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Market Wrap

Gentle Ben Speaks Again

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Ahead of FOMC Chairman Ben Bernanke's testimony this week, one writer predicted that the chairman would gentle the expected warnings about inflation. That's exactly what he did. Big money market participants were primed to rally the markets, and the Gentle Ben approach encouraged retail traders to go along. By this morning, the euphoric relief had been dampened as traders anticipated a barrage of economic events and a further day of testimony by the FOMC chairman.


The Wall Street Journal Online did its part to worry market participants this morning by publishing an article detailing the ongoing shakeup among sub-prime lenders. The article focused on the number of major financial firms that were forcing sub-prime lenders to buy back the loans they originated, a tendency that's been detailed on these pages, too. The FOMC chairman was asked about this shakeup during the Senate's question-and-answer session yesterday, and onlookers might have wondered if he would be grilled more thoroughly on the subject today in the less Fed-friendly House.

Early Fed-friendly and economy-friendly economic releases supported futures into the cash open. Support appeared to be needed as markets proved hesitant ahead of the day's barrage of economic releases and any potential missteps by Chairman Bernanke. With the clear exception of the RLX and the RUT, which headed opposite directions at the open, many indices waffled near breakeven levels until the releases and testimony had been finished.

Despite numerous new or multi-year records achieved again today, the day was to end with a similar lack of conviction, as evidenced by the low volume. If you've been reading my Thursday Wraps since Keene and I traded days, you know I also look for technical reasons why prices behave as they do. A clear technical and easily anticipated reason exists for today's action. Small-range, low-conviction days tend to follow big-range days, especially if those big-range days followed other gains. That was certainly true of the SPX.

I want to note that, in addition to Chairman Bernanke's testimony, there were nine separate economic releases today, some of those important to the economy. That means that this report lengthens more than either you or I want to read on a Thursday evening. However, I don't schedule the releases. If you want only charts and a forecast of what happens tomorrow, the sections are set out so that you can do just that.


Annotated Daily Chart of the SPX:

The last three times the SPX approached this trendline, it either consolidated for several days before falling back to a bottom-of-the-channel test or else fell back immediately. Daily RSI has also reached the levels from which it begins to predict that pattern, too. The daily Keltner channel also reveals resistance that looks firms immediately above the SPX.

A caveat exists this time, however. Several indices, the SPX among them, have spent the last week forming continuation-form inverse head-and-shoulder formations. The timing is right for a final neckline test tomorrow. If big money intends to send markets higher, this is the time to do it, before an invalidation of those short-term formations shows that the bears have the stronger hand over the short-term period. A test should occur relatively soon tomorrow morning.

A thirty-minute close above a Keltner line that's currently at 1,461.05 will tend to support the thesis that big money is breaking the SPX above that neckline, while sustained 30-minute closes beneath a Keltner line currently at 1,456.47 suggests a drop toward 1,454-1,455 instead, with some ambiguity about what happens after that. This ambiguity proceeds both from the Keltner setup and from the fact that the SPX would be dropping back into the right-shoulder area of this week-long formation. That's a notorious zone in which to attempt a trade. It's almost always a choppy zone, and we've seen that chop ever since yesterday's first zoom higher.

The Dow also produced a small-bodied candle not so much <i>at</i> resistance as <i>on</i> it.

Annotated Daily Chart of the Dow:

As with the SPX, the Dow is jammed against massed daily Keltner resistance (not shown), echoing the impression that resistance essentially held here. Resistance lies slightly higher on the daily Keltner chart than on this trendline.

However, as with many other indices, the Dow had produced an inverse H&S over the last week. Unlike those others, the Dow appears to have broken through its neckline version Wednesday morning, truncating the right shoulder, resulting in that sharp rise yesterday. The upside target for that inverse H&S for the Dow appears to be somewhere between the Dow's intraday high today and 12,780-12,790, depending on how the neckline is drawn. So, the Dow draws close to finishing that pattern and exhaustion might be anticipated soon, if the original impulse has not already been exhausted.

