Option Investor
Market Wrap


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Beginning late yesterday afternoon, I believed that today might be a standoff day. Bulls and bears might pull back, panting, from yesterday's jousting tournament and reassess their stances. Bulls had been bloodied yesterday, but bears hadn't been able to bring about a complete victory. Most indices remained above rising trendlines off March's lows.

Since I expected today to be a reassessment day, I didn't anticipate the outcome to give us much information or materially change the impact of what happened yesterday. It didn't. Many indices such as the SPX ended the day with small-bodied candles indicative of indecision.

Bulls weren't going to be provided much help from their ally--a USDJPY that had been rising off the March lows. That currency pair had sometimes led and sometimes followed equity gains but was always right there to provide sustenance for U.S. equity bulls hoping for a reinstitution of yen carry trades or even signs that the U.S. economy might be strengthening in comparison to others.

Central bank action across the globe stalled the dollar's attempts to strengthen, at least for today. The USDJPY dropped below its rising trendline off the March low and closed the day there, too. If the USDJPY tends to lead the SPX, as it sometimes does, that prompted worry that the SPX and other indices could drop below their analogous trendlines, too.

What stalled the dollar? No one influence can be blamed, of course, but this week has offered several developments that impacted currencies. Australia's central bank met and kept rates steady. Today the Bank of England (BoE) and the European Central Bank (ECB) both made rate decisions, and that certainly influenced currencies. As expected, the Bank of England kept rates steady, striking what that central bank thought was the appropriate balance between concerns about a slowing economy and worrisome inflation.

Despite concerns about the British economy expressed in an article in THE LONDON TIMES edited by Anatole Kaletsky, the BoE's Monetary Policy Committee remains more worried about inflation. Kaletsky included comments by Sushil Wadhwani, former external member of the Bank of England's Monetary Policy. Wadhwani claims that the British economy is following the U.S. economy down a dark road, trailing about a year behind.

The ECB also kept rates steady. Recently, the ECB's president, Jean-Claude Trichet, has voiced opposing concerns. He has long remained adamant about the ECB's primary role in providing stability at a time when the inflation rate runs far above the ECB's comfort level. The recent moderation of that inflation rate to 3.3 percent from the 3.6 percent didn't ease those inflation concerns.

Recently, however, President Trichet has added concerns about the implications of a euro that has been at record highs against the U.S. dollar. Raising rates would tend to strengthen the euro against other currencies, causing problems for European multinational companies selling into the U.S. Some central bank watchers predicted a softening of his and the ECB's hawkish stance.

The central banks met mainstream expectations but not mainstream hopes. Recent troubling data had raised hopes among some that both the BoE and ECB would ease. Some market watchers believe they'll still be forced to do so before too long.

In his introductory statement at the press conference following the ECB's decision, President Trichet said that "inflation rates are expected to remain high for a rather protracted period of time." The ECB believes that although economic growth may be moderate, real GDP growth will occur. In a background of "turmoil in financial markets," the bank again emphasized its mandate: "maintaining price stability in the medium term." He affirmed the ECB's belief that "price and wage-setting behaviour could add to inflationary pressures." He warned against "schemes in which nominal wages are indexed to consumer prices," fearing that increasing wage pressures will add to other inflationary pressures.

On a good note, if perhaps contrary to other evidence, he mentioned continued strong loan growth outside the financials, suggesting "that the availability of bank credit to euro area firms has not been significantly impaired by the financial turmoil thus far." Those who would like to read the entire statement can find it at this link.

With small-bodied candles produced just above potential support, is there anything we can tell by the daily and intraday charts? Let's look.


Annotated Daily Chart of the SPX:

The SPX is literally trapped between a rock and a hard place, both here and on the daily Keltner charts. Today's close was the first since April 15 below the 9-ema, a moving average I prefer over the more frequently watched 10-sma shown above. The SPX closed back below the descending trendline that had marked resistance since October 11 after breaking above it over the last week. It attempted to push above the 50 percent retracement of that slide off the October 11 high but couldn't maintain values above that Fib level. All those levels should now be considered potential resistance again on daily closes.

Yet the SPX maintains its rising trendline off the March low. The USDJPY's action suggests that trendline might not be inviolate, however. Also, I'll show a VIX chart later that compares some things happening now with setups last occurring from October 5-11.


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Those comparisons don't prove anything other than that market participants need to spend some time tonight with their what-if plans in case the SPX and other indices roll down toward their 30-sma's, but they do at least suggest that. I do, too.

If the SPX instead pushes higher, watch for rollover potential at any of the landmines drawn on the chart. A push toward 1424 or even 1430 remains possible but before the SPX can sustain values above such powerful resistance, it's only natural for it to sometimes pull back to stronger support.

