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Market Wrap

New Years Party Fizzles

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Within a few minutes of the open this morning, Dow watchers were treated to another new record intraday high. Some other indices were hitting new multi-year intraday highs, too. Rumors must have begun circulating that the last scheduled party entertainment, the FOMC minutes, would be a party-pooper. Indices had begun turning down from their day's highs ahead of its arrival, buyers fleeing the party in droves.


European markets had led the way higher yesterday. The new fund money that typically floods the markets at the beginning of any new year was ready to be spent. Company-specific news, a decline in crude futures ahead of tomorrow's delayed crude inventories, and a Fed-friendly economic release delayed until this morning helped fuel the celebratory spirit.

The later release of the FOMC minutes proved the Fed wasn't in a particularly equity-friendly mood as of December 12, however, and most indices ended the day well off their day's high, some in negative territory. With the early punch higher into a new all-time intraday high and the steep decline into negative territory by the afternoon, some technicians were salivating about the possibility of a key reversal day on the Dow, but it wasn't to happen. A key reversal occurs when, on high volume, prices spike to a new high, reaching gains that typically take an entire day to accrue. Then, there's a reversal to negative territory, leaving a long upper shadow.


No one was thinking about a key reversal day on the SPX, however. The SPX never hit even a recent new high today. In fact, if its daily candle had not been produced in a consolidation zone, it is one that might be indicative of a short-term reversal to the upside, a bounce attempt in the making.

Annotated Daily Chart of the SPX:

At the end of the day, the SPX looked as if it might be headed up toward 1,417.70 resistance, with that particular intraday Keltner resistance line (9-ema on the 30-minute chart) providing resistance on 30-minute closes since early afternoon. Although the end-of-day bounce was strong, the SPX has to make it through that resistance on a 30-minute close before the short-term downtrend has changed at all. Next strongest Keltner resistance above that was at 1,420.33 as of today's close, with that important on 30-minute closes. If the SPX should bounce tomorrow morning, those would be the first places to watch for resistance.

A daily Keltner chart shows the SPX's daily candle ending right at the breakout level that the SPX had charged above in late November, so it's not surprising to see that doji produced today. SPX 1,399-1,400 remains a distinct possibility, and if it's tested, bulls want to see about 1,399.70 hold on daily closes. The SPX has been closing above that Keltner level since early August. Unfortunately, nothing was decided on a Keltner basis today, either. Sometimes a Keltner breakout or breakdown precedes a price breakout or breakdown, but it hasn't happened yet.

On a daily Keltner basis, a bounce would find the strongest resistance at about 1,434.75 on a daily close, although other, lower resistance exists, too, including the resistance that was tested today.

Unlike the SPX, the Dow did punch to a new high, a new all-time intraday high, so its daily candle with its long upper shadow appears more bearish than the SPX's.

Annotated Daily Chart of the Dow:

The Dow appears headed for a test of its 30-sma, as important for the Dow as it is for the SPX. This average has been supporting prices for many months. I'd look for a test of the 50-sma or even the aqua-colored 72-ema at about 12,102 if the 30-sma's support fails.

As of the close, the Dow had already charged through several layers of Keltner resistance as it bounced off the day's low, with the next short-term resistance at 12,486-12,490 on 30-minute closes. It's easier to push the Dow around than it is the SPX, so I don't trust its picture, but that should be the first place to watch for resistance if the Dow continues to bounce tomorrow morning. Keltner lines are scattered thinly on the Dow, so there's not a sense of whether short-term support or resistance might be stronger on this index. On a daily Keltner chart, resistance and support both appear relatively strong and relatively balanced, so no prediction of next direction is offered there, either. The day's candle is problematic and potentially bearish, but just avoided being decidedly so.

The Nasdaq's daily candle was probably the most interesting of the lot. The Nasdaq has trended sideways out of it rising price channel, and has narrowed into a triangle as it trends sideways. Today's candle spanned the barriers of that triangle. Buyers were buying at support and sellers were selling at resistance.

