If I were to actually leave the house tonight and someone asked me how my day
was I would say one word and one word only; volatile. If you dont watch TV or
listen to the financial news channels on XM or Sirius satellite then you might
not realize that the Dow, S&P and NYSE all had stellar days for one main reason.
That reason is that the Fed/Treasury department decided to go into the mortgage
business. The government will be backing the conservatorship with about $100
Fannie Mae and Freddie MAC, each.
In other financial related news Ambac Financial Received Regulatory Approval to Support Obligations of Its Investment Agreement Business. ABK announced that Wisconsins Office of the Commissioner of Insurance has approved up to $1 billion in future inter-company asset sales and secured lending transactions between Ambac Assurance and its Investment Agreement business affiliates.
Washington Mutual (WM) confirmed today that Alan H. Fishman has been appointed
chief executive officer and has joined WM's Board of Directors. In addition, WM
announced that it has entered into a Memorandum of Understanding (MOU) with the
Altria Group (MO) and UST, the maker of smokeless tobacco products, have announced that they have entered into a definitive agreement for MO to acquire all outstanding shares of UST. Under the terms of the agreement, shareholders of UST will receive $69.50 in cash for each share of common stock held. The transaction is valued at approximately $11.7 billion, which includes the assumption of approximately $1.3 billion of debt.
Boeing (BA) advanced 0.85 to $63.84 even though the company announced that it was unable to reach a labor agreement with the machinists union. 26,800 have gone on strike.
The New York Stock Exchange (NYSE) advanced 134.86 on 1.3 billion shares traded today. There were 1,793 advancing issues versus 998 decliners. The NYSE had 58 new 52 Week highs and 142 new 52 Week lows. One the Nasdaq Composite index there was a total of 2.6 billion shares traded on 1,726 advancing issues. In addition, there were 1126 decliners today. The COMP had 76 new highs and 142 new 52 week lows.
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Crude oil closed down a little today at $106.23 but traded within a $4 point range. In early trading the commodity was higher. Even though the current track is for Ike to run through the Gulf oil patch, it appears that the market is going to wait on the next hurricane before bidding up the price of oil. The strengthening dollar continues to give support to the decline in the commodity complex. The Eurodollar futures are currently at 1.4122, which is almost 20 cents per Euro lower.
As mentioned in last Wednesdays commentary, I pointed out that the 38.2% Fibonacci retracement had been the magnet for the price action of late and that a break of the 50% would cause the picture to turn ugly. In addition, 1260 was the first support level with a target low of about 1240. The SPX broke lower through the 50% retracement level and violated the 78.6% level on Friday before bouncing higher to close just below the 61.8% Fibonacci level (1224). I also pointed out that the RSI hadnt signaled anything other than consolidation and was looking as though the momentum was downward. In addition, the slow Stochastics had crossed below the moving average which generally signals that the direction is to the downside. Thursdays decline and Friday mornings follow through confirmed the slow Stochastics indication. The RSI and Slow Stochastics both broke below their respective oversold barriers. By Fridays close, they both had emerged from oversold territory to confirm that a bounce was due. That is the past and the future indication is that there is still upside momentum from both the Slow Stochastic and RSI. The Slow Stochastic has crossed above the moving average which usually indicates upside momentum. The SPX broke above the 21 day exponential moving average (EMA) intraday but ended lower at 1267. The SPX did close above the 8 day EMA which closed at 1265. With the SPXs 8 day EMA lower than the 21 day EMA the moving averages are currently indicating weakness. In addition, the Bollinger bands have expanded greatly to acknowledge the increased volatility in the SPX. Last week, the main concern was that the upper band was curling downward and had served as a resistance level for the SPX on Wednesdays high. It is amazing how often the pinching of the Bollinger bands is followed by a sharp move in the direction of the momentum (Stochastics in this case).
Last week the 50 day simple moving average (SMA) was the dynamic support level that held up as the support on Wednesday. However, the SPX closed just below the 50 day SMA (1268.6) today. The trend, as indicated by the 89 and 200 day SMA, is still very much down. Once the 89 day begins to curve upward the trend will become upward. There is still quite a bit of resistance at 1300 and also at 1315 from both the August price highs and the 89 day SMA. The ADX and Money Flow index are both indicating nothing. The ADX generally indicates that a trend is in place when the indicator is above 15 and increasing. The support is from Fridays low of 1217 and July 15th low at 1200.
Russell 2000 (RUT)
The RUTs relative strength has continued through the recent overall volatility. Even the 8 day EMA maintained above the 21 day EMA. The RUT advanced up 14 points to 732. The upper Bollinger band is declining while the lower band is moving upward. The pinch of the bands may be indicating some future volatility in the RUT just it did in the SPX. The main difference in the two indices is that the RUT has upside momentum as indicated by both the Slow Stochastics and RSI. The Slow Stochastics is about to move up through the moving average which will confirm the upside momentum. The RSI hasnt confirmed the upside momentum until the RSI breaks above the recent high from 9/3. As of the close, the RUT closed above both the 8 and 21 day EMAs.
The ADX is indicating consolidation because the indicator is less than 20 and declining. The Money Flow index has continued to decline while the RUT is consolidating. The Money Flow is basically indicating a stealth sell off. On Thursday, the RUT remained above the 200 day SMA but closed below the 89 day SMA. Fridays low violated the 50 day and 89 day SMA intraday but was able to close above both averages. If we are using the 89 day SMA as the trend indicator, then the RUT is currently on an uptrend. Support is from the 200 day SMA and then Fridays low. A break of either would signal another sell off. A break above 755 and then 765 is the signal for a new upside move. Otherwise, the RUT will remain in this consolidation phase; which may happen while the SPX and NDX find their footings.
NASDAQ 100 (NDX)
I want to spend a little time on the NDX since it is showing quite a bit of weakness. The RUT, which is comprised mostly of small capitalization stocks, has been receiving more money flow while the NDX is being distributed. For instance, the NDXs Money Flow index above peaked at 80 in August and bounced from about 25 on Friday. While the market closed down today the Money Flow increased a little. In addition, the low price of 1734 filled in the March gap at 1750 today. One issue in the above chart is that the ADX is above 20 at 21.09 and moving upward. The ADX is representing that the NDX is in an established trend. Therefore, the ADX is suggesting that the downtrend is alive while the Money Flow is indicating that the NDX is near a low. There is the other gap at 1706 from March 17th that may need to be filled prior to any move to the upside. If there is a move upward, todays high of 1797 will be the first resistance level. The next level of resistance is at the 50 day SMA (1859 and declining). Moving averages provide dynamic support and resistance where price levels remain fixed.
The Consumer Staples (XLP) sector has remained the leader of the pack in relation to relative strength among the S&Ps sectors. The trade has been long the XLP and short the Energy or Basic Materials (XLE or XLB) sectors. The Consumer Discretionary (XLY) sector is another strong sector that has come from energys weakness. But consumers arent running out to buy fancy purses and clothes as fast as they buy the necessities. The XLY (shown below) broke and closed above its 200 day SMA today. The Money Flow index appears to have hit a bottom. ADX has not yet confirmed a new uptrend. Finally, the price needs to break and close above $32 in order to establish some follow through.
Earnings and Economy
As a card player, the only interesting stock reporting earnings tomorrow is Shuffle Master (SHFL). I dont think Cramer even knows half of these stocks.
Last week I wrote about the EPS trade with Take Two Interactive (TTWO) as the example. There must be some additional news expected or surrounding the stock because the Implied Volatility only dropped 10% from last week. On the next one, I will send out an update the next evening on how the trade works and how to manage the risks with position sizing and trade allocations.
There are only two major economic reports due out tomorrow including the Pending Home Sales and the July Wholesale Inventories. The market is expecting further weakness in pending home sales from Julys 5.3% increase. August was a slow month for a lot of my Realtor friends. I play in a weekly poker game that at its peak the majority of the players had some involvement in Real Estate or mortgages. I believe that almost all of them have now switched to different industries, thus giving up. There is one individual I am waiting for to switch careers before calling a capitulation bottom.
The September open interest will only be valid for use until this Friday when I will begin to use Octobers option open interest. The NDX shows peak open interest at the 1700 strike price. There are 17,605 contracts open at that strike. There should be substantial support at 1700 from the open interest and the price gap at 1706 finally getting filled. There is some resistance at the 1850 call option strike price. However, the peak is at 1950 with 18,481 contracts open. With only two weeks left, the 1850 strike price is the only resistance level I expect to see come into play. But you never know.
The SPX posts its strikes in $5 increments. There is usually a lot of open interest at the $25 points. The peak open interest on the puts is at the 1250 strike price with 246,199 contracts. After that, the 1225 strike price comes in with some high open interest that could come in with some backup. On the upside, there is resistance at the 1275 Calls with 89,191 contracts. The peak open interest is at 223,427 on the 1300 Call Strike price. Therefore, there is some serious resistance above.
Good trading to all!