 15-minute close above the Keltner line now at 1414.38, it sets a short-term upside target of 1416.47, but that's not much of a gain, is it?

It would take a 15-minute close above that channel line at 1416.47 to reset a new target, with that new upside target near 1422. As the SPX has consolidated recently, however, it's shown a tendency to remain mostly within the channel lines now at 1406.70 and 1416.47, occasionally piercing them but then climbing right back inside the channel.

The Dow's setup is similar on an intraday chart, but on the daily chart, it appears a little weaker by several measures.

Annotated Daily Chart of the Dow:

The Dow has stopped following its former trendline higher and instead trades sideways. Today's candle pierced a new high but then fell back by the close. This would have been a strongly bearish candle if it had not formed within a consolidation zone, but notice the similar candle December 7, also occurring in a consolidation zone. The potential bearishness of such candles just can't be given the same credence as one that had occurred at the top of a strong climb. It's indicative of indecision, and we already knew that bulls and bears were undecided.

A 15-minute nested Keltner chart shows that the Dow pierced support now at 12,310.27 several times Wednesday, but always closed above it. Each bounce produced a lower high, however, another example of a potential bearish right triangle formed today on an intraday chart. A 15-minute close beneath the day's low of 12,301.64 would confirm the bearish right triangle, setting a short-term downside target of 12,264.82. A 15-minute close above a Keltner line at 12,328.71 as of the close would set an upside target near 12,360. Like the SPX, the Dow has mostly adhered to channel lines defined by those outer targets mentioned here, so traders should be watchful of the potential support near 12,264.82 and resistance near 12,360, if those should be approached.

The Nasdaq attempted a late-day breakout above the bearish right triangle that it had been forming on the intraday chart, but it was below possibly key Keltner resistance at 2,435.11, with next Keltner resistance at about 2,440.56. Unless the Nasdaq can close 15-minute periods above the lower of those two resistance levels, it maintains a downside target of about 2,417.97, with short-term potential light support at about 2,426.66.

That potential target of 2,417.97 is just above the 30-sma, the black moving average seen below.

Annotated Daily Chart of the Nasdaq:


The Keltner evidence would suggest that another 30-sma test could be in the works for the Nasdaq. A break of that average on a daily close would produce the first such break since mid-August and would change the trend of Nasdaq bounces from that average.

The SOX had dropped to a test of an even more important average, its 200-sma.

Annotated Daily Chart of the SOX:

So far, the December downturn could be construed as another test of support, with the pullback's shape looking like that of a potential bull flag. However, the RSI break below a trendline that had been in place since July does add more concern to those in bullish plays, especially since RSI trendline breaks sometimes precede price trendline breaks. This adds worry that the SOX will break through the support that appears strong. My sense is that the SOX may not yet have hammered at that support long enough to break through it and may need at least another day or so of consolidation before it could do so, even if that's what it's going to do, but the SOX should certainly be watched tomorrow, and other tech-related trades keyed somewhat off what you see on the SOX.

The 15-minute nested Keltner channel chart was showing bullish divergence as the SOX dropped lower Wednesday, suggesting that it could attempt a bounce. I wouldn't trust any 15-minute evidence, however, if the SOX drops below that months-long ascending trendline.

The RUT's RSI has not dropped below its supporting trendline, but it is turning lower beneath the resistance offered by a descending trendline. This occurs as the RUT chops within a rising wedge.

Annotated Daily Chart of the RUT:

Once upon a time, such rising wedges were deemed bearish, but notice that I've called it a "triangle" here and not a wedge because such wedges have not been prophetic of breakdowns for several years. The bearish right triangle on the RSI would seem to confirm that "bearish rising wedge" interpretation. However, in a rising trend climate, such supposedly bearish rising wedges have often just reformed themselves into rising regression channels as prices went higher. Traders should watch for an RSI break either direction as a clue to the next RUT direction, keeping in mind that the smaller cap companies that make up the RUT can be more interest-rate sensitive than big-cap companies.

So far, the RUT maintains its 10-sma, but a close beneath that moving average would confirm a breakdown of the rising trendline that's been in place since early October. It would suggest another test of the 50-sma or even the aqua-colored 72-ema might be in the works. A daily Keltner channel chart must be sought for a next upside target if the RUT should bounce above the line of descending highs that it's been forming since December 4, headed up through that rising wedge again, and that shows resistance in the 804 and then 812 regions.

Keying down to a shorter-term 15-minute chart provides nearer resistance and support. Strongest near-term resistance can be found from 790.52-791.56, with that descending trendline off the December highs just above that, at about 793.40 at the close, but still descending. The RUT would need a 15-minute close above both levels of resistance to show that it was breaking up through a potential bull flag that's been forming on 30- and 60-minute charts.

