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Market Wrap

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The markets had a really nice day by the close. The S&P 500 closed up over 30 points, the Dow Jones Industrials closed up 276 points and the Nasdaq 100 closed up 45 points. But at the open the markets dropped while it had to disseminate the economic reports from 8:30 am. The June CPI rose by a larger than expected amount. The report pointed to high energy and food prices causing the report to spur a 1.1% month-over-month jump in CPI, which was higher than the expected increase of 0.7%. Core CPI rose 0.3%, topping the expected rise of 0.2%. Total CPI is up 5.0% year-over-year, which the media pointed was the largest increase since 1991. The futures initial reaction was negative but eventually found some stability pre-market. The FOMC Minutes were released at 2:00 PM and showed that some Fed officials favored a rate rise very soon, fearing an "upward drift in long-run inflation expectations." Rates were left unchanged at the last Fed meeting, although there was a dissention that called for a rate increase.

But the Futures were pointed upward prior to all of the above data because Well Fargo (WFC) reported better than expected earnings and raised its dividend. Wells Fargo reported second quarter earnings of $0.53 per share which were $0.03 higher than Wall Street's expectation. In addition, WFC raised its dividend by 10%, indicating it is in a solid financial position despite the current environment. The early commentary was pointing to the logic that a company in todays regulatory arena wouldnt increase dividends if it knew it would have to lower them soon to free up cash. WFC advanced over 30% today while the financial sector increased as a whole over 12% on positive earnings news from Schwab (SCH), Northern Trust (NTRS) and Marshell & Ilsley (MI). Looking at the Select Sector Financial Spiders (XLF), both the RSI and Stochastics have re emerged from oversold territory (see chart below) on a daily basis. The XLF needs to break above the late June consolidation high at $20.63 to confirm the financial sectors bounce up.

After dropping more than $6 per barrel Crude oil dropped another $4 again today. Todays low of $132.1 exceeded Crudes 50 day Simple Moving Average (SMA) and Exponential Moving Average (EMA) but closed above both at $134.60 a barrel. Crude hasnt actually come down far enough from its momentous run to touch the 50 day EMA or SMA since it broke below them in January 2008. A break below doesnt mean that the run in oil is over. The markets seemed to find relief in the decline in crudes price over the past two days. The S&P and Dow have to fight extra hard to move up when there is such a massive energy sector allocation in the respective indices. Financials obviously attracted capital as did consumer discretionary stocks and transportation related stocks. For instance, Ford (F) and General Motors (GM) both advanced strongly, as measured by percentages, on oils decline. Airlines surged 18% on oils decline.


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Market Internals

The New York stock exchanges advance decline ratio was 3:1 today with 2429 advancing issues versus 808 decliners. New 52 week highs, however, were out shadowed by new 52 week lows, with 13 New Highs and 201 New Lows. A simple explanation is that the markets actually declined in the first half hour of todays session. Todays volume was 2,229 million shares versus the 50 day moving average of 1,597 million. The only negative is that todays volume was less than yesterdays 2,335 million shares. The ARMs index or $TRIN closed at 0.80 indicating that there was more volume from advancing shares than declining shares.

The Nasdaqs internals were accumulative as well in that the advance decline ratio was also greater than 3:1 with 2262 advancing issues and 700 declining issues. There were 32 new highs and 216 new lows today. Similar to the NYSE overall volume declined from yesterday. There were 2,450 million shares traded today versus the 50 day moving average 2,141 million shares traded today.

The S&P 500 (SPX)

As mentioned earlier the SPX bounced up today from hitting a two year low yesterday. The decline yesterday to 1200 put the SPX just below the 127.2% Fibonacci level of 1207 we looked at last week. I have drawn a new range from the May high to yesterdays low to determine the price that the SPX may bounce to before finding resistance. There is price resistance at 1277 from the late June volatility highs. The first line of resistance is at 1257 from the 23.60% level and then 1292 from the 38.2% Fibonacci retracement level. There is also price resistance at 1292 from the failed bounce attempt on July 2nd. A move to 1292 will most likely be met with a lot of resistance because there are two resistance levels right there as well as the 1,300 strikes open interest resistance. But the SPX needs to break above 1250 where there the peak open interest (65,340 contracts) exists at that strike price. The peak open interest on the puts is at the 1200 strike price with 98,233 contracts. The minor support exists at 1225 with 47,020 options open.

The daily SPX chart above shows that the RSI and Stochastics have both re emerged out of oversold territory. The SPXs close of 1245.34 is just above the 8 day exponential moving average (EMA) of 1244.75. The 21 day EMA (green line) is at 1277 which is coincidentally at the same level as the next price resistance I covered a little earlier. When there are multiple arguments for resistance or support at the same price levels that verifies that the support or resistance is more established than when there is only one sample. Multiple samples at the same level mean that multiple technical methodologies are being represented. And that translates to more people agreeing on a particular price.

