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Stir in a Little of This, a Little of That

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Adventurous cooks sometimes add surprising ingredients to recipes, such as adding a cup of red wine to a chocolate cake recipe. Sometimes their creativity is rewarded; sometimes, not. As the morning began, the ingredients for a sweet confection for today's trading had been assembled. Then market watchers noticed some surprising ingredients and weren't sure what to make of the recipe. The cake rose in the oven, but then the beautiful chocolate layers collapsed.

Introduction

Ericsson's (ERIC) agreement to buy Redback Networks (RBAK) and the overnight rebound in the Asian markets were the leavening ingredients that were supposed to lift the markets this morning. JP Morgan's addition of General Electric (GE) to its Recommended Portfolio and Banc of America Securities' affirmation of Hewlett-Packard's (HPQ) buy rating and top-pick status sweetened the batter. So did Maxim Integrated Product's (MXIM) change in executive lineup. Dell's (DELL) naming of a new chief financial offer and President Bush's mid-morning conference were a little of "that," however, throwing in surprising ingredients. Sometimes such ingredients increase power of the leavening agent or just temper the sweetness, but FedEx's disappointing trimming of its third-quarter outlook had done some of its own tempering, too, and the leavening agents just couldn't work.

Among other details revealed in the press conference today, President Bush said that he would support a boost in the minimum wage paired with tax relief. This evidenced his professed willingness to work with the incoming Democratic Congress while adhering to his own agenda for the economy, too. He mentioned Social Security and immigration reform. He pointed to economic strengths he believes have been seen in the U.S, but also urged Americans to shop for the holidays. He also wants to permanently increase the size of the U.S. Army and Marines, he said today, with such a development perhaps adding to recent speculation that he intends to attack Iran before he leaves office.

President Bush followed through on his intentions to provide tax relief, signing a tax and trade bill that provided 20 tax breaks and brought forward trade benefits for developing countries. The bill also included protection for doctors from a large cut in Medicare payments.

Today's Wrap is lengthened again beyond the optimum, this time by company-related news. If you don't want to read the entire thing, you know the organization by now. Look at the charts and then skip to the "Tomorrow" section at the end.

The charts show that the mixture of events and news bites failed to please traders today.

Charts

Annotated Daily Chart of the SPX:

The SPX ended the day at Keltner support, also near the support at the day's low. One comes to the opinion after looking at the chart that only the closing bell saved the SPX from breaking through that support. That gives some credence to the idea that the tentative support might not hold, evidence that's perhaps backed by a look at the 30-minute chart. That chart shows a potential short-term downside target of 1421 and perhaps even 1419.

If the SPX bounces instead, resistance is layered near 1425, 1427 and then, stronger, near 1431, at least as of the close.

The Dow was also sinking toward its morning low as the closing bell sounded.

Annotated Daily Chart of the Dow:

The Dow's 15-minute Keltner chart suggests that 12,429-12,442 may be tested tomorrow, with potential short-term support at those levels. Unless the Dow plunges through that potential support, I would expect some kind of hesitation or perhaps even a bounce attempt. If that fails, the 30-minute chart suggests that 12,400-12,410 could be tested.

If the Dow bounces instead, first resistance for the morning is layered at 12,473, 12,486 and then, stronger at 12,499.

Bulls have been pushing at that former rising trendline for a while now, however, without being able to break through it. Unless they do so soon, the Dow may need another pullback to its 10-sma and perhaps even to its 30-sma to retest support. Bulls should assess whether they're willing to wait out such a test, if it should occur.

The tech stocks were slated to provide most of the leavening today, but they failed at that task, as evidenced by the Nasdaq's daily candle.

Annotated Daily Chart of the Nasdaq:

The Nasdaq's 15-minute Keltner chart sets a potential short-term downside target near 2,421 and the 30-minute chart, near 2,423. The support at those levels is already turning lower, weakening. However, the Nasdaq also has today's low just below to provide potential support.

If the Nasdaq should bounce first thing tomorrow, resistance is layered at 2,431 and then stronger, from 2,436-2,441.