Place these comments in the context of my own "it's still got to retest the bottom" bias. Not all share that bias, and it hasn't yet been proven to be the correct one.

Annotated Daily Chart of the Dow:

The Dow's daily Keltner chart shows that potential support layered down to 12,600 looks much stronger on the Dow than the SPX's potential support on daily closes near 1389.40. Of course, Dow support on a daily close down to 12,600 allows for a 30-sma test, so even that stronger appearing support does not preclude that test. Often, however, when support appears that strong, it's difficult for prices to fall to far through the support layers, barring a strong push or a gap below them. Prices don't tend to drift through that kind of potential support.

So, SPX and OEX traders might watch the Dow to see how it's handling that support, if it's tested. Barring a strong push or a gap through it, the Dow might be the first of those three to attempt a bounce. Since AIG is a Dow component stock and AIG reported after hours tonight, the Dow's relative strength on a Keltner basis could disappear if investors react negatively to AIG's report this afternoon.

Annotated Daily Chart of the Nasdaq:

The Nasdaq's daily Keltner chart suggests a slightly greater possibility that the Nasdaq will test 2421 than that it will close much above 2465, but it doesn't provide much more information than that, and that's just a judgment call. Two days of closes back below the 200-ema, coupled with an inability to push above that horizontal resistance, also keep alive the possibility of a retreat to the 30-sma, the bottom of the rising blue channel and the former red resistance trendline. Those setups don't promise such an action, of course, but if in bullish positions, I would prepare my profit-protecting plans just in case.

Another push up to green Fib level and even the declining 200-sma remain possible, but I would watch for rollover potential at those levels.

Annotated Daily Chart of the SOX:

The SOX was one of the first indices to break out of its congestion zone and lead others higher, so it should be watched for signs that the momentum has waned or, conversely, that new breakouts are occurring.

Annotated Daily Chart of the RUT:

Annotated Daily Chart of the TRAN:

The TRAN also often leads the SPX, OEX and Dow, so keep it on your radar screen. Equity bulls don't want to see the TRAN and the RUT breaking through their 30-sma's on daily closes.

My concern has heightened this week due to a VIX setup I've been pointing out to the subscribers to the live portion of the site over the last few days. That setup is seen on a daily nested Keltner chart.

Annotated Daily Keltner Chart of the VIX:

The setup and action as the VIX approached black-channel support on this Keltner chart are similar, although of course not identical. For example, October 12, the VIX's retest of its 9-ema resulted in a daily close just below that moving average, while today's violation looked a bit more pronounced. However, I pay attention to anything that's happening for the first time since October 5-11, when many indices were hitting their highs before sliding lower, and particularly when that "anything" has something to do with the VIX. Equity bulls don't want a repeat of the situation that followed the October 5-11 time period last year, when the VIX bounced from this channel and then kept bouncing.

I haven't included RSI on the chart, but the setup there is similar, too. RSI has been testing the 30 level for many days as the VIX approached and now attempts to bounce from that potential support.

This chart, along with the wedges seen on some other daily charts, leads me to be cautious. As noted earlier, I'm of the "needs to retest" ilk, so I tend to be cautious and on the lookout for rollover potential. For now, all indices are safely ensconced in their climbing price channels, so nothing untoward has happened yet. This VIX action rates the same way a bearish divergence would on another chart. It offers a warning to prepare your what-if plans, but it doesn't prove that they're going to be needed.

Today's Developments

Today's economic release calendar was light but that light release schedule was joined by another economic event: a speech by former Fed Chairman Alan Greenspan in New York at 12:30 pm ET. The markets did chop around a bit during the time that Greenspan would have been speaking, but that chopping around was typical of the entire day. I could find no mention of his discussion, no bullet points being issued on financial websites. Unfortunately, an Internet search for information on Greenspan turns up articles ranging from "I lost my house because of Greenspan" to "Greenspan is the man." Weeding through them to find anything relating to today's discussion proved impossible.

Weekly initial and jobless claims, once a throw-away number, have assumed greater importance in recent months. Economists predicted that claims would drop to 370,000 from the previous 380,000. They dropped further, to 365,000, falling 18,000 on a seasonally adjusted basis from a revised higher number for last week. That's been a trend lately: the previous week's initial claims being revised higher. The four-week moving average was reported at 367,500, remaining well above the benchmark 350,000 that signals a weakening labor market. These occasional one-week drops have not improved the four-week moving average. Continuing claims dropped, but the four-week moving average climbed.

