Jim is off this week so I (Keene Little) will be filling in for him.
The stock market is doing a great impersonation of James Bond. Actually I've named the model of this market the Bauer Model--comes with gold trim. That would be after Jack Bauer (for those of you who watch the show "24" on Fox you'll know what I'm talking about). This market refuses to die and the lack of internal market breadth and volume during the rally from the March lows has not prevented the market from putting in a stellar performance. The DOW is now up 12 out of the past 13 days. If that's not a record it's very close to one. It certainly puts it at the top of the list. And it may not be finished.
The after-hours futures action is not very positive after the earnings announcements from INTC, IBM and YHOO (INTC is up but the others are down) but we all know that can get completely reversed by the following morning. But based on a few things I see we should be very close to putting in at least a short term high, if it wasn't done today. It will take a pullback in order to help determine whether it's a corrective pullback (which will lead to more new highs) or something more impulsive to the downside that starts breaking support. It's still too early to tell.
Last Wednesday I had said we had a nice setup for a short play. Even though it was an early call I liked it because it was easy to keep a very tight stop. As it turns out the market was not ready to call it a day--it turned around and headed higher again. Unless we're just at the start of a very strong move higher, the daily oscillators warn that we should be looking for a high soon. I'll lay out in the charts the key levels we'll watch in order to help us identify potential support and resistance areas and where the EW (Elliott Wave) counts are triggered.
But first, since I mentioned them, the earnings reports of 3 big ones--INTC, IBM and YHOO--could cause some reactions tomorrow. INTC reported a 19% rise in its profits (good) while sales dropped 1% (bad). They earned 27 cents a share vs. 23 cents last year (good) but 5 cents of that was derived from a one-time tax settlement (bad). They are forecasting sales in the $8.2B-$8.8B vs. expectations for $8.8B, so they're on the light side for sales volume (bad). And gross margins slipped from 55.1% a year ago to 50.1% this past quarter (very bad). That means the price war between INTC and AMD is taking its toll. I don't see anything particularly bullish about their earnings report but the after-market price action had INTC up about $0.42 from its $20.99 closing price.
IBM reported a 6.6% increase in revenue ($21.9B, up from $20.7B) and earnings increased from $1.08 to $1.21 per share (so good and good). IBM did not offer guidance for the next quarter (as is their policy). Apparently software sales haven't excited the analysts who feel future growth could be slow. The stock traded down $0.67 from its $97.15 closing price.
YHOO was taken out to the woodshed after hours--shedding $2.60 from its $32.10 closing price (-8.1%). At $29.50 in after hours, if it opens there tomorrow and can't rally then it will be a break of its 50-dma at $30.82, something it has only done briefly in January and March. A downside break on volume this time could be much different. YHOO reported profits declined -11% due to increased expenses. Earnings were 10 cents a share, down from 11 cents a year ago. Sales were up 7% to $1.67B but obviously their expenses were up more.
So with INTC the lone survivor after hours, and I'm not sure why, it could make for an interesting morning session.
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CPI and Core CPI
But the market liked the idea that the Core CPI was lower than expected and within the comfort zone of the Fed. That keeps the Fed on the sidelines and I guess that's now bullish. So we've gone from expecting the Fed to reduce interest rates and that's why we've rallied so strong (which has only been the excuse) and now the market hopes the Fed will just stay on the sidelines and that's bullish. But before long, when the mood shift, as it always does, good news will be bad news and everyone will wonder why the market is in a sour mood.
Housing Starts and Permits
I came across some interesting data in today's Gartman Letter where he talked a little about the housing numbers. He made mention that the housing starts topped out at 2.2M in late 2005 but of course have contracted sharply since then, breaking the strong bull market move in housing from the late 1990s when starts had bottomed at 0.8M. He looked at past housing booms and busts and found that bottoms typically were not found until starts bottomed around this 0.8M number. This was true after the highs in 1972, 1977-78 and 1984. As he pointed out, we should not expect a bottom in housing until starts get down to around 0.8M, roughly half of where we are today. Fewer housing starts will of course mean fewer building permits. There is a lot of pain left in this industry before the popped bubble can heal.