Since Tuesday morning, the Dow's pullbacks have been bouncing from the 30-minute 9-ema, with that average at the Dow's 12,765.01 closing level as of the close. Nearest short-term resistance was at about 12,779.72-12,790.81, with all these support and resistance levels important on 30-minute closes but sometimes violated during the 30-minute period. The Keltner chart provides no forecast as to whether that resistance or nearest support would be approached first tomorrow morning, but the 15-minute Keltner chart gives a few more clues. The Dow is in breakout mode on that chart. Unless it breaks below 12,755 on 15-minute closes, it continues in breakout mode, so first support should be watched for at that level. Would-be short-term bears want the Dow to sustain levels below that breakout level and for any subsequent attempt to rise to be stopped at that level. Remember that these lines are dynamic and will shift up and down somewhat with the Dow's movements.

That 15-minute chart suggests that if the Dow drops below the breakout level, it's likely to test 12,725 or maybe even 12,699.

The Nasdaq also produced a candle sitting on the former resistance, but the Nasdaq's version proved slightly more bullish than the Dow's. There's a reason, though, a reason that might not apply tomorrow, so keep reading.

Annotated Daily Chart of the Nasdaq:

Just before today's close, the Nasdaq managed a bump higher that turned that candle into a more bullish one than the small-bodied candle it had been producing most of the day. The Nasdaq's RSI has not yet reached its resistance level, although it's close, so it's possible that the Nasdaq could run a little further before the momentum runs out of steam. That last little push higher this afternoon also broke the Nasdaq out of its 15-minute Keltner channel and tentatively confirmed the Nasdaq's version of an inverse H&S on the intraday charts. All those factors support the idea that the Nasdaq could run a bit higher.

However, if the Nasdaq should gap below about 2,494 tomorrow morning or if it should fall precipitously below that level in early trading, such an action would suggest that this afternoon's confirmation and more bullish-appearing candle were nothing more than momentum carrying the Nasdaq higher into the close, ahead of Microsoft's after-hours update.

MSFT was easing in after-hours trading, so it's questionable whether that brief breakout will be maintained. As this report was prepared, information from the analysts' briefing was just trickling in, and the eventual upgrade/downgrade decisions won't appear until tomorrow morning. Chief Executive Steve Ballmer said that analysts may have been "overly aggressive" when forecasting revenue for Windows Vista in 2008, and market participants didn't appear to like that news, as they shouldn't. He said that for fiscal 2008, operating expenses would likely be a little below $2.7 billion, less than the previous fiscal year's. The drop was termed small. As this report was prepared, MSFT was trading at $29.15 in after-hours trading, down from the $29.46 close. That can change before tomorrow morning, but if investors are too dismayed by news that hopes for Vista revenue were too high, MSFT won't be contributing to any further breakout momentum tomorrow morning.

Like so many other indices, the SOX had created a potential continuation-form inverse H&S on intraday charts. That's not visible on the daily chart, however.

Annotated Daily Chart of the SOX:

The daily Keltner chart suggests that the top-of-the-channel 482-ish level may be attainable for the SOX, but its current level near the neckline resistance of an inverse H&S on its intraday charts echo the long-establish support/resistance zone just above 476. In early January, the SOX gapped in that zone, and the area proved problematic for the SOX when prices attempted to rise through it in early February. By no means is the SOX's smooth progress up through this channel assured, then.

The SOX's behavior has been hard to assess for months, as is evidenced by this choppy chart pattern that's been building so long. To be honest, I've drawn this green channel that seems to have some relevance, as evidenced by RSI topping and bottoming at the channel boundaries, but I have no idea whether this channel will continue to be relevant or not. A breakdown below the channel meant little and a breakout above it might not, either. Until the SOX breaks free of the chop zone, comes back to retest it and then pulls free again, you either stay away from this index or you take your chances.

