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Market Wrap

Bifurcation: the Splitting of an Entity into Two Parts

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It wasn't so many years ago that traders regularly heard the word "bifurcation." Tech-related and non-tech indices performed differently quite often at some market periods.

Bifurcation appears to be returning, with techs and the small-cap Russell 2000 having held up better this week than some other indices. Neither has yet broken out of the rising channels they began forming as they rose off March lows. Other indices have.

Bullish traders have taken comfort from that relatively stronger performance of the techs and the small-cap Russell 2000 during this week's downturn. However, all woke this morning to not-so-happy news. Some said that news crushed hope for anything more than a steadying today. In truth, technical considerations on the charts suggested that today was likely to be a consolidation-type day all along. Logic would suggest that, too, after this week's market behavior.

Overnight, crude had risen to yet another new high in electronic trading, this one above $135 a barrel. That occurred as traders braced for the National Hurricane Center's forecast for the about-to-be-upon us hurricane center. When that report arrived this afternoon, the prediction by the National Oceanic and Atmospheric Administration (NOAA) was that "projected climate conditions point to near normal or above normal hurricane season in the Atlantic Basin this year."

That includes a 60-70 percent chance that 12 to 16 storms will be named, with about 6-9 of them being hurricanes and 2-5 of those being major hurricanes. The average season has 11 named storms, NOAA said. If this were a company giving guidance, we'd say it was raising guidance, wouldn't we, as 12-16 named storms would be above the 11 average. I'm sure Jim Brown will be covering this in more depth in his reports.

In addition, a WALL STREET JOURNAL article this morning speculated that the IEA's ongoing study of the world's top 400 oil fields might result in a steep downward revision of forecasted supplies. That report is due out in November.

That speculation will not be new to our readers who have benefited from Jim Brown's in-depth study of energy matters over the last few years. It appears that in the past the IEA has stuck to assessing demand and suddenly decided it was time to look more closely at supply, but we've known about the supply problems through Jim's dedicated and in-depth research.

Other news involved a financial that had in the past cratered our markets. UBS announced a fire sale on its shares in an effort to raise $15.5 billion. Those new shares would be offered at a discount more than 30 percent below the current price, with the existing shareholders the ones offered the rights to this discounted stock. The rights will be tradable from May 27 through June 9. Just yesterday, UBS had engaged in another fire sale, selling subprime and Alt-A mortgage assets with a nominal value of $22 billion to BlackRock, Inc. (BLK) for $15 billion.

The bad news wasn't finished. David Bove of Ladenburg Thalmann downgraded Goldman Sachs (GS), Lehman Brothers (LEH) and Merrill Lynch & Co. (MER) to sell ratings and cut estimates for their 2008 earnings. Brokers would continue to feel the effects of a chaotic operating environment through the second quarter, he said. He kept Morgan Stanley's neutral rating.

With all that bad news to digest, the markets performed relatively well, even the indices such as the SPX. By the end of the regular trading session on the NYMEX, crude had dropped $2.43 to close at $130.74 a barrel. While that was considered good news for equities, it brought energy-related SPX composite stocks such as XOM lower, and many such stocks comprise the SPX.

What does that steadying today mean? Let's take a look at the charts.


Annotated Daily Chart of the SPX:

If the SPX bounces, the intraday charts at the end of this article list some levels to watch for stalling or rollover potential. However, the converging 10-sma and 200-ema provides an obvious spot on the daily to watch for that potential.

The chartist studying this daily chart is faced with a couple of quandaries that I'll lay out for you. A rising wedge as seen here is typically a bearish formation and fits with the whole idea of this being a bear market rally. Since it's my own belief--or possibly, just my fear--that the markets still need a retest of the year's low, if not more, then that wedge fits. Now the SPX has broken through that wedge's support.

ThThat's one argument. Here's another. It's possible that the SPX is doing nothing more than widening that wedge into a regular old rising channel with a lower boundary parallel to the top one. One bit of evidence for this is that the mid-April test of the bottom trendline coincided with a 30-sma test. If that channel's lower trendline were redrawn, the lower trendline test would again coincide with a 30-sma test, or perhaps just be a little off. So, we can't let our biases lead us into only one interpretation. In my own trading, I prepare for a sharp downside as best I can, but I don't preclude all bullish trades, either, as some of my credit spreads are bull put credit spreads. I just know where those stops are going to be and engage in fewer of those trades than in the bear call spreads.


