Jeff Bailey is away on a much-deserved vacation this week. I, Linda Piazza, am substituting for him in tonight's Wrap.
By noon, the Dow and the Nasdaq had joined the SPX in the feat of climbing above their closing prices the day before February's sell-off. The Wilshire 5000 had climbed to a new all-time high. Indices paused, sinking back a little in the early afternoon, then surged again into the close.
The SPX has gained ten out of the last twelve sessions. According to candlestick theory, it's had enough "record" sessions--sessions that moved higher--that it's approaching the end of the newest trend. Let's take a look at what the charts might say about that.
Annotated Daily Chart of the SPX:
The SPX charged up to hit the daily Keltner target that I had mentioned last week but hadn't trusted to be viable. I had mentioned the targets for various indices with some trepidation, trepidation that turned out not to be warranted. Those targets will be detailed again in the "What about Tomorrow?" section, where they were included last Thursday, but if the SPX begins sustaining daily closes above daily Keltner resistance, just above today's close, the next target is currently near 1,499.
Typically, however, this particular channel resistance does prompt either sideways consolidation while the 9-ema rises from below, playing catch-up, or it prompts a downturn to retest that daily 9-ema's support. That daily 9-ema is just under 1446 currently. Remember that consolidation can be accomplished by a push higher that is not sustained through the end of the day, with that push piercing Keltner resistance but closing beneath it again. Consolidation does not preclude that push higher. Consolidation does not prove a reversal is in progress, either. It can result in further sideways behavior until the overbought pressures are relieved.
The Dow did not hit its daily Keltner target today, with that target now at 12,793. The Dow's chart is the one I used last Thursday to urge caution about bullish plays if the wedges were broken to the upside. I point this out so that you know I didn't conveniently invent the blue trendline at which the Dow stopped today. It was on the chart last week.
Annotated Daily Chart of the Dow:
The Dow stopped right on that rising channel's resistance. As I pointed out last Thursday, these so-called "bearish" rising wedges sometimes just broaden out into a rising price channel. There was plenty of room for new bulls to profit this time, but today's close, parked at resistance that has held since March, after many days of strong gains, just ahead of one of the most important economic releases of the week, may be a scary place for bulls to be sitting tonight. I would have locked in some of my profit if I had been long a bunch of calls, but that candle's shape suggests I would have been nearly alone. Shorts who had held onto the bitter end today, maybe first expecting a pop-and-drop day and then a sell-off in the last hour, must have helped fuel that end-of-day rise.
Like the SPX, the Nasdaq ended the day just at or slightly under daily Keltner resistance. If the Nasdaq begins sustaining closes above that resistance, the next target on that chart is currently way up at 2,613.54. However, like the SPX, the Nasdaq often either consolidates or pulls back toward stronger support upon first hitting the Keltner resistance level it hit today. Let's look at what can be discovered on the regular chart.
Annotated Daily Chart of the Nasdaq:
The RUT was another index that ended the day jammed against daily Keltner resistance. If the RUT begins sustaining daily closes above that resistance, then it sets a potential next upside target just under 858. You know the spiel by now about consolidation or a pullback being the high-probability next move once this Keltner level has been hit, but do be aware that the RUT tends to overrun targets more than some other indices. Let's look at the regular candlestick chart.
Annotated Daily Chart of the Russell 2000:
The TRAN is lagging some other indices in many ways. It, too, posted a strong gain today and a breakout above its rising wedge formation, but the TRAN has far to go to even approach its February high, and its breakout isn't as staggering as on some other indices. Friday, it even lost ground. I'm keeping a watch on this index, and remain somewhat wary because the TRAN is far from occupying its usual leading-index status. So far, wariness is all that's warranted.
Annotated Daily Chart of the TRAN:
The TRAN's daily Keltner target is just under 5,150 currently, but the TRAN, unlike most other indices, did not closely approach it today. That's another sign that the TRAN is not leading, unless it's leading in hesitation!
