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Market Wrap


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For those who preferred the new format for the newsletter that I was trying (table of contents, sections split apart, etc.) I apologize that I will not be able to continue doing the newsletter that way. It takes a few hours to put the report together and then the new format is quite a burden on the html guys to get it onto the web site. In the interest of getting the report to you in a timely manner it's better if we keep the formatting simple.

There was virtually no economic news to move the markets today and the battle between the bulls and the bears as to what the earnings mean for the future continues to give us a whippy and choppy market. As has been par for the course, each time it looks like we might get a little trend going during the day, it reverses. When it looks like we're in a bull or bear flag it doesn't follow through and stops out a lot of traders leaning the wrong way, and then it reverses again.

There's just not a lot I can tell you about this market except to say stay patient if your preferred trading is directional. If you're a directional trader you've probably been directed to the loony farm by now. If you're a market neutral trader (e.g., selling credit spreads) you're a happy camper to see the market stay within a trading range and let you collect some premium (and with a low VIX even you have suffered).

I prefer to trade directionally and mostly trade futures. Call me a hyper type-A kind of guy. I want some action. To say this market is not for me would be a gross understatement. I've turned mostly to credit spreads and have to satisfy myself with boring profits (wink) while I wait. Most days I spend my time researching and reading, making some intraday commentary on the Market Monitor (how many times can you say "the market is chopping up and down, hold your fire, keep your powder dry"?) and then when I realize I haven't even opened my broker window I'm amazed. It's quite a change for someone who likes to trade every day.

So that's my way of telling you to sit tight and not force trades. Even though I know the experts say it's more important to know when to trade than how to trade, putting that to practice is not easy. It's like being told to buy low and sell high. OK, got some clues for me as to how to do that? So, speaking of clues, let's just get right to the charts tonight and maybe get this to you a little earlier than usual.

First up, since I mentioned the VIX, is a review of another sentiment chart, the call/put ratio as reported by ISEE:

ISEE Index chart, Daily (courtesy International Securities Exchange):

I've shown this chart many times before and to reiterate I find this chart to one of the more accurate options sentiment charts when it comes to the put/call ratio (or call/put ratio as they report it). They have a very effective way of weeding out hedge plays and isolate the speculative plays, which is a better measure of sentiment than to simply look at the total number of puts and calls being bought and sold.

Yesterday's reading was 158 and typically when the reading gets above 150 it's a warning that we have excessive call buying going on. The previous highs on October 29th and December 28th coincided with market highs that led to steep sell-offs. If you see a reading approaching 200 it's time to back up the truck and load up on put options. Same thing with a reading approaching 50 (more put buying)--load up the truck with call options. So we've got a warning here that the bulls are feeling a wee bit complacent about the up side so be cautious if you're one of them.

And speaking of warnings, the market breadth in rallies continues to stink. As can be seen in the table at the beginning of the report, new 52-week lows continue to beat out new highs, even when the market rallies. The big guys might be trying to rally the market but the soldiers doth protest and are going AWOL.

In Monday's newsletter I pointed out some differences between using arithmetic vs. log price scales, especially when using longer term trend lines and large price changes. In tonight's charts I'm using the log scale on the indices because I've notice price action around them seems to fit better. On any chart I'm using the log scale I've so noted it in the top left corner of the chart. If price action looks like a better fit with the arithmetic scale I left it that way. I recommend you do the same thing when reviewing your charts--flip back and forth and see where the better fits are with trend lines.

SPX chart, Daily

Higher highs and higher lows makes for an uptrend and that's what we've had since the March lows. But when those highs and lows overlap, as they have, it's a sign of corrective price action. Corrective price action to the upside is not bullish so beware that not all up trends are created equal. Ideally, from a wave count perspective, the move up from March would look better with a pullback and another push higher, as depicted in dark red. A drop down to the uptrend line from March, near 1350 by Friday, would be a good setup for another run up to about 1410 (the downtrend line from October) by the end of this month or early May.

Sell in May and go away looks like good advice when I look at the setup on the charts.

While I say it would be bullish above 1415 (key level there), I would be very cautious since there's plenty of resistance up to 1460. A break below the uptrend line from March 17th, confirmed with a break back below 1324 would be more immediately bearish and we'd likely see a move back down to the 1270 area.

