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Market Wrap

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By last night's close, China's Shanghai Composite had made up slightly more than half its tumble from the May 29 intraday high into the June 5 intraday low. Other Asian markets turned in mixed performances, as did European bourses. They provided little guidance as to what would happen in the U.S. equity markets, and little warning, either.

Introduction

I was watching three other charts and inter-market relationships during the pre-market session, however. One, a chart that compared the U.S. dollar to Japanese yen, suggested early gains; the others, trouble for equities. The more promising of the three was soon to change sides and contribute to the equity slide.

Annotated Weekly Chart of the U.S. Dollar/Japanese Yen:

A USD/JPY bounce that had begun yesterday afternoon was reversed by the end of the day. In addition, the Euro/Yen produced a strong downdraft that lasted right into the last minutes of the day today.

This chart and that of the Euro/Yen brings back questions about the yen carry trade that have plagued markets since February. Equities swooned under the weight of those questions, with the possibility that the carry trade might evaporate as the yen rose against other currencies, removing cash available for other investments.

Rate hikes have also been on the minds of the globes' investors, with those questions interwoven with currency issues. This week, the ECB raised rates, as did New Zealand's central bank. Rate-hike fears rose in Japan. The Bank of England held rates steady.

A Marketwatch.com report noted heavy selling of Germany's and other governments' bonds during the overnight session. Some bond analysts suggest diversification away from long-term bonds is occurring, and U.S. investors also worried about the meaning of such diversification. We've heard multiple explanations of why "it's different this time" with equities rising without pause, with one of those reasons being the influx of cash into the U.S. and other markets from global investors. What happens if those investors pull back their money, failing to show us the cash? Could that send U.S. bonds lower and rates higher, squeezing small caps and other businesses as well as home buyers?

With that background, this morning's jump in ten-year yields before the cash market open pushed equity futures lower.

Annotated Daily Chart of the Ten-Year Yields:

Late in the day, CNBC reported that the influential Bill Gross of Pimco fame was bearish on treasuries.

The other chart I was watching this morning was that of the crude futures. Jim and Keene have mentioned the storm threatening shipping lanes in their Wraps this week. Crude futures moved higher this morning. Futures ended the day up $0.98 at $66.94, another negative for equity investors.

Market breadth was dismal. As Marc Eckleberry commented on the live portion of the site, the NYSE adv/dec line was the worst produced since May 2004. The day produced records and headlines different from those we've grown accustomed to seeing. The Dow's three-day drop has been in excess of 400 points, one headline declared.

Damage was done. Let's look at charts to see how much.

Charts

Annotated Daily Chart of the SPX:

Most of the writers on this site have been urging bullish subscribers to practice sound account-management practices, to set stops at account-appropriate levels, following the SPX and other indices higher with stops.

The SPX approached a zone today that should produce consolidation or bounce attempts. Oddly enough, today's dismal breadth measurements may support such action within a day or two, but I would feel better about that prospect if there had been a bounce into the close. A high-volume move with a bounce from the low would have shown that someone with deep pockets was absorbing at least some of that stock being dumped. We did not see that kind of action, which suggests that downward momentum remained strong right into the close. It could continue tomorrow, but short-term bears, especially those in June options, need to be aware of the possibility that a consolidation process or bounce attempt could begin soon.

Many months have accustomed bulls to buying the low on the Thursday before option expiration. Three days of strong losses may have dulled that impulse, but I don't think it's gone away entirely. On any bounce, I would guard any bullish profits at the converging 10-, 20- and 30-sma's. Bears could watch for rollover possibilities from that level as long as they trusted themselves to set and adhere to stops, because a retest of the recent highs cannot be precluded.

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The neon-green long-term trendline shown on the SPX chart is related to the corrective fan principle, as those who read my weekend Trader's Corner articles will recognize. This is the trendline broken in February, supposedly signaling the end of the long rally off last summer's low. As I have been suggesting and again wrote in last weekend's June 2 article, it's possible that what has appeared to be a rally since March is actually the prelude to some sort of disorganization pattern, such as that seen on the SOX from January to May last year. What appeared to be a SOX rally then was actually just the widest part of a big triangle that was setting up, a triangle eventually broken to the downside.

