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Market Wrap

A Typical Pattern Repeated

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Late last night, developments in China began a landslide that buried other Asian bourses in losses, too. The Shanghai Composite Index lost 4.5 percent after the government delayed an important economic release until after the market close. When the delay was announced, market watchers reasoned that the government delayed the release because it would show much hotter growth than was wanted. They were right. China's first-quarter GDP soared 11.1 percent above the year-ago level, with inflation rising 3.3 percent in March alone.

Introduction

Other Asian bourses were hit hard, too, although not as hard as the Shanghai Composite. The Nikkei 225 closed down 1.67 percent. However, that close was far off the low of the day, and the Shanghai Composite had also bounced hard off its low. It had been down an about 7 percent at one point during the day. Those bounces might have reassured U.S. equity bulls that the recovery had already been underway in Asia by the close, giving hope that U.S. equities might avoid a similar rout altogether.

Our futures had turned sharply lower during the night, as did European bourses, but the pressure let up slightly as our open approached. Across the globe, property- and commodity-related stocks took a hit as market watchers reasoned that tightening credit across the globe would impact those companies most.

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Earnings from U.S. companies had begun to flood the airwaves. Mostly upbeat earnings reports eased some concerns, and U.S. futures and European bourses bounced off their worst levels. The initial drop when U.S. markets opened was quick and hard, but indices soon settled into a typical opex Thursday sideways movement.

Market breadth was dreadful all day, however. Ahead of earnings from Google (GOOG) and AMD and words from two FOMC speakers--Yellen at 3:50 and Fisher at 8:30--equities softened into the close, but the indices I checked did not retest their morning lows. The Dow eked out another closing high. Like the Asian bourses, ours left candle shadows springing off those lows. Let's see what that means on the charts.

Charts

Annotated Daily Chart of the SPX:

If the SPX is to continue the pattern it employed in the many months it was climbing off last summer's low, it typically produces at least one close at or below the 10-sma before it springs higher again. I don't know if that pattern will repeat, but the index certainly looks as if it needs that pullback, and I'd plan accordingly.

Annotated Daily Chart of the Dow:

The SPX and Dow still need a pullback to the 10-sma, but the Nasdaq produced that test today. I actually prefer to watch the Nasdaq with a 9-ema, with that average at 2,490.35 as of the close.

The Nasdaq often consolidates a day or two at least at support, sometimes with long-shadowed-small-bodied candles. I'd take that pattern into consideration, but important earnings and the SEMI Book-to-Bill number may impact the pattern. Breadth on the Nasdaq was dismal today, with decliners far outnumbering advancers and down volume far ahead of up volume. I'm not sure that the testing of support is quite finished here.

Annotated Daily Chart of the Nasdaq:

The Russell 2000 may be an important index to watch in the coming days. It dipped down to test rising trendline support and managed a spring from that support, closing the day back above the 10-sma, but only barely. Short-term bulls will want to watch that trendline or channel support, making sure that the RUT doesn't breach it on a daily close. The RUT remains vulnerable to a 50-sma or even 72-ema test, but such tests wouldn't be particularly bearish if the support holds on daily closes. Skittish traders will be eyeing the potential double-top formation on the RUT, however, and the index needs to behave well (maintaining important support levels on daily closes) to avoid scaring the more skittish investors.

Annotated Daily Chart of the RUT:

Although some disagree with the predictive quality of the TRAN's actions and I understand that there's not always one-on-one correspondence, it looked likely that the SPX, OEX and Dow would bounce today, given what was going on in the TRAN this morning. The TRAN bounced hard. Given what was going on this afternoon, there's reason for some concern. The TRAN fell back and produced a doji at resistance, bringing up the specter of a double-top formation. Remember that such formations are not confirmed until prices drop below the trough between two highs, so don't short stocks based on a potential double-top formation. The TRAN has a long way to go to confirm this formation, but not a long way to go to make some market participants a bit skittish.

Today, I heard someone on CNBC commenting that the Dow's new highs were probably more supportive of the U.S. markets, protecting them from what was happening in Asia, but that someone wasn't paying attention to the new highs recently reached across the globe. Some of those equities being dumped last night were on bourses that had recently reached new all-time or multi-year highs.

Annotated Daily Chart of the TRAN:

Annotated Daily Chart of the NYSE:

Many were wowed by the SOX's advance today, so it seems appropriate to include its chart again tonight.

Annotated Daily Chart of the SOX:

Today's Developments

This morning's first economic release came during the pre-market session. Weekly Jobless Claims for the week ending April 14 were expected to number 315,000, down from last week's 342,000. First-time claims did fall by 4,000, but that put them at 339,000, higher than expected. The four-week average rose to 328,750, the highest number in more than a month. Continuing claims rose by 6,000, also to a level that's the highest in more than a month. The four-week average rose 9,000. Both initial and continuing claims are higher than the year-ago levels, by 8 and 3 percent, respectively.