Key Levels for SPX:
- bullish above 1415
- bearish below 1324

SPX chart, 120-min

While SPX could rally right from here up to the trend line along recent highs (about 1425), that's the least likely scenario in my opinion. More likely is a pullback to the uptrend line from March 17th, near 1350, followed by another rally leg into the end of the month or early May, potentially topping out around 1400-1410.

DOW chart, Daily

SPX is well below its broken uptrend line from October 2002 so it doesn't matter in that respect whether I use the arithmetic or log scale. But for the DOW it's a big difference. Using the log scale shows price finding the broken uptrend line to be resistance. At Friday's high it ran into its broken uptrend line and its downtrend line from October. It was a double whammy and not surprisingly the DOW has since pulled back from it.

As with SPX I think the DOW's pattern would look best with a pullback to its uptrend line from March 17th, near 12500 by Friday, and then another leg up to finish the bounce off the March 17th low by the end of this month or early May, perhaps getting close to 13K for a high. It takes a break over 13100 to make it look more bullish and a break below 12270 to become more bearish. That's quite a wide spread and in between could be a lot more of the same choppy price action we've been seeing.

Key Levels for DOW:
- bullish above 13100
- bearish below 12270

DOW chart, 120-min

I kept all the little red trend lines on each of the moves up and down since March 17th. Sometimes that's all you need to trade--break a trend line and reverse and go that way with your trading. Right now, based on the break of the uptrend line from April 15th, you should be favoring the short side of the market, especially with trend line resistance just above.

Nasdaq-100 (NDX) chart, Daily

NDX is also struggling under its broken uptrend line from October (again using the log scale) and has tagged it three days in a row now. Each time it's been slapped away. Marginally higher, near 1936, is its downtrend line from October. While I say bullish above 1936 I think the bulls would find a lot of trouble between here and 2021 (62% retracement) so stay cautious if you're long and the market is able to push higher.

Right now the bearish divergence on MACD between the April 7th and current highs is a warning of loss of momentum in the buying while it's hitting resistance. Combine these signals with the excessive bullish sentiment as measured in the ISEE call/put ratio and we've got a clear warning to bulls.

Key Levels for NDX:
- cautiously bullish above 1886
- bearish below 1777

Nasdaq-100 (NDX) chart, 120-min

If the market pulls back into Friday before rallying again next week we could see the same thing for NDX. A drop back down towards 1830 and then another rally up to 1940-1950 is a good possibility. A break of the uptrend line from March 17th would be more immediately bearish.

Russell-2000 (RUT) chart, Daily

The top of a parallel channel since January and the downtrend line from October proved to be tough resistance on Friday. I'm showing a bit of a rising wedge pattern that calls for one more rally leg, probably next week, to finish it. The bearish divergence on MACD is a warning to bulls and the rally leg is by no means assured. A break below the uptrend line from March 17th (which the RUT is closest to) would be a heads up for the rest of the market so watch the RUT as a leading indicator. Another push higher could push marginally above 724, the key upside level, and get immediately reversed so stay cautious if you buy the break above resistance.

Key Levels for RUT:
- bullish above 725
- bearish below 685

Russell-2000 (RUT) chart, 120-min

This chart shows why I selected 736 as the key level--it's where the move up from April 15th would have two equal legs up. In the corrective pattern that the market has been in, this would be a typical move. But any further decline on Thursday would likely break its uptrend line from March 17th and that could spell trouble. Confirmation of the break would be a drop back below the April 15th low near 685.

BIX banking index, Daily chart

The pattern of 3-wave moves to the lows since February is indicative of not a bottom but a correction. We could see another rally leg (pink) before ending the correction but it would be followed by another decline. The alternative is for price to continue chopping lower to create an overlapping 5-wave move down within the descending wedge (dark red count). As in all triangle patterns, you will see nothing but chop inside them and trading them is an exercise in frustration. If I see this pattern play out into June/July as depicted then I'll be interested in recommending some bottom picking in the banking sector. But as for now I think all bottom calls for this sector are premature. Same with housing.

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

While the banks appear to be forming a descending wedge it looks like housing could be forming a rising wedge. It's just another triangle pattern and means more chop. But it's not a bottom. Whether price drops lower from here (dark red) or after another leg up (pink), we should see lower lows. Watch for support, or not, at the uptrend line from January, currently near 380.

