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Market Wrap

Not Much Traction

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This afternoon, a CNBC commentator noted that although stock markets' performance had not shown much traction this week, prices were finally beginning to move. Much of that movement was driven by the gains in the SOX. Component stock Marvell Technology Group (MRVL) is listed as one of the possible beneficiaries of the iPhone technology that Apple introduced this week and MRVL posted a strong gain today. Apple's (AAPL) gains helped support the Nasdaq, too, but the Russell 2000 proved a reluctant follower rather than taking its usual upside leadership role. Some other indices posted only modest gains in the under-0.20-percent ranges.


The SPX is one of the indices that failed to gain much traction today.

Annotated Daily Chart of the SPX:

The SPX remains squarely within its most recent narrow trading range. The RSI near 50 indicates nothing but rather confirms the lack of traction. A daily close above the 10-sma is needed to break the SPX out to the upside and one below the 50-sma is needed to break it to the downside, but even then I would expect nearby support or resistance to hold on the first test. Nearby resistance would be found at 1427-1431 and than at its former rising red trendline. Nearby support can be found at the 72-ema, coinciding with the lowest red trendline.

The 15-minute Keltner channels delineates the narrow channel in which the SPX has been trading. As of the close Wednesday, the channel's parameters were at about 1416 on 15-minute closes and 1405.15 on 15-minute closes. An upside break on a 15-minute close sets a short-term upside target of 1425.74 and a downside one of 1396.40. Absolutely nothing on the charts indicates whether that channel range will break or in which direction. Nothing on the daily chart shows this, either. There's no traction here.

The Dow's chart shows similar characteristics.

Annotated Daily Chart of the Dow:

The Dow's narrow consolidation band is visible on this daily chart as well as on an intraday one. Unfortunately, Keltner channel values for the Dow show a gap in my charting service, so that the channel lines are not as reliable. The 30-minute chart shows channel lines near 12,459-12,460 and 12,366, all on 30-minute closes. Since this echoes the approximate boundaries of the week's consolidation zone, it's not important that we see those intraday values.

Although the Nasdaq gained some traction today, fueled by Apple and the stocks in its food chain, it did not break out of the triangle I mentioned last week.

Annotated Daily Chart of the Nasdaq:

The Nasdaq ended the day jammed against this resistance. The Nasdaq also ended the day jammed against 30-minute Keltner resistance, with that resistance just under the day's high of 2461.34. Since last Thursday, the Nasdaq has adhered to this channel's resistance on 30-minute closes, including last Thursday's end-of-day spike during the last 30-minute period, so the possibility exists that it could do so this time, too. Personally, I wouldn't be surprised to see some early carry-through tomorrow morning, but, if so, I'd be alert to the possibility of a pop-and-drop move.

The 15-minute Keltner channel suggested that as long as the Nasdaq maintained 15-minute closes above a line near 2456, it might try for the next target at 2471.70.

Since the SOX was the driver of many of the day's gains, it's important to see what happened on that index.

Annotated Daily Chart of the SOX:

The SOX strength was apparent in the first close it produced above the 30-sma in a month. It did not, however, break above the top of the potential bull flag it's been producing since mid-November, and its gains remain suspect until it does so and confirms by closing above its December 493.25 intraday high.

As of the close, it was pausing at 15-minute Keltner resistance at about 484 on 15-minute closes, but had set a potential upside target of 485.88 on the 30-minute chart. It has to maintain 30-minute closes above a line at 481.67 (9-ema on the 30-minute chart) to maintain that upside target, however. The RSI on the 30-minute chart had reached levels that often indicate that a short-term pullback is needed. I also wouldn't be surprised to see some follow-through to the upside tomorrow morning, but would also be watchful for resistance catching hold soon if the SOX should attempt an early climb.

The RUT's behavior causes some concern among those seeking signs of the sustainability of today's gains.

Annotated Daily Chart of the RUT:

The RUT closed beneath its 50-sma for the first time since mid-August. Unfortunately, the Keltner channels for the RUT were also missing some bars, so the channel lines are not as reliable. However, it appeared that 30-minute resistance would be found near 780-781. The RUT needs to climb above that level and sustain values there to prevent sinking further, toward the aqua-colored 72-ema shown on the chart. With the 50-sma at 781.63, the importance of the 780-782 level's resistance is emphasized. If in long positions on the bounce from today's low, watch for resistance at that level, if touched, and for stronger resistance near 786-787.

