Option Investor
Market Wrap

Ground Control To Major Tom

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There is no way I can possibly cover all that I've observed since last week's market wrap (07/28/08) and meet deadline for tonight's wrap, so retreat to your den, close the door, and pay attention.

I'm not going to talk about Jim Cramer and his past Fed bashing from a year-ago, nor his recent bullish "bottom" call. I'll listen to Mr. Cramer, but I don't use him as a "contrarian" indicator as some may, nor do I think he is always right.

I'm not going to be able to cover Cisco System's (NASDAQ:CSCO) $23.96 +5.78% earnings report, which put a bid in technology stocks today.

I'm certainly not going to be able to cover the roughly 350 earnings reports released today, nor the many earnings press released I've read since Alcoa (NYSE:AA) $32.17 +1.61% kicked off earnings season.

I'm not going to be able to go over yesterday's ISM services report, which was an upside surprise to economists' forecast and a likely catalyst to yesterday's gains.

I'm not going to tell you that the recent decline in energy prices and commodity prices (see CRB index chart from 07/23/08 market wrap) in general hasn't had some number-crunching analysts making some adjustments to Q3 earnings forecasts. Especially those where company CEOs and CFOs cited "higher input costs" as weighing not only on bottom line results, but also having some customers delaying orders in hopes input costs of their own abated.

I will tell you that tomorrow's European Central Bank (ECB) decision on interest rates will probably be as closely monitored and analyzed that yesterday's FOMC decision on rates.

What I am going to tell you is to look at the above picture, and believe me when I tell you that tomorrow's job report, and current market internals and PRICE technicals are at what looks to be a point of "equilibrium."

I will once again emphasize that a trader/investor doesn't need to be FULLY invested, and entirely on ONE SIDE of a trade (all bull, or all bear).

I will review with you what you've observed and what to look for tomorrow, and the days ahead, so you can be ready to trade tomorrow, and MANAGE THE TRADE going forward.

I will preface tonight's market wrap with my bullish/bearish bias for BROADER U.S. equities, which is currently 60% bullish and 40% bearish.

Let's quickly cover today's internals and I'm going to quickly run you through some of today's action.

We'll start out with some profit taking at the open after a decent session of gains yesterday, we'll note Canada's Ivey Purchasing Managers Index from north of the border, and then throw in the EIA weekly U.S. crude oil, total gasoline and total distillate inventory data released at 10:35 AM EDT.

Wednesday's Market Internals -

A weak internal reading was found at the open and a slightly stronger-than forecasted Canada Ivey PMI reading of 65.5 at 10:00 AM EDT (forecast 62.0) and still expansionary (above 50 expansion, below 50 contraction) combined with a steady trade in oil prices helped keep PRICE losses in check in the first hours of trade.

I would also have to add that the continued STABILITY and slowly trending HIGHER U.S. dollar (US Dollar Index) hasn't been hurting equities either. That is, the Fed and Treasury have been sticking with their "the dollar will reflect U.S. economy" and there's still a few of us out here that listen to the Fed and the Treasury department, and monitor the dollar's strength/weakness.

Certainly it can give some insight as to Fed monetary policy, but also an observation of "confidence" in this major world currency which just about everything is priced/translated in, or to.

Might as well wait to see what the EIA had to say about U.S. oil, gasoline and distillate stockpiles at 10:35 AM EDT.

Today's Economic Data (Calendar)- All times are EDT

A weaker-than-forecast German factory orders would suggest the ECB on "hold" for rate policy, but you just never know for certain. They're VERY focused on past/current inflation trends (as they should be), but they've been so focused, they may be choking things there into recession.

In past wraps I've mentioned that they've been so focused on one tree, that they might not be able to see the forest.

In 2000, the Fed was so focused on "wage inflation" that it may have kept tightening (raising rates), which some argue sent U.S. into recession.

I'd say the Ivey PMI "not overly strong, but not as bad as some had thought." Yes, it is another country, but just north of the U.S.

At 10:35 AM EDT we got some intra-day chop and volatility in oil and unleaded prices when the EIA reported stockpiles of crude oil rose by 1.61 million barrels. While the build was larger than forecasted, total gasoline stockpiles fell by 4.34 million barrels. Mass confusion in the pits took hold.


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Ah, but refiners do more than refine gasoline. Total distillate stockpile rose for a 13th-straight week. Total distillate stockpiles jumped another 2.84 million barrels (diesel, jet fuel, heating oil are a part of total distillates).

The Strategic Oil Preserve (SPR) added 515,000 barrels to 706.8 million barrels.

On the INPUT side of things, weekly crude oil inputs into refineries fell by 123,000 barrels per day. One "surprise" was that since last week, refinery OPERABLE capacity jumped by 12,000 barrels per day. This figure doesn't change very often, but this is now a record with U.S. refineries able to refine 17.6 million barrels of crude oil per day..

With the added capacity, U.S. refiners were running at 86.96% of total capacity last week, which was down fractionally from last week's 87.17%.

The number of days of U.S. crude oil supplies rose slightly to 19.5 days from last week's 19.3 days.

