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Market Wrap

A Day for the History Books

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Introduction

Early this morning, a CNBC correspondent speculated on whether today would be a day for the history books, the day that crude touched $100 a barrel.

The prospect of $100-a-barrel crude didn't scare futures traders in the pre-market period, with futures steadily improving overnight as the U.K.'s FTSE 100 was poised to reach its sixth day of gains. Germany's DAX and France's CAC 40 also gained, doing their part to keep our early morning tenor bullish.

Neither did futures traders appear to be scared by a Goldman Sachs (GS) estimate that Citigroup (C) would be writing down $18.7 billion in CDO-related write-downs rather than the previously estimated $11.0 billion. C might have to slash its dividend by 40 percent, GS said. GS also hiked its estimates for CDO-related write downs for Merrill Lynch (MER) and J.P. Morgan Chase (JPM).

What the prospect of history-making crude prices and perhaps history-making write downs could not do, however, two developments about 8:30 am ET did. The U.S. November Durable Goods disappointed, and news services announced the death of Pakistan's opposition leader and former Prime Minister Benazir Bhutto in a suicide bomb attack. Her death put into perspective all the "history-making" reports that had been circulating earlier.

Pakistan was reeling from its history-making day, and the rest of the world was wondering what that death meant for the stability of the region. The prospect of an unstable, nuclear-armed Pakistan sent gold prices soaring and dropped our U.S. dollar against other currencies. It was going to drop equity prices, too.

Charts

The SPX's chart is filled with trend lines. This can be confusing to subscribers. I puzzled quite a while over whether some should be deleted. However, doing so changed the long-term and short-term pictures. Look at the chart, and then I'll give you a rundown of the trend lines.

Annotated Daily Chart of the SPX:

Near the bottom of the chart and about 2/3 of the way from the bottom, you'll see parallel ascending red and black trend lines. These are the bottom and midline of a long-term ascending price channel. That channel has been in place since late 2002. I don't want to delete those lines because they show us that the SPX is still climbing within a long-term price channel. That gives us some perspective on where we are on a long-term basis. As bad as things have seemed at times over the least year and today in particular, as volatile as markets have been, the SPX has remained within that channel.

However, it's now in the bottom, more bearish and weaker half of that channel, as is shown by its position below the midline. It's either recharging for another push into the top half of the channel or else . . . well, we don't want to know the "what else," do we?

That channel's support was last tested by a quick and painful descent from October into November. Keep in mind that long-term trend lines can be just a hair off in angle and be 50 or 100 points off over time. That approach to the red trend line that marks the bottom of the channel could have been closer.

There's something else to notice. In early December, the SPX finally broke up through the red intermediate-term price channel in which it had been falling quickly. The mid-December decline constituted a retest of that price channel's former resistance. So far, it has now held as support. The SPX sprang up from it.

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That was short-term bullish, but that bullishness wasn't to be confirmed, as it turned out. The SPX needed to accomplish two things before confirming that support, and it hasn't done so: it needed to sustain daily closes above the descending blue trend line and the 12/11 high. Even then, the SPX would have soon run headlong into the midline of that big price channel, also potentially strong resistance.

Instead, the SPX turned back sharply from its approach to that blue best-fit trend line. The potential reversal signal that was created Monday, Wednesday and today sets up the possibility that we'll see another test of the rising green channel line.

However, that can't be guaranteed, because the action from 11/26 to the present has created a big triangle shape, and the SPX closed the day today just about exactly in the middle of that triangle. Triangles can be notoriously difficult to trade.

Although many questions remain, one is answered by today's sharp pullback: bulls must now factor in vulnerability to a retest of the rising green trend line. Bears can't count on that test, but bulls better know where they stand if it happens and better figure out tonight if they're willing to stick it out while such a test occurs.

This isn't license to load up the truck with bearish trades in the expectation that such a test will definitely occur. The vulnerability is there, and those in or wanting new bullish trades should be aware of it, but no such retest is yet proven. After today, it's a stronger possibility than ever, but the close the middle of a big triangle doesn't inspire confidence in any prediction.

Other charts display many similarities.

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Annotated Daily Chart of the SOX:

Annotated Daily Chart of the RUT:

Some important tests are occurring on the VIX's daily chart. Perhaps you feel that the VIX is not amenable to technical analysis, but I disagree.

