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Market Wrap

Another Consolidation Thursday

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Headlines proclaimed the news before the market opened. Mostly better-than-expected earnings reports, especially from the recently lauded blue chips, would power the indices higher today. The Dow did reach another new high, although this time it wasn't accompanied by new all-time highs on the NYSE, as it was yesterday. It was accompanied by a recent new acquaintance, however: poor or mixed breadth measurements.


Despite the indices producing new all-time or recent highs, such as the Dow, the OEX and the new recent momentum darling, the MID (Mid-Cap Index), many indices produced consolidation formations or actual downturns. The TRAN was among those indices pulling back.

Amid the rally call this morning were speakers calling out warnings about the dangers posed by ETFs, the credit crunch and the yen carry trade. A couple of Fed governors spoke. Some market pundits blamed one or the other worry or event for the hesitancy or sideways-up consolidation patterns produced in the markets today. However, in truth, we ought to begin naming these Thursday Wraps "Consolidation Thursday Reports" since so many Thursdays lately have been spent consolidating the previous Wednesday's gains. We know of the tendency to consolidate after big gains, so today's actions were to be expected.


Annotated Daily Chart of the SPX:

Note the converging green trendlines at the top of the chart. Those will likely be strong resistance, but resistance sometimes also has a way of being a price target. I wouldn't be hugely surprised to see them act that way this time, either, although I really think any short-term gains could be labored ones right now. Remember that any such resistance test could be part of a sideways/sideways-up consolidation pattern that the SPX sometimes produces before dipping down to test the 10-sma. Yeah, I'm back on that "10-sma test" talk again. I'll tell you why in the "What about Tomorrow"" section.

Bottom-of-the-channel support, long-term Fib support and historical support all now converge near and just above 1460. Bulls would prefer to see that hold on daily closes. If that support breaks for more than a few hours, next support converges between 1434-1444, and that needs to hold if bullish hopes are to be maintained. A failure of that support questions again whether all this zooming around hasn't been part of a period of disorganization after February's descent.

Last night, Keene reported on the NYSE's volume patterns and new-high/new-low patterns. As his charts displayed, those patterns are not corroborating the index's rise. That's part of what's wrong and part of the reason that I'm not sure how to interpret what's been happening. As I've said other times recently, I'm neither bullish nor bearish. I'm firmly in the "disorganized-pattern-ish" camp.

You don't have to know which I am or even which you are. As long as the SPX is bouncing from its 10-sma and bottom-of-the-channel level, you have your answer as to what's happening. If in bullish plays, do have profit-protecting plans in place for each of those tests, however, and keep ratcheting up your stop appropriately.

If those volume patterns really are pointing out something rotten, the fallout could be quick.

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

The Nasdaq's daily candle was one indicative of indecision, but price ended up perched right in the middle of the top half of the price channel. We don't have many clues about next direction. Perhaps a study of the bigger-cap NDX might prove helpful, especially with MSFT reporting this afternoon.

As I type, MSFT is zooming up to $30.17, with this after the earnings report and before the conference call. Diluted earnings were $0.50 a share, but backing out a couple of cents for tax benefits and adding back a cent for legal charges, that would be $0.49. CNBC and Marketwatch.com were reporting that expectations were at $0.46. This weekend, Jim reported that MSFT would be including some previously deferred revenue from Vista (TM) and 2007 Microsoft (R) Office, and that amounted to $0.12 a share. The company reported record profit, but the analysts haven't picked apart what was said just yet. Remember that after-hours action sometimes doesn't see follow-through the next day.

Annotated Daily Chart of the NDX:

The NDX tends to be a little gappy, but if it gaps tomorrow, bulls don't want that gap to be to the downside and for the decline to continue. That sets up a potential reversal signal for the NDX. A sideways-up consolidation pattern could continue to rise along the underside of that resistance. I don't know what will happen tomorrow, but I do know that sometime or other, these indices are going to go back and test rising support.

