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Market Wrap

All Over the Place

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Although the tenor in Asian bourses was generally negative last night, the patterns displayed on various charts were all over the place. The Shanghai Composite, the index that purportedly started the global plunge, fell again last night but bounced from above Tuesday's low. The Nikkei 225 had held up better than most Asian bourses on Tuesday, but it played catch-up last night and fell to a multi-week low before bouncing almost 200 points off its low. The Taiwan Weighted didn't do much bouncing at all. New Zealand's bourse ended up positive.

Pressured lower by global downturns, our futures had dropped deep into negative territory by the time that most U.S. traders woke. About the time of the release of economic data at 8:30, they plunged further. It's not certain that the releases were responsible, however, since European bourses also turned down about the same time on strong volume. Sometimes the so-called "reasons" are nothing more than a catalyst for what was due to happen anyway.

U.S. indices would follow one of those Asian patterns, it seemed, but which would it be?

Introduction

One part of the answer didn't take long to determine. The U.S. indices weren't going to bounce from higher lows than Tuesday's. The second part of the answer wasn't going to take long to determine, either. The indices were going to bounce sharply. That bounce would eventually take most indices into positive territory before they retraced into the close. Still, the SPX closed almost 23 points off its low of the day; the Dow, almost 173 points; and the Nasdaq, almost 45 points.

The sharp early move lower triggered downside trading collars on the NYSE soon after trading opened. Some blamed a statement from the Japanese Vice Minister for Finance for creating another spike in the yen, which in turn triggered another global sell-off of equities to pay for yen loans. Others blamed Rodrigo Rato, managing director of the International Monetary Fund, with Rato warning that the carry trade has downside risks. For those who have heard the term "carry trade" bandied about in recent days but aren't familiar with the term, it references the borrowing of a low-yielding currency to invest in higher-yielding currencies. Because Japan went through such a long period of deflation, many had borrowed yen to invest in other currencies. Now that the yen is rising, those yen have to be paid back, much as equity shorts would have to cover if a sharp rise occurred.

In turn, the stronger-than-expected ISM was credited with slowing the stop and bouncing indices off their lows. If that was true, then someone had advance knowledge of the ISM's number because the bounces started about 15 minutes in advance of that release.

As subscribers will know from reading these pages, however, equity markets were long overdue for a correction. The higher momentum carried them past the point when they should have corrected, the more weak hands were in plays that would be quickly dumped and the sharper the drop. The purported reasons were just catalysts.

Charts

Last week, I warned subscribers that the SPX had a pattern of closing at least one day below its 10-sma, and so they should anticipate further pullbacks. That was an understatement, wasn't it?

Annotated Daily Chart of the SPX:

I know we've been taught that strong volume means confirmation of the move, so that a strong-volume decline is considered affirmation of selling, but let's look at this a little differently. The volume was not just strong on Tuesday: it was huge. That means--it absolutely guarantees--that big money was involved. It's not just mom-and-pop investor producing that volume. Most of them didn't know what had happened on the markets until after the close, when they heard about it on their way home from work or while watching the evening news.

What were institutions doing then? At least some of them were accumulating. That was proven when markets had bounced off the lows by the close, and it was validated when they closed higher yesterday. Do you think that would have happened if institutions were only dumping? (They certainly dumped early in the day.) Do you think hopeful retail investors and starry-eyed mom-and-pop investors would be numerous enough and have pockets deep enough to absorb every bit of volume that big money, the institutions and others, were dumping on the markets? I don't think so. I'm indebted to MASTER THE MARKETS by Tom Williams for this take on the interaction of volume and price action.

Does that mean that we won't see further declines? Absolutely not. Institutions can afford to average down. We can't. The current consolidation could be part of a consolidation that typically occurs midway through a fall. Plus, even big money can be wrong.