The drop in crude did not provide much benefit to the TRAN today. Although the TRAN posted a gain, it did not fully participate in the bounce and it did not break out of a recent consolidation zone. With the TRAN sensitive to both crude prices and the economic outlook, one has to question what it might be telling about economic strength since it's not benefiting from declines in crude prices.

Annotated Daily Chart of the TRAN:

The TRAN needs to participate more fully and break above its 30- and 50-sma's if gains in the SPX, Dow and OEX are to prove sustainable. As of the close, the TRAN was reaching toward 30-minute Keltner resistance at about 4654.40, but seeming to have some difficulty with nearer and softer Keltner resistance. The lower channel band in which the TRAN has been traveling this week was at about 4600 as of the close.

After-hours developments included Genetech's (DNA) stronger-than-expected fourth-quarter net income, with the company's stock gaining in after-hours trading. Atmel's (ATML) stock also gained in after-hours trading after Goldman Sachs said it held a 10.1-percent position in the stock. Sapient Corp. (SAPE) was gaining after reporting its earnings, but Ashworth Inc. (ASHW) declined after its loss widened and the company reported that it would be seeking a new CFO. It hasn't been a good day for executives with apparel makers today.


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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 January 5, with that survey revealing a big gain in volume. On a seasonally adjusted basis, volume climbed 16.6 percent over the previous week's volume. Now that the downturn in the housing industry has extended so long, these volumes have also been seeing some favorable year-over-year comparisons, with the overall volume rising 12 percent when compared to the year-ago level. This is on an unadjusted basis. All this occurred as the average interest rate for a fixed-rate thirty-year mortgage fell to 6.13 percent from the previous weeks 6.22 percent.

Components of the overall number also jumped. Four-week moving averages were mixed, still influenced by the month-ago downturn. The four-week moving average for the Refinance Index was down 5.1 percent.

These numbers come after builders revealed yesterday that their net sales orders are still down from year-ago levels. Those net sales are still being impacted by higher-than-normal buyer cancellations. In some cases, those cancellations have fallen over year-ago levels although they remain above the norm. Later in the day, a Raymond James & Associates' analyst claimed that the residential builders would remain soft this year and could show further declines.

A few minutes after the MBAA released those mortgage application volume figures, the Commerce Department released figures on November's trade gap. Those showed that the gap narrowed for the third month in a row. The gap narrowed 1.0 percent, to $58.2 billion, its lowest level in 16 months, surprising economists who had expected the gap to widen to $59.8 billion. October's deficit was also revised to $58.8 billion from its previous $58.9 billion.

A 9.5-percent decrease in the value of imported petroleum contributed to a smaller increase in import prices in November. Exports rose to a new record level, driven higher by exports of civilian aircraft.

Year-to-date, the deficit remains high, and 2006's deficit will surpass 2005's record of $716.7 billion. Year-to-date, the deficit is 7.5 percent, at $701.61 billion. The trade deficit with China also widened, with the year-to-date gap now at $213.5 billion, up from the $185.3 billion that had been hit by November of last year.

At least one economist took a look at the decline in the imports and attributed it to more than a decline in energy prices, however. He saw it as a sign of slowing U.S. demand. One could argue that the sharp decline in crude prices and not a decline in demand was responsible, but then some are questioning whether a decline in demand is at least partly responsible for the drop in crude prices, so the question of whether demand is decreasing doesn't entirely evaporate. As long as asking that question remains a plausible one to ask, it's not surprising that markets might not be gaining much traction.

For now, however, the decline in the gap was expected to positively impact our GDP, with the likely magnitude of that impact has not yet been calculated. That's both good news and bad news, depending on whether one is more concerned about a sharp slowdown or inflation. Bond yields turned higher, focusing on the risk of inflation from stronger-than-expected growth. Ten-year yields were to close at 4.69 percent, perilously close to the 200-sma and the neckline of a potential bottoming inverse head-and-shoulder formation, with that neckline at 4.74 percent. Traders watching interest rates to gauge whether interest-rate-hike fears are escalating should be aware that the current inverse H&S formation could be considered the head of a larger formation, so that another pullback to form a right shoulder could be anticipated if the 200-sma, now at 4.85 percent, is reached. The possibility exists, however, that yields could rise for a number of days through the 200-ema and to the 200-sma, spooking equity markets, so keep an eye on the ten-year yields (TNX).