Annotated Daily Chart of the Nasdaq:

Clearly, the boundaries of this triangle are important, so it should be watched. Any traders who are buying or selling based on these boundaries should be keeping stops close in case of a fake-out move. A downside break will soon encounter potential support at 2,370 although stronger support is much lower, near the converging 200-sma and -ema's. An upside breakout might soon encounter resistance at November's 2,468.42 intraday high and then again near 2,500, at the site of the former rising channel's bottom trendline. Know ahead of time how you'll handle tests of those levels if they should be hit and you're in a play.

I want to emphasize that the position of the daily candle, the close near the 10-sma and the spanning of the neutral-ish triangle all combine to suggest indecision on the part of Nasdaq traders. There's no prediction here about which way the Nasdaq will go, but there are clear boundaries now to watch.

On an intraday Keltner basis, as of the close the Nasdaq was charging into fairly firm resistance just above and just over 2,425 on both the 15- and 30-minute charts. That's the first place to watch for resistance tomorrow, unless the Nasdaq jumps above it at the open. Watch today's opening level, too, the top of the gap up from last week. If the surge off the day's low hadn't been so strong, the picture would show a likely downturn tomorrow morning, maybe right off the bat, at least to test the support near 2,410-2,411, but then that surge was strong.

The SOX barely held onto its 200-sma support after spending a several weeks chopping away at a convergence of moving averages that had provided solid support for a while. I had predicted when the SOX first sank back to test the 200-sma in the middle of December that support was too strong to break right away and would require either a period of consolidation that chipped away at it or else a big plunge through it, even if it was going to eventually break, something that wasn't yet proven. That support appears to be softening, but it did hold on a daily close. So did the 30-sma's resistance.

Annotated Daily Chart of the SOX:

SOX 454-455 looks like next light support, but firmer support is down near 444-446, with the 200-week sma at 446.14 and recent historical support just below that. Resistance is at the 30-sma on daily closes, with November's 492.11 high next resistance above that.

As of the close, the SOX was facing 15- and 30-minute Keltner resistance at 465.90 and 465.41, not able to break through even that first level of resistance, as had other indices. If it can't do so tomorrow morning, a retest of Keltner support at 459.36 might be in the works. If it does break higher, next resistance is at 466.71 on a 30-minute closing basis, with stronger resistance near 469.

Like many other indices, the RUT produced a doji, a candle with long upper shadows and a small body that indices that the opening and closing values were close or the same.

Annotated Daily Chart of the RUT:

As of the close, the RUT's 30-minute Keltner chart suggested that this index was still moving toward a test of 787.97 next Keltner resistance. That's close by, however, and only a last-minute shove higher pushed the RUT above resistance nearer 787. Next intraday resistance levels are at 789-789.64, if the RUT should continue bouncing tomorrow morning.

This article would be too long if I included every chart I'd like to include. Instead, I wanted to spotlight a few other developments. The ten-year yield, the TNX, is maintaining support at its 10-sma. As long as it's doing that, it's still in a climbing mode, moving off the early December low. A climbing yield is not typically equity-friendly when market participants are fearful of further rate hikes, but equities might not be taking this bounce seriously, since it could still be a bear-flag type bounce. The yield needs to move above the 200-ema at 4.71 percent before it breaks out of its current consolidation, with the 200-sma at 4.86 percent.

The TRAN is finding resistance where it once found support, at its converging 50- and 30-sma's. There's another of those potential head-and-shoulder formations that never seem to mean much any more on its daily chart, but I do watch these for information on how bears and bulls are doing, relatively. Bulls want to see the TRAN break above those converging 50- and 30-sma's on a daily closing basis to avert the possibility of a head-and-shoulders formation confirming.


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Today's Developments

At 7:00, the Mortgage Bankers Association released its weekly mortgage application volume survey for the week ending December 29. Volume increased 3.6 percent on a seasonally adjusted basis, but fell 27.4 percent on an unadjusted basis, not particularly surprising for a holiday week. Year-over-year, volume climbed 6.9 percent. Components all increased on a seasonally adjusted week-over-week basis, but four-week moving averages declined for all components. Thirty-year fixed-rate mortgages climbed to 6.22 percent from the previous week's 6.12 percent.

