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Market Wrap

Beneath the Melody

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Led by the Nikkei 225, global bourses crooned happy melodies this morning. Surprised by upbeat trade balance figures in Japan, traders sent Japanese equities higher, starting off the chorus of song.

Underneath the happy melodies, however, something else was beginning, a droning in a minor key. Bonds such as the euro zone government bonds were sinking, their yields rising. Was that minor-key droning a sign that bond traders were taking seriously the threat that U.S. central bankers might hike rates again?

With the interest-rate-sensitive Russell 2000 being one of the indices leading others to new heights, the question was a necessary one. As I've pointed out in the past and as Keene indicated in last night's Wrap, RUT prices don't always trade in immediate opposition to the yields. They didn't yesterday, and they didn't start out that way today, either. Bond yields and the RUT both immediately headed higher. Another leading index, the TRAN, zoomed higher, too, ahead of a key release. Neither of those two indices was to eclipse their early morning highs, however. Although the RUT made a try after the bond market close, the TRAN couldn't manage much of a bounce after the crude futures closed.

The day's attempts at song produced a cacophony of sound rather than a melody that pleased either bulls or bears. Bulls could listen to the SOX's siren song. That index taking over and posting a startling 13-point gain as it tried to reclaim its leading-index status, leading the Nasdaq to a gain. The RUT produced a new closing high, too, although the shape of the day's candle perhaps sounds a sour note. Other indices gave up their major-key melodies to participate in that minor-key drone, however, with the Dow, OEX, TRAN, RLX and BIX all pulling back.


Yields had started climbing across the globe last night, and an afternoon auction of five-year notes here in the U.S. sent yields higher after a middling bid-to-cover ratio in the five-year notes. For those new to our pages, that means that demand for the bonds was only middling, sending their yields higher. If demand is low, higher yields are needed to entice investors. Yields climbed across the spectrum of U.S. treasuries, and yields in the ten-year treasuries managed to scramble back into a test of their 200-ema by mid-afternoon.

Yields weren't the only thing climbing and testing important averages. By mid-afternoon crude had driven high enough to test its 72-ema and approach the February 9 high on the current contract. While yields pressured interest-rate sensitive sectors, rising crude costs exacerbated the effect. The FOMC's minutes yesterday made it clear that FOMC members looked at declining energy costs as a decisive factor in easing inflation pressures.

News sources promulgated rising yields and crude costs, as well as rising geopolitical tensions, as the reasons for the downturns in some indices today. However, a study of charts turns up other reasons for today's pullbacks, reasons relating to chart characteristics.


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The SPX has been testing the old familiar midline resistance pointed out in so many other Wraps.

Annotated Daily Chart of the SPX:

If the SPX should continue today's pullback, bears should protect gains if the RSI is approaching a value of 30-35 as the SPX's price approaches either the bottom of its rising channel or its 30-sma. A bounce from that average can't be guaranteed, but unless the SPX plunges straight through, an attempt to bounce can be.

Will the SPX continue the pullback? At the close today, the SPX had just popped above Keltner resistance that had been holding it back most of the afternoon, with that resistance converging near 1,455.70 on 15-minute closes. I don't entirely trust these last-minute breakouts, but if that former resistance now holds as support on 15-minute breakouts, the SPX is setting a short-term upside target of about 1,460.70-1,462.00. If the SPX climbs first thing tomorrow morning, I would look for first resistance at that level, which should be near the midline of that rising channel.

Barring a strong push through support of the type we saw early this morning, the short-term Keltner lineup suggests that short-term support may be slightly stronger than resistance, suggesting some upward pressure, so there could be an early test of resistance. Unless this is going to be the time that the SPX breaks through that midline and sustains values above it, however, experience and an RSI reading on the 15-minute chart that is not shown here suggest that an upside move might soon get reversed.

What has experience taught us? A cursory glance at the chart showed that each time the SPX does its zoom-higher/consolidate-several-days/pullback routine, it closes at or beneath the 10-sma at least one day before it starts the process again. That means that once it's begun this consolidate-sideways phase, it's due a pullback to close below the 10-sma before it can sustain a strong upward move. This may be the time the pattern changes, but that's been the pattern so far.

The Dow has a recent pattern that may be in play, too.

Annotated Daily Chart of the Dow:

The last few times the Dow has bumped against the top of this channel, it's pulled all the way back to test the 30-sma, the black line seen above. It looks due for another test.