A little later in the morning, the Commerce Department released November's Wholesale Inventories, and the news wasn't good, but this number isn't closely watched by many market participants. U.S. inventories rose 1.3 percent while sales rose only 1.0 percent, pushing the inventory-to-sales ratio to 1.20, its highest rate in three years. The build in inventories surprised economists, who had expected only a 0.5-percent gain. One spot of good news is that October's rise in inventories was revised lower, to 0.4 percent from the previous 0.8 percent.

The release of this number illustrates how difficult it's become, almost minute-by-minute, to judge where the economy might be going. While the narrowing of the trade deficit could be judged by some to show that the economy is strengthening and GDP might increase above previous estimates, this rise in inventory-to-sales figures may be indicating slackening demand.

As is typical, however, markets showed little reaction to Wholesale Inventories, perhaps treading water before the crude inventories release that was to come in thirty minutes. Crude costs and energy-related companies had been much in the focus all day and indeed all week with geopolitical developments in Russia, Belarus and Venezuela also impacting energy companies' stock, crude and natural gas prices. Late Tuesday, Chevron Corporation (CVX) provided its interim update and, in some respects, that update echoed ConocoPhilips' from last week and BP's from yesterday. CVX said that falling commodity prices and margins, when compared to the prior quarter's, would hit its earnings for the fourth quarter. Production volumes have also declined. The company also expects after-tax charges to climb to the high end of the standard range or perhaps be above that high end.

Belarus' president announced today that Belarus and Russia had reached some sort of agreement in their energy showdown, but Russia had not yet confirmed that agreement as of the last announcement I read.

The European Commission must have been watching this development quite closely. Today, the European Commission stepped into the arena of global discussion concerning energy. The commission wants a "new industrial revolution" that would reduce the EU countries' dependence on foreign energy sources. This could be accomplished, the commission said, by increased investments in renewable energy and nuclear power, cutting greenhouse emissions, and liberalization of gas and electricity markets in Europe, cutting the power of the big energy utilities. Without changes, Europe will depend on imports to supply 84 percent of its gas and 93 percent of its oil needs by 2030, with those imports jumping to 65 percent of consumption. The European Commission may have a tough task of convincing all its members with divergent lifestyle, political and industrial needs to agree on a single platform, however.

Similarly, OPEC may have difficulty deciding on a unified platform as it seeks to stabilize crude prices. OPEC is currently meeting, a guest speaker on CNBC explained, trying to get the quota system working again, but that's a cumbersome process that could require some finesse and some time, the guest speaker said. Seasonal influences are also at work, as demand typically drops beginning about January 15.

Developments in Venezuela added to the upheaval. Venezuela's President Chavez was sworn in to his second term today. He gave few details of his plans to nationalize telecoms, utilities and some crude-related companies, at least in the first hour and a half of his speech. He praised socialism, the aegis under which he plans the nationalizations. This morning, the Venezuelan financial market and some companies in particular were rebounding from yesterday's drubbing, with some sketchy hopes that the investors would be repaid for their shares of the seized companies. The National Assembly retained the right to set the fair price for those shares.

It was into this climate that the government released its crude inventories figures for the week. Industry watchers were wrong on their predictions on almost all counts. Crude inventories dropped more than expected, by 5.0 million barrels. Gasoline supplies rose 3.8 million barrels, and distillates rose almost double the expected amount, increasing by 5.4 million barrels. Crude for February delivery, with that contract to expire next week, took a hit, dropping to a close of $54.02 a barrel, down $1.62. As this report was prepared shortly after the equity markets closed, crude had dropped to $53.90 in extended trading.