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However, for now, for right this minute, unless Asia does something surprising overnight, markets have a tentative and only short-term upside bias, with dips to the rising red trendline proving to be buying opportunities. I would keep my stops tight, however, because a retest of the breakdown zone could prompt a rollover as hard as the one we saw earlier this week. We can all see the breakdown levels, even the neophyte technical analyst, so some will start dumping ahead of a test, and markets might prove more than a little jittery. I suggest waiting out the results of any retests unless you're an adept scalper or trading with lottery money only.

Today I'm trying something different, and intraday formations and support and resistance levels will be shown in the "What about Tomorrow?" section at the end of the article. Those charts will show you exact levels to watch.

The Dow's daily chart shows similar characteristics to the SPX's.

Annotated Daily Chart of the Dow:

Like the SPX, the short-term bias is to the upside.

The Nasdaq's pattern is different than that seen on the first two charts. Tuesday's bounce was minimal, although there was some follow-through with a higher close Wednesday. The support in the 2,340-2,370 zone needs to hold.

Annotated Daily Chart of the Nasdaq:

The SOX's chart is as messed up as it's been for months.

Annotated Daily Chart of the SOX:

The RUT bounced strongly off its lows today, but it stopped short at the 72-ema, an important average for the RUT.

Annotated Daily Chart of the RUT:

I was watching the TRAN Tuesday morning as the indices started their bounces, and I knew immediately that something was fishy.

Annotated Daily Chart of the TRAN:

I'm going to be showing intraday charts of some of these indices in the "What about Tomorrow?" section so I don't have room for more here, but I wanted to make a couple of notations. Ten-year yields have dropped further this week, but still drop into the right-shoulder zone for their potential inverse H&S. That has not yet been violated. Tuesday, both yields and the RUT dropped, but the inverse relationship of the yields and the RUT stocks is not going to survive a rout of all equities.

Crude futures climbed today, slowly building support above the 72-ema that has proved to be resistance so many times this year. That average was at $60.84 as of the close today. If that tenuous support holds, crude futures could retest the 200-ema at $64.57, as I've been suggesting, but that support needs to hold.

Today's Developments

The first economic release of the day was the Challenger Gray & Christmas Inc. Layoff report. Announced corporate layoffs for February soared 33 percent higher, the firm reported. This was second straight month of increases, but subscribers should keep in mind that these numbers are not seasonally adjusted. The announced layoffs are actually lower than in the first two months of last year. As might be expected, announced layoffs were highest in the automotive and construction sector, but the firm warns that it's beginning to see some spillover into other sectors, such as the food industry.

The next economic release was one of the most important. Some Fed watchers believe that the core personal consumption expenditure index serves as a preferred inflation measure for the FOMC. It was expected to rise 0.3 percent in January, and that's exactly what it did, but that expected result didn't mean that the news was welcome. That index has now risen by 2.3 percent over the last 12 months, well above the purported FOMC-preferred range of 1-2 percent. This was not good news for the markets, because it spoke of higher inflation risks at the same time that previous data this week had spoken to the risk of lower growth. None of that fits with the Goldilocks scenario.

The non-core number, including energy and food costs, rose 0.2 percent, with the 12-month rate now up 2 percent, but that was lower than December's number. Annual bonuses and stock-option gains pushed personal incomes higher by 1 percent. Excluding those gains, incomes still rose 0.4 percent, above the expected 0.3 percent. Consumer spending increased 0.3 percent when adjusted for inflation or 0.5 percent otherwise, above the expected 0.4 percent. Real disposable incomes rose 0.5 percent.

The Labor Department released initial claims for the week ending February 24 in that same 8:30 time slot. First-time claims rose 7,000 the previous week, with the four-week moving average climbing 7,500, to its highest level since October 2005. Continuing claims rose 134,000, and the four-week moving average rose by 24,000, both figures also their highest in more than a year.

The 10:00 release of the manufacturing ISM (Institute of Supply Management) number was the most anticipated of the economic releases today. Some of the regional PMI's such as yesterday's Chicago PMI have been indicating the possibility that the ISM could contract further. You may remember that January's ISM had fallen to 49.3 percent, below the 50-percent benchmark that distinguishes a contracting economy from an expanding one.