Like the SPX, however, the short-term Keltner setup suggests that support is slightly stronger than resistance. Barring a strongly negative open, the Dow may be due for a short-term bounce to test 12,703-12,720 tomorrow morning, with this zone marking potential first short-term resistance on 15-minute closes. Next resistance lies at 12,752, but will be higher if the Dow climbs to test it tomorrow. Short-term support is strongest near 12,650-12,651 on 15-minute closes, but that's also a zone that will move with the Dow, and is important only near the open tomorrow.

The longer-term 30-minute chart shows the Dow looking decided less positive, with the potential for a decline to 12,562, depending on whether the resistance near 12,703-12,720 holds.

There was nothing negative about the Nasdaq today, or was there? It turns out that the day's candle is far from bullish. This might be particularly important when the breadth indicators show that despite the day's gain, advancing issues barely eked out a gain over declining ones on the Nasdaq. Up volume was much stronger than down volume, indicating that the buying was concentrated in a few issues.

Annotated Daily Chart of the Nasdaq:

The chart looks as if traders were stretching, trying to push the Nasdaq up toward the top of this channel, but they weren't doing it on particularly strong volume. A gap-down opening tomorrow will look particularly ominous, but we can't presume that gap-down opening as I'm writing this article far in advance of the time you'll receive it, when futures will already be open and the Nikkei 225 will be trading.

The Nasdaq ended the day pressed against short-term Keltner resistance, but the Nasdaq often overruns such resistance. It did so this morning, for example. Charts other than the 15-minute one show a potential for the Nasdaq to press toward 2,528-2,530 if it bursts higher first thing tomorrow morning, but the daily chart suggests that further gains will require a real breakout to be sustained. This looks like a bearish candle, but not all potential reversal signals result in a reversal.

Is the breakout coming? Anyone who watched the SOX today would see the potential, but the SOX's movements have proven so choppy that it's difficult to trust any formation or any breakout out of any formation.

Analog Devices (ADI) reported earnings and guidance that encouraged the markets and helped prompt an early tech bounce. While ADI is not a component stock of the SOX, the early tech bounce helped the SOX and impacted the semis. In addition, Morgan Stanley upgraded National Semiconductor (NSM), and company that has warned more than once and that is due to report on March 8, I believe.

Annotated Daily Chart of the SOX:

As can be imagined after such a day, the SOX is in true breakout mode on the 30-minute Keltner chart. The breakout level on that chart was at 482.86 as of the close of trading, with that breakout level important on 30-minute closes. If the SOX maintains that support on those 30-minute closes, the breakout mode continues. If it gaps down tomorrow, opening below that level, or else plunges through it, bears want to see a retest and failure at that level before they even begin to believe the breakout mode has ended.

Widening the time interval being considered to a daily one reveals potentially strong resistance near 491.40 on daily closes. A possible scenario, then, is a rise toward 491.40 and a pullback from there. A big-range day such as today's also suggests the possibility of a smaller-range day tomorrow, but the SOX has months of built-up energy behind it, built up during all those months of consolidation. It usually does adhere on first test to those daily Keltner boundaries, but that's not a guarantee that it will tomorrow. I hesitate to give any prediction of the SOX's behavior just yet because it has defied all predictions. The SOX's breakdown through this channel on January 18 was just as convincing a breakdown as this upside breakout has been, and yet it was reversed after a couple of days of edging-down candles. Something like that could happen in the reverse, with that edging up to the 491.40 level being part of the process.

RUT investors also stretched to break that index above recent resistance. While the RUT produced yet-another new closing and intraday high, it did not convincingly break above that resistance.

Annotated Daily Chart of the RUT:

The RUT has now pressed into the zone of the upside target set when it broke above that rectangular consolidation pattern. I warned last week that any discussion of the RUT should be put into the context of that upside target. What happens now that the RUT has pressed into that zone? Is the breakout energy exhausted now?

One short-term upside target has been set at about 830.10, with the daily chart suggesting an upside potential higher than that, at about 837.33, but only if the RUT can immediately press higher and keep going. If not, another pullback to the 819-823 zone may occur. Lately, the RUT has spent most days testing the daily resistance that it was testing at the close and the support that it was testing at the low, and which now extends down into that 819 zone. If that pattern continues, it should be time for a downturn toward that 819-823 level.

As always, what happens with the RUT may be somewhat dependent on what happens with yields. You may question, then, why the RUT rose today when yields were also climbing. The chart below may explain.