As Jim Brown noted last night, last night's Semi Book-to-Bill report produced the fourth consecutive month that orders were less than shipments. SOX-component supposedly MXIM sweetened the day's mixture for the SOX as well as the markets in general. The company said its founding CEO would retire on the advice of his doctor, also relinquishing his place on the board. Separate appointments will be made for his CEO and chairman positions, with Tunc Doluca, a company employee since 1984, now set to become CEO. This news and today's bounce comes just a few months after MXIM received a delisting warning from the NASDAQ, when the stock was still in a choppy recovery period off its August low. The bounce punched MXIM up to the top of a descending trendline off its November high, but it couldn't break through that descending trendline and was destined to pull back off its day's high as some of that leavening power failed to work. MXIM closed up 1.32 points or 4.37 percent, but more than $0.80 off the day's high.

The SOX also pulled back from its day's high.

Annotated Daily Chart of the SOX:

The SOX may provide the first indication that the stalemate on the indices is breaking up. I noted last week and, I think, the week before that the river of averages below the SOX's current position would provide support strong enough that it would take either some chopping up and down to soften or else a strong plunge that pierces straight through it. Since then, we've seen the requisite bounce from that support and then some chopping away at that support when the bounce didn't get far. It will take a daily close below the neon-green 200-ema or above November's high to convince me that the SOX has chosen any direction, even a short-term one, but I would be watchful for one of those to happen any time now. Keltner evidence confirms my impression that these are the breakout levels to watch, both on the topside and the downside, but be prepared for a fake-out move that quickly reverses. My gut reaction has been that a breakout won't happen until after the holidays, but I think the minimum chopping-around period has now been fulfilled, so it could happen any time now.

Over the short-term, both 15- and 30-minute Keltner charts suggest that the SOX is more likely to head down than up first thing tomorrow, but perhaps not until after a first test of the 474.31 zone. The 15-minute chart sets a potential first downside target of 470; the 30-minute chart, 469. If the SOX should bounce and get past that 474.31 zone, it's still got resistance layered up to 476.34 and then at 479-480.

The RUT could be headed down for a retest of the 50-sma tomorrow, too, if technical analysis holds. It doesn't always. I, unlike some others, don't consider this a failure of technical analysis. Instead, I think it tells us something important about the markets: that big money funds and institutions are holding markets at certain levels for reasons we don't yet know. I think it tells us to be careful about any play or any assumption, that the climate isn't yet clear, and I personally believe that's important to know.

Annotated Daily Chart of the RUT:

For example, the RUT's RSI churns within a triangle shape, churning near the neutral 50-level. So far, that indicates indecision to me, and not a confirmation of the bearishness of the breakdown out of that rising wedge. That predisposes me to believe that, until such signs change, we're likely to see chop between the top of that former rising wedge and the rising aqua-colored 72-ema now at 765.04. If the RUT should turn lower tomorrow, however, and you're in short-term bearish positions, know ahead of time how you'll deal with a test of the 50-sma as that could prompt a bounce attempt.

The RUT's 15-minute Keltner chart showed prices caught between support and resistance, with resistance having only a slightly stronger look than support. If that support should hold, it's going to take a strong thrust up to break through resistance at 787-790, on 15- and 30-minute closes, but then the RUT sets a first upside target of 795. If support should break, an event given only a slightly higher probability by the Keltner evidence, a first downside target would be found near 781.50. Traders should be aware of potential support near the day's low, the top of the RUT's gap higher today. The 30-minute Keltner chart has already set a tentative target of 781, but gap support can be important.

The TRAN, the Dow Jones Transportation Index, has already spent two days meeting and exceeding downside targets on the 15-minute and 30-minute charts, which means that traders should begin watching for a potential bounce, although not necessarily expecting it. There's some danger about any assumption with this important index. It broke through and closed below its 200-sma today, but the TRAN, like the SOX and the RUT, can easily overrun intended targets.

Annotated Daily Chart of the TRAN:

The TRAN should be watched tomorrow, but expect potential support near its 200-sma or perhaps a little higher if it should drop. The TRAN's daily Keltner chart shows a possibility that the TRAN could sink to 4,534.40. As of the close of trading today, resistance was beginning to firm, too, however, leading to the conclusion that it's going to be tough for the TRAN to get much higher than its 10-sma on a bounce.

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Today's Developments

Perhaps the most important ingredient today was the overnight development in Asia. The rebound in Asian markets came as a result of the development Jim Brown noted in his Wrap last night: the government in Taiwan has said that it will reverse the announcement by the country's central bank that had set new rules for foreign investment. Jim said last night that the government's position was still unclear. It's still unclear to me whether the word "reversal" being used today means a complete reversal of all the rules the central bank was attempting to impose or only some. I don't want to merely rehash Jim's excellent observations in my Wrap tonight, so go to the archives to read Tuesday's Wrap if you'd like more background about the important ramifications of any such decision on all global markets.