Another early morning report was less positive, however, unless one was looking for a reason for the Fed not to raise rates. The ADP employment report, constructed to mimic the government's jobs report that's due out on Friday, estimated that private-sector employment fell by 40,000 jobs, the first time that will have happened in four years, if the estimate is correct. When government-sector jobs are added into the ADP number, the ADP release predicts that Friday's nonfarm payrolls could drop by 25,000.

Until today, economists have estimated that Friday's number would rise by about 103,000 jobs, so this is a significant difference. ADP doesn't always get it right, but, if I'm remembering correctly, the ADP tends to overestimate the number of payrolls when it does get it wrong, not underestimate.

Markets apparently gauged this as a Fed-friendly number, one that would lead to further pauses or even a rate cut, since the immediate reaction was that bonds rose and yields fell, but this is not an economy-positive number. That reaction wasn't to last long anyway, but it did last long enough to prompt a burst higher in such rate-sensitive sectors as the BIX and the RUT.

At 10:00, the Institute for Supply Management released its important gauge on manufacturing activity for December. Although economists had predicted another sub-50 number according to one source, indicating contraction, another source pegged the expectations at 50.0-51.0. The number beat all those expectations, however, rising to 51.4 percent. For those new to watching the markets, 50 marks the contraction versus expansion benchmark, with numbers above 50 indicating expansion. Manufacturing ISM had been trending down since July, with December marking the first month the number had risen since then.

This number stalled the headlong rush higher that had started the trading day. Manufacturing ISM is one of the Fed's best tools for gauging economic health, and consistent readings below 50 often prompt the FOMC to lower rates. The downturn in bond yields that had started the day was reversed, and bond yields jumped.

However, delving beneath the headline number produced some good news for almost everyone, with inflationary pressures inching lower and with production and new orders climbing. The prices-paid component, the inflation measure, sank to 47.5 percent from the previous 53.5 percent. New orders rose to 52.1 percent from the previous 48.7 percent. Production climbed to 51.8 percent from the previous 48.5 percent. The employment index rose, too, but only to 49.7 percent from the previous 49.2 percent.

The Commerce Department also released an economic number at 10:00, November's U.S. construction spending. This number pointed to the continued weakness in home construction projects, as that component helped produce the 0.2-percent drop in construction spending. Private residential construction spending had dropped 11.0 percent lower than the year-ago level, somewhat offset by a 5.2-percent rise in spending on transportation projects and increases in private-sector lodging projects, outlays for manufacturing facilities and commercial-space spending.

Economists had predicted a larger 0.5-percent decline, so the number surprised to the upside. Also, year-over-year, the headline number rose 0.1 percent, and October's number was revised from a 1.0-percent drop to a more moderate 0.3-percent decline.

However, market watchers worried over the impact of the FOMC minutes to be released later in the day, and that worry asserted itself once the initial burst of buying had finished. The minutes of the December 12 FOMC meeting had been delayed from their scheduled Tuesday release, released instead at 2:00 this afternoon. Indices had already begun turning down ahead of the release of those minutes, a downturn that was exacerbated by their release.

Although one FOMC member had begun talking about a switch to a neutral or balanced-risk status, a change from previous minutes, a preponderance of the discussion at that meeting had centered on worries about inflation, which was termed "uncomfortably" high. The members also noted that the economy had softened "a touch" more than they had expected and that downside risks had increased a bit more than they had thought they would. The members expressed concern about the slowdown in the housing sector. Instead of the preferred Goldilocks situation--decreasing inflation and a mildly softening economy--the Fed seemed worried about inflation and a softening of growth that was worse than anticipated. Within 30 minutes of the release, most indices had turned negative, with the narrow-based Dow and TRAN among the holdouts in positive territory as the 30-minute mark was hit. The Dow was to eventually follow the other indices into negative territory before its end-of-day bounce, however, just holding out longer than some others.