RRetailers reported April sales throughout the early morning period. Wal-Mart Stores (WMT) and Costco Wholesale Corp. (COST) beat forecasts as some retailers benefited from warmer weather and an extra day to sell goods. Warehouse goods stores also benefited from consumer worries about the availability of grains and other staples. We were all hearing stories about customers hoarding rice and other grains last week, prompting Costco to institute a limit on the amount a customer could purchase. Some clothing retailers suffered from a tightening in discretionary spending, however, and even some lower cost stores such as JC Penney's did not fare as well as hoped.

March's Wholesale Trade, at 10:00 am ET, rose 1.6 percent. The prior report had shown a drop of 0.8 percent. Wholesale Inventories had been expected to rise 0.5 percent after a prior rise of 1.1 percent, but instead dropped 0.1 percent. The previous 1.1 percent climb was revised lower to 0.9 percent, too.

That drop in inventories can be viewed through different lenses. The bearish lens says that manufacturers are gearing down because they forecast continued drops in demand. Others say that any tick up in demand now will force a faster ramping up of manufacturing if inventories are low.

TThe Federal Reserve released weekly figures on outstanding corporate paper. Once again, outstanding commercial paper dropped with asset-backed paper again responsible for the bulk of the drop. As I've said every week lately, if outstanding corporate paper is used as a measure of how easy it is to obtain credit, these figures are not showing any easing in the credit crunch. Of course, other measures are used, too. Jamie Dimon, CEO of JPMorganChase & Co. (JPM) said today that banks have been able to raise capital. He said that financial crisis was mostly completed, with hedge funds already through a process of massive de-leveraging.

Bronwyn Curtis, Chair of the Society of Business Economists in the U.K., might dispute Dimon's assertions about credit crunch. THE LONDON TIMES, online version, reported Curtis' concern that the LIBOR rate (the rate at which banks loan to each other) "remains elevated relative to the policy rate." Curtis further claims that the credit crunch is expanding, not going away.

The last release of the day was the Energy Information Administration's report on weekly natural gas storage. Those inventories climbed 65 billion cubic feet, but attention soon turned back to another commodity in the energy complex: crude. By early this morning, crude for June delivery had reached a high of 123.90 at the NYMEX. Crude closed the NYMEX session at $123.69 according to the NYMEX site, off that high but not far off, but had traded above $124 in electronic trading as this report was prepared.

After the NYMEX close, it was reaching fresh highs. Many stocks and indices in the energy complex gained, too. Examples were the OIX and XOI for indices; XOM, CVX and SLB for individual stocks.

Companies reporting earnings included ATVI, PCLN and VRSN. AIG was due to report after the close. After a WALL STREET JOURNAL article disparaging the company's prospects, AIG traded lower ahead of earnings. The after-hours report noted a $7.81 billion or $3.09 a share loss for the first quarter. The adjusted loss was $3.56 billion or $1.41 a share against expectations of a loss of $0.76 a share. The company said it would raise $12.50 billion by selling new shares and other measures.

Tomorrow's Economic and Earnings Releases

Tomorrow's economic events include the pre-market release of March's International Trade figures. Economists predict that the deficit will narrow to $60.8 billion from the previous $62.3 billion deficit.

TThe ECRI Weekly leading Index appears at 10:30. Although I know at least one fund manager follows this number closely, I've never noted any particular market reaction to its appearance.

Company's reporting earnings tomorrow include CCU.

What about Tomorrow?

All the indices typically covered in this section show similar characteristics, with all chopping around today between support and resistance on their 30-minute charts. I've set up each chart to show the conditions under which new targets might be set and those targets. When choppy sessions are set up between equally weighted resistance and support levels, however, it's impossible to guess in which direction the indices will break out.

AAnnotated 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 Russell 2000:

Today is the last Thursday before option expiration week, and those Thursday's can be wild, setting up the action into the next week. Today's action wasn't wild at all, but we must still be aware that expiration-related activity can be influencing action. Maintain a bit of skepticism about what you're seeing.

What do I think? I don't know what I think because I try not to form prior opinions when the short-term and even intermediate-term setups are like these. I know what I fear: a sharp downturn that might hurt subscribers who buy too much into the "it's over now" theory and have too much risk on their plates or a sharp rally that hurts those who are sure markets are going to roll over and have risked too much on bearish trades.

I'll also confess that I'm out of all May credit spreads, and have so far only put on bear call spreads for the June cycle. I've been waiting for the downturn I expect to happen before I attempt the bull put portions of my condors. I may miss trades, but I'd rather miss them than be wrangling a going-wrong credit spread in an expanding-volatility environment, if such should occur.

I happened to have written the Wrap last October 11, and I went back to read what I had written then: "So, let's be moderate in our outlook," I suggested after warning of some troublesome signs, "recognizing possibilities but not getting too jittery just yet. . . . Make your just-in-case plans. Then you'll have them, whether you ever need them or not." That seemed like good advice then, and it does now, too.

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