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Market Wrap

Fill It to the RIMM

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It was hard to determine if we were getting some opex pinning today, especially with the afternoon rally or if it instead was pinned on hopes that RIMM would give the market a nice boost with a good earnings report. The cash market finished at the highs and then RIMM did not disappoint and the futures drove higher after the cash market closed. That gives us a potentially bullish start for tomorrow.

The only caution here for the bulls is from an observation based on what I've seen so many times before when a big tech company blasts higher after their earnings report, and takes futures up with them after hours. I've commented on this many times in the past--we've seen many times a company like Intel (INTC) give a big boost to the after-hours futures market only to open up down the following morning and sell off from there. The only explanation I have for this is that the shorts get scared by the strong earnings report (or get popped out by buy programs) during after-hours but then the sellers step in to take profits the following morning.

I have no idea if we have the same setup this evening and we'll just have to wait to see how the morning opens up. RIMM reported earnings of $370.5M for its 3rd quarter, a double from a year ago, as demand for their smartphone products continued to be strong. Their revenue also doubled to $1.67B. After closing the regular session at 106.98 its price shot up to a high of 119.56 before pulling back a little for the night. If it opens at this level tomorrow then it will have gapped up and over its downtrend line from its November high (currently near its 50-dma at 112.83).

Last night I had mentioned that I hoped today's price action would clear up a couple of questions as to what could be playing out in the larger price pattern. Unfortunately today leaves the question "which way from here" still open to several possibilities. In fact the rally in the small caps has me wondering if something a lot more bullish could be playing out. I'll show the possibilities on tonight's updated charts.

Another pattern we've been seeing this month is traders taking advantage of buying spikes. Lately we've seen several gap-up sessions immediately get sold into. It seems a little more fear has entered the market lately and that's showing up as bear spikes (the bears spike the ball back to the bulls every time the bulls lay it up for them). As always, patterns change as soon as they're recognized but stay aware of it tomorrow morning if we find the market gapping up again, like it did this morning.

This December has certainly been different from the "normal" December. The average gain for the S&P 500 in December is +2.0%. I recently came across some numbers showing the performance of the S&P 500 this month and recreated it by calculating the daily and cumulative returns for this month and then compared it to historical:

December Returns, 2007 vs. Last 20 Years

The left two columns show the average over the past 20 years and by those numbers you can certainly understand why traders lean bullishly coming into December. The trading day is not the date but is the number of the trading day in the month. The first ten trading days tend to be weaker and then the bulls take over the last half of the month. The right two columns are for this year and you can see somewhat of a "backward" month. The first half of the month was all over the map but generally positive (until the 7th trading day, December 11th, when the bears mauled the bulls). And the second half of the month looks downright bearish so far.

Will the bulls be able to turn this around before the end of the month? The last seven trading days have typically been the most bullish and we're into those seven days now. Tomorrow could be an important day that sets the tone for the rest of the month.

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Looking at the table at the top of this report, I highlighted the new 52-week highs and lows because it's still a concern how many new lows there are vs. new highs. As noted in the table, even the Nasdaq had more than 3:1 new lows vs. new highs on a day when it rallied nearly 40 points (+1.5%). I know tax loss selling is probably still a culprit but these numbers tell me the market may be getting lifted higher on the backs of fewer stocks. The good news for today is that the advancing volume and issues beat out the decliners.

Economic reports
Today's economic reports included the final GDP numbers, unemployment claims, leading indicators and the Philly Fed index. None of these reports had any impact on the market this morning except for a brief negative reaction to the GDP number. But the futures were rallying before the reports came out and into the cash open before the selling started.

GDP--Final
In what was recognized as a fond farewell to strong GDP growth, today's report was unrevised from the preliminary report of +4.9% growth in the 3rd quarter. Forecasts are for the economy to slow to +1% growth or less in the 4th quarter so today's numbers didn't mean much to the market, except to remind people that those were the good old days. A pop in inventory building and stronger export business helped the 3rd quarter GDP but these have slowed down and now we've got a slowing housing market, business investment and consumer spending. The fear is that these all have slowed to the point where we might see negative GDP growth for the 4th quarter and then everyone will be talking in hushed whispers about the dreaded 'R' word.

Initial Claims
Initial jobless claims rose 12K to 346K, the highest number in two years and higher than economists had expected. The 4-week average rose 4,250 to 343K, the highest average since October 2005 (Katrina). There is concern that the increase in initial claims signifies a slowing in the economy which is leading to more layoffs. Companies appear to be moving from a hiring freeze to letting people go. That's a significant step for businesses who know how difficult, and expensive, it is to get people back on board when business conditions improve. When businesses start laying off it's because they don't see a turnaround on the horizon.

Continuing jobless claims also rose 12K to 2.65M. The 4-week average was up 23K to 2.63M, the highest level in almost two years.