Here's a chart showing housing permits over the past 2 years:
Building Permits, Monthly, from April 2005
While everyone got all excited about the increase in the housing permits you can see it didn't mean a whole lot. And we should look for it to drop below 1.0 before we can start believing the calls that a bottom is in sight.
Industrial Production and Capacity Utilization
Other than the DOW getting most of the attention today, with some spillover into the S&P 500, the rest of the market, especially the techs and small caps, did not fare as well. You can see by the advance-decline volume and issues in the above chart it was a very mixed day. Whenever we see the DOW and SPX outperforming the rest of the market it's usually a defensive posture so it raises a caution flag. Let's see what all the charts are telling us.
Before getting to the stock charts, here's an update on the 10-year yield chart:
10-year Yield (TNX))chart, Daily
As expected the bond market rallied (yields dropped) just as the 10-year yield hit its downtrend line from June 2006. I'm not sure if it will consolidate sideways a little longer in its triangle pattern or if a pullback will be followed by a break north, as depicted on the chart. A break below 4.47% would negate any bullish potential in the 10-year yield.
DOW chart, Daily
As I mention on the chart, there is nothing bearish about this chart at all, except maybe for the possibility that the overbought oscillators are pointing to at least a pullback coming. But price is clearly in an uptrend and that's what should be respected until it's not. Simple, no? If only. The green price depiction is based on expectations for an impulsive rally from the March 14th low, which would be a 5th wave to end the rally from last July. I have a price projection up around 13400 for this move.
The bearish (dark red) EW counts calls the bounce off the March low as wave-B in an A-B-C decline from the February high. The fact that other markets have made new highs does not negate the possibility for a b-wave correction. It becomes what is called an irregular flat wave correction and the following c-wave often moves to a Fib projection of 162% of the previous move down (wave-A). That would currently mean a move in the DOW down to about 11400. This bearish wave count calls today's high as the potential end of the bounce although there is a Fib projection for the move up from March 14th (two equal legs up) at 12814.
DOW chart, 60-min
The 60-min chart shows the 12814 potential but today the first Fib projections were met--12779 and 12796. The 12779 projection is for two equal legs up from March 30th and then 12796 was a Fib projection on an even smaller time frame for the move up from April 12th. This latter projection happens to correspond exactly with the February high. But if the DOW consolidates just underneath this 12796 level then it will start to look more bullish for another push higher. Therefore as I had mentioned on the Market Monitor today, it was a good setup to short today's high but another press higher would be looking next for a possible failure at 12814. Any higher than that would be bullish and I'd look to the green bullish wave count shown on the daily chart.
SPX chart, Daily
As with the DOW, the green bullish wave count shows the potential for SPX to rally on up to new all-time highs. Two equal legs up from the March 14th low is just under 1484 so any higher than that and I'd say there's a good chance the bullish count is alive and kicking.
For the bears who don't see how we could rally to new all-time highs, I'll show this chart of SPX back in 1987:
SPX chart, Daily, 1987
I got this chart out of "Technical Analysis of Stock Trends" by Edwards and Magee so it's just a scanned in copy. After a -9% correction from the March high the market rallied +23% to the August high. I don't have internal market breadth, volume, etc. to see how that rally looked but I suspect it was not very healthy. After a quick drop into September, a 3-wave bounce into early October, the bottom then fell out and we had the stock market crash of October 1987. I don't know if history will repeat but this is worth keeping in mind.
SPX chart, 60-min
The 60-min chart shows SPX is ready to at least take a breather after hitting some Fib projections lined up around 1474, which is where price stalled today. Assuming we get a pullback, if it's a choppy sideways/down correction then the green bullish path will be the more likely outcome. But if it starts to drop sharply and breaks the uptrend line then it will look more bearish. A break below 1444 would be confirmation we've seen the top of the bounce.