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Summer is beginning and I think it's possible that we could have one of those dreaded awful summers when markets just chop around in seemingly random ways all summer. My best guess would be that the SPX could chop around between about 1360 and 1440 if such a pattern is set up. If there's a sharper downturn or a sharper upturn that's sustained, I'll have to throw that theory out the window, but it's one that I'm keeping on the radar screen for now.br>
That means, of course, that I wouldn't be surprised to see the SPX give way and drop toward 1382 or even 1360. Neither would I be surprised to see it climb toward the 200-sma again, and therein lies the quandary for us chartists.

I think it's moment-by-moment and day-by-day right now, a time to employ every carefully honed trading skill, including the skillful use of stops.

AAnnotated Daily Chart of the Dow:

Similarly to a possibility seen on the SPX's chart, this chart presents the possibility that the Dow could spend some time chopping around from about 12340 to 13170. Sustained daily closes below the descending green trendline would cause me to throw out that scenario.

Annotated Daily Chart of the Nasdaq:

A Keltner chart suggests that if values below 2440 are sustained the Nasdaq could drop toward 2360, so I would factor that possibility into my trading plans, but that same chart also presents a possibly higher probability that the Nasdaq will climb toward the top of the channel instead. Me? I'd be leery of stalling or rollover potential near the converging 10 and 200-sma's if the Nasdaq should climb that high.

Annotated Daily Chart of the SOX:

Lots of Keltner-style resistance gathers from 427-435.50 on the SOX's chart. Support looks relatively firm from 363-397 on that chart, too. Combining that information with what I've seen on other charts, chopping around between the 30-ema and about 436 might be possible for the SOX. A sustained break of the 30-sma might mean a quick trip down to 383 or perhaps even 375.

Annotated Daily Chart of the RUT:

A Keltner chart suggests that if the RUT sustains values beneath those rounding-up 30-sma and 72-ema's, it may be vulnerable to about 696-698, which would suggest a retest of that descending red trendline. For now, though, the RUT could just as easily press up toward 747-751, but I would be careful of stalling or rollover potential any time now. I wouldn't be surprised to see the RUT ping-pong back and forth between about 717 and 750 for a time now, but sustained levels below or above those would force me to throw out that scenario.

Annotated Daily Chart of the USDJPY:

Today's Developments

Today's developments included the usual roster of Thursday releases, including initial and continuing jobless claims at 8:30 am ET. Initial claims dropped 9,000 to 365,000, staying above the benchmark 350,000. The four-week moving average also dropped. At 372,250, however, the average is also above that 350,000 benchmark, signaling that employment is weak. For comparison, initial claims were just 311,000 a year ago. br>
Continuing claims also dropped, but their four-week average still climbed. The uninsured unemployment rate stayed at 2.3 percent. A year ago, it was alternating between 1.9 and 2.0 percent each week.

The Bureau of Labor Statistics announced April's Mass Layoffs at 10:00 am ET. Those numbered 1,308, down 263 from the prior number. The total mass layoff initial claimants totaled 133,914, down 23,242 from the prior number.

OOther releases included the first quarter Office of Federal Housing Enterprise Oversight (OFHEO) Housing Price Index at 10:00. Prices fell 1.7 percent when that quarter was compared to the prior one and 3.1 percent when compared to the year-earlier period. OFHEO said the declines were the steepest in their 17-year history of keeping records.

Weekly natural gas inventories came last. Natural gas inventories rose 85 billion cubic feet. A commentator on CBNC worried aloud that the build won't be enough to match the levels needed before the heating season begins next winter. He indicated that 3.5 trillion cubic feet were in storage before last winter's heating season began, but only 1.6 trillion cubic feet are in storage now.

Federal Governor Randall Groszner, a voting member of the FOMC, spoke on "Prospects for Recovery and Repair of Mortgage Markets" at 9:00 am ET. His talk followed Fed Governor Kevin Warsh's somewhat sobering speech yesterday. Warsh had emphasized the Fed's willingness to help provide liquidity and loosen tight credit markets but had asserted that the Fed couldn't do it alone. Private financial companies had to step in, too, to resolve the difficulties that resulted in what he said "may be the most pronounced time of testing for central banks in a generation."