If so, we have a hard few months ahead of us, as an as-yet-unseen formation sets up, with parameters that we don't yet know. Resistance and support might be difficult to determine, and action, choppy.

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

The Nasdaq's close at the 50-ema and above the intraday high for February supports the idea that this index, at least, may see consolidation or a bounce attempt over the next few days. The Nasdaq tends to chop around a bit before deciding next direction, so be careful. A drop below support, if not quickly reversed, could just as quickly send the Nasdaq into 2500-2517 next support.

Annotated Daily Chart of the SOX:

A drop below 444-450 support questions whether the SOX could drop all the way back to last year's July low, but daily Keltner charts give a little more optimistic picture. They show potential support near 467 on a daily close, with next support below that at 421.67. If the SOX should drop further, toward 467, tomorrow morning, watch for potential support near that level on a daily close, without expecting that support to hold if markets plunge again.

Annotated Daily Chart of the RUT:

I'm a bit surprised, given the RUT's sensitivity to interest rates, that it held its price channel, as well as the pink 50-ema seen on that chart, wondering what impact the RUT's rebalancing this month might be having on its price chart. I consider the 72-ema important on the RUT's chart, as can be seen by the number of opens, closes, highs or lows along that -ema, so watch for potential support on daily closes at that -ema if the RUT should decline further tomorrow morning.

Today's Developments

Today's economic reports appeared to be just a blip on the screen for most people, but they should be covered. Today began with the typical weekly Initial and Continuing Claims. First-time claims declined 1,000 to a seasonally adjusted 309,000, with economists having expected a climb to 312,000 instead. The four-week moving average is considered more reliable, and that rose by 2,750 to 307,250. Continuing claims rose 72,000, to 2.54 million. The insured unemployment rate remained steady at 1.9 percent.

At 10:00, April's Wholesale Trade was reported. That was expected to rise 0.3 percent, with the previous rise also at 0.3 percent. Expectations for April were met, with March's revised higher to 0.4 percent. The Commerce Department issues this report, one that corroborates what's happening in the economy more than predicts it. Its importance kicks in when big changes are seen, swinging it outside expectations, as that can lead to a revision of GDP estimates.

Sales increased and inventories fell, pushing the sales-to-inventories ratio down to 1.12, slightly below March's 1.13. A 6.7-percent surge in petroleum sales strongly impacted the 1.3-percent increase in overall wholesale sales. Petroleum inventories gained 6.3 percent.

At 10:30, the Energy Department updated natural-gas inventories. Inventories rose 110 bcf. The number was bearish for these futures, which dropped into their 200-ema.

April's Consumer Credit was reported at 3:00. The Federal Reserve reported that outstanding consumer credit climbed $2.6 billion, much less than the anticipated $5.8 billion. Revolving credit such as employed in credit cards declined by an annualized 0.5 percent, the first decline in more than a year. Non-revolving credit climbed, however, with total outstanding debt rising to $2.42 trillion.

May's Chain Store Sales were also reported during the day, some before the market opened. Early reports tagged WMT, COST, LTD, JWN and JOBS as beating estimates although some reports cautioned that WMT barely beat and gave a lackluster prediction for June same-store sales. An end-of-day check of those companies that reportedly beat expectations showed each of them dropping sharply with along with other equities today. Reports claimed that JCP, M, ANN and ANF missed expectations.

Merger and acquisition activity figured in market-related news reports, too. BMET received an increased offer of $46 a share from a group of investors. Brian Tierney expressed interest in DJ. PEP and PAS will jointly acquire 80 percent of Sandora, a Ukranian beverage firm.

Reporting companies included ADCT and SHFL. ADCT reportedly beat expectations while SHFL reportedly missed. ADCT closed higher, but by only a few cents, and the daily candle left an ugly long upper shadow as prices retreated from the day's high.

In other company-related news, Meritage Homes (MTH) warned for fiscal 2007. CNBC reported this morning that the company was seeing many cancellations, too.

Apple (AAPL) will debut the iPhone for $499-599, prompting a raising of its target by one firm and a price bounce even in today's dismal market environment. The candle was a bearish one, a potential reversal signal, with the strong volume indicating that some distribution might have been occurring. Any potential reversal signal would of course need to be confirmed by price action and may be predicting nothing more than a pullback to the 10-sma if there is such a "reversal," but keep our stops account appropriate.