Strongest near-term Keltner support was at 784.05-784.70, as of the close.

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Today's Developments

For the last two weeks, the weekly report by the Mortgage Bankers Association has shown increasing mortgage application volume. Its survey for the week ending December 8 showed another jump in volume. The volume increased by a seasonally adjusted 11.4 percent from the week-ago level. It was 22.2 percent higher than the year-ago level, now having reached volume last seen fourteen months ago.

The refinance component has risen to a level not seen in fifteen months, up a seasonally adjusted 15.5 percent from the week-ago level. The refinance component also made up a higher percentage of total applications, rising to 52.6 percent of all volume, up from the previous week's 50.1 percent. This occurred although interest rates rose to 6.02 percent from the previous week's sub-6-percent level. Other components of the survey rose, too, as did the four-week moving averages. The DJUSHB, the Dow Jones U.S. Home Construction Index, jumped this morning but then trended down most of the day, perhaps pressured by what was happening with interest rates.

The big news arrived at 8:30, when November's retail sales came in stronger than expected. Those sales rose a seasonally adjusted 1 percent, with the Commerce Department pegging that as the biggest one-month gain since July. Sales had been expected to rise only 0.2 percent. Some doubt that the figures are reliable, but others were ready to send U.S. indices higher based on that news and its hope that the U.S. consumer was still going strong. Although the recent report from the various Fed districts showed that the Dallas area was reporting more weakness than some other FOMC districts, an anecdotal shopping trip of my own this weekend proved that plenty of people in this area, at least, appeared to be out doing holiday shopping.

Not all the news relating to the retail sector was good, even during that giddy pre-market period. Prudential had downgraded both Best Buy Co. (BBY) and Circuit City Stores, Inc. (CC). Still, the RLX, the Retail Index, shot up in the first few minutes of trading along with other indices.

In a separate report, the Commerce Department also reported on October's business sales. The picture wasn't as rosy as the retail sector's sales figures. Sales at U.S. businesses dropped 0.2 percent in October, with that drop following September's record 2.3-percent decline. Worse, inventories rose 0.4 percent, inching the inventory-to-sales ratio up to 1.31 from September's 1.30. That's the highest inventory-to-sales figure since February 2004. Excluding autos, sales fell 0.4 percent and inventories increased 0.3 percent.

Looking at these inventory-to-sales figures can produce conflicting and confusing conclusions, even among experts. Some argue that seeing businesses build inventories is a good thing, as those businesses are anticipating an increase in demand. Others think that a rise in inventory-to-sales ratios is never a good thing. Those on inflation watch would point out that such a rise undercuts the ability of businesses to raise costs on goods, however, lessening the potential for inflation.

Bond yields apparently did not agree with that interpretation, especially with the surprisingly strong retail sales figures presenting a different scenario. By mid-morning, Fed funds futures had indicated that the chances of an FOMC rate cut by April had dropped from 30 percent to 20 percent, with inflation one primary concern that might keep the Feds from cutting rates. Five-year, ten-year and thirty-year yields had jumped at the opening of the bond market and climbed into a new December high. Bonds move opposite yields, of course, and an afternoon auction of 10-year notes was not well received. By the afternoon, that rise in interest rates was purportedly pressuring interest-rate sectors and stocks, such as Citigroup and JP Morgan.

That supposed disinflationary effect of rising inventory-to-sales ratios is not one welcomed by companies, anyway. U.S. auto manufacturers have been working hard to reduce inventories, and the retail auto sector did see a decline in its inventory-to-sales ratio to 2.07 from its previous 2.11.

The TRAN, the Dow Jones Transportation Index, pushed higher in the first 15-minute period, as did many other indices, helped by a short-term easing in crude prices and speculation about merger talks between airlines Continental Airlines (CAL) and UAL Corp. AirTran also announced that it wants to acquire all of the common stock of Midwest Air Group (MEH) that is outstanding. Even the non-business channels' news programs focused on the merger talks between CAL and UAL, although those channels focused on the likely effect on the consumer: higher costs.

CAL is a component of the TRAN. The economy-sensitive TRAN had been hit hard yesterday in the post-FOMC decline. The early bounce in the TRAN wasn't to last, however, and neither was the early decline in crude futures. FedEx (FDX), another TRAN component, broke its prior December low. By the time of the release of the crude inventories, crude futures had risen and the TRAN was negative. This sister index of the Dow and sometimes indicator index was to remain negative the rest of the day.

Crude inventories dropped more than expected, with the Energy Department reporting a draw of 4.3 million barrels for crude supplies. Motor gasoline inventories dropped 100,000 barrels, and distillates fell a lighter-than-expected 500,000 barrels. Still, that's the tenth straight week of declines in distillates. Refinery utilization was a lower-than-expected 89.1 percent.