OEX chart, Daily
It's too messy if I show all the Fib projections for OEX but let me mention them to show you why the 676-680 area may be the important Fib zone to watch. The 62% retracement of the 2000-Oct 2002 decline is at 671. But when looking at other indices it could be argued that the bear market leg down ended at the March 2003 low with a truncated low on several indices including the OEX. Using that low for calculating the retracement levels from the 2000 high gives us 676 for the 62% retracement. Many traders, including computer programs, reacted to the 670-671 level because of retracements off the 2002 lows.
From the 2003 low, a 162% projection of the first leg up to the January 2004 high gives us 680 as a potentially important Fib level. Looking at the leg down from the February high and projecting up from it, a b-wave correction, as labeled in dark red, most commonly goes to 117% of the initial move down (labeled wave-A on the chart). That Fib is just under 680. A move up from March 14th with two equal legs up is just shy of 677. If the market has not finished its bounce then a little sideways consolidation followed by another press higher could find resistance in that 677-680 Fib zone. That's if the rally didn't finish today (today's high was just shy of 675).
Nasdaq-100 (NDX) chart, Daily
I continue to entertain the thought that the techs are forming an ascending wedge from the March low. The NDX closed above resistance by the trend line along the lows from November but left a bearish looking dragonfly doji. If this is followed by a red candle on Wednesday then it will be a bearish reversal pattern. Then we'll see if it breaks its uptrend line of instead consolidates for another run higher.
Nasdaq-100 (NDX) chart, 60-min
The shorter term view shows potential to rally up to Fib projections near 1850. It takes a drop below 1802 before the bears can claim any kind of victory.
Russell-2000 (RUT) chart, Daily
Between the broken uptrend line from August, which continues to act as resistance, and the uptrend line from March, the small caps also look like they could be forming an ascending wedge. A small correction could be followed by a minor push higher to about 850 by this pattern. The break over 824 put this one on the bullish wave count so it's the bulls to lose here. A break back below 812 would be bearish and a break below 803 would confirm it so.
Russell-2000 (RUT) chart, 60-min
A closer view of the resistance around that broken uptrend line from August shows the battle that's been going on there. The upside pattern counts well as complete for a correction to the initial decline from the February high (even though it made a marginal new high). So the next move looks like it will be down. But as with the others, any consolidation near the highs would start to look bullish for a continuation higher.
NYSE (NYA) chart, 120-min
I wanted to show the NYSE chart because it has looked so bullish compared to the others. But it too has achieved some upside Fib targets--it came within 2 points of its 9655 Fib target which is also at the top of a parallel up-channel that price has been in and the oscillators look ready to roll over here. A break below 9500 would be bearish.
I mentioned last week that the whole rally in March has been on lower volume and that should be worrisome for the bulls. When we have a market retesting a previous high on lower volume that is a classic setup for a double top and it's why I continue to feel bearish about this market. Here's an updated chart:
NYSE price vs. total volume chart, Daily
After volume (lower chart) spiked up on the decline from the February high the volume has trailed off as the NYSE has pressed higher. This is not bearish and even today's new high was on lower volume. Many are trying to pooh-pooh this and say it's not relevant this time. It will be very relevant if price comes crashing down and people start asking how come we didn't know it was about to happen. This chart and the banks continue to have me leaning into the bear camp asking if I can join them.
BIX banking index, Daily chart
The banks got a very large bounce yesterday which took this index right up to its new downtrend line which happens to coincide with its 200-dma. If the banks are unable to break the downtrend here then the next move will likely be a very sharp decline. If that happens I can guarantee the rest of the market will follow.
I'm running out of time here so I'll use tomorrow to show the setup we have on Mother MER. As many of you know, I've long said you should keep an eye on MER as it's a great proxy for the broader market. It reports on Thursday I think and its chart is telling me it very likely finished its bounce and is ready to resume its southbound journey. Heads up on that and I'll show you tomorrow what I'm looking at.