An Andrew O'Day podcast on Marketwatch.com this morning addressed the reasons being floated for crude's decline. Among those are the continued mild weather and skepticism about OPEC's production cuts. Jim Brown gave readers specific data last night in his Wrap that heightens that skepticism. A guest speaker on O'Day's podcast also suggested that a softening economy could be behind the decline, with some also theorizing that a softening in emerging markets could be behind the decline in many commodities. Jim also addressed this theory last night, warning that we also must consider the possibility that something as mundane as profit-taking could be responsible for the drop in copper and other such commodities. Jim and others have mentioned the rise in the dollar, with fewer dollars now needed to buy the mostly dollar-denominated crude.

Again, though, the specter of softening economies arises from this discussion. Thailand has done its part in complicating any understanding of what is happening with emerging and other foreign markets. The government appears inept or wishy-washy, throwing out ideas, testing the waters, and then withdrawing those that don't appear to work. The government drafted an amendment designed to limit foreign control over domestic companies in certain sectors by capping voting rights by foreigners in companies deemed important for national security. The negative reaction perhaps prompted the government last night to say that the telecommunication sector would be exempt from some aspects of the new rules. They must cap their foreign shareholdings at 49 percent, but voting rights aren't capped at 49 percent. One writer's interpretation of the news was that the foreign investors who were board members of a telecommunications company would be allowed to retain control of the board. The overall impact of these changes by the Thai government will be to limit foreign investments in Thai companies and perhaps will broaden, scaring investors out of many emerging countries, limiting the capital those countries have available and hamstringing further development.

Later in the afternoon, Ecuador announced that all sovereign debt accrued over the last thirty years was illegal. This added to the discomfort brought about by Thailand and Venezuela and perhaps to the lack of traction seen in some indices.

Michael Moskow, President of the Federal Reserve Bank of Chicago, spoke to a business conference in Iowa today, affirming that his main concern remains the threat of higher inflation. He cautioned that it's not yet the time to begin thinking about cutting interest rates although he believes that recent news has proven more favorable to the wanted economic and inflation outlooks. He wants to ensure that recent developments that point to a possible easing of inflation concerns are not temporary, especially since the unemployment rate may be approaching levels that will add wage inflation pressures. Moskow believes that, other than the housing sector, the economy performs well and that GDP may pick up. He rejected worries that weakness in housing could still spill over into a general economic decline.

In addition to these economic developments, sector-related and company-related developments were discussed. As they were last Wednesday, analysts were active today. Bear Stearns cut the health care, staples and utilities sectors to an underweight rating. The firm raised the tech sector to an overweight rating. A.G. Edwards downgraded IBM to a hold rating from its previous buy rating, citing "IBM's recent lack of growth in bookings in its services business." Raymond James upgraded Peabody Energy (BTU). Jefferies & Co. cut Motorola (MOT) to a hold rating. Citigroup raised its price target for XM Satellite Radio (XMSR) to $21 from its former $16 target.

Other corporate news surfaced today. GE is selling its plastics business, reportedly for $10 billion. Gap Inc.'s (GPS) adult-division president will leave as of January 12, and an Old Navy executive will be leaving a few days later. The company did not say that these executives had been fired or provide any other explanation for the executive shake-up, but many have speculated that the shake-up may be related to GPS's recent poor performance. Paramount Pictures Production also announced that its head was leaving.

Another retailer, Sears Holding Company (SHLD), said that sales fell in the November-December period, but that falling sales were more than offset by gains attributed to property sales. These property sales were part of complicated total return swap investments. Derivatives trading showed losses, but the company expects to end the year with a hefty $3.5 billion in cash and cash holdings. Some speculate that the company could use this cash to move away from its core business, which continues to decline. The result of its various dealings, core business and otherwise, prompted the company to announce that fourth-quarter profit could gain as much as 28 percent.

In other news, U.S. Airways Group (LLC) raised the stakes in its hostile merger bid with Delta Air Lines (DALRQ). It offered an additional $1 billion in cash and set an offer deadline of February 1 for Delta to pause its bankruptcy reorganization. LLC wants to see creditor support that allows it to study Delta's books and an antitrust filing. Delta has said that its board would consider the revision, but a spokesperson also pointed out several potential problems, saying that the increased cash offer actually increased the debt load for the combined companies. Some doubt that the two companies could get past antitrust scrutiny anyway.

Later in the day, news surfaced that Delta was in talks with Northwest Airlines Corp. (NWACQ), but with any joining to occur after both have emerged from bankruptcy-court protection. Still, this provides Delta's creditors with a possible alternative to accepting LCC's hostile takeover bid.