Groszner believes that "any assessment at this stage about the recovery and repair of the mortgage markets is preliminary." As all FOMC members have done over the last year, he outlined the steps that the FOMC had taken to ameliorate credit and liquidity problems. He noted that many types of investors had sought out CDOs because they were tagged as investment-grade vehicles but yielded more than other investment-grade vehicles. He talked about the differences in the current, more complex "two-layer securitizations" and previous iterations of these securities.

We've heard all that, so there was nothing new in those statements. He listed a number of needed changes, current initiatives by the Federal Reserve, the Basel Committee on Banking Supervision, the Conference of State Bank Supervisors (CSBS), the American Association of Residential Mortgage Realtors and others to resolve the problems. He believes that the financial system will eventually become more resilient but that the efforts will take time. All in all, the talk seemed a bit more soothing than yesterday's by Warsh.

When the Federal Reserve released its weekly figures on outstanding commercial paper, the figures showed the first gain in outstanding paper in at least six weeks and perhaps longer. For the last two to three months, despite assertions about the easing of the credit crunch, most weeks have created declines in outstanding commercial paper. br>
This week's result is good news for those watching for an improvement in companies' abilities to place corporate paper for short-term needs without going to banks for more expensive loans. However, the gain was oddly enough mostly in financials, with non-financials still showing some negative numbers.

In company-related news, Ford Motor (F) announced that it will cut production this year in response to the weakening U.S. market. That weakening economy, coupled with higher commodity prices, means that the company no longer expects to be profitable in 2009.

AApple (AAPL) received happier news. Oppenheimer upgraded the stock to an outperform rating. With techs outperforming recently, a Briefing.com article noted that large-cap techs now had the largest sector in the SPX, surpassing financials, a claim I haven't checked out.

Another writer claimed yesterday that energy-related securities had bypassed financials to obtain the largest weighting. One energy-related stock that was in the news today was NRG Energy, offering to acquire Calpine (CPN) in an all-stock offer.

After hours, GAP (GPS) reiterated its profit forecast for 2008 and reported first quarter profit that rose 40 percent but climbed due to inventory control measures. Sales actually dropped. Barnes & Noble (BKS) cut its forecast for full-year sales and said it was exploring whether a transaction with Borders Group (BGP) was feasible. Ann Taylor (ANN), Computer Sciences (CSC), Gamestop (GME) and Hormel (HRL) all reported today, too, with those considered having beat expectations.

Tomorrow's Economic and Earnings Releases

Tomorrow's schedule will be particularly light with only the 10:00 am ET release of April's Existing Home Sales having the capacity to move the markets. Those sales are expected to be an annualized 4.86 million, down from the previous 4.93 million. The weekly ECRI leading index will follow at 10:30, but that doesn't tend to be a market mover.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

Annotated 30-Minute Chart of the Dow:

Annotated 30-Minute Chart of the Nasdaq:

The other intraday charts were 30-minute ones, but I've switched to a 15-minute one for the RUT, because this index did not even approach its potential downside target on the 30-minute chart.br>
AAnnotated 15-Minute Chart of the Russell 2000:

Tomorrow is the last day before the long weekend, and many traders will be leaving early, so volume may well be light, making trading patterns unpredictable. Trade only if you have a stellar setup and evaluate long and hard whether you want to carry those options positions over a long weekend. In fact, unless there's a sharp downturn tomorrow that plumps up volatility levels, you may notice that your options' extrinsic value (what's sometimes called the "time value") decreasing beginning about noon tomorrow, so plan ahead.br>
I wanted to note that this is my last regular Thursday Wrap. As much as I love charts and discussing the markets, a family member's health situation has made it necessary for me to cut back on obligations. I will be substituting for Jim next Tuesday and then will be substituting occasionally for other writers when needed. You can still find me in the live portion of the site and in the weekend's Trader's Corner articles.

Have a happy long weekend, everyone! Our gratitude goes out to those who gave their lives in support of our country this Memorial Day Weekend, and our sympathy goes out to their families.

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