Annotated Daily Chart of the SOX:

Annotated Daily Chart of the RUT:

Annotated Daily Chart of the TRAN:

After a disappointing auction today, bond yields climbed. The ten-year's yields are once again consolidating just beneath the converging 200-ema, 10-sma and 200-ema's, so far holding the support of the 10-sma. Bulls don't want to see tomorrow's GDP push these yields too high tomorrow morning, under the premise that the FOMC will have to hike rates, but neither do they want too steep a decline under the premise of flight-to-safety, with bonds the preferred holding over equities. Newbies, remember that yields move in the opposite direction of bonds.

Daily Chart of the Ten-Year Yields:

Today's Developments

Today's slot of economic releases began as usual with the weekly jobless claims at 8:30. Economists had predicted that first-time claims would drop to 330,000, down slightly from last week's 339,000. Instead, claims dropped a bigger-than-expected 20,000, to 321,000. The four-week moving average was still rising under the impact of previous weeks, climbing to its highest level in more than a month. Many think it's more important to watch the four-week moving average than the week-by-week numbers.

Continuing claims rose 65,000, the highest number in almost two months. The four-week moving average rose 19,250 to 2.534 million.

The next release was March's Help-Wanted Index at 10:00. This index measures the number of help-wanted ads in major newspapers. The index fell to 30, down from the previous 31 and much lower than last March's 37. Eight of nine regions produced decreases. Some question this index's reliability lately, however, as job ads migrate from newspapers into Internet sites. Economists do not appear to believe that the downward drift in job ads is due only to that effect, however.


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Natural-gas inventories for the week ending April 20 rose by 18 billion cubic feet, a number that fell right in the middle of consensus expectations. An NCBC commentator noted that, while supplies are plentiful and the addition was in line with expectations, the injection rate is actually a little lower than is typical for this time of year. Colder weather is prompting Northeasterners to use that natural gas for heating rather than allowing it to be injected into the storage, but eventually the weather will warm and supplies will be augmented, he noted.

Two Fed governors spoke this afternoon and one, at least, was credited by with temporarily weakening markets. I don't necessarily buy that theory. His comments were hitting the airwaves at the normal stop-running time of day, about 1:45 EST, as big money people return to their desks and test support or resistance. So, whether Dallas Fed President Richard Fisher's comments that the sub-prime effects might not have fully been assimilated yet was the true impetus or just the excuse ascribed to that little mini dip, I don't know.

Although the Kansas Fed's Manufacturing Survey is not as important as some of the other district reports such as the Philly Fed report, the Kansas survey today was the last chance to get a view of manufacturing strength before tomorrow's GDP report. This district encompasses Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico and western Missouri. The summary of that survey revealed rebounding manufacturing activity in April, with expectations for future activity increasing, too. Raw material prices eased a little, although the costs of finished goods price indices also rose, if slightly.

This report was released at 11:00 EST and was followed by one of the day's mini dips, but it's not clear that the dip had anything to do with the survey. I had to do a fair amount of searching to come up with the survey, as it isn't even easily uncovered on the Kansas Fed's site.

Most news today centered on earnings reports and other company-related news. Apple (AAPL) reported after the close yesterday, of course, with the stock seeing an immediate pop afterwards. The stock popped at the open, too, but AAPL couldn't hold onto all those gains and it fell through the rest of the day. It didn't close its gap, of course, but did end up below $100 again and well off its $102.50 high of the day. Qualcomm's (QCOM) report was yesterday, too. QCOM also jumped at the open but then ended up well off its high, below yesterday's pre-release close. Both stocks were expected to move the markets today in a positive manner since most considered their reports to be strong ones.

Beazer Homes (BZH) reported a loss. The company also said that it couldn't stand by its 2007 profit forecast due to conditions in the housing market. BZH bounced but fell back, leaving a long upper shadow. Two other homebuilders, PHM and RYL, have also withdrawn their guidance for FY 2007.

Dow Chemical Co. (DOW) reported this morning. Although the report didn't appear to me to be particularly encouraging, futures did seem to react positively about that time. The day's trading didn't reflect great enthusiasm, however, with a long-legged doji with the body right at the converging 10- and 30-sma's.