The opposite is true of the NYSE. The NYSE hit that daily Keltner resistance Friday, a day ahead of many other indices. Today it broke higher and soared up to the next target, closing at that resistance. Its daily chart shows the staggering gains made over the last three trading days.
Annotated Daily Chart of the NYSE:
Keep in mind that a so-called parabolic move can indicate that bullish enthusiasm is overdone and all who can buy are in the process of buying. Don't assume a rollover, but be cautious with short-term bullish gains from this point.
At 8:30 this morning, the April NY Empire State Manufacturing Survey was released. That survey did not meet expectations for a headline number of 7.6, but instead inched up only to 3.8 from March's 1.9 headline number, indicating that the manufacturing sector is not as strong as hoped. This survey is not as influential as the more closely watched Philly Fed number, but bulls should still have been a little troubled that the headline number did not meet expectations while the survey's prices-paid component jumped to 40.5 from the previous 30.2. The employment index fell to 5.4 from the previous 11.4. New orders climbed but shipments fell. Frankly, I found the market reaction puzzling ahead of tomorrow's CPI, when we should have seen some hesitation.
March's retail sales figures also appeared during that same time slot, with that number released by the Commerce Department. Retail sales slightly beat expectations of 0.6-percent gains by climbing 0.7 percent, but higher gas costs contributed to that gain. Gains in clothing and building materials also prompted the gain, but those assessing the number concluded that it wasn't higher-volume sales that pushed the number higher but rather higher costs. That should also have been worrisome to those on inflation watch. Maybe the watch tower has been deserted.
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The next economic report was February's Business Inventories, expected to see a gain of 0.3 percent. The number came in right in line with expectations. Sales increased more than inventories, by 0.4 percent, but inventories are still high relative to sales when compared to the last two-year period. The inventory-to-sales ratio was 1.29 for February. Other details included a decline of 0.7 percent in retail auto inventories. Some interpreted that as meaning that businesses are working off some of their excess inventories, but is that due to increasing sales or a reluctance to stockpile autos that might not be sold?
The last release of the day came from the National Association of Home Builders and Wells Fargo, not from the government. The April Wells Fargo/NAHB housing market index fell to 33 in April, down from March's 36, only barely above last September's 15-year low of 30. It dipped slightly below the consensus expectation of 35, with all four regions of the country reporting slipping numbers. This number measures how confident U.S. builders are about the housing market, with the chief economist for the NAHB concluding that problems in the sub-prime sector continued to hammer away at builders' confidence levels. That economist mentioned downside risks that remain considerable.
Several important companies reported earnings today, with Citigroup (C), Wachovia (WB), Mattel (MAT) and Eli Lilly (LLY) among that group. Quarter over quarter, C's profit dropped 11 percent. Excluding a previously revealed charge to reorganize and cut costs, however, C reported net income of $5.88 billion or $1.18 a share, beating expectations of $1.09 a share. Some market watchers scrutinized the company's credit costs, and those were driven higher by credit costs and an increase in loan loss reserves. A year ago, the company held $154 million in reserve. This year, it has added $597 million in those reserves. C was quick to say that some of those increases were due to portfolio growth.
Although Citigroup couldn't hold onto all its early gains and in fact produced a somewhat bearish daily candle, its earnings report did much to soothe markets worried about how the spillover from the sub-prime debacle would impact financials. In addition, Fremont General (FMT) reported that a buyer had been located for $2.9 billion of its sub-prime loans. Thinking over the day's market reaction, it appears that many market participants were more concerned about whether the sub-prime woes would cause any meltdown in the financials than they were about any inflation worries. The climb today had the feel of a relief rally in which too many bears had been caught short.
WB's earnings beat expectations, too, also adding a little balm to those worries about the performance of financials. WB does not have a lot of exposure to sub-prime loans.
MAT's profit declined when compared to year-ago levels, but that decline was due in part at least to a tax benefit it had received a year ago, and it beat expectations for this quarter. LLY took charges related to an acquisition, but if those were excluded, the company beat expectations, too.