The Conference Board released March's Leading Indicators at 10:00. Despite its name, this release's numbers usually prove rather predictable, if still somewhat predictive. (That's not as contradictory a statement as it seems at first glance.) The Conference Board said the index rose by 0.1 percent, an improvement over the previous two months' declines, but certainly not a stellar number. The leading economist for the Conference Board characterized the number as indicating a potential "softer economy this summer," as quoted in a Marketwatch.com article, with the housing and manufacturing sectors areas for concern and consumer sector an area of strength.

Natural-gas inventories came next, at 10:30. Those supplies dropped by 46 billion cubic feet. Together with speculation that this year's hurricane season could be an active one, the number was considered bullish for natural gas prices. Another energy-sector future, the crude futures, plunged, however, driven lower by expiration-related activity, the reopening of an Enbridge pipeline from Canada and perhaps even from some worry that central-bank tightening across the globe could cut into demand. That last suggestion is pure speculation on my part, however. Jim will have more salient explanations in this weekend's report. A Briefing.com article listed expiring-tomorrow crude futures' close at $61.80.

The Philadelphia Federal Reserve District released one of the day's most influential reports, April's Philly Fed Survey, at noon. Expectations for this number ranged from 2.0-3.0, up from the previous month's anemic 0.2. In addition to the relief provided by dropping crude prices and the typical opex Thursday forces at work, the consolidation after the initial drop may in part have been due to market participants waiting out the release of this number before taking further action.

The Philly Fed number did not meet expectations, but the equity markets greeted the number as if that were good news, perhaps because of the specter of what too-hot growth had done in China overnight. The diffusion index remained at 0.2 instead of rising to 2.0-3.0. The portion of the index that deals with future expectations rose to its highest reading in 12 months, to 25.8, up from the previous 17.4. New orders and employment component indices also rose, but only slightly, and shipments fell. The prices-paid component index rose to 24.3 from 21.8. That shouldn't have been particularly good news.

Bank of America Corp. (BAC) reported before the open this morning, reporting adjusted earnings that beat expectations by two cents. Something about the report did not please investors, however, or else it just suffered a bout of profit-taking, because the stock price quickly plunged to test Monday's gap higher. Gap support held for now, as did 10-sma support, but the stock's price closed far below yesterday's.

Another financial, Merrill Lynch & Co. (MER) fared better in investors' eyes, at least initially. Although the price dipped with other equities early in the morning, MER's price quickly recovered. By the release of the Philly Fed number, prices had retested yesterday's high, but then prices backed off, leaving a doji for the day's candle. This was a doji in a congestion zone, so it was mostly indicative of indecision. MER said net income was $2.26 a share, with expectations having been for $1.97 a share. Revenue was $9.85 billion against expectations of $9.07 billion, with investment banking activity helping to produce those results.

Altria Group Inc. (MO) reported earnings that fell to $1.30 a share from the previous $1.65 a share. On an adjusted continuing operations basis, the company appeared to miss some estimates by two cents, but it did raise its profit forecast for the year. Investors didn't care at the open. The stock's price gapped lower, but prices never fell as low as the early April decline.

Reporting companies today also included Kraft Foods Inc., with those results termed "mixed" in some articles. Profit declined 30 percent. Market share increased, but not in a wide enough swath.

UnitedHealth Group (UNH) and Continental Airlines (CAL) also reported. Some articles characterized UNH's report as beating EPS forecasts and others as disappointing, but investors sold, gapping it lower at the open. Sales, at $19.05 billion, were above the previous $17.58 billion, but some also worried about the company's forecast of higher medical costs for FY 2007. UNH had climbed well off the low by the close, but will now have resistance in the $53.16 zone.

Excluding restructuring costs, Merck (MRK) earned $0.84 a share, compared to $0.78 the same period a year ago. Sales rose to $5.77 billion from the previous $5.41 billion. MRK had been expected to earn $0.84 a share on revenue of $5.36 billion. MRK reported that R&D expenses will be higher in the first quarter and in the comparable quarter last year. It reiterated its full-year EPS forecast, excluding some charges, but if I'm reading the report correctly, its expected reported earnings of $2.60-2.75 a share were shy of the $2.86 average expectation. MRK closed slightly higher, but within a recent consolidation zone after last week's gap higher. Schering-Plough Corp. (SGP) appeared to blow through expectations, reporting earnings of $0.42 a share, excluding some charges, against expectations of $0.29 a share. Investors liked the report, gapping this stock higher at the open.

Fairchild Semiconductor Intl. (FCS) reported that gross margins slipped to 27.7 percent from the year-ago 29.9 percent. First-quarter earnings and revenue declined, with earnings falling from $0.21 a year ago to $0.05 in the first quarter. Adjusted earnings were $0.16, however, a cent above expectations of $0.15. FCS gapped lower at the open but soon bounced up to test the gap. Prices couldn't close that gap, and FCS closed below its 10-sma for the first time since mid March.

Another tech, Novellus Systems (NVLS) disappointed. Furthermore, market participants didn't like its guidance on bookings. This stock also gapped lower, but also soon began bouncing. It left a big gap to fill, however, and even closing on today's high couldn't fill it.