U.S. Home Construction Index chart, DJUSHB, Daily
As mentioned earlier, the housing numbers got the bulls excited (or the bears nervous), and the small bounce could continue a little higher, but this index is not even close to finding a bottom.
Oil chart, ETF (USO), Daily
I'm going to start using the ETF to track oil since it's harder to keep up with the changing contracts. I suspect more of you would be willing to trade USO than the futures contract anyway. USO is on the verge of breaking support by its uptrend line and 50-dma. It needs to turn right back up otherwise the correction to the decline from July 2005 could be finished (or it may just chop around sideways/up for a lot longer). A break below $50 would have me bearish oil.
Oil Index chart, Daily
The oil stocks tell me that we'll probably see a breakdown in USO. The stocks have finished a 5-wave move up from the March low and that calls for at least a corrective pullback. More bearishly the move up could have finished a larger correction from the high back in December and now the next leg in the pattern will be a strong move down that breaks its uptrend line from October 2005. In either case I think it's a good time to protect some positions in this index.
Transportation Index chart, TRAN, Daily
The Trannies are only a handful of points away from a Fib projection to 5127 so a minor push higher on Wednesday could do it. The shorter term pattern suggests that it could get another leg up so watch that level for resistance. So far the Trannies are not confirming the new highs in the other indices, or the test of the high for the DOW.
U.S. Dollar chart, Daily
The US dollar has refused to bounce and now it's looking closer and closer to finding a bottom. Everyone hates the dollar. The daily sentiment indicator is now down to the level (9) that has marked previous bottoms in the dollar so it's ripe for a rally. Price has dropped again to the bottom of its down-channel (which is a slight descending wedge). It could bounce and drop to a final low near a Fib projection at $81 but at this point the uber-bearishness on the dollar suggests dollar bears (euro bulls) need to be cautious.
Gold chart, StreetTrack Gold ETF (GLD), Daily
If the US dollar is close to bottoming, as I think it is, then gold should be close to topping. While GLD broke above its downtrend line from May 2006 that line is only off two points with the 2nd point being the February high, so it's not necessarily relevant. Price is pressing the top of a small up-channel from the March low. The count will change a little if this continues to press higher (the gold contract has not made a new high above its February high yet), but that only changes the downside price pattern.
The only real question in my mind is whether we'll see a corrective pullback that stays above $62 or a stronger move down that breaks support. It's way too early to tell for sure (although I'm leaning towards the breakdown for reasons mentioned in past Wraps, such as the dollar looking ready for a much stronger rally and all asset classes selling off in the coming bear market).
Results of today's economic reports and tomorrow's reports include the following:
It will be very quiet tomorrow as far as economic reports go--only the Crude Inventories to be reported.
SPX chart, Weekly, More Immediately Bearish
I'll continue to show the bearish resolution to this chart until and if SPX manages to rally above 1484. Until that happens there are several reasons, especially with the NYSE as mentioned above, to believe we're close to another sharp decline in the market. But if it rallies further then the upside potential is large and we'll want to find long entries for what would probably be a rally into the summer. But even the weekly chart here, with the bearish MACD divergence, while stochastics has cycled back up to overbought, suggests a downside resolution here.
Wednesday morning could be a little volatile until the dust settles around the earnings reports that came out after hours on Tuesday. An initial move down, such as a gap down, could easily get reversed with a couple of buy programs. We've got some large funds who will want to protect their short positions in hopes they'll just expire worthless on Friday. Opex activity on Wednesday can cause quite a bit of volatility all by itself.
Unless you see crisp setups, which I'll do my best to identify on the Market Monitor, trade light and trade fast. Once we get through opex we will hopefully have a clearer idea as to what is setting up for the rest of the month. Good luck and I'll be back tomorrow night.