The Nasdaq 100 (NDX)

The NDX bounced up over 45 points today after testing the gap up low from March 21st or 1760. There is still a gap that needs to be filled at 1752. The NDX could continue to bounce higher to the 89 day SMA (grey line) at 1894. But before that MA is tested the NDX needs to break above 1871 1875. The support is at 1752 from the March gap. The 50 day SMA (blue) tried to cross above the 200 day SMA (red) in late June but could hold above while the NDX was trending down. With the 50 day MA less than the 200 day SMA the index is on a confirmed downtrend. However, that signal could be quickly changed if the price moved high enough to cause the 50 day MA to cross above the 200 day SMA.

The daily NDX chart above shows that the NDX crossed and closed above the 8 day EMA (magenta line) today. In addition, the 8 day EMA curled up from the bounce. The 21 day EMA (green line) is at 1862 and stands in the way of the NDXs ability to breakout to begin a new uptrend. Also required for a new short term uptrend is the 8 day EMA crossing the 21 day EMA. The short term EMAs provide trade entries and short term support and resistance levels to trade into. The 50 and 200 day moving averages mainly provide support and resistance to change the overall portfolios bias. For instance, with the price below the 50 and 200 day SMAs in addition to the 50 day SMA trading below the 200 day SMA the tendency is to only trade short positions by selling at resistance levels. I prefer to go long biased when the contrarian indicators confirm the bottom and not rely on short term technical analysis to pick a bottom. That doesnt mean it isnt ok to buy at oversold levels for a trade. Most money is made in the middle of the trend and lost trying to find the beginning of it.

The NDX open interest for August shows that there is peak open interest at the 1800 put strike and therefore support there. Conversely, there is resistance at 2025 from peak open interest (3940) in the calls. Another level of interest is 1850 on the calls with 2446 contracts open.

There is a lot of news coming out tomorrow which should provide for a volatile day. Good news from IBM could be offset by negative news from Microsoft. I am not making predictions on who will surprise positively or negatively. Other market moving stocks reporting tomorrow include Google after the close, Coca-Cola before the open, and JP Morgan in the morning, and a slew of bank stocks too long to list. However, I am particularly interested in what Capital One has to report since they are supposed to make money from the consumers willingness to pay interest on purchases made with their cards. United Technologies, a Dow component, is also reporting tomorrow morning. It looks like five of the thirty industrial stocks are reporting at some point tomorrow. I will be covering the EPS Volatility trade in the Option Writer tomorrow using GOOG. I prefer to sell the premium just prior to the close of option trading (15 to 30 minutes prior to 4:00 PM EST). I will insert the concept in tomorrows edition of Market Wrap so it is timelier.

Tomorrow is a slow day for economic reports as compared to today. I write that because a lot of the economic data was directly from Ben Bernankes mouth as he was testifying before the Senate today. His comments basically discounted the FOMC report released at 2:00 PM this afternoon. Housing is still very much a major concern for our and Europes economies. Why mention Europe? Because if their economy and housing market is suffering, then they arent going to want to buy houses here. They might buy businesses or invest in other vehicles that they actually have control over. The initial claims will give a clue to whether the increase in willing employed citizens from last week was just a seasonal fluke or the beginning of a trend in employment. More employed means higher wage inflationary pressures. That translates into the Fed raising the rates. It was interesting hearing one Senator question why the Fed practiced Liaise Faire (hands off) economics when it came to enacting new banking and lending practices while controlling rates and money policy with Keynesian (meddling hands on) techniques. Some of the comments from the Senate were outright accusatory and defamatory. If I had an opinion that mattered I would say rightly so. But my beliefs arent as important as the facts. We have a weak economy. How do we make money from the Fed if we think that the rates will move up before the election? If you trade currency or Fed Funds futures you can go long the dollar or short the Fed Funds futures. The rate increase/decrease argument can go either way and may have to be a surprise to make a difference. This concept is very similar to the capitulation topic. When will the capitulation occur when everyone is looking for it to occur? No one wants to be the sucker that marks the bottom. Of you are a contrarian like me, you have a friend that always buys the top and sells the bottom. When that person is talking about waiting for the capitulation it will only come after they sell. For instance, the shake out last week that placed two of my contrarian signals at a POSITVE bias. The VIX was the only indicator that hadnt confirmed the long bias. Yesterday the VIX spiked and then contracted into the close therefore confirming a short term capitulation had occurred. We will all have to see if the indicators confirm a shift in the bias. Good trading!

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