A couple of weeks ago, the RUT broke out of a more clearly defined pattern, but it's beginning to establish a new resistance zone, one that held last week. I had pointed it out in last Thursday's Wrap.

Annotated Daily Chart of the RUT:

The RUT's candle today was not a bullish one, but rather one indicating indecision, the second day in a row that it's produced such a candle. Any decisions we're making about the RUT must be made in the context of the upside target it has now set near 830, by virtue of having broken out of a rectangular consolidation pattern. Not all such targets are met, but it's important to keep the context in mind.

Intraday Keltner charts don't promise that the upside will come soon. Two days in a row, the Russell has tested Keltner resistance that's currently near 817.49-818.00 and it has fallen back both times. The RUT's Keltner resistance at that level and its support near 813 look about equally weighted, so there's not a strong prediction of which way the RUT will go first thing tomorrow morning. The best prediction they're making is that the RUT might attempt a short-term bounce from about 815 but then that it might get turned right back at about 816.20 or so, but I would look for either that strongest nearby resistance up near today's high or the strongest nearby support down near 813 to be tested fairly soon tomorrow, depending on how that first support/resistance test turns out.

The RUT's 30-minute chart suggests that the RUT would need to clear 819 to break through the neckline of its inverse H&S, but then it would find 30-minute Keltner resistance at about 821.51.

All in all, the evidence taken together gives rather more weight to the possibility of a pullback toward 813 than it does to a breakout, but that may depend on the action of the treasury yields. As many readers will remember from my discussions and those of other writers, the interest-rate-sensitive RUT tends to trade opposite the direction of bond yields, although the day-to-day relationship is not always immediate.

As I warned last week, yields were in the process of pulling back and forming the right-shoulder level for a large inverse H&S, this on the daily chart, and they needed another week or two to chop out that right shoulder level.

Annotated Daily Chart of Ten-Year Yields:

Another index that produced a small-bodied candle today was the TRAN. The TRAN is sensitive to both the economy and crude costs, and yesterday's testimony by Chairman Bernanke and declining crude costs had fueled a drive higher by this index. Today, the outlook wasn't as rosy. An executive with Norfolk Southern (NSC), a TRAN component stock, spoke with a CNBC commentator today, saying that the company was seeing weakness across the board in their transportation business. He was careful to clarify that the company's business was hit by weakness in autos and others in the transports might be having different experiences, since he felt that the economy was basically strong. NSC's decline in share price today, added to that of other railroad companies, contributed to a hesitation in the TRAN after that index soared to new heights yesterday.

Annotated Daily Chart of the TRAN:

I don't write for the live Market Monitor portion of the site any longer, but if I did, I would have been warning all day yesterday that no bearish SPX, OEX or Dow positions should be attempted as long as the TRAN continued screaming higher, as it had that day. Now, I'll provide a warning to bulls: the TRAN's candle today was not a bullish one, particularly as it comes at the top of a rise. It's possible that a pullback into a midline and/or 10-sma test could begin immediately. If it does, and especially if it's sharp, do not attempt long SPX, OEX or Dow plays and guard your stops if you're already in one. The TRAN often serves as a leading index for these indices, and it just doesn't pay to trade opposite it.

This daily chart suggests that a pullback could begin immediately, but the Keltner chart suggests that a 5,156 potential upside target has not yet been erased. If you're bearish and using the TRAN as a gauge for the SPX, OEX or DOW tomorrow morning, you want to see the TRAN drop below about 5,070 and maintain levels below that, because that is the current breakout support for the TRAN on the 15-minute chart. It's also a 23.6 percent Fib retracement of the rally off last Friday's low for the TRAN. Watch next support levels at the 38.2 percent retracement at about 5,038 and the 50 percent one at about 5,011.60. These Fib levels sometimes do show some concurrence with the TRAN's behavior.