Nothing MAJOR to note on an intra-day basis, but note some volatility in the energy commodity area today.

The DJUSHB finished relatively unchanged. Today's Mortgage Bankers Assoc. weekly mortgage application survey not all that revealing in my opinion. I don't see anything overly bullish in the report. The purchases index rose 1.8% to 315.2, while the refinance index rose 4.4% after a 22.9% decline last week.

The average contract interest rate for a 30-year fixed edged down to 6.41% from the prior week's 6.46%, while a one-year ARM edged down to 7.17% from the prior week's 7.25%.

Tomorrow's Global Economic Calendar -

Again, I'm pressed by deadline, but the above economic calendar will be busy. Before U.S. equities open for trade at 07:00 AM EDT the Bank of England will release its lending interest rate (currently 5.00%). Then just after the U.S. opening tick the European Central Bank will release its decision on interest rates (currently 4.25%).

I would think BOE and ECB "hold" at a minimum. With some recent abatement in energy prices and commodities, BOE might be less hawkish, as might ECB. What they "say" might further influence currencies, so be watchful. It certainly looks as if currency traders have been making some adjustments of late, and so have equity traders.

Major Global Indexes, Currencies, Oil, Gold and $HUI Table

Here's how things stood on a more "global" basis at Wednesday's close. I should note that Hong Kong's Hang Seng Composite ($HSI) was closed due to a cyclone.

At the far right of the above table, we should note the dollar's strength so far this quarter (+2.4%) for the weighted basket DXY, and if the dollar's weakness was partially attributed to a rise in oil prices, then USO and even gold as depicted by the StreetTracks Gold (GLD) also reflecting the dollar's gains.

The EuroCurrency Shares (FXE) $154.28 -0.27% closed smack on its 150-day SMA and once again resting on/at that 154 level.

Again ... a lot of number crunching going on and the above table gives us a feel on just how "dynamic" things are.

EuroCurrench Shares (FXE) - Daily Intervals

Currency traders are all abuzz regarding the euro, and oil traders are too. In mid-June I had subscriber's "on the alert" that the euro was at a major level of support and if it cracked lower, oil prices might follow.

The euro rallies strong on hawkish comments out of the ECB's Trichet and oil rallied strong.

See tomorrow's economic table and consider the implications.

OK, now I've got to update a Point and Figure chart from my 07/14/08 market wrap and the Russell 2000 Index (RUT). Take a moment if you can and go back and look at that chart and commentary.

What unfolded AFTER that wrap was a BEARISH triangle pattern, but then buyers really came in and shoved price higher.

Here's where things stand at tonight's close. Main point here is to look at the chart.

PRETEND you shorted the BEARISH triangle, then got COMPLACENT.

You NEED to do THIS, if you BOUGHT the S&P 500 (SPX) today. I'll show you why in a minute.

Russell 2000 (RUT) - 4-point box

Today's trade at 724 is a BULLISH triangle in the RUT.X.

Back in mid-July the various bullish % indicators were all DEEPLY oversold, but VERY weak.

What I want traders and investors to focus on in part is the BREAK lower and BEARISH triangle when the RUT traded 656, fell to 648, then RAMPED back higher as BUYERS came in to the small caps with a vengeance.

The REASON "triangle" patterns can be so POWERFUL is the near-term lower highs and higher lows creates PRESSURE and buyers and sellers clash.

Now the RUT is trying to make its way HIGHER above trend. If LONG the RUT, or IWM, or other "like" security, a "sell signal" would be found at 700.

If I were short (and I'm not), a trade at 728 is going to have a BEAR assessing risk up to 760.

OK, NO COMPALCENCY! And while I suggested in last week's market wrap that traders be BULLISH the S&P 500, or SPY, or ProShares UltraS&P 500 (SSO) with PARTIAL positions, now look at the SPX.

S&P 500 Index (SPX) - 10-point box

Today's action has a BULLISH triangle pattern triggered as the SPX traded 1,290. See the "triangle" and BULLISH as the SPX manages to trade 1,290.

Go ahead and say "dirty trick," perhaps like the "dirty trick" that got played on BEARS in the RUT back in mid-July.

I say PLAY BULLISH the SPX with a stop at 1,240 for more CONSERVATIVE bulls, or 1,230 for those willing to give things a little more room near-term.

USE PARTIALS still as you KNOW there's a pretty FULL economic calendar to digest.

Now, one last chart of the SPX and I think this one just about does it.

Let's add a little more NOISE to the SPX chart, and instead of looking at the conventional 10-point box, lets change our scale to a 5-point box.

Let's use StockCharts.com's PnF chart. You can for FREE at www.stockcharts.com!

S&P 500 ($SPX) - 5-point box

Make the "tie" with the SPX back on June 6th and the euro (euro currency shares) and possible impact with all it may encompass.

See the "triangle" today?

See how market participants just haven't been able to get the trade at 1,295 since late June, or early July (red 7).

I'd be ready for "launch sequence" and tomorrow's economic data may trigger some SERIOUS action.

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