The retail sector is a good one to watch because a consumer-led recession would certainly be reflected in poor retail sales. The sector has already come down but it has a very interesting pattern (at least to me):

Retail SPDR (XRT), Daily chart

This chart shows a good example of a large sideways triangle playing out since January. It has remained inside its parallel down-channel and is forming a sideways triangle for what could be the 4th wave correction in the decline from June 2007. This index is also trading very well technically--the January low was exactly at the Fib projection at 28.62 (well, it actually undercut it by 4 cents) where the 2nd leg down was 162% of the 1st leg down (the June-Aug leg down).

The triangle pattern since then should get another leg up, as depicted, before finishing. So we could see a very good short play in this sector setting up later in May. In the meantime stay aware that the choppy environment we've been in will likely continue (it is, after all, another triangle pattern).


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As for downside potential, once we get the next leg down, if it's to be a 5th wave (dark red wave count), it projects to 24.60. But if the pink wave count is correct, calling the sideways consolidation as wave B, then wave C projects down to about 16.80 (two equal legs down from October). The b-wave sideways triangle actually looks better to me because it's getting too large--it's the subjective part of EW (Elliott Wave) analysis but I'm thinking the move down the $17 area looks more likely if we see it play out as depicted into May. That would be about a 50% haircut from an expected $33 price at the end of the triangle.

The retail sector could very well be telling us what's going to happen in the broader market. I know a lot of people expect an election-year rally but I'm thinking there are going to be a lot of disappointed people this year.

Transportation Index chart, TRAN, Daily

The Transports came oh so close to the 5147 price projection (for two equal legs up from January) and its broken uptrend line from March 2003 (I'm using the arithmetic scale on this one as the trend line is much higher and not a factor when using the log scale). As shown, the top of a rising wedge pattern for the rally off the March low is currently just above the March 2003 trend line. The current pullback found support today at the bottom of the wedge which is the uptrend line from March 17th. If it breaks down from here we might have already seen the top. If it rallies a little further (pink) I see resistance levels between 5200 and 5300.

To those who say we're in a bull market because of a DOW Theory buy signal, my understanding is that that signal is most important after major tops and bottoms and less useful in the middle of a move. But even the move above the February high by the TRAN has not been matched by the DOW (its February high is 12767). Yes, the DOW briefly moved higher but has since closed below that high for the past two days. Obviously it could move back above it but as I said, this is not as reliable an indicator as it is at major lows and highs.

Oil chart, Oil Fund (USO), Daily

The April rally is looking a bit extended but it's hard to argue with a strong up trend. Daily oscillators are clearly overbought but of course can stay there in and indicate an uptrend in progress. The June contract for oil (the new front month) left a bearish hanging man doji on the chart today and the 30 and 60-min charts left bearish divergences at this afternoon's highs. So the picture is looking at least short term bearish for oil even if it's able to hold up or push slightly higher first. Whether it drops straight down or consolidates in a choppy sideways/down move will tell us whether there will likely be one more leg up (pink).

Oil Index chart, Daily

While the oil contract is leaving bearish signals on its chart we see a bearish setup on the oil stocks as well. Before continuing, I had mentioned a great short play setup last Wednesday on this index based on price pushing up against its broken uptrend line from August 2007 (using the arithmetic scale) and a completed 5-wave count in the move up from March. What I neglected to mention is where to place a stop on the play and that was a mistake on my part and I apologize. All new trade entries must have a stop in mind before ever entering the trade. While I placed the key level to the upside at 900, meaning any higher than that was potentially bullish, I meant to say (but forgot) use 910 as your stop (a new high above the January high).

In Monday's newsletter I reviewed several charts using the LOG price scale and posted two charts of OIX showing the difference. Tonight's chart is using the LOG scale and you can see price pushed right up to it yesterday and today's candle is a bearish engulfing pattern (engulfs the previous day's candle). So here I am again, pounding the table. This is a very good short play setup and this time the stop should be at 930, above today's high. The play should work right away or get out of the way. It could go marginally higher and be another setup but you'll have to play that by ear. Right now, based on today's chart, short against 930 is my recommendation.