Annotated Daily Chart of the VIX:

Today, the VIX again found resistance on the daily close at its green 200-ema. Tomorrow, equity bears hoping for more downside want to see the VIX jump above that average and climb up through its gap from mid-December. Bulls want to see the VIX roll over through the blue 200-sma and below the previous December low. That provides you something to watch tomorrow for guidelines.

Today's Developments

Today featured a number of economic releases, many of them postponed from Wednesday due to the mid-week market holiday. The day's releases began with the 7:00 am ET release of mortgage application figures from the Mortgage Bankers Association (MBAA).

The overall measure of mortgage loan application volume fell a seasonally adjusted 7.6 percent from the previous week. On an unadjusted basis, however, and when compared to the year-ago level, application volume climbed 9.9 percent.

All component indices, including government mortgage activity, also decreased week over week. All four-week moving averages decreased, too. The percentage of mortgage activity related to refinance slipped from the previous week while the percentage of adjustable-rate mortgages (ARMs) inched higher. The average contract interest rate for 30-year fixed-rate mortgages dropped to 6.10 percent and points decreased slightly.

Next, the Labor Department released its weekly update on initial and continuing claims. Initial claims rose a seasonally adjusted 1,000 to 349,000. The four-week moving average, considered a better gauge, dropped 1,000 to 342,500. The prior week's claims were revised higher.

Continuing claims jumped 75,000. The four-week average of continuing claims rose 13,500. Although the Labor Department says that it's typical to see continuing claims rise this time of year, both were the highest number in more than two years. Continuing claims tell us something about how hard or easy it is for applicants to find a new job after losing a previous one. Obviously, it's not so easy these days.

During the same 8:30 release slot, November's Durable Goods advance number appeared. Expectations were for a rise of 2.9-3.0 percent after the prior decline of 0.4 percent. Instead, orders rose only 0.1 percent. Only a 20.9 percent increase in orders for civilian aircraft and parts picked it up that much. If orders for transportation goods were excluded, orders dropped 0.7 percent.

December's Consumer Confidence arrived at 10:00. Although this number isn't afforded much importance now and didn't appear to be market moving today, its importance might rise. Analysts predicted 86.4-86.5 for this number, down from the prior 87.3. The number rose a higher-than-anticipated 88.6, with the prior number revised higher to 87.8. The Conference Board termed improvements in inflation, stock prices, employment and business conditions "marginal." Components such as the present situation index and others might have risen month over month but remained far below year-ago levels.

The Department of Energy released crude inventories this morning, with those inventories delayed a day due to the market and government holiday. Crude stocks dropped 3.3 million barrels; gasoline inventories climbed 700,000 barrels and U.S. distillates dropped 2.8 million barrels. A drop in crude and distillates was anticipated, according to last night's reports I heard, but the drops were both bigger than predicted. The climb in gasoline inventories was about as expected. Refineries operated at 88.1 percent of their operable capacity, a rise from the previous 87.8 percent.

The American Petroleum Institute's figures were much different, as they often are. The API reported a rise of 900,000 barrels in crude stocks, a drop of 2.4 million barrels in gasoline supplies and a drop of 2.7 million barrels in distillates.

Crude did climb today, but it did not touch $100 a barrel.

The last release of the day was the Kansas City Fed Survey, released at 11:00. This Fed Survey isn't as predictive of the Institute of Supply Management's (ISM) value as are some others such as the Philly Fed. Few news sources report it, and it's difficult to even navigate around the Tenth District's site to find it. Today's report summary indicated a moderate increase in manufacturing output, but future price expectations that "were still somewhat elevated." Although the headline production number showed that 10 percent of firms showed month-over-month increases in production, an improvement from the previous seven percent, most other month-over-month components decreased. This included shipments, new order and order backlogs.

Year-over-year comparisons showed the headline number increasing, too. Individual components were mixed in year-over-year comparisons. Its $97.50 high tested the 11/21 high of $97.60 for this contract but didn't best it. The day's action produced a doji at resistance, so watch for a potential gap lower and continued drop tomorrow as a confirmation of an evening-star formation on crude, too. Continued sideways to sideways-down consolidation would be more bullish.