What about if you're bullish the SPX, OEX or Dow? Then you want the TRAN to breakout higher or at least maintain that 5,070-ish support and attempt a bounce from it. The TRAN is one of those mo-mo indices that can really get going, but the charts I study suggest that it's not going to get going too much past about 5,160, and that the most that bullish traders should expect is an attempt to punch higher and then some consolidation. The charts can be wrong: I can be wrong in my interpretation of the charts. However, that's what I see.


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Today's Developments

Today's slate of economic events was full, and that's an understatement. The day's slate began with the weekly Jobless Claims at 8:30, joined in the same time slot by January's Import-Export Prices. Weather-related causes may have contributed to a jump in jobless claims, the government reported this morning. Initial claims rose 44,000 to 357,000 last week. However, that weather-related portion amounted only to less than a quarter of the increase. The four-week average also rose, by 17,500 to 326,250. Continuing claims rose 71,000 to 2.56 million, the highest level in more than a year. The four-week average of continuing claims also rose to its highest level in a year. Year over year, initial claims are about 11 percent higher and continuing claims are about 1 percent lower.

One Marketwatch.com article discussing the figures notes that the number of continuing claims has remained "stubbornly higher," indicating that despite the low unemployment rate, displaced workers are sometimes having trouble finding employment. Almost a third of the official unemployed have been looking for jobs longer than 15 weeks, the figures note. Later in the day, some time was spent during FOMC Chairman Ben Bernanke's question-and-answer period before the House discussing which types of workers are finding it harder to find employment. His conclusions and those of others sometimes differed. Some say that the low unemployment figure is being buoyed by low-income workers, while Bernanke argued that his reports indicate that industry is encountering difficulty locating enough highly skilled employees for its top jobs.

January's Import-Export figures delivered some good news. A decrease in import prices was expected since energy costs were lower during part of the period covered. The 1.2 percent decline in import prices proved to be roughly in line with the expected 1.1 percent decrease. A CNBC commentator noted that if petroleum were excluded, import prices were unchanged. While that was true, if all fuels are excluded, prices rose 0.3 percent, the third month in a row that this figure has increased. Some economists note, too, that February's colder weather will erase the beneficial effects of lower contributions by energy imports.

Exports from the U.S. rose 0.3 percent in January, bringing the twelve-month increase to 4.1 percent. While I would normally detail the components of this number more thoroughly, the number of economic releases today prevents me from doing so since this Wrap will be longer than optimal. You can read the full report on the Labor Department's website, if desired. It should be noted that while the international trade numbers are not the most important economic releases seen this week, they do provide the only early forecasts of the net export performances.

One of the most important releases of the day was February's New York Empire Manufacturing Survey, also released at 8:30. The expectations for this number had been all over the place. I had read predictions for everything from 8.7 to 12.5, with January's number having been 9.1. Instead, the index jumped to 24.4, climbing back toward the 25 at which it had peaked in November before sliding into January's number. Except for the possibly troubling inflationary impact of an increase in the employment indices, good news was found in an increase in new orders to 18.9, a rise in shipments to 27.1 and a moderation in the prices-paid component to 26.9 from January's 35.1. Unfilled orders moved into positive territory, but inventories remained negative, although moving higher to -7.5 from the previous -19.2.

The Industrial Production and Capacity Utilization, released at 9:15, sometimes can be important to the markets, although not all components of this number are well trusted. When the Fed remains on inflation watch, capacity utilization over 85 percent would mean that inflationary pressures could be building, for example, but this is the component that is often subject to revisions. This time, no such inflationary pressures were building because capacity utilization dropped to 81.2 percent from the previous 81.8 percent. Expectations had been that it would fall only to 81.6 percent. Industrial production fell 0.5 percent, a drop that was termed the biggest since the Hurricane Katrina period. The drop would have been bigger without the 2.3-percent rise in the output of utilities, a rise prompted by the recent cold weather. One of the components, manufacturing output, fell 0.7 percent, and this drop appeared to trouble equity investors.