Expectations for February's ISM stood at about 50.0 percent. The ISM surprised by jumping up to 52.3 percent. Component indices rose, too. New orders climbed to 54.9 percent from January's 50.3 percent. Inventories rose to 44.6 percent from the previous 39.9 percent. The employment index climbed to 51.1 percent from the previous 49.5 percent. Perhaps not quite so welcome was the climb in the price index to 59.0 percent from 53.0 percent, but overall, the ISM was hailed as a sign that the economy might struggle to its feet after all.

The Commerce Department also released figures at 10:00, with its release January's Construction Spending. Spending on private residential construction fell 1.8 percent. This drop was deeper than November and December's declines before December's was revised to a climb of 0.6 percent. Predictions had been for a decline of only 0.3-0.5 percent in construction spending. Year-over-year, spending on private construction housing projects fell 13 percent.

Spending on public construction projects rebounded 0.6 percent, with December's figure revised higher to 2.4 percent. Federal construction spending rose 9.7 percent, rebounding from its 2.4-percent drop in December.

The last release of the day came from the Department of Energy at 10:30. The drawdown in inventories in natural gas was smaller than expected, with the drawdown measuring 132 billion cubic feet. The expected drawdown ranged from 146-159 billion cubic feet, depending on the analyst making the prediction. Inventories are now down 263 billion cubic feet from the year-ago level, but remain above the five-year average.

Several speakers garnered attention. Treasury Secretary Henry Paulson addressed the Economic Club of Washington today, with excerpts from his address hitting the wires about late morning. Bullet points from Treasury Secretary Paulson's address included his confirmation that despite a slowing of the economy in January, the economy remains on a path toward sustainable, moderate growth. He believes that further economic developments should be watched carefully and that President Bush's free-trade agenda has merits. He believes that new trade barriers would stifle American competitiveness and living standards. He disputes the belief espoused by some that the trade deficit reflects harmful influences of free trade and attributes it at least partially instead to strong consumer demand and low savings in the U.S. He believes that China should move more quickly to reform its economy and appreciate its currency.

Former Fed Chairman Alan Greenspan spoke today and some claimed that he had been all over the place this week in his predictions of a recession in late 2007. Today he was reported as having said that he didn't believe a recession was probable, and that was considered a backtracking from his previous statement this week. However, when the text of his original comment appeared earlier in the week, he hadn't called it a done deal then, either, despite the multiple headlines saying he had.

Auto manufacturers began releasing February sales data today. Ford (F) reported that car sales dropped 22 percent last month. General Motors (GM) surprised by reporting a 3.4-percent climb in February sales. DaimlerChrysler's (DCX) Chrysler division reported declining February sales, but that decline was less than expected.

Coverage of company-related news will be brief today since so many economic events occurred, lengthening the Wrap. Citigroup (C) rebounded, with some crediting the stock's rebound with helping to support the SPX and Dow. Briefing.com mentioned that C's potential exercise of an option to acquire the wholesale mortgage origination unit of Ameriquest could slow the bankruptcy filings of sub-prime lenders.

Other M&A activity or speculation dominated the pre-market session. The WSJ reported that Oracle Systems (ORCL) will buy Hyperion Solutions (HYSL) at a premium to Wednesday's close. The newspaper also reported that Blockbuster (BBI) is in discussions to buy Movielink. Carl Icahn has filed to increase his position in Motorola (MOT). Home Depot (HD) may have a buyer for its supply unit, or rather three potential buyers: three groups of private-equity teams. In other news, Lehman Brothers raised Apple's (AAPL) rating to an overweight one.