U.S. Dollar chart, Daily

The US dollar is refusing to break out of its little sideways triangle pattern that it's been in since the March low. But I'm beginning to wonder if that's the correct interpretation (which calls for a leg lower out of it, shown in dark red). The very choppy pullback from the March 24th high is looking more like a b-wave within an a-b-c bounce off the March low. That would mean a small rally leg up to around 73.50 before heading lower, shown in pink.

A small rally in the dollar could further depress the price of gold, and other commodities. Gold appears to have topped out earlier than oil and its non-confirmation of oil's rally continues to point to a high in oil soon. Gold players may be seeing a topping pattern in the euro that is warning them to take profits. Oil is clearly suffering a different problem than gold but still the short term fundamentals do not support a continuation of the rally in oil. In the meantime I continue to watch the pattern in the euro which could be close to giving us a sell signal:

Euro (June contract) chart, Daily

The euro is still within its bearish rising wedge (confirmed with the bearish divergence on MACD) so a break down from it, confirmed with a drop below the April 18th low at 1.5675, would be a sell signal. A drop back down to 1.500 and its uptrend line in May would be the likely move. For forex traders this is a good short setup.

Gold chart, Gold Fund (GLD), Daily

GLD is finding support at its 100-dma again, after finding support there at the end of March. This time I'm thinking it's not going to hold. If you look at the chart of the gold contract below, you'll see that price rebounded back up to the broken uptrend line from August 2007, which is a little different than what GLD did, and it presents a more bearish picture (test and failure at previous support--a kiss goodbye).

MACD is also showing a bearish setup--it bounced back up to the zero line but has since curled back over. This is typically a very good sell signal (just the opposite when it does it from above). Think of MACD as topping off its gas tank at the zero line, ready for a new assault to oversold (or overbought if it came out of overbought).

So assuming for now that we're going to get a move down with two equal legs, I show the price projection at 79.32. This is right on top of the horizontal red line that is at the apex of the sideways triangle in November and December, a common support level.

GLD is on a P&F sell signal and the current bearish price objective is also at 79. I'd say we have a bit of correlation for a downside objective and support at 79. It could be a good buying opportunity down there if you like the idea of owning gold for the long term.

Gold chart, Gold contract, June (GC08I), Daily

The shiny metal itself managed to retrace 50% of the drop from its March high (957.45 and 956.20 was the high on April 17th) but appears to have started its next leg down (at least that's the setup here). Its downside projection is in the 794-810 area by the triangle apex and two equal legs down. Let's just say it's headed to $800 and it could be a buying opportunity there, and a good short from here.

Economic reports, summary and Key Trading Levels

Thursday's economic reports could move the market so watch early-morning price action. Be aware that a large move prior to the cash market opening is often a head fake move and more often than not is a good fade trade.

In after-hours Amazon (AMZN) reported better than expected earnings and got rewarded with selling--it was off about $4 to $77 after hours. Starbucks (SBUX) missed on their earnings and said this is the weakest economic environment in the company's history (the company has been around since 1971 and Howard Shultz, the CEO, joined the company in 1982 and the company was incorporated in 1985 and then went public in 1992--now go into a store and wow them with your knowledge and see if you can get a free coffee out of them--do it Friday morning when McDonalds is giving away free lattes). For its fine performance SBUX was off about $1.85 to $16 after hours.

AAPL also reported and said they had $1.05B in sales, up from $770M a year ago, and handily beat analysts' estimates. Unfortunately stock price is derived on what they're going to do for us and not what they've done. They guided lower and their price followed in after-hours but then closed near the cash market closing price. So no harm no foul from AAPL tonight. Equity futures however are depressed this evening.

It's not an easy market to trade and could remain this way into May but I do see us getting closer to the end of it. Hang in there, stay patient for a little longer and then get ready to go directional again (which means credit spreaders could find it a bit more challenging). We'll have plenty of time to evaluate that to see how it all sets up.

Good luck and I'll be back with you on Wednesday.

Key Levels for SPX:
- bullish above 1415
- bearish below 1324

Key Levels for DOW:
- bullish above 13100
- bearish below 12270

Key Levels for NDX:
- cautiously bullish above 1936
- bearish below 1777

Key Levels for RUT:
- bullish above 724
- bearish below 685

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