One Marketwatch.com article characterized the company's North American sales as "weak," but revenue did rise on strong volume and price increases in many of the company's businesses. Those weak North American sales were countered by strong sales related to housing and automotive sectors in other regions of the world. The company increased its quarterly dividend by 12 percent and reported earnings of $1 a share, down from $1.24 in the year-ago period. Licensing revenue dropped from the year-ago level, but comparisons were rendered unfavorable because the year-ago licensing revenue had been uncharacteristically high.

Exxon Mobil (XOM) also reported today. XOM's first-quarter earnings of $1.62 a share were higher than last year's $1.37 a share and also far above the Thomson Financial estimate of $1.52 a share. However, revenue, at $87.22 billion, was lower than the $88.98 billion from the year-ago level.

Ford Motor Co. (F) reported a narrowing loss of $0.15 a share, down from the year-ago loss of $0.76 a share. With certain exclusions and inclusions (my lame attempt at sarcasm), the company's loss narrowed to only $0.09 a share. F reported that a favorable currency mix helped it to that lower loss as did the company's own improvement in product mix. Volume proved lower, however, and the company's president and CEO spoke about the many uncertainties going forward.

Halliburton (HAL) reported income from continuing operations of $0.52 per diluted share. The diluted shares include results from KBR, Inc. This was $0.10 above the year-ago earnings per diluted share of $0.42. Revenue was higher than the year-ago level, with HAL, like Dow, crediting some foreign regions for contributing to that higher income. HAL's chairman, president, and CEO was "encouraged by the prospects" that await the company, he said in a statement released to the news.

3M (MMM) reported earnings of $1.85 a share, up significantly from the year-ago level of $1.17, but those earnings included a gain of $0.57 a share from the sale of a pharmaceutical unit in Europe. Excluding items, the earnings were $1.28, of course. Thomson Financial's expectations were $1.12 a share. While articles did not clarify whether those expectations were before or after that gain from the sale of the business, but I'm assuming they're being compared to the $1.28 figure. Revenue was $5.94 billion, with Thomson Financial forecasting $5.68 billion.

Valero Energy (VLO) earnings' report had been well received this morning. Then the company also said that it would initiate a stock buyback program. The company intends to spend $6 billion in that program. The day ended with VLO producing a long-legged doji on the top of a climb. Watch carefully for reversal or consolidation as the doji can indicate a need for one or the other.

Other reporting companies included BMY and TEN, among others. Other company-related news included Wendy's (WEN) decision to make itself an acquisition target. Harman International (HAR) consented to being taken private in a deal valued at $8 billion.

Tomorrow's Economic and Earnings Releases

Tomorrow's economic reports include the biggie of the week, the first quarter's GDP and chain deflator. That is scheduled for first thing tomorrow morning, during the pre-market 8:30 time slot. Economists expect growth of 1.9 percent, down from the previous 2.5 percent, and the chain deflator is expected to be at 3.0-3.2 percent, up from the previous 1.7 percent. With indices as extended as they are short-term, bulls want that number to walk a tightrope strung between hopes for at least moderate growth so that there's no sign of a downturn and hopes that the growth isn't too strong so that there's no impetus for a rate hike. Watch the reaction of bond yields tomorrow morning (try the TNX) to gauge how bond traders are reacting, at least. Sometimes they react more strongly or more quickly than equities.

Another release will be April's Consumer Sentiment, often an important number in its own right, at 10:00. That's expected to slip to 85.0 from the previous 85.3. The ECRI Weekly Leading Index comes next, at 10:30.

Companies reporting earnings tomorrow include AT, BIDU, BKC, CAM, CRDN, FLIR, GLGC, GT, IFX, ZEUS, SMI, SPG and WM. GT (Goodyear Tire) may be important because of the outlook it gives us on automobiles and the transportation sector, but it may be difficult to turn the focus onto reporting companies tomorrow, as it has been today.

What about Tomorrow?

Last week, my advice was wrong. I told subscribers that the SPX would likely retest its 10-sma within a few days if it was returning to its previous pattern. I didn't have grand hopes of it doing so on an opex Friday. Although I told bulls already in plays that their task was easy--they just had to make sure that the SPX was bouncing from its 30-minute 9-ema's--at no time did I warn anyone to expect a big rush higher on Friday. In fact, such a hard bounce didn't fit the SPX's usual pattern at all--and I mean "usual" as in more than a year, including times of strong rallies--and I did not expect it at all.