The day's economic releases provided only a few dollops of interest. After a period of improvement in the Mortgage Bankers Association's weekly survey of mortgage application volume, the survey for the week ending December 15 showed a decline again. This was no minor decrease, either, but a 10.2-percent decline on a seasonally adjusted week-over-week basis. The decline was larger when unadjusted. However, the good news, if any was to be found, was that volume was 13.9 percent higher than the year-ago level.

Components of this number also fell by double-digit percentages on a week-over-week basis. The exception was the government component, which fell only 3.1 percent. Refinancing activity also fell as a component of total volume, down to 50.8 percent from its previous 52.6 percent. Four-week moving averages climbed, still influenced by the last couple of weeks, which had shown increases. Last week, the average contract interest rate for a fixed-rate 30-year mortgage had already climbed above 6 percent again, and this week, it increased to 6.10 percent. The DJUSHB, the Dow Jones U.S. Home Construction Index, dropped to 721.46 today, a minor decline below yesterday's 720.94 close, but the index looks as if it could slip back toward a test of the 710 level.

Some commentators expected today's crude inventories to be bullish for crude prices, with many other reasons being cited for bullishness in crude. Those reasons included continued difficulty with delivery of crude due to the fog in the Houston/Texas City ship channel. After having driven through a several-hundred-mile swath of Texas last night, I can stand witness that the fog was still present last night, at least.

The government reported a drop of 6.3 million barrels in crude inventories, a climb of 1.2 million barrels in distillate supplies and a climb of 1 million barrels in gasoline supplies. According to a Marketwatch.com analysis of the government's figures, crude inventories have dropped 12 million barrels in a month.

The American Petroleum Institute didn't see that same climb in distillates, however. The API said that crude inventories dropped 4.3 million barrels, distillates fell 1.4 million barrels, and gasoline supplies dropped 300,000 barrels. The Department of Energy and the API almost always disagree.

Crude prices ended at $63.69 according to my feed source, $0.23 above yesterday's close on futures for February delivery. The TRAN, the Dow Jones Transportation Index, proves sensitive to both crude and the economy, and the disappointing third-quarter outlook of TRAN-component FedEx (FDX) illustrates that sensitivity. FDX beat expectations for its second-quarter earnings, with an easing of crude prices helping the company to provide that earnings surprise, showing its sensitivity to crude prices. The company said that third-quarter earnings would be $1.20-1.35, below the $1.55 currently expected. Some consider this company a bellwether for the economy as it ships both for businesses and people, and the volume of its shipments is indicative of the health of the economy.

Much company-specific news has already been mentioned, but it was a day when company-related news garnered much attention. That included the news about Ericsson's (ERIC) agreement to buy Redback Networks (RBAK) at an 18 percent premium to yesterday's close. The news impacts the networking sector, too, because ERIC believes that the acquisition will allow it to better compete against Cisco (CSCO). ERIC closed at $40.56, down from yesterday's $40.62 close after opening higher. RBAK jumped, closing at $25.66 after yesterday's $21.17 close. CSCO managed a positive close at a closing level not seen since early 2004, but it did so with a red candle that moved down all day.

Another acquisition deal was announced. Texas Pacific Group and Apollo Management Group will buy Harrah's Entertainment (HET). Other M&A news was on the wires. Over the last months, much speculation has surrounded global building materials companies, and two more were in the news today. Arcelor Mittal (MT) will buy Mexico's Sicartsa from Grupo Villacero.

In other company-specific news, Ford (F) received another upgrade today, this to a hold rating from its previous sell rating at KeyBanc Capital. Investors should hold what they've already sold? Some apparently took the upgrade to mean buy back what you sold, with F closing above its 10-sma for the first time in about a month.

After hours, Merck (MRK) announced that the FDA had approved its IVANZ for prevention of surgical-site infection, a new indication for the drug.

Bed, Bath and Beyond (BBY) announced a $1 billion buyback plan, but also announced that an SEC probe is ongoing. Nike (NKE) said strength in some brands and a tax benefit helped it overcome higher raw-material costs, currency fluctuations and uncertain spending by consumers to post an 8-percent rise in quarterly profit. As this report was prepared, the stock had dropped in after-hours trading, perhaps amid concern that it was losing market share as the preferences in shoe styles changes.