Yesterday, SLM Corporation (SLM), better known as Sallie Mae, announced that the company would issue $2.5 billion in common and preferred stock. The issuance is intended to provide funds needed to repurchase shares that it's required to buy back at above-market prices. The company didn't intend to buy those shares back at above-market prices. Contracts it had previously entered, before SLM's decline due to the credit crunch, set a price that was once below the market price but is now above it. SLM fell heavily today.

Another Mae, Fannie Mae (FNM), fared better today. It gained. The Office of Federal Housing Enterprise Oversight (Ofheo) announced that FNM and Freddie Mac (FRE) are "adequately capitalized," several news sources reported. This statement was issued in Ofheo's quarterly report on whether the entities were meeting required government standards. In a couple of measures--capital requirement and core capital--FRE barely squeaked by, however. These requirements were examined as of September 30.

Tomorrow's Economic and Earnings Releases

These days, I feel that a lineup of tomorrow's reports isn't complete without a mention of what might be happening in Japan tonight. That's because what happens in Japan might impact the yen, which in turn impacts the yen carry trade. That yen carry trade influences the performance of our equities. This morning, the movement of currencies was at least corroborative if not predictive of equity movements. For those who don't know about the yen carry trade, the direction of the USDJPY (the U.S. dollar in comparison to the yen) usually either leads or corroborates the direction of our equities. Whatever type of trade you're in, you'd like to see the USDJPY going the same direction.

The Bank of Japan has been hinting that the economic recovery in that country might be stalling, which could prohibit the BOJ from raising rates as Governor Fukui had hoped to do before now. The country's housing has been in a steep decline, too, although a change in rulings or regulations has been blamed for that. A reversal of the regulations is anticipated.

If you're a U.S. equity bull, you don't want to see economic numbers from Japan that will hint at too-high inflationary pressures. If you're a U.S. equity bear, you want the opposite. You want the yen to strengthen against the dollar, or, stated differently, the dollar to weaken against the yen.

Tonight, many important economic numbers will be released in Japan, including November's nationwide CPI, Tokyo's December CPI, and November's jobless rate, household spending survey, industrial production index and retail sales figures.

In the U.S., the day's releases begin at 9:00 tomorrow morning, with the NAPM-NY report for December.

The important December Chicago PMI arrives at 9:45. Expectations are for this number to slip lower, to 52.3 from the previous 52.9, staying above the important contraction/expansion benchmark at 50. This number could prove market moving.

November's New Home Sales will be released at 10:00. Industry watchers predict that sales dipped to 720,000 from October's 728,000.

The ECRI Weekly Leading Index will be the last release of the day and the week.

What about Tomorrow?

Today saw many indices complete three-day reversal signals known as evening-star patterns on their daily charts. That gives us a presumption of short-term weakness that might see some carry through in the next few days. Let's see what the intraday charts have to say about that.

Annotated 15-Minute Chart of the SPX:

Annotated 15-Minute Chart of the Dow:

Annotated 15-Minute Chart of the Nasdaq:

Annotated 15-Minute Chart of the RUT:

These short-term charts have shown breakdowns and have set short-term downside targets. Not all such targets are met. Some are exceeded. Although I love using Keltner channels because of this ability to set targets, no method of technical analysis is foolproof. This is especially true when many indices are dropping into last week's gaps, where gap support might be found. Doubt is also heightened when targets are set by a breakdown that occurs in either the first few minutes of trading or the last few minutes, as occurred today.

So, bears, you should plan tonight what you'll do if a bounce occurs, either first thing or perhaps after reaching the potential support levels mentioned on these intraday charts. What you want to see is for the 9-ema to keep dropping lower and for any bounces to find resistance on 15-minute closes beneath that curving-lower (red) 9-ema. You don't want sustained 15-minute closes on any of these charts back above the flat (aqua) 120-ema. If such closes are sustained, prices have moved back into chop zones and the downside targets are erased. Then you'll have to wait for breakouts up through the (pink) 45-ema's or back down through those 120-ema's to determine next direction. Either way, be prepared.

Bulls, I've already pointed out when discussing the daily charts that you need to factor in vulnerability to the supporting trend lines on those green rising price channels on the daily charts. While such vulnerability doesn't guarantee that prices will drop that far, and it certainly doesn't guarantee that it will happen without some back-and-forth rally and decline activity as prices zigzag that direction, you certainly don't want to hold onto a losing bullish trade too long if there's vulnerability to that level. You also might want to wait to see how such a test plays out, if it occurs before entering new bullish trades.
 

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