If overseas performance and an influx of funds' monies had played a part in the jubilant start to the year's stock-market performance, so did company-specific news. Wal-Mart (WMT) had sent its happy greetings to the market this weekend, saying this weekend that it expected December same-store sales to rise 1.6 percent above the previous year's number, a significant raising of the company's previous 1.0-percent estimate. In other news today, WMT announced that it will use a new computerized scheduling system to redo the scheduling of employees.

Markets also initially cheered the executive shakeup at Home Depot (HD), with its chairman and chief executive agreeing to a $210 million separation package. In recent times, some have criticized the disparity between his pay package and company performance. Those watching the implosion of the DJUSHB, the Dow Jones U.S. Home Construction Index, and other such indicators of the state of the industry over the last two years would probably not place total blame on this executive for the lackluster performance of a stock in the same food chain.

It's perhaps not surprising that Home Depot (HD), lower down in the food chain that includes the home builders, would be suffering from a downturn in the housing market. Today, home builder Lennar Corp. (LEN) offered more evidence of that downturn, warning that it would see a fourth-quarter loss. The company also announced that its LandSource joint venture would add another partner.

Analysts were busy today, with Raymond James upgrading HD, Bear Stearns upgrading Merck (MRK) and Banc of America Securities downgrading GM. Citigroup downgraded Amazon (AMZN). Banc of America downgraded GM to a sell rating. Piper Jaffray raised Google's (GOOG) price target to $630 and named the company its top pick for 2007. Bear Stearns also upgraded C.H. Robinson Worldwide (CHRW), J.B. Hunt Transport (JBHT) and Old Dominion Freight Line (ODFL). CHRW and JBHT are components of the TRAN, the Dow Jones Transportation Index, and those upgrades, coupled with a steep downturn in crude futures, perhaps contributed to the relative durability of the TRAN's bounce today when compared to what happened to other indices.

Auto and truck sales figures trickled out today. Ford (F) said that its December U.S. sales declined 12.8 percent, with truck sales driving that figure lower. For the full-year, sales dropped 8 percent over the previous year's sales, with the Land Rover the only Ford vehicle to increase its sales. GM announced that U.S. sales dropped 13 percent in December. DaimlerChrysler fared better, with its drop only 1 percent. For the full year, the company's sales dropped 5 percent.

Toyota's sales proved more promising, up 12.9 percent over 2005's sales. For the fifth year, the Camry was the best-selling car in the U.s.

The S&P 500, the SPX, and two other Standard and Poor's indices, the MidCap 400 and SmallCap 600, saw some changes in composition as of the end of trading today. In the SPX, Ensco International Inc. (ESV) took BellSouth's (BLS) place. ESV provides offshore contract drilling services to the oil and gas industry. ESV was previously a component of the S&P MidCap 400. It was replaced there by Cimarex Energy Co. (XEC), an oil and gas exploration and production company. XEC was previously a component of the SmallCap 600. It was replaced by Hornbeck Offshore Services Inc. (HOS), a provider of offshore supply vessels to oil and gas companies. HOS is also a component of the Russell 2000.

Commodities dropped. Gold dropped $8.20. Crude for February delivery dropped $2.73, to $58.32, with predictions for milder weather and a firming dollar perhaps both contributing to crude's drop.

After the close, retailers reporter December sales. Hot Topics (HOTT) tumbled in after-hours trading after its December sales disappointed and it cut its estimate for fourth-quarter profit. American Eagle (AEOS) also fell during after-hours trading, although the retailer saw an "excellent" December. Its forecast for the fourth quarter also disappointed, although matching expectations. A non-retailer, Immucor (BLUD), did manage a gain in after-hours trading after it said that its full-year earnings would be higher than previously guided and announced that quarterly profit climbed 75 percent.

Tomorrow's Economic and Earnings Releases

Tomorrow's economic slate starts with initial jobless claims for the week ending 12/30, to be released at 8:30. In the 10:00 am time slot, November's Factory Orders and December's ISM services will be released. Neither of these numbers should be as important as today's releases, barring some big surprise. Factory orders are usually fairly predictable, with the expectations for a rise of 1.4-1.5 percent after the previous big drop of 4.7 percent. ISM Services might be somewhat more important, with expectations for 57.0-58.00, below the previous 58.9. The 50.0 mark is the contraction/expansion benchmark for this number.