These two manufacturing-related releases were to be followed at noon by another influential manufacturing survey, February's Philly Fed Manufacturing Survey. Normally, I would cover the economic events in the time order in which they appeared, with Bernanke's testimony being next to be covered, but these three related releases made more sense grouped together.

The Philly Fed survey was expected to drop to 5.0-5.3 from the previous 8.3. The Philly Fed Survey dropped more than expected, to 0.6, barely managing a number above the 0.0 benchmark that distinguishes the difference between growth and contraction in this number. As one headline indicated, the NY Empire and Philly Fed surveys pointed in different directions, but the Industrial Production and Capacity Utilization result may have given more weight to the Philly Fed's result. The new orders component slipped into negative territory, measuring -0.5. Shipments dropped to 1.7, but unfilled order rose to a -10.5.

The Philly Fed and Industrial Production figures indicated unexpected weakness. These releases gain importance in a time when some economists speculate that the fourth-quarter of 2006's GDP will be revised much lower on February 28, perhaps as low as 2.2 percent. The first estimate was 3.4 percent. If those economists are right, this would be the biggest downward revision in more than a decade. Economists predicate their belief that the GDP will be revised sharply lower at least partially on a bigger-than-expected decline in inventories. Other's point to the widening of the trade gap as a major predictor of a decline in the GDP, while acknowledging that the widening of the trade gap also indicates that the U.S. consumer remains strong, demanding imports.

The Treasury Department also reported today, detailing U.S. monthly capital flows for December, and that news was decidedly important although little discussed. For the first time in 18 months, capital flows registered a net outflow, with this net outflow measuring whether foreign funds are streaming into or out of the U.S. economy. They reversed to an outflow of $11 billion, a sharp reversal from November's inflow of $70.5 billion. The breakdown indicates that private investors sold $42.5 billion in long-term and short-term securities while official institutions bought $31.5 billion.

FOMC Chairman Ben Bernanke's testimony before the House has already been mentioned. That testimony began at 10:00. His prepared comments were the same as yesterday's, with the chairman apparently not feeling a need to correct the impression given yesterday that he is less concerned about inflation than he had been previously. Gentle Ben he remained.

He was questioned about the capital outflow, with one representative noting that the high percentage of our debt held by foreign governments. Bernanke doesn't "consider that to be a major concern," he argued, saying that it was "unlikely . . . anywhere in the foreseeable future" that foreign governments would dump our "safe and liquid" Treasury debt, with the holding of such debt "beneficial to themselves."

One commentator called him "remarkably consistent," especially in the way he responded when pushed to comment on government policy. Just before a 15-minute break, for example, a Republican representative pressured him to comment on whether "continuing low [tax] rates will contribute" to economic growth or whether the economy's strength might be adversely impacted if the Democratic-controlled Congress raises taxes. Despite the demand that the chairman "should tell us" his opinion, the chairman refused to take a stand, saying that "most economists would say that lower dividend and capital gains [taxes] have efficient benefits" but that there are "always competing" concerns and that there "needs to be a balance between spending and taxes."

House members questioned him closely about other regulations, including the Sarbanes-Oxley Act of 2002 and the federal legislation some desired concerning national fair housing rules to prevent predatory actions by sub-prime lenders. In almost all instances, FOMC chairman Bernanke seemed to favor flexibility over regulations. He worried, for example, that setting some sort of national legislation to prevent predatory or unfair rules concerning mortgages could adversely affect legitimate sub-prime lending. He used phrases such as "very difficult to write rules in advance that strike out all practices in all instances," "more effective to be flexible" and "principles versus legislation." He also appeared to advocate flexibility in applying Sarbanes-Oxley rules. While he was "not prepared at this point to call for any statutory changes," he did seem to speak with approval of a standard that would take "in account the size and complexity of a company" so that unnecessary burdens wouldn't accrue to smaller companies. He believes that while it remains important that "greater clarity" is achieved, that achieving clarity should be accomplished "at the lowest costs [to companies] that we can."

