Option Investor
Market Wrap

Happy Upcoming Three-Day Weekend!

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When most traders woke this morning, U.S. equity futures were about even with or slightly lower than their fair values, giving little indication of what would happen on this last trading day of the week. Asian markets had turned in mixed performances. The Nikkei dropped, but the Hang Seng and Shanghai Composite rose. European markets had turned modestly higher.

Looking at those performances alone, it would have seemed that little had happened overnight, but the overnight session had been a busy one overseas. The Bank of England kept rates steady at its meeting, but earlier in the night, China had raised its banks' reserve requirements. China's move was intended to tighten the money supply for lending and cool off its overheating economy. This was Beijing's sixth time this last year to raise reserves.

If the pre-market action gave little guidance, market watchers could at least look to the historical tendency for this holiday week in general and this day in particular to maintain a bullish tenor. That it did. Tuesday, markets had posted strong early gains. Since then, many equity indices had begun moving sideways/up within tight rising regression channels on their intraday charts. Shortly after noon today, after the big money people left to begin their three-day weekends and left junior traders at their desks, many indices started breaking out of those channels to the upside.

It was all expected fare for those who have watched many a light-volume holiday week, but what did it really mean to the markets ahead of tomorrow's important economic release and next week's trading? Let's look at the charts to see what they might show.

Charts

Annotated Daily Chart of the SPX:

Bulls should be making efforts to protect profits as the SPX edges higher. Resistance that has held on previous tests may hold again, and some could begin bailing from positions ahead of such a test. A drop back to the 50-sma or even the 72-ema remains possible. Such a drop could occur at any time with the SPX again drawing near the top of its rising channel. If the SPX instead breaks through the top of that channel on a daily close, it may retest the previous high of the year.

The same advice holds for the Dow.

Annotated Daily Chart of the Dow:

I'm not going to show the TRAN's chart today. The TRAN has been flopping around without much direction. Although it did rise this week, it's barely pulled above its 50-sma today.

This index, sensitive to both energy costs and the economy, hasn't shown any kind of leadership role this week. Not only is it not leading the gains, but, unlike the Dow, SPX and OEX, it did not manage to best March's highs today. That should be watched. We can't always expect day-to-day confirmation from the TRAN, but I'm always leery of those other indices heading off any direction when the TRAN is lagging their movements. Many times, its actions have sounded the first warning that something wasn't quite right in the way other indices were behaving.

Many subscribers will also be aware that the BIX also has not been showing upside leadership, not confirming upside moves. After dropping lower Monday, the BIX has been consolidating mostly within Monday's range. Today it tightened that consolidation pattern.

The Nasdaq, however, charged up toward resistance.

Annotated Daily Chart of the Nasdaq:

If you're bullish, you're happy to see this climb, but you should be at least a little cautious about the test (gap and former trendline) that's occurring, as well as the slightly rising-wedge-ish shape to the move over the last couple of months. I'm not sure whether resolution will come Monday on the Nasdaq, with the chart hinting at the potential for that to be another indecision-type day or a pullback day, but bulls need to spend some time evaluating their plays this weekend, if they haven't already exited to watch this test.

I've been leaning toward a disorganization thesis rather than a bearish one for the intermediate term since late February, as you know if you've been reading these Wraps, but I'm concerned that this chart formation has begun to look more bearish than bullish, despite this week's rise. It certainly looks more dangerous, so protect positions, whichever way you're leaning. As long as one formation is morphing into another, I don't find any formation completely trustworthy, but I am growing more concerned about the shape of the action on this chart.

The SOX still chops around within a consolidation zone on its daily chart, so I'm not going to include its chart tonight, either. Like the TRAN, it's abdicated its former leadership role.

Annotated Daily Chart of the RUT:

If that resistance holds, the RUT will likely pull back to test the 10-sma if not the horizontal blue line that's now coinciding with the 50-sma, both near 800. Bulls would prefer that the RUT had been able to push through that midline. Traveling through the lower half of a price channel shows less strength than being able to push through to the upper half.