Leading Economic Indicators (LEI)
The LEI was down -0.4% after a -0.5% drop in October. This was a little worse than the -0.3% expectations by economists. Only three of the ten indicators that make up the index were up in November, with vendor performance the biggest positive contributor. Stock prices were the largest negative contributor. The coincident indicator index, which measures the present economy, has been deteriorating over time, hurt from the housing slump and high energy prices. Many economists now expect to see the LEI show a steady decline into the new year.

From May to November of this year the LEI dropped -1.2% which is the largest decline in six years and is the lowest it's been since mid-2005. The slowing could get worse before it gets better.

Philadelphia Fed Survey
The Philly Fed index supported what the other economic reports have been showing lately--a slowing economy. The index fell to -5.7 in December from +8.2 in November, making for the lowest reading since April 2003 and much worse than the +6.0 that had been expected by economists. Economists are now hanging onto their hopes that the ISM (Institute for Supply Management) number to be released January 2nd will be an improvement. Worrying many is the fact that the component that measures expectations for manufacturing growth over the next six months fell again, following the steep decline in November.

This news of a slowing economy would normally be blessed by the stock market with a big rally since it would mean the Fed is free to reduce interest rates in an attempt to boost the economy. But the recent inflation numbers, which are expected to get worse, has the Fed's hands tied and the market senses this. Stagflation is becoming a real possibility. Not many of us traded in the 1970s (or will admit to it) but the chart of the stock market during that period of stagflation is not a pretty one, at least not for buy-and-holders. Traders on the other hand who like swinging both ways can do very well.

For a reminder, the stock market did not like high energy prices, high inflation and a slowing economy. This is how it looked back then:

DOW chart, Weekly, 1961-1988

I placed a note on the chart pointing to the high in late 1972 suggesting we may be perched at the same place. After slightly exceeding the early 1966 high, which was retested in late 1968, the market then sold off to below the 1970 low before running back up and testing the high again. Those were some big swings. Will we have a repeat performance? Only in hindsight will we know the answer to that question but I see it as a distinct possibility. The credit crisis is still in its infancy. The credit balloon is thinning but hasn't popped yet.

As I said earlier, these economic reports had very little effect on the market. Some sectors rallied while others declined and the message from the market was rather mixed today. Depending on which index/sector I look at I get a very different impression as to what to expect for the rest of this month. Some charts became less clear and I'll note those in tonight's updates:

DOW chart, Daily

There's been very little change on many of tonight's daily charts. The DOW had an inside day, as I suspected it would, so the short term outcome is still in question. While I show the key level for the bearish wave count down at the November low, a break of Tuesday's low would be a heads up that bearish things are happening. It takes a rally above 13525 for the bulls to get something going otherwise a higher bounce could be just that, a higher bounce.

DOW chart, 60-min

The DOW finished right at the top of a potential sideways triangle consolidation. By this pattern it's a sell right at the top of the triangle with a stop at Wednesday's high (where the triangle pattern would be negated. A break of today's low would be a confirmed sell signal. But if the rally continues tomorrow then I see upside potential to the 13400 area. If it makes it much higher than that then I think there will be a good chance Santa will be good to all the little boy and girl traders (except Goldman Sachs--they've been very bad this year).

SPX chart, Daily

SPX also had an inside day and therefore there's no resolution as to which way this could go. The same levels I discussed for the DOW apply to the SPX so follow the break higher or lower for at least a trade.

SPX chart, 60-min

Like the DOW the SPX finished right at the top of its sideways triangle, even with a little throw-over finish (typical for these patterns). Short against Wednesday's high is the right play here and then switch long if stopped out (for a trade only until we see what kind of upside potential there might be). A break of today's low would be a confirmed sell signal.

I drew the triangle pattern slightly differently than on the DOW 60-min chart to show the possibility that we're getting a larger a-b-c rally off the Tuesday low. The current sideways triangle may be a short term continuation pattern (pink wave b) for an upside move that could take SPX up to near 1480 before the selling resumes. So a choppy pullback tomorrow that finds support at or above 1450 could be a good setup for a long trade back up to 1479. I'll be watching for this possibility in the Market Monitor tomorrow.

Nasdaq (COMPX) chart, Daily

The techs got a nice strong rally today and while it's possible that's all there will be to the current bounce I would say it's for the bulls to lose here. If the bulls can keep the rally alive tomorrow then I'm going to start thinking a lot more bullishly about a run higher into the end of the month.

Nasdaq (COMPX) chart, 60-min

The NAZ just barely broke above the key level at 2639 by breaking above the December 12th low. There is one other potential bearish count which requires this bounce to stay below 2650, the low on December 11th, so I'm not sure yet the significance of today's high. But regardless, the pink wave count shows the potential to rally up to the bullish key level at 2672 before turning back down (or it could immediately head lower from here). Any higher than 2672 would have it on the bullish price path.