Annotated Daily Chart of the TNX:

As is obvious on this chart, yields have approached important resistance levels. They've now chopped around the minimum appropriate time to form the flat part of the right shoulder for this inverse head-and-shoulders with the upward-tilted neckline. If yields should bump higher tomorrow, those investors in RUT stocks who deemed today's rise as nothing more than chopping around within a chop zone might begin to think differently. A pullback in yields or perhaps even further consolidation in this week's range might give investors in RUT stocks encouragement to try for higher prices.

The TRAN also found resistance at a rising trendline.

Annotated Daily Chart of the TRAN:

Watch the TRAN tomorrow for further guidance on what to expect with the Dow, SPX and OEX. The TRAN looks overdue for a pullback to the midline and 10-sma, but if it breaks higher instead, it will likely carry those other indices with it or at least support them in further consolidation. The TRAN hit daily Keltner resistance yesterday, so I wasn't surprised to see it pull back today. It looks ready to drop toward 5,092 on the daily Keltner chart, but the TRAN can break out instead, just as any index can.

What happens with the TRAN may be at least partially a result of what happens with crude costs, although the TRAN is also sensitive to issues related to the economy's health.

Annotated Daily Chart of Crude:

Remember that last month's contract has just expired, so some of this buying in the new front-month contract might be related to rolling into new positions.

Today's Developments

While last week's Initial Claims release prompted some worry, today's reassured that last week's bump higher had been an aberration. Initial claims fell 27,000 to 332,000. That remained above the consensus 325,000, but did hint that the government might have been right when it blamed weather-related causes for some of last week's surprisingly high number of claims. What's even more reassuring is that last week was also the time that the monthly non-farm payrolls numbers were compiled. Those on inflation watch will want to remember, however, that the FOMC doesn't want the Non-Farms Payrolls numbers to be too resilient, not resilient enough to increase inflation pressures.

The four-week average of new claims rose 1,250 to 326,250. Continuing claims fell 45,000 to 2.5 million. The four-week average of continuing claims rose 6,750, to 2.52 million. Initial claims are about 11 percent higher than a year ago while continuing claims have dropped about 1 percent from that period.

A later employment-related figure, the Conference Board's Help-Wanted Index, dropped. For January, that figure fell to 32, down from the previous 34. The year-ago level had been 38. This number measures the job offerings in major newspapers in the U.S. The Board's economist concluded, "These data all add up to a picture of a labor market with a little more spark now than a few months ago." If that continues, that trend may not be one welcomed by the FOMC, as the committee is watchful for increasing wage pressures. I'm endeavoring to keep this Wrap as short as possible, but if you'd like to read the complete Conference Board report, you can find it by cutting and pasting the following link: http://www.conference-board.org/economics/helpwanted.cfm

Crude inventories were the next to be released, and those numbers blew expectations out the window. Crude inventories rose 3.7 million barrels, much more than expected, but the drops in gasoline and distillate inventories were much higher than anticipated. They were 3.1 million barrels and 5.0 million barrels, respectively. As one CNBC guest opined, the relationships were as anticipated, but the numbers were all bigger than expected. Refinery utilization was 85.2 percent of capacity. The net effect of this release was to send crude prices higher.

This occurred against a backdrop of rising geopolitical concerns. Iran has failed to meet the deadline to suspend its nuclear enrichment activities, the United Nations' nuclear watchdog group said today. Because of Iran's importance in considerations of matter related to crude supply, the heightened concern may have impacted crude prices.

Natural gas inventories were released at the same time. They dropped 223 billion cubic feet. This was roughly in line with the expected drop.

February's Kansas Fed Manufacturing Survey was released at 11:00, but this survey doesn't typically rate as one of the most-watched ones. The release noted that "manufacturing activity growth rebounded strongly in February." Rising food prices pushed most price indices in the survey higher. Expectations for capital spending and future factory hiring increased, too.

Much company-related news sounded cymbals and gongs, beginning late yesterday. Cisco Systems Inc. (CSCO) and Apple Inc. (AAPL) announced late yesterday that they will share the name "iPhone" and dismiss any pending legal actions. You may remember that CSCO had brought suit against AAPL over the name that CSCO had trademarked, but the new agreement to drop the suit is conditioned on an exploration of interoperability between the two companies' products. The companies did not detail possible collaborative efforts.

While the CSCO/AAPL deal promised to meld ideas, a Whole Foods (WMFI) and Wild Oats Markets (OATS) announcement went further, with WFMI bidding to acquire its rival.