Dell (DELL), The Gap (GPS), Fluor (FLR), and Novell (NOVL) all reported after the close. Dell termed its report a preliminary one due to the ongoing federal investigation into the company's finances. Fourth-quarter profits and revenue fell from year-ago levels, with revenue falling 4 percent. Earnings fell from $1.01 billion or 43 cents a year ago to $673 million or 30 cents per share in the just-ended quarter. Analysts had expected 29 cents. The company noted that it would face pressure for several quarters. The immediate response had been a surge in prices but then prices rolled down again. As this report was drafted, Dell was trading at $22.60 in after-hours trading, down from the $23.01 close.

With reports that GPS's report showed that margins were being squeezed, that stock still managed to remain eke out a $0.02 gain in after-hours trading, as this report was prepared. Same-store sales also declined.

Tomorrow's Economic and Earnings Releases

As is typical for each week, economic releases slow down tomorrow. The two that calendars list are the February Consumer Sentiment at 10:00 and the ECRI Weekly Leading Index at 10:30. Consumer Sentiment sometimes proves important during periods when the economy depends on the consumer to keep it buoyant. Although it hasn't been noted as a market-moving release lately, it has been at other times, and may begin to assume more importance if fears of a recession rise. Expectations are for a number from 93.0-93.3, with the prior number at 93.3.

What about Tomorrow?

I'm going to try something different tonight and give you a look at some of the intraday charts I watch, showing what I think will happen rather than telling.

These are nested Keltner charts, and some people find them a confusing tangle of spaghetti-like lines. However, I've pointed out the levels to watch, so don't get too bogged down trying to understand each jit and jot of the Keltner lines charts. You don't even have to study the lines themselves, but just my annotations and the Fib brackets I've placed to the side, if that's what you prefer.

As you're studying the charts, remember that Keltner lines are dynamic. They're going to move in the direction of price movement, so their levels as of the close today are not written in stone. Also remember that it's the 15-minute closes that are important with these, not an intra-15-minute-period move above or below a line.

15-Minute Chart of the SPX:


Annotated 15-minute Chart of the Dow:


Annotated 15-Minute Chart of the Nasdaq:


Annotated 15-Minute Chart of the Russell 2000:


Overall, as I've said, the short-term (maybe as short-term as the morning trade tomorrow) bias appears to be to the upside. That's shown on the daily charts by the springs off support. It's shown on these intraday charts by the inverse head-and-shoulders that are trying to form, by the firming-up support at the 23.6 percent retracement levels of the decline and by the flattening of Keltner support lines. Nothing, however, absolutely nothing seen on a short-term or even daily chart can withstand the winds of something like what happened on Tuesday, so use stops and adhere to them.

Notwithstanding what's showing up on these charts, markets are jittery and that might be reflected in the action tomorrow. Some further consolidation in the right-shoulder zones would not be unexpected. Don't expect any upside targets to be hit, either Keltner or the ones determined by the confirmation of these potential inverse head-and-shoulders. In other words, don't trust any of this, holding out for every last cent you expected to make while your bullish trade turns into a loss and then a bigger loss, but do consider the possibility that, barring any further developments overnight, the short-term bias might be to the upside.

I wouldn't trade it myself. Breadth indicators are still awful, with decliners swamping advancers and down volume, up volume. I would wait for those retests of the breakdown zones. However, if you're trading a tentative upside move tomorrow, if one should occur, keep those stops tight. You've already seen what can happen when prices plummet suddenly.

Despite my prediction for tomorrow, I'm more uncertain about the long-term. As many readers will remember, I told you about three weeks ago that I had sold all my long-term stock holdings. There weren't much because most of my trading account is utilized to trade credit spreads, not in buy-and-hold plays, but I had 250 shares altogether of a couple of big-cap stocks. I felt fairly certain that the time had come to convert those shares to cash and I won't be reinvesting that cash in stock holdings any time soon. I'm not advising you to cash out any stock holdings you have, but am only pointing out the uncertainty I began to feel about next direction about three weeks ago, an uncertainty that I pointed out at the time and that I still feel.
 

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