Crude futures did little more than consolidate today, however, ahead of this week's OPEC meeting. According to my feed source, crude futures for January delivery closed at $61.45 a barrel, up from yesterday's $61.02 close, but with the day's range nearly matching yesterday's.

OPEC members were gathering this morning in Nigeria. Some industry watchers have concluded that OPEC members have probably cut over half of their target cuts since the emergency October meeting. A Lloyd's unit reported that OPEC's weekly exports had dropped 10.4 percent or 2.6 million barrels a day. Some industry watchers are paying special attention to Saudi Arabia, with that country saying or complaining they have been cutting the lion's share. Angola could be joining OPEC for this meeting.

Some company-specific news has already been included in the other parts of this Wrap. In other company-related news, Home Depot (HD) confirmed that it intends to acquire The Home Way as a means of expanding into China. Sun-Times Media (SVN) blamed a "significant shortfall" in cash flow and operating performance in the Chicago area for its decision to suspend the company's dividend. Qualcomm (QCOM) announced some changes in its executive lineup. Monster Worldwide (MNST) restated historical financial statements, with the restatement necessary due to an investigation into the company's historical stop-option-granting procedures.

Late-day developments included news that Qantas Airways had accepted a private-equity consortium's $8.7 billion takeover bid. Texas Pacific Group and Australia's Macquarie Bank were two of the three members of the consortium.

Tomorrow's Economic and Earnings Releases

Thursday's economic releases include the typical jobless claims at 8:30, with Import/Export Prices for November at the same time slot. Prices are expected to rise 0.1 percent after the previous 2.0-percent drop. The third-quarter's Quarterly Services Survey will be released at 10:00 and the weekly natural-gas inventories will appear at 10:30.

Of course, the most important economic release guiding trading tomorrow will not actually be released tomorrow. That's Friday's November Consumer Price Index, to be released at 8:30 Friday morning.

Earnings tomorrow include ADBE's, with that report scheduled for after the market close. BSC will be reporting before the open, however. Other reporting companies include CIEN, COST, LEH, PIR and WGO.

What about Tomorrow?

Last week, I discussed my gut feeling that the markets needed to chop around a bit more before they broke out of any consolidation patterns. At the time, I thought such choppy market behavior might even carry through another couple of weeks, at least. Some time earlier, I had pointed out that the often-leading-index the TRAN had a potential formation on long-term charts that would mean that it could chop around for several months, and it's been doing just that. The Dow, OEX and SPX aren't going to get too far if the TRAN is still chopping around.

As I look at charts tonight, I can see some continued evidence for more chop: the Dow's and Nasdaq's sideways movements out of their former rising price channels show that bulls didn't have enough strength to keep prices bouncing within those channels, but bears certainly didn't have enough drive them far away from them, either. Bears had only enough strength to produce sideways movement, not the expected steep fall. However, the SOX is perched precariously above support that should be strong and will have to be strong if the tech-related indices are going to gain, and the TRAN looks as if it could be gearing up for a test of its 200-sma just below 4597. Both of those 200-sma tests are important to those indices and to the markets as a whole.

I do not have as strong a sense of whether that consolidation could continue longer or whether it's due to end soon, perhaps with Friday's CPI or perhaps even tomorrow, with traders scrambling into or out of positions ahead of that CPI. The charts show indices poised too perfectly at key levels, and the weeks of consolidation have flattened indicators in a way that makes them less useful. I'm not indecisive tonight: I'm saying decisively that charts aren't giving a clue.

Watch interest rates. Watch the TRAN. Watch the SOX. They may give you your best indication. Other than that, my advice is the same as it's been: if you're in long-term bullish positions, I began escalating my advice into a warning a couple of weeks ago to protect long-term bullish positions, and I continue to escalate that warning. I do believe that the markets have entered a more disorganized period, and bulls need to know how much risk they're willing to take before next direction is decided. This is particularly true of those in options positions, with chop being deadly to options prices unless you've gone far out into the future for those options.

Some bears have perhaps been profiting from the recent choppiness, but there's no long-term descending phase in place yet, either.

I'm sure Keene will discuss expectations for the Consumer Price Index or CPI in his Wrap tomorrow night. The difficulty for options traders, however, is that, unlike futures traders, they won't have another opportunity to address their positions between Keene's Wrap and Friday's open. Many options traders are in December trades and will need to make decisions about SPX and RUT positions before the close tomorrow anyway, since those have Friday morning settlements, but those in January or later positions or OEX options positions also need to decide whether they're going to hold overnight or close positions Thursday. Spend some time tonight deciding whether you're going to hold overnight tomorrow night if you're not stopped by market action, given the importance of Friday morning's CPI or Consumer Price Index.
 

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