Some discussion focused on the greatest challenge the government faces, the rising debt that Bernanke terms "implicit debt, the promises that we've made to our retirees" and others who might be recipients of entitlement programs. He replied to questions about models for interest rates by 2030 if no changes are made in a situation that we can't "grow our way out of." With a sober voice, he concluded "those are very high tax rates" when agreeing that we might leave our children with a lower standard of living.

He was asked about CEO compensation rates, education and projections of future career needs. House members questioned him about the impact of raised trade barriers on low-income consumers and GSE reform. He was asked if he advocated the continued separation of real estate and banking, so that banks didn't venture into the real-estate market.

His testimony now finished, market participants were free to turn to the number of economic releases that appeared during this testimony. A number measuring January's Risk of Recession was released as the FOMC Chairman's testimony began. That risk of recession was measured at 15 percent.

While Chairman Bernanke was still speaking but before the question-and-answer session had begun, the weekly Natural Gas Storage was announced. Industry analysts had expected a withdrawal near the record number, and they were right. Withdrawals were 259 billion cubic feet for the week. However, coupled with predictions of warmer-than-normal temperatures for the next 8-10 days, the "beginning-of-the-end-of-winter" seasonal effects, as one CNBC analyst termed it, and the matching of built-in expectations, natural gas declined for a time before bouncing into the close. The data was considered bearish for natural gas prices, but the day's close was positive.

February's NAHB/Wells Fargo Housing Market Index followed at 1:00, while the FOMC chairman's Q&A session was still proceeding. This index rose to 40, up from January's 35 but still far below last February's 56. This marks the tenth month that the index has been below 50. The index showed that builders across the four regions delineated by the NAHB felt optimistic. We've been hearing about that optimism in some conference calls after earnings reports, when CEO's or other execs mention that they believe the housing market is in the process of bottoming. Others are not so certain that a bottom has been reached, but this survey showed 40 percent of builders optimistic.

The SEMI Book-to-Bill Ratio was also released this afternoon, with that number at 1.06 for January. For background, this is up slightly from December's 1.05, now at a level last seen last July before the number began dropping into sub-1.00 levels. This number is a three-month moving average of global billings and bookings of semiconductor equipment headquartered in North America. The bullish vs. bearish benchmark is 1.00 for this number.

Because of the number of economic events today and the attendant length of this Wrap, discussion of company-related news will remain brief. Hershey Foods (HSY) announced a reorganization plan that includes boosting production and laying off 1,500 employees. Oppenheimer upgraded Qualcomm Inc. (QCOM) to a buy rating.

Goldman Sachs upgraded JetBlue Airways (JBLU) to a buy rating even as CNBC was airing complaints of passengers stranded on the tarmac for ten hours after they were boarded in New York but not allowed to get off when flights were significantly delayed. The firm downgraded AMR to neutral from its previous buy rating.

On reports that it is in preliminary merger talks with a Belgian-Brazilian brewer, Anheuser-Busch (BUD) rose in pre-market trading and gapped higher at the open. Fellow brewer Molson Coors (TAP) beat expectations when reporting today.

Other reporting companies today included Biogen Idex (BIIB), with that company missing expectations although earnings were above the year-ago level. Baker Hughes, Inc. (BHI) did not meet expectations for its fourth-quarter net income. Guess (GES) initiated a dividend of $0.12 a share, approved a 2-for-1 stock split and reported that it nearly doubled its Q4 profit.

Tomorrow's Economic and Earnings Releases

Friday's economic calendar begins with the 8:30 release of January's Housing Starts and Building Permits. For review, housing starts measures the number of residential units on which construction has actually begun. Building permits is a more forward-looking number, because this leading number measures the number of permits that are taken out before excavation even begins. Expectations for housing starts are for 1.600 million units, down slightly from the previous 1.642 million. Market watchers want to see these numbers echo the optimism seen in today's NAHB Housing Market Index.