In other M&A news in the same sector, Midwest Air Group Inc. (MEH) rejected a $290 million offer from AirTran Holdings (AAI). In early December, MEH rejected another AAI proposal.

Tomorrow's Economic and Earnings Releases

Tomorrow's economic releases include the jobless claims release at 8:30, natural-gas inventories at 10:30 and December's Treasury Budget at 2:00, all these times EST. Some don't consider the Treasury Budget a market-moving announcement because it can be so volatile. If the number comes in far off the expected $24.0-26.0 billion number, that tendency might change.

As we move further into warnings season, though, any warnings could have more impact. Outside of warnings or other updates, few companies report tomorrow. As Jim noted last night, earnings season begins to heat up next week, but companies reporting tomorrow include CRAI, NASI, and SRR.

What about Tomorrow?

Last Wednesday, I said that I was stymied, but so were other market participants, including the big-money people who could push markets around. Some want a the-market-will-do-this-or-that reading here on these pages, but sometimes it's valuable to know that the markets are not likely to do anything at all. Most charts provided absolutely no prediction of next direction last week, and I said so. There was a reason they didn't provide any prediction: they weren't going to be going anywhere.

Today, some indices tried for an upside breakout, specifically the SOX, Nasdaq, NDX, and BIX (although neither the NDX nor the BIX was covered among the charts shown in this article due to space constraints). All ended today near resistance, and so it becomes important to watch how they perform with regard to that resistance tomorrow. The BIX and SOX, in particular, can be market-leading indices, and they appear to be trying to lead to the upside.

However, they were gaining little assistance from other indices. In particularly, neither the RUT nor the TRAN turned in strong performances, and those, too, tend to be market-leading indices. Any rally attempt must remain suspect when they're not participating. As I've said many times on these pages, the SPX, OEX, and Dow are not going to get too far in any direction if the TRAN is headed another direction.

Frankly, I don't consider any of these discussed indices to have broken out today, and the so-called traction that was gained was gained only among a narrow group. The bounce remains suspect for now. For tomorrow, bulls want early and sustained breakouts in the SOX, NDX and BIX, and they want the Russell 2000's participation this time. In order for the RUT to participate, bond yields probably need to stabilize or turn lower. The TRAN also needs to participate if the SPX, Dow and OEX are going to participate, with those indices all needing to climb above and sustain values above their 10-sma's.

I don't yet trust the bounce, but it must be watched. I've long-ago given my advice to long-term longs, and now I suggest that short-term longs, perhaps long from the bounce from today's low, spend some time tonight formulating how they'll deal with tests of the resistance levels I've outlined above, including those 10-sma tests in the SPX, OEX, and Dow, should they occur. Know whether you'll take automatic profit at those levels and then sit out the test until direction is decided or whether a different decision will be made.

The possibility remains that the tests of those levels will not occur at all tomorrow, however, given the reasons I've outlined for distrusting the bounce as yet. No breakouts have occurred on many indices, so the chances are just as strong that tomorrow will see another rollover toward the consolidation zones' support levels, perhaps after some early upside follow-through on some indices but perhaps just from the get-go. If I were following my gut instincts alone, that would be my best-guess scenario (for a rollover toward support), but traders should be aware that tomorrow is the Thursday before option-expiration week, and such Thursdays can be wild as big-money people and institutions roll over into new positions.

So, while I'd probably have to reluctantly give the rollover-toward-support scenario my vote (perhaps after some initial upside follow-through by the SOX and some other indices) due to the non-participation by the RUT and TRAN, any strong bounce by those two indices, if not quickly reversed, would change my short-term outlook. The bond market opens before the cash market, so you can watch ten-year yields, the TNX, to gain some idea of how the RUT might be impacted before the cash markets even open. Futures will be of some help, at least for the opening bias.

My strongest advice is not to let any position get too far into the losing camp tomorrow, with that being the Thursday before option-expiration week. Any positions entered early in the day should be small ones because of the possibility that the opex-related action will undo anything discerned tonight on a technical-analysis basis. So could geopolitical news. If you don't believe that to be true, think back to the time when the news about Thailand's government's imposition of changes related to foreign investment first hit the markets.

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