In addition to those earnings reports, other company-related news help give equities that early morning sendoff. Procter & Gamble (PG) raised its dividend to $0.35 a share from $0.31 a share, to be paid on May 15 to shareholders of record on April 27. Other company-related news came from THE WALL STREET JOURNAL, reporting that Sallie Mae or SLM Corp. would be sold and taken private by a buyout group. Shares would be bought at $60.00 a share, and "bought" proved to be the operative word at the open for this stock. Other M&A news this morning included Quest Diagnostic's agreement to buy Ameripath.
In addition to this news, a number of pharmaceuticals made announcements during the day. Amgen (AMGN) announced results from a Phase III study of its Aranesp drug for cancer patients with anemia. The study produced disappointing results, and the drug does not receive approval by the FDA or EMEA for use in those patients. Inclone (IMCL) announced better results from its Phase III study of Erbitux in patients with metastatic colorectal cancer. The median time of survival without a progression of the disease improved in more than half the patients when compared to another drug regimen that included Erbitux with a second drug. EZ EM (EZEM) received FDA clearance for its injector system.
After-hours developments included a halt in trading of Universal Forest Products (UFPI) after the company reported earnings that showed the impact of a softening housing market. Black & Decker (BDK) raised its earnings-per-share forecast, however, so maybe drills are selling better than lumber.
Tomorrow's Economic and Earnings Releases
Tomorrow's economic calendar is full. At 8:30, the important March Consumer Price Index, the CPI, will be released. This number tells the FOMC whether higher prices are filtering through to the consumer, increasing inflation pressures. Of course, those of us living real lives know that both food and fuel costs impact us, but it will be the non-fuel and food core CPI that is most important to watch. Economists predict that core CPI will rise 0.2 percent, with the prior rise also at 0.2 percent. The headline number is expected to rise 0.6-0.7 percent, considerably hotter than the previous 0.4 percent rise. For some time, markets have ignored the potential for credit to tighten again if the FOMC is forced to hike rates, with signs of economic growth just encouraging enough to offset those worries, but that equilibrium may not always be maintained.
In the same time slot, March's Housing Starts and Building Permits will be released. These numbers have also sometimes proven market moving in a climate in which some worry that housing-sector weakness may spill over into other parts of the economy. Housing Starts are expected to number 1.495 million-1.5 million, down slightly from February's number, and building permits, about 1.52 million, also slightly below February's number. The after-hours announcements from UFPI prove that there has been some spillover.
March's Industrial Production and Capacity Utilization follow at 9:15. Those can also prove market moving, although some aspects are volatile and not trustworthy, and others are often quite predictable. Companies reporting earnings tomorrow include INTC, with the time of that report not scheduled at the time I was checking the calendar. Other reporting companies include IBM, JNJ, WM, WFC and YHOO. Financials such as WM may be particularly important as market watchers want continued reassurance from the financial sector. It will be a big day for reporting companies.
What about Tomorrow?
The normal expectation for the day following a big-range day such as today is a consolidation day or a reversal day. Let's look for any evidence that might tell us if one of those two is likely for tomorrow.
Last Thursday I had said that although some gains were to be expected Friday morning since the indices had produced bullish-engulfing candles in many instances, I didn't see evidence that Friday's gains would be big. I guess what you quantify as "big" determines whether you think my outlook for Friday was justified or completely off base.
However, I had also mentioned that "[m]y daily Keltner charts show me that it would be easy to see the SPX reach toward 1468; the Dow, 12789; and the Nasdaq, 2516." I didn't expect those to be reached Friday, and they weren't, but I honestly didn't expect them to be reached today, either. I wasn't sure they remained viable targets. They were, obviously. The SPX topped 1,468 by less than a point, and the Nasdaq topped its target by less than three points. The Dow didn't quite reach its upside target.