Cooper Industries (CBE) beat expectations. For the second quarter, it expects to earn $0.72-0.76, with analysts expecting $0.74, squarely in the middle. CBE soared higher soon after the open and then settled into a consolidation pattern by the middle of the day.

Helping the transportation sector in its strong performance early today, Union Pacific (UNP) beat expectations, and it built on yesterday's gains. It closed at what may be an all-time closing high, although my charts don't go back far enough to be certain of that.

In other company-related news, General Motors Corp. (GM) reported global sales that rose 3 percent above 2006's first-quarter sales. However, its global share slipped to 13.1 percent from the previous 13 percent. This comes as Credit Suisse lowered first-quarter earnings estimates for the company, to $0.67 from 0.81.

Hewlett-Packard (HPQ) was believed to have obtained more of the market for PCs in the first quarter, with that supposition helping the stock price in early trading. INTC and AMD received upgrades from FTN Midwest, both to buy ratings. INTC benefited; AMD did not, with its earnings report this afternoon and some apparently fearful ahead of that report.

The first headline I noticed about AMD's earnings noted the bigger-than-expected loss and falling profit margins the company reported. Its loss was $0.90 a share if certain charges are excluded and certain compensations are included (no comment) against expectations of a loss of $0.47. Margin had dropped to 31 percent from 40 percent just a quarter ago and 59 percent a year ago. Lower shipments and weaker chip prices hurt the numbers.

Google's (GOOG) results show it slightly beating expectations or slightly lagging them, depending on the article and the author. A MarketWatch.com article noted that analysts expected $3.30 a share but that the company reported $3.18 a share. The same article noted that net sales of $2.53 billion beat expectations of $2.49 billion. Profit climbed 69 percent and net sales rose 66 percent. The stock was up sharply in after-hours trading, at 480.81 as I type, up from the 471.65 close. The day's high had been 481.95. Remember that after-hours trading is not always predictive of the next day's pattern.

The SEMI Book-to-Bill number was due out this evening, but had not yet been released as this report was prepared.

Tomorrow's Economic and Earnings Releases

Tomorrow's economic calendar is light. At 10:00, March's Mass Layoffs will be released, followed at 10:30 by the ECRI Weekly Leading Index. The fourth quarter's Bankruptcy Filings will be released sometime during the day.

Companies reporting earnings will include CAT, HON, JCI, MCD, SLB and XRX. Earnings reports may prove more important than the economic reports.

What about Tomorrow?

The SPX and Dow look as if they need to retrace to their 10-sma's, and the SPX, at least, likely needs at least one close at or below that average. Whether that happens tomorrow or not, I can't be sure, but I think short-term bulls are living on borrowed time until that happens. Prepare accordingly.

Annotated Daily Chart of the SPX:

If the SPX instead springs above that new resistance tomorrow morning, expect resistance at the 1475-1478 zone.

Annotated Daily Chart of the Dow:

Option-related activity may prevent that needed pullback in the SPX and Dow to their 10-sma's and potential close at or near those averages from happening tomorrow, but begin to prepare your trading plans accordingly. If your long option play cannot endure such a test, make exit plans. Those plans can be as simple as continuing to raise your stops with any price movement higher.

I'm not going to show the Nasdaq's 30-minute chart. The Nasdaq is ensconced between firm 2494-2499 support on 30-minute closes and 2522-2525 resistance, with no real insight as to which will be stronger. Given that the Nasdaq often consolidates a day or two at support, that's not surprising, so that there's little information I can give about likely next direction.

The same is true of the RUT. The RUT ended the day slightly below important mid-channel support on the 30-minute channel, but essentially "at" that support. A sustained decline targets 806.82 as a potential short-term target, while a sustained climb above about 823 on 30-minute closes targets a potential rise to 830-831.

What's my intermediate-term view on the markets? Long ago, I learned to recognize that feeling when I just couldn't get a take on the markets. When I was a new trader, I would try to force a view because I wanted to trade all the time. Later, I recognized that what I thought was an inability to make a decision often was followed by a period when markets couldn't make a decision, either. I was picking up some clues, unrecognized (by me) ones. I'm wrong sometimes, of course, and sometimes very wrong, but I learned not to try to force a conclusion. Some of you will be pointing out that I failed to take advantage of the rally, but you would be wrong, because "taking advantage" in my kind of trading meant making sure that I was exiting as many bull call spreads on each dip as I could, preparing for the possibility that the markets could spring higher and endanger my sold calls.

Right now, I can't get a handle on the markets. I warned late in February that I was seeing buying and that traders need to be prepared for volatility that could expand to the upside, too. But I saw a disorganized pattern rather than anything cohesive. I wish I could say I'd come to some sort of conclusion now, but I haven't. Markets still don't feel trustworthy to me, the patterns unreliable as yet.

For now, however, SPX traders are seeing the old pattern tentatively reinstituted, so you know what to watch. If those patterns are broken or if other indices now making double tops, such as the RUT and TRAN, suddenly crater, be prepared. I'm neither bearish nor bullish the markets, but firmly in the "disorganized-ish" camp.
 

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