Although more traders probably follow the Russell 2000 than the mid-cap stocks as represented by the MID, mid-cap performance should not be ignored right now. The MID may be taking over some the leading-index bragging rights from the RUT. I haven't followed this index's behavior long enough to be able to ascertain whether this looks like momentum players piling on or something more indicative of what's going on in the economy, however.

Annotated Daily Chart of the MID:

The MID has approached its former high closely enough that a failure, if one is going to occur, could happen at any time. Those in bullish positions should be careful to protect profits in case of a failure at this level. Nothing on the chart predicts such a failure yet but traders should make plans if in bullish positions.

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Today's Developments

Weekly initial jobless claims rose by 11,000 to 321,000 for the week ending March 31. The four-week average fell by 1,500 to 315,750. Continuing claims fell 25,000, to 2.49 million. The four-week average of continuing claims declined 7,500 to 2.52 million. As subscribers may know from monitoring other reports, a concern has been that despite a low unemployment number, once workers lose jobs, they seem to be having difficulty replacing them. The continuing claims numbers have remained stubbornly high.

Although it's not an economic release, ZipRealty Inc. today released its figure for the number of homes listed for sale in 18 major U.S. metropolitan areas as of the end of March. The firm said that the number of homes increased 6.5 percent month over month. Credit Suisse Group estimates that the more typical February-to-March increase over the last 22 years has been 1.7 percent. ZipRealty's spokesperson said the greater increase this year may reflect greater caution on the part of sellers, anticipating that their houses may take longer to sell and wanting to have a contract in hand before they go looking for another house prior to a desired summer move.

My husband and I are looking for a home, having sold our house. We're finding many homes being listed as short sales right now, with buyers defaulting and desperate to avoid foreclosure and with the requirement that buyers' lenders approve the deal. I'm not sure that explanation by ZipRealty's spokesperson represents the full explanation.

Later in the morning, homebuilder Ryland Group (RYL) issued an announcement that it will likely experience a first-quarter loss of $0.50-0.60 a share due to an impairment charge of about $65 million. A spokesperson said that, contrary to hopes that pricing would stabilize, the company was not able to hold pricing and "aggressive pricing strategies" required the company to devalue some assets.

Natural gas inventories were higher by 58 billion cubic feet. I don't follow natural gas futures closely, so can't pretend to be expert. I can report that CNBC's guest industry analyst expects that the risk to natural gas prices for the short term will be toward the downside now that geopolitical tensions have eased, with some expectation by that expert that prices might trend toward $6.50-7.00 over the next few weeks. Not being knowledgeable about these prices or of seasonal effects that impact pricing, I can't speak to the validity of his comments, but that predicted decline certainly didn't happen today. Natural gas futures had a volatile day, rising to test their 200-sma and falling back from that average. The 200-sma has proven to be strong resistance for the previous three tests.

My feed service shows that natural gas futures closed at $7.61 today. The same feed showed crude futures consolidating today, with futures closing the main trading day at $64.10, just cents below the 10-sma and still above the descending neckline of a confirmed inverse head-and-shoulders on the daily chart. Jim Brown will be writing the Wrap this weekend, and I'm sure will have more salient points to make.

The afternoon surge in equity prices occurred concurrently with an announcement that Kerkorian's Tracinda would make an all-cash $4.5 billion offer for Chrysler, an offer conditional on a labor deal. The deal is also conditional on how pension and healthcare costs related to Chrysler retirees would be shared. Although certainly interesting and material to DCX, that deal probably will not impact the overall health of the markets. DCX is not a component of the Dow, OEX or even the SPX. However, news can push equities around on a light-volume day like today, and other automakers are components of those indices. GM shareholders appeared to be happy that GM wouldn't be acquiring Chrysler after all, but today's strong rise still did not break GM above recent resistance.