Today's delayed crude inventories should also be released tomorrow, at 10:30, and that could be important if there's a big surprise either direction. Currently, industry watchers expect to see another downturn in crude of about 1.32 million barrels, but distillates are expected to remain relatively steady, industry experts think, at about 220,000 barrels more than last week's report. Gasoline inventories are expected to rise 590,000 barrels.

Companies reporting earnings tomorrow include STZ, MON, and TXI.

What about Tomorrow?

I'm stymied. I expected buying off the bat today. It's the first day of the year, the first day of the quarter and the first day of the month. So, I discounted that buying to some degree. The sell-off was strong, and I thought that was giving us some important information. However, the end-of-day bounce was stronger than I expected and took a different form than I expected, with tall green 15-minute candles that shot higher.

If I'm stymied, so are others. The Nasdaq's candle reveals that. What can be more indicative of a stymied group of traders, even big-money traders, than a big doji candle, indicative of indecision itself, that spans the entire border of a neutral triangle, the epitome of indecision on a price chart?

The Dow and the TRAN look more bearish than the SPX. The Dow barely avoided a key reversal day today, so this narrow index should be watched closely tomorrow. The TRAN tested its 30-sma and found that formerly supporting average to be resistance, so the possibility exists that it's leading the Dow into a decline through that average. The SOX's late-day bounce barely saved it from a close below its 200-sma, but then that bounce did occur. No matter how bearish the early afternoon appeared, its bounce and the bounces in other indices can't be totally ignored.

I wonder about them, though. It's perhaps a bit too coincidental that the day's bounce off the lows for so many indices occurred after the crude futures and bond markets had closed, with some special concern about what yields might do after the FOMC minutes were released.

So, for now, my advice remains as it has the last couple of weeks, without my being able to pinpoint this thing or that thing on the charts that proves the next direction. Nothing on those charts says that the next direction can't be up as well as down. If the big-money people that drive prices where they're driven can't decide and produce charts that tell us more, I can't pull a prediction out of my hat. So, I am still concerned about some chart developments, concerned enough that I've been advising for the last couple of Wraps I've prepared that long-term longs should consider locking in some profits, perhaps also allowing a few positions to run higher with prices. I believe that traders should be setting account-specific and careful stops for those few positions, though. I can't tell you where those stops should be because that varies according to when you entered and how much profit you locked in. If you locked in enough profit that the few positions you have left are paid-for, with the profits taking care of all the debits you incurred in placing the positions, you can set wider stops than someone who still has half the debits at stake.

It's been my thought, based on the TRAN's weekly and monthly charts, that markets have needed a couple of months of mostly sideways movement before a next direction is picked. I'm not sure that's over yet. It felt today and has felt for a while as if traders are walking across a trap door whose springs are ready to give way. Downturns have been swift and vicious, even if they don't last long enough to create much negativity on the daily charts, but bears would also claim, with equal validity, that the upthrusts have been vicious.

Today's downturns from the highs on very high volume felt bearish, too. However, there is nothing on those daily charts to strongly predict that traders are about to see their long positions crash through those trap doors. It's just not there yet. It feels as if it ought to be there, as if it's time, but I don't trade on feelings and I wouldn't advise you to do so, either. We've seen potential reversal signal after reversal signal not mean anything at all.

Tomorrow will be an important day for the TRAN with crude inventories released tomorrow. If it continues to find resistance at its 30-sma, I view that as a short-term negative for the TRAN, SPX, OEX and Dow. Tomorrow will be an important day for the SOX. If it falls through its 200-sma on a daily close, I view that as a short-term negative for the tech-related indices. Watch the ten-year yields. If they should break above their 200-sma, I view that as a short-term negative for homebuilders, retailers such as HD, and rate-sensitive sectors such as the BIX and the RUT. So, all traders should be watching the TRAN, crude futures, the SOX and the ten-year yields tomorrow as a gauge of market strength.

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