Tomorrow's Economic and Earnings Releases

Tomorrow offers a full economic schedule, but the most important release of the day may be the last one: the December Philly Fed Manufacturing Survey at noon. Expectations for this are a drop to 4.0 from the previous 5.1. The third-quarter's GDP will be released earlier, but, as Jim Brown mentioned this weekend, this will be the final revision for this number. Unless there's a big surprise, it should not be a market mover. I have sometimes found that markets tend to hesitate before such a release, just to make sure there's no surprise, but this one will be released at 8:30 tomorrow morning. Any hesitation would be in the future's market and not in the cash market.

Other releases include the weekly jobless claims number, also at 8:30; the Chicago Fed National Activity Index for November, at 10:00, the Conference Board Leading Indicators for November at 10:00; and Mass Layoffs for November at 10:00. Although the Conference Board's release is termed "Leading Indicators," most of the information provided in this release can be predicted.

Natural gas inventories will come at 10:30, and these could be important. Natural gas futures dove today.

Companies reporting tomorrow include CAG, GIS, RHT, RIMM, RAD, SLR and WOR.

What about Tomorrow?

Before I discuss what I think might happen tomorrow, that discussion has to be put into the context of my overall outlook. For the last several weeks, I've been changing my stance from the it's-just-the-usual-bullish-climb-and-consolidate-action advisories to increasingly strong warnings about protecting bullish gains. I had thought the markets were likely entering a period of disorganization that might extend longer than the typical week-long consolidation we'd been seeing up until then. I began pointing out some signs that I felt were disturbing, or should be, to bulls, while still warning bears that I didn't see convincing signs of a trend change.

Last week, I warned that the stalemate that had been going on might break as early as the next day, and it did, but I'm not sure that the choppy consolidation is finished. I think that the consolidation zones may instead be expanding, and that's dangerous for bulls and bears. Chop within a wide-but-as-yet-undefined zone can stop out both bulls and bears just before markets reverse and head the other direction.

Some would quibble with my definition of this as chop. Didn't the Dow climb to yet-another intraday high today? Didn't the OEX hit another six-year high on Monday? Didn't the SPX, too, on Friday? Granted, that all happened, but market action is marked by some indices chopping between a key moving-higher moving average and a moving-higher midline of a rising price channel, mostly moving higher but with small-bodied candles marking indecision. Others, like the SOX, are more clearly chopping around. So, to me, it all looks like dangerous and choppy action.

Whether this is a typical topping-out kind of move or a need for a prolonged period in which gains since 2003 need to be consolidated, I'm not sure. The VIX's action certainly warns that it could be the former, but could it also be warning of a prolonged and dreaded (for directional traders) period of consolidation? We're going to have to wait to see.

Bulls, however, should not be waiting for formulate their get-out plans. Some may have already begun laddering out of positions, and I don't think that's a bad thing. Whenever traders have massive gains, it's always a good idea to exit enough positions to lock in a profit, perhaps letting the rest of the now-free positions run with stops being ratcheted up as prices run higher. If they do. If you're in long-term bullish positions and you're sitting on big gains, you might consider laddering out of some positions, beginning to lock in some of your profits.

So, with that out of the way, what about tomorrow?

Tomorrow, before trade opens, traders should take a look at the overnight action in Asian and then take a look at our futures' reaction to that action. Although that's not a fail-safe exercise, it can sometimes tell you much about the tenor in the markets. If you're bullish and Asian markets have rolled over, you want our futures to have held up as they did so. That's no guarantee that cash markets will hold up all day, but it at least assures you that some effort is being made to prop them up into the open.

Watch the TRAN and the SOX when trading opens. Both ended the day at important levels, with the TRAN showing that it's short-term oversold. Don't bet on the Nasdaq going too far one direction if the SOX is going the opposite, and don't bet on the SPX, OEX or Dow going too far one direction if the TRAN is going the opposite.

As detailed above, some indices show signs that they're likely to head lower toward stronger support, but that support is not too far below in some cases and remember that noon Philly Fed? What if the support or resistance detailed above is hit or approached just before the release of the Philly Fed? You'd better have a plan in mind tonight about how you will handle this occurrence. The release could be market moving and, in a light-volume environment, markets can really move. Have a plan. Be prepared.
 

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