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Market Wrap

Big Blue Get Things Green

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Upbeat guidance from Dow Industrials heavyweight International Business Machines (NYSE:IBM) $102.93 +5.38% helped give stocks a much needed lift to start the week, but action in IBM suggests my call for a "modest recession" in 2008 is well underway.

The Dow Industrials (INDU) 12,778.15 +1.36% regained the bulk of Friday's losses after its most-heavily weight price component IBM warned that preliminary Q4 earnings from continuing operations looked to be $2.80/share, which would be up from the $2.26/share reported in the same quarter last year. Big blue said revenues look to be up 10% vs. the year-ago quarter to $28.9 billion, driven by growth in Asia and Europe.

Intl. Business Machines (IBM) - $2 and $1 Box

Having given two (2) consecutive sell signals at $102 and another at $99, today's trade at $102 in IBM does have its bearish vertical count column (Os from $110 to $98) giving us an early observation that market participants my see some longer-term downside risk to $82.

IBM's Bar Chart - Daily Intervals

Last week's email folder had many subscribers asking about "anchor points" for developing channels and the above point and figure chart might just have traders and investors seeing some distribution LOWER in IBM from the recent highs of $121.46 to a low of $99.27 on 11/09/07, then being followed by a relief rally up to $112.19 on 12/26/07 before the most recent distribution back lower.

I've utilized the Andrews Pitchfork (Modified Schiff) tool to now begin developing bearish channel.

It is notable that IBM would have seemed to have MARKET PARTICIPANTS almost "knowing" last week's lows of $97.04 would be found as the stock reversed course from what is only now seen as a 61.8% ($112.38) retracement of the recent range.

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As earnings season kicks off and companies report, or update their visibility on earnings, stocks like IBM become very important.

It's not only what they companies, but it is the MARKET'S reaction to the news that will grab our attention in the weeks and months ahead.

While stocks may sometimes NEVER achieve their bullish, or bearish vertical counts, sometimes they do. Sometimes they'll even EXCEED them.

Still, with some "good news" from IBM, its worth dragging down a retracement to $82.00 on the stock, just to see if market participants think the stock has that type of downside.

Intl. Business Machines (IBM) - Daily Intervals

I can't cover the 30 Dow Industrial components in an evening's market wrap, but that doesn't mean traders and investors can't utilize the techniques I've taught you over the years.

Suffice it to say a break to new lows on IBM would be viewed as BEARISH in my (Jeff Bailey) opinion.

I can almost envision some further gains in IBM up to its 200-day SMA ($108.29) and the upper-end of the Andrews Pitchfork. An aggressive BEAR could short such a trade with a tight stop above $113.92. A more conservative bear could wait for the test of $108.29, then SELL/PUT WEAKNESS back below $106.38.

For many fundamentalists, it certainly "doesn't make sense" that IBM is trading down at these levels with some "upbeat guidance."

With that in mind, it really "won't make sense" if the stock takes out the recent lows.

Bottom line ... when things "don't make sense," that's when we as traders and investors become alert to some type of change taking place.

Here is a sign of "change" for the Dow Diamonds (DIA) $127.51 +1.04% that I would want us to be alert to.

Dow Diamonds (DIA) - Daily Intervals

I would argue that there may not be any "one" particular stock in the very broad Russell 2000 Index ($RUT.X) that could have as much price impact on that index as IBM can have on the Dow Industrials (INDU) 12,778.15 +1.36%, or the Dow Diamonds (DIA) $127.51 +1.04%.

Early last week I was BULLISH the DIA, looking for an "oversold bounce" to $131.50.

But "something changed" and the DIA has started to spend too much time below an Andrews Pitchfork (modified schiff) channel.

In Thursday afternoon's Market Monitor at OptionInvestor.com I alerted traders that the DIA was testing its 11/27/07 trade of $129.00 and was "prairie dog'n." That is, the DIA was sticking its head above that important 11/27/07 intra-day observation (see my 12/03/07 Market Wrap).

As you can see, the DIA "didn't like what it saw" at the $129.00 level, let alone its 11/27/07 close of $129.32 and suggests a change may be taking place.

Dow Diamonds (DIA) - Daily Intervals

I've confessed before that I do not portend to know anything about "wave counts," but I do know how to look at a point and figure chart and identify relative highs and lows, and make adjustments when I observe a change taking place.

If I were to take an Andrews Pitchfork (modified schiff) from the anchor points now shown, a BEARISH, or downward channel becomes present.

As we near this month's (January) option expiration, I also show the major open interest (OI) levels for the DIA's calls and puts.

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Another Dow component that has gotten headlines in recent months had shares of Citigroup (NYSE:C) $29.06 +1.75% bouncing from yet another 52-week low found last week.

CNBC reported today that sources it deemed reliable will have the banking giant set to announce further writedowns that could be as high as $24 billion. There was also speculation later in the day that the company will reduce its dividend.

Citigroup (C) - Weekly Intervals

The news flows out of Citigroup (C) have been "negative" for months, and so far, the stock's price hasn't disappointed bears.

Since breaking to an initial 52-week low below the $45.00 level, C's losses accelerated.

With rumor and speculation of more bad news coming, a WEEKLY CLOSE above $32.33 would be shocking. Perhaps suggesting a "change" has taken place.

Several weeks ago an analyst thought the time to try nipping away at C from the bullish side was to wait for the company to cut their dividend.

Citigroup (C) reports earnings/losses tomorrow morning before the opening bell. Consensus is for a loss of $1.00/share on revenues of $10.64 billion.

Plenty of time to get bullish C, but would suggest that BEARS have locked in some type of gain at this point.

Closing U.S. Market Watch - 01/14/2008

Gold and silver as depicted by the StreetTracks Gold (GLD) $89.55 +1.09% and iShares Silver Trust (SLV) $162.80 +1.26% continued their surge to record levels with the U.S. Dollar Index (DXY) exhibiting weakness.

StreetTracks Gold (GLD) - Daily Intervals

In Thursday evening's Market Monitor at OptionInvestor.com, I scrambled to try and warn potential "gold shorts" what they needed to see as another "top" was about to be found.

The "break" back below mid-point of an Andrews Pitchfork (modified schiff) wasn't found, but with overhead supply nonexistent, new highs are!

Further near-term gain looks to be $92.50, and with the FOMC meeting and decision on rates slated for release on January 31st, gold is probably the toughest and most dangerous short on the list.
 

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