While I didn't necessarily expect bearish behavior, I did expect what was the norm for the SPX. For more than a year, that's typically been a return to the 10-sma, usually within 6-7 days after last touching it.

I take my responsibility to readers seriously. To verify that I hadn't been way off track with that advice last week that bulls should prepare for and expect a retreat to the 10-sma within a couple of days, I went back to January, 2006, counting the number of bars between touches of the 10-sma. Most times that the SPX climbs above the 10-sma, the SPX has again touched its 10-sma within 6 or 7 days after last touching it. Those two numbers reoccurred over and over during that 16-month period. Only three times during that period has it taken 10 bars for the SPX to return to its 10-sma and none has it taken longer. Today was the 10th bar. Last Thursday was the 5th bar, so it seemed likely that a retest would occur within a couple of days, matching that typical 6-7 days between touches.

In addition to the aberration that occurred from Friday through today, the SPX has had a phenomenal run of days producing higher highs than the previous day, or "record sessions" in Japanese candlestick theory. As of today, over the last 19 days, 13 of those have produced those higher highs, with days without those higher highs separated by only a day or two. When such higher highs are separated by only a day or two, the count is not restarted at 1 but continues. One Japanese candlestick pattern is called "eight to ten record sessions." Supposedly the possibility of a trend reversal increases as those eight to ten record sessions are completed.

Different markets can have different personalities, and the number of record sessions can typically be shortened or lengthened, but the point is that everything, every tool I knew to watch, suggested it was time for a pullback to the 10-sma. I wasn't warning of anything more bearish than that and said that wouldn't be bearish if that's all that occurred, but still my advice was lacking, as it didn't prepare subscribers for Friday's big push or the ones that have come since.

My outlook now? It's not going to be a surprise. The SPX needs a pullback to its 10-sma. Desperately. Every measure I see says that should happen soon, even if the SPX is going to remain exuberantly bullish. The TRAN's decline today warns me that something wasn't in synchronization with the SPX, Dow and OEX rises. I'm not even going to put up short-term Keltner charts tonight, because my advice is and has to be, to expect a 10-sma test within two or three more days, and maybe as early as tomorrow.

Can it happen differently? Can markets just keep zooming? Sure, they can, but then they're just going to get more extended. This isn't hard if you're in bullish positions already: you just keep following the markets higher, but you stay aware of important earnings releases or economic events that could gap prices lower one morning. You evaluate whether you're going to leave your whole position at risk overnight and take action accordingly. Tomorrow morning is one of those times where bullish positions could be at risk of a strong downdraft that sends markets rather quickly back to their 10-sma's, but it could also confound the bears by extending the gains yet another day.

A potential Keltner and converging trendline resistance near 1502-1506 may beacon as a price target, too, so the current exuberance could conceivably carry the SPX up that high in another sideways/sideways-higher consolidation pattern that plays out over the next few days. Have profit-protecting plans in place if in bullish trades and if such a test occurs, especially if there has not yet been an intervening 10-sma test.

A test of and bounce from the 10-sma or even from convening bottom-of-the-channel, historical and Fib support near and just above 1460 wouldn't be particularly bearish, either, as long as the SPX maintains that support and bounces from it. However, between that level and the lower converging support between 1434-1444, the SPX is sort of in a nowhere zone: not particularly bearish and not particularly bullish. I'd be really careful of any assumptions or initiation of new plays inside that zone.

I feel similarly about other indices, too. We need those retracements. Until we have them and see how markets behave when those 10-sma's or channel support lines are tested, we really can't draw too many conclusions. If they're tested tomorrow and you want to test bullish positions, do so, but I'd personally evaluate whether I wanted to hold an options position over the weekend if indices closed Friday on their 10-sma's, based on hope that Monday would produce a bounce. Be sure you have appropriate stops in place underneath them. I'm reserving judgment for now.

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