Toll Brothers (TOL) reported earnings. In the course of that report, the company lowered guidance for full-year revenue and house deliveries. The company reported that the first quarter's net income fell 67 percent and revenue declined 19 percent. Teekay Shipping (TK) also reported, with that crude-oil tanker company's results 58 percent lower than the year-ago level as the company deals with higher costs and lower spot charter rates. J.C. Penney Co. (JCP) also reported a decline in net income. The company said that profit for the first quarter would not meet analysts' expectations. Fellow retailer Abercrombie & Fitch (ANF) also sounded a warning, saying that it would face pressures for the first half of the year.

After-hours developments include an announcement that Microsoft (MSFT) had been ordered to pay Alcatel-Lucent $1.52 billion in a patent case related to MP3. MSFT was edging lower in after-hours trading. As this report was prepared, it was trading at $29.31, down eight cents from the $29.39 closing. MSFT had been the subject of news articles throughout the day, with Google Inc. (GOOG) launching business applications that GOOG hopes will be competition for some of Microsoft's programs. Intuit (INTU) also moved lower after it reported earnings.

Tomorrow's Economic and Earnings Releases

Tomorrow's economic releases are light. Only the little-watched ECRI Weekly Leading Index will be released, and that appears at 10:30. Few companies will be reporting earnings. Those that are include CCU, DPZ, GLGC, LR, and LOW.

What about Tomorrow?

Traders should be aware that next week is a bigger week for economic reports, with Consumer Confidence on Tuesday, the GDP and Chicago PMI on Wednesday, and the ISM on Thursday. Some of what occurs tomorrow may be about positioning ahead of next week's more important reports.

So much about what happens tomorrow also depends on what happens with crude prices and bond yields, but with so little on our economic agenda, it's difficult to predict which direction those might move, particularly since both are challenging important resistance levels and particularly since both are somewhat dependent on, or rather, are predicted by what happens in the forex (currency) markets. All I can say is that they should be watched, with the appropriate levels marked on the charts in the chart section of the Wrap.

The TRAN once again looks due for consolidation or pullback, and the SPX and Dow also are setting up to follow through on recent patterns. Again, if forced to vote for tomorrow's outcome, I would find it unwise to vote against a repeat of the recent patterns, so that I would again vote for a repeat of those patterns: a continuing pullback to the bottoms and/or midlines of their rising channels, as is discussed above in each case and as shown in the charts section.

However, those patterns will eventually be broken, either by prices falling through the bottoms of those channels or by prices breaking out through the top. The tension seems to build daily, with downturns now being harder than they once were, but being bought by as much violent-seeming energy. Predictions become more difficult, and I urge you not to stick in losing positions, "knowing" that prices are going to turn around. You've got the channels and the RSI to watch. Set your stops.

The SOX has broken out, but it hasn't confirmed by a breakout above the last high, and that may or may not be important. The SOX did close the highest it's closed this year, but it didn't move above the former 2007 intraday high, so I don't consider the breakout confirmed. Be cautious about protecting bullish positions, if you've entered them. I personally haven't traded anything on the SOX in months, although I did trade some SOX condors late last year when the consolidation pattern was more clear-cut. Keene advised last night that traders avoid this index, too, but those who did buy the breakout or the successful test of the grouped averages now want the SOX to maintain that channel's boundaries on any pullbacks, or at least the 475 zone on daily closes. If you're in bullish positions and the SOX rises tomorrow morning, know how you'll treat a test of potentially strong resistance in the 490-492 zone. Decide tonight.

The RUT. That's the most difficult of all for me to predict tonight and I know there are many out there who want to know where it's going. I have no gut instinct for what might happen here, because this index just runs away sometimes and it certainly has been attempting to do so this time, too. However, here goes: the short-term rising trendline essentially held again today. The daily candle was not a particularly strong one, and when the RUT produces candles like this at the top of a climb, it usually does pull back or consolidate. However, a run up toward 830 and perhaps even as high as 837-838 can't be precluded, and consolidation can take the form of a day that sees a strong run-up, a strong downturn and a return at least part or maybe even all of the way, producing either a doji or another hanging-man candle. Daily RSI is no good for predicting when the pullback will occur on the RUT because it tends to trend a bit on the RUT. It is, however, at levels that suggest that a pullback or consolidation could occur at any time.

If it sounds as if I'm waffling with the RUT prediction, I am. I don't know. I never "know," but sometimes one can gain a better feeling for what might happen than can be found at other times. This time there's some energy I can feel and see, and others can, too, in the RUT's more volatile intraday moves, but I can't tell which way it's pushing.

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