The most important release will likely be the fourth-quarter's PPI or Producer Price Index, also released at 8:30 (although one source said 10:00). While not considered as good a gauge of inflation as the CPI, it will still be watched.

Two releases come at 10:00. February's Preliminary Michigan Consumer Sentiment and the fourth-quarter's E-Commerce Sales will be released, with that consumer sentiment also likely to be watched. Economists predict that February's Consumer Sentiment will be 97, inching higher from 96.9. The last release of the day on Friday will be the Weekly ECRI Leading Index, released at 10:30.

Companies reporting earnings Friday include CPB, GT, SJM, MFA, VC, and ZOOM.

What about Tomorrow?

The SPX ended the day with a small-bodied candle at that same midline resistance that it's faced so many times in the last couple of months. Each and every time it's faced that resistance during the last couple of months, it's backed away. As I said at the last test, it's going to take strong conviction on the part of big money to drive the SPX above that resistance and keep it there. That conviction was not present today.

A favorite tactic of big money when it doesn't want to buy at exalted levels but is still bullish or else wants to unload more stock at high levels is to force others to do that buying. How is this accomplished? A gap above key levels will accomplish that goal.

Think about it. If markets can be gapped, and amateur hour is one time when it sometimes can, what happens then? Shorts who entered at the resistance test are forced to cover, and their buying does a lot of the work for big money. Retail traders who think they're missing the train do the rest of the work. If such a gap higher should occur tomorrow morning, those retail traders will have been eyeing those inverse H&S formations on so many intraday charts, even if we all know that any H&S, reverse or otherwise, and particularly when it's a continuation-form one, is unreliable these days, the impulse to buy a jump across the neckline will be there.

I want you to keep that possibility in mind and exercise extreme caution if the SPX is gapped higher tomorrow. Would-be short-term bulls can go with the flow if that happens, but keep those stops tight because I see so many reasons for a different short-term outcome.

However, if you want to know my gut instinct, I'm going with the idea that the presumed resistance will remain resistance. This is predicated on the TRAN's behavior today and the likely downturn to test support expected after such a candle is produced. If that happens, this important indicator index will not be indicating higher prices for the SPX and lending its leading-index-type support. Even if markets gap higher and the TRAN leads the way, the TRAN is going to slam into likely resistance only a few points away.

The Dow has hit or nearly hit the upside target for its confirmed inverse H&S and its daily candle did not impress me with its strength, particularly as the intraday candles appeared to be rounding over into the close. The same caveats exist with the relationship of the Dow to the TRAN, so watch the TRAN. Even if the TRAN climbs, be quick on your toes if you're in bullish Dow plays and the TRAN hits that 5,160 zone, however, in case the TRAN is turned back sharply from that level.

The RUT's chart also suggests that either further consolidation or a pullback should be a strong possibility, but a gap higher above the nearby resistance will change that outlook. Watch the yields tomorrow morning before the open, as the PPI index is released, for some insight. As was mentioned above, the CPI and not the PPI is the FOMC's primary gauge of inflationary pressures, but that doesn't mean that a really hot PPI number couldn't prompt a bounce in yields, particularly as they've reached strong potential support.

Okay, so perhaps you've been reading this section and seeing the "consolidation or pullback" forecasts and focusing mainly on the "pullback" part, thinking that a bearish play is the right way to go tomorrow morning. You should be keeping two things in mind. It's option-expiration Friday. Any would-be bears should be evaluating the prospect of being caught in a non-performing play as markets consolidate on an opex Friday, as sometimes happens.

Also, you should be keeping that gap-them-higher-and-trap-shorts tactic that's sometimes employed. We're at a prime place for that to occur and the underlying psychology of the markets, as evidenced by all those potential inverse head-and-shoulders formations, says that somebody has been trying to set up such a possibility.

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