Russell-2000 (RUT) chart, Daily

Like the techs the RUT has broken a key level to the upside and therefore has more bullish potential. I see possible resistance near 770, 780, 790 and then 800. The bulls have their work cut out for them. But the bears now need to break back below this week's low to prove they're back in control. I currently see the ball up for grabs and don't have a good feel for where this is going next (hence my comment on today's chart).

Russell-2000 (RUT) chart, 60-min

As mentioned on the daily chart, there are too many ambiguities at the moment on the RUT's chart. Upside potential and resistance are at the decade levels. A heads up that the bears are taking back control of the ball would be a break below 750.

BIX banking index, Daily chart

The move down in the banks the past week looks a little funky. It reminds me of an ending pattern (suggesting a bigger bounce) but the ending pattern does not look complete yet (suggesting at least a little lower). The daily oscillators are setting up a monster bullish divergence at a potential retest of the November low and if nothing else is suggesting a big bounce is coming. But a break of the November lows and continued selloff would obviously negate the bullish divergence potential.

U.S. Home Construction Index chart, DJUSHB, Daily

Like the banks the housing index has a very funky looking pattern over the past week. All those little candles making marginally lower prices looks more like an ending pattern for at least the leg down from the December high. RSI is just hovering above its broken downtrend line. Another leg up looks like it's coming and if it does then we'll see if resistance is found in the 370 area. If price drops from here then we should see a relatively quick drop below 250.

Oil chart, Oil Fund (USO), Daily

Oil had an inside day and leaves us guessing which way next. Above 75 and the bounce should continue a little higher (but not necessarily to a new high) but below 70 should see a selloff.

I forgot to mention on last night's chart the labels I placed on the MACD. This is for those who are learning EW (Elliott wave). You can use MACD to help you with your wave counts by counting the corresponding highs on MACD. The 5th wave is typically weaker than the 3rd wave and will have a lower high on MACD (or higher low in a decline). This helps you confirm your wave counts.

Oil Index chart, Daily

The oil stocks continue to chug higher and hopefully will make it up to the potential target for this run at 884.58. At that point the EW count would be satisfactorily complete at the first Fib projection for the 5th wave. As mentioned above for the oil chart, if that final high is met with bearish divergence on MACD (and RSI), as it's currently showing, then you'll have higher confidence in the wave count (and either short this sector, take profits, or pull stops up tighter on any long plays you might have).

Transportation Index chart, TRAN, Daily

The Trannies were weak again today but then got a nice bounce later in the day, recovering nearly all of the day's losses. This left a hammer candlestick so a white candle tomorrow would be a bullish reversal pattern. But you can see a few of those during the declines that got reversed quickly back to the downside. So it's not a foolproof pattern but merely a heads up that we could see a bottom form here.

U.S. Dollar chart, Daily

The U.S. dollar is not showing us any bearish divergences yet but it is overbought and therefore a pullback could happen at any time now. However, the bulls have got this one for now with an up-channel in progress. So it's bullish until it breaks.

Gold chart, February contract (GC08G), Daily

Gold remains trapped inside a potentially bullish sideways triangle pattern--buy a break out the top of it (look for confirmation with a rally above 823 and better confirmation above 844). On the flip side, the bearish wave count is very bearish so sell a break below 789. If you buy gold here, your stop should be below the start of the triangle so below 780. That level would also confirm the selloff for those want to sell short.

Results of today's economic reports and tomorrow's reports include the following:

Friday's economic numbers have the potential to move the market since the Fed watches these numbers carefully for evidence of inflation. I suspect if the numbers come in more inflationary than expected that the market could sell off on that. But anything showing a relief in inflation, which would give the Fed a little more leeway to further reduce rates, would be potentially bullish. Not that it matters in the end but the market seems to think so and that's how we have to trade.

I won't re-post the SPX weekly chart tonight since there's very little change to last night's chart.

This afternoon's rally left the market in a potentially bullish position if it rallies right away tomorrow. It could tolerate a small pullback but not below today's lows, and preferably not even below this afternoon's lows. But as I showed on the SPX 60-min chart there is a way to consider one more pullback, even to today's low, as a bullish setup for a run up to near 1480. That would be the equivalent to a 300-point rally in the DOW. We've been stuck in a choppy price pattern that has been full of whipsaws. Whether that changes tomorrow is not clear as of tonight. It means we should continue to exercise caution and let the market prove to us where it's going, i.e., get out of this trading range.

Tomorrow is of course opex Friday and we could find prices starting to get pinned, especially in the afternoon. We are also heading into a holiday period and I suspect many traders have no intention of trading on Monday. Therefore volume tomorrow could become pitifully low. That of course makes any choppy price action potentially worse from a whipsaw perspective. Trade light and trade carefully--nice crisp setups and let the market come to you where you are satisfied where your stop can be kept close. Take the next bus if you don't like the looks of the first one that comes by (or the second, or third...).

Good luck in your trading and if you're done for the year I hope it was a good one. Merry Christmas and I'll be back next Wednesday. Hopefully I won't be too distracted by some new toys preventing me from being useful to you on that day.

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