I had advised subscribers who wanted to determine whether the uptrend in place last week was continuing on Friday to use the 15-minute 9-ema as a guide. Continued bounces from that average would mean that the short-term trend remained intact. Sustained closes beneath it, with the 9-ema serving as resistance, would mean that the short-term uptrend had ended. The early-morning decline on Friday temporarily pushed prices beneath 9-ema's on various charts, but prices weren't sustained at that level. Within a couple of 15-minute bars, prices were back above that 9-ema and bouncing from it again. That pattern held through the rest of the day and should have signaled any short-term bears that they were on the wrong side of the tracks.
This morning's spurt higher carried prices far above that average on various indices' charts. It wasn't until about 1:00 this afternoon, the same time the Wells Fargo/NAHB housing market index was released, that the SPX's sideways/sideways down move off the day's high brought it in contact again with that average that had been rising beneath prices all day, playing catchup. Crude costs had bounced off the morning low, too, so it was difficult to gauge whether it was the housing index, the rising crude costs or simply a midday rest that prompted the retesting of that average. Crude closed the regular session up $0.04 at $63.67.
However, Friday morning's decline and bounce also revealed that all most indices did on Friday's early decline was to drop back to the 30-minute 9-ema and start bouncing from that average, so it's the 30-minute charts that I watched today for any signs of short-term trend reversal. It's those charts that will be displayed below.
Annotated 30-Minute Chart of the SPX:
Unless the SPX plunges sharply, it's likely to find at least temporary support when two Keltner lines converge, particularly when they're as important as the lines now beginning to converge near 1458-1460. These signify breakout levels. Even if the SPX should begin producing 30-minute closes beneath the 9-ema, do expect a bounce attempt at least at the then-current levels of these Keltner lines (they'll move a little in the direction of price movement) unless the SPX is plunging.
Annotated 30-Minute Chart of the Dow:
The same pattern holds. Unless the Dow plunges, expect any test of the breakout level to produce at least a bounce attempt, whether it's successful or not.
Annotated 30-Minute Chart of the Nasdaq:
Annotated 30-Minute Chart of the Russell 2000:
Tomorrow's CPI could well be a market-moving event. If anything could send the indices plunging or soaring, the CPI could do it. I just can't see the indices soaring after such strong gains, at least not until after some sideways consolidation. I can see a need to pull back, so a plunge remains possible although nothing yet says it's probable. Any reaction to the CPI must be weighed in with bullish enthusiasm and option-expiration-related buying or selling. Ahead of that number, I can't say which it will be, but I don't have to do so. You can put those 30-minute 9-ema's on your chart and watch for yourself. If you're in bullish positions, you want to see indices continue to print 30-minute closes above those 9-ema's.
You want-to-be bears have a more difficult task. You want to see three things: 30-minute closes beneath those 9-ema's, thirty-minute closes beneath the breakout level, and a retest of the breakout level with it holding as resistance. If tomorrow is to be a consolidation day and you enter, thinking that your conditions have been met, you might find that's all the movement that's going to occur for that day or for the rest of the week as indices consolidate sideways. The SPX for many months had a rather reliable pattern of strong gains, then four to six days or so of sideways/sideways-up consolidation, and that pattern, if reinstituted, could carry us through the end of option-expiration week with consolidation days. If tomorrow is going to produce a deep pullback, it may occur with little warning without providing you with all these handy-dandy little confirmations.
If you're tempted to entire a bearish play, you've had stark evidence today of what can happen when bullish momentum is strong. Keep losses manageable.
Market experience confirms that either consolidation or a pullback are more likely tomorrow, but I still don't quite feel confident that charts have settled down into "the" pattern after the disorganization that began in late February. I remember warning then that the pattern could broaden, which would mean that we would see new highs on at least some indices, so I'm withholding judgment still. This should not be considered advice to adopt a bearish stance. Although last week's chart had taken on a slightly more bearish cast, I said then that those formations could as easily morph into something more bullish as had all the previous formations the last few months morphed from one thing to another. I just don't know right now.
Although the shooting at Virginia Polytechnic Institute and State University today was not a market-related phenomenon and so was not discussed as part of this Wrap, the entire OptionInvestor.com staff sends condolences to friends and family of those impacted.