Upgrades and downgrades may have impacted some stocks, although that relationship always proves iffy. Goldman Sachs downgraded Micron (MU) to a sell rating, saying that the firm expected weak DRAM pricing and disappointment after too-bullish estimates to negatively impact stock prices. GS cut its price target for the stock to $10.00. Credit Suisse cut its price target for Countrywide Financial (CFC) to $50. Although the firm kept CFC's outperform rating, it lowered its estimates for earnings, too, due to the ongoing problems that could impact profitability of mortgage banks. JP Morgan downgraded Rockwell Automation after its CFO resigned.

Ahead of Research in Motion's (RIMM) announced April 11 reporting date, Goldman Sachs raised its earnings and subscriber-rate estimates for the company. GS maintained its current buy rating and price target of $185 for RIMM.

Tomorrow's Economic and Earnings Releases

Although the stock market will be closed tomorrow, my information is that the bond market will be open until 10:30 ET tomorrow morning. This two-hour period will allow bond traders to react to the March Non-Farm Payrolls number, to be released at 8:30.

That release could have proven market moving to equity markets, too, if they were open tomorrow. As of last weekend, the consensus had been that payrolls would rise by 140,000-168,000, depending on the source, but with that range above the previous month's addition of 97,000. Yesterday's ADP produced a number for private-sector employment of 106,000, which predicts that the payrolls number might be a little softer than that previous expectation, given that about 24,000 government-sector jobs will be added to the ADP's number. As always, I caution that ADP has been very wrong in its estimates two or three times over the last 12 months.

February's Wholesale Trade number will be released at 10:00. It's expected to drop 0.4 percent, after a gain the previous month of 0.7 percent. The ECRI Weekly Leading Index will be released at 10:30, followed in the afternoon by February's Consumer Credit at 3:00. Bankruptcy filings for the fourth quarter of 2006 will be released sometime during the day.

What about Tomorrow?

There is no "tomorrow" in trading for equity options traders. For those traders, markets will open again Monday morning. I'm going to include the usual charts that I post in this space on Thursday afternoons, but these intraday charts could have little bearing on what happens Monday since tomorrow's economic release may swing the markets one direction or the other. These are provided for background only, because some show some interesting characteristics. Jim Brown will be doing the weekend Wrap. I urge you to look to his report because it will be completed after we have seen that Non-Farm Payrolls number and the bond market's reaction.

I always caution that these Keltner lines are dynamic, and I want to reiterate that caution. They'll move slightly (or greatly, if the move is big) in the direction of price movement when the next day's trading opens. By the time trading has been underway a number of hours, their levels may be much different than what is shown here.

Annotated 15-Minute Chart of the SPX:


The Dow's attempted breakout was even less convincing.

Annotated 15-Minute Chart of the Dow:

The Dow's action looks as if the gathered overhead Keltner lines are proving to be tough resistance, but a gap higher Monday morning could change that. Watch out for any movement that pierces this resistance, but then produces closes below during the 15-minute periods. That shows that resistance held.

The Dow climbed from left to right on this chart, but resistance firmed from left to right, too, as even inexperienced Keltner chartists can tell from the thickening of overhead resistance. A strong momentum push is usually required to break through this kind of resistance.

That may occur Monday morning, depending on what happens with tomorrow's numbers, but this chart again points out why I love nested Keltner charts so much and feel that they give me lots of information I don't gain elsewhere. Nothing else gives me that picture of thickening resistance even while prices climb.

Now that I've said such glowing things, the Dow will probably leap handily over that resistance! Nothing works all the time, of course, but it works often enough to prove valuable.

Annotated 15-Minute Chart of the Nasdaq:

Annotated 15-Minute Chart of the RUT:

I'm not going to give a further prediction of what's going to happen Monday morning. Indices were parked at strengthening intraday resistance (SPX, Dow, RUT) while others were at daily resistance (Nasdaq, RUT). We're in the unusual position of having a trading holiday in which an economic release that has clear market-moving potential will be released, so it's silly and not helpful to speculate on what will happen next when you'll get another look at the results this weekend. I can't remember another such setup in recent history.

So, enjoy your day off from trading, but do make sure to read Jim's Wrap this weekend and make some plans according to what you read there.
 

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