Sales are expected to be strong, but some analysts warn that AAPL will be pricing out the sales over a 24-month period rather than booking the full amount right away. The iPhone's impact on revenue growth may be masked by this.

National Semiconductor (NSM) reported after the close. As this report was typed, NSM was zooming, racing up to $28.14, considerably above its $25.79 cash close. Remember, however, that after-hours action is not always indicative of what happens the next day, particularly if it's occurring before the conference call, as this is. Headlines proclaimed that the company's profit fell, but that it beat expectations. The company believes that its Q1 fiscal year sales will be above its Q4 ones. It plans a $2 billion buyback program, but will also offer $1 billion in notes. The board declared a dividend of $0.04 a share.

Qualcomm also rose in after-hours trading after it received a favorable ruling from the International Trade Commission.

U.S. Treasury Secretary Henry Paulson supposedly began speaking as the cash markets closed this afternoon, but I could not find press releases detailing his statement, if he did. Former Federal Reserve Chairman Alan Greenspan was on tap to give a dinner speech.

Tomorrow's Economic and Earnings Releases

Tomorrow's economic releases will be light, with the only one of note being April's International Trade figures. Various analysts predict a wide range of $63.4-65.0 billion for the deficit, with the previous report at $63.9 billion.

What about Tomorrow?

Tomorrow is tough to predict. Momentum was strong into the close, but such excessively bearish days, especially when coming after two other days of losses, often produce consolidation efforts or bounce attempts. This time, I think some damage has been done to bullish psyches. While some buying may occur, many will be quick to dump, too, so I urge caution about participating in any bounce attempts as they may be choppier than the straight-up gains to which bulls have become accustomed. The SPX, in particular, has a potential bearish head-and-shoulder formation on its daily chart, with the shoulder at former supporting moving averages, perhaps now serving as resistance.

However, there's always a caveat, and this one is that, even if real damage has been done, rallies after such declines can be as swift and sharp as the declines themselves, even if they're sometimes also short.

I'm not going to show intraday Keltner channels tonight. All indices are in breakdown mode on all time frames. I can't point to a certain moving average or Keltner channel and say "that's the one" that will be resistance, either, as prices tended to find resistance on averages at lower levels as the day progressed. For example, it might have been (and was) the five-minute 100-ema that was providing resistance Tuesday and Wednesday, but by this afternoon, it was the three-minute 100-ema that was serving as resistance on bounces.

I can say, however, that since Tuesday morning, the five-minute 100-ema has been resistance (other than for a twenty-minute period at the close Tuesday) on each test of that average. That average was at 1505.07 as the trading closed today and had not been closely approached since late Wednesday.

Absolutely nothing has changed in this three-day downtrend until and unless the SPX can break above that average and maintain five-minute closing levels above it. It currently serves, then, as a short-term barometer, and as potentially strong resistance. If the SPX can break above that level, I would look for potentially resistance in the 1517-1525 zone, the possible right-shoulder level for that potential head-and-shoulders formation. I don't consider these formations reliable any longer, except that they can predict current bullish or bearish strength.

If the SPX is to rise into a right shoulder, we can often find that it takes about as long to build a right shoulder as it did a left one. That left one required something like six trading sessions. If there's symmetry this time, that means that we could see a sharp rise into that right-shoulder level and then several days of consolidation, with resolution (either by a downturn toward the neckline or by an invalidation) occurring near or shortly after opex.

That's just speculation. Right shoulders sometimes are symmetrical, and sometimes aren't. It may be time for a choppy attempt at consolidation or a bounce attempt, but I thought that might happen today, too. The mixed overnight behavior of foreign bourses as well as of some inter-market relationships (bond yields bearish for equities while the USD/JPY was short-term supportive at the open) also corroborated the idea that the day might be a consolidation day. It wasn't. That's a warning to let price be the arbiter.

Still, watch those bond yields (TNX) and the action of the yen against other currencies for at least some short-term guidance. Don't try to catch a falling knife here, but do be aware of the possibility of a consolidation or bounce attempt.
 

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