Markets had a hangover Wednesday morning, induced by a bear party Tuesday and not helped by foreign bourses that dropped through the night. Interior Secretary Gail Norton's update on hurricane damage to oil and gas facilities on Tuesday induced fear of the inventories number, and hawkish statements by three Fed heads Tuesday hit interest-rate sensitive issues. Feeling the headache, the Dow Jones Transportation plunged straight down to support before the inventories numbers, and then stumbled through another layer or two of support afterwards.
Annotated Weekly Chart of the TRAN:
The diamond pattern seen here indicates emotion-based trading and typically serves as a topping formation. We experienced traders and OIN subscribers know better to count on those "typical" outcomes, however. The trendlines shown on that chart should be watched for upside or downside breakouts, for guidance as to the TRAN's action and to that of the markets in general. The Fibonacci bracket anchored to the TRAN's rally low and high shows a strong correlation with consolidation zones as the TRAN was climbing, hinting that this bracket might be encompassing the total movement and that the TRAN's intermediate-term high might have already been seen. Based on this evidence alone, a downside breakout might be the most expected outcome, but a retest of the summer high cannot yet be ruled out.
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The TRAN closed below its 200-sma Wednesday, having bounced intraday but not able to sustain the bounce. As long as the TRAN maintains daily closes beneath the 200-sma, a trip down to the 200-ema at 3583.75 and the 19.1% retracement of the rally, at about 3566.55, might be indicated.
The declines in distillate and motor-gasoline supplies proved deeper than expected, driving the TRAN lower. According to the DOE, gasoline supplies dropped 4.3 million barrels while the American Petroleum Institute, the API, noted a similar 4.8 million-barrel decline. The DOE reported distillate inventories lower by 5.6 million barrels and crude down by 300,000 barrels. The API said distillates dropped by 5.6 million barrels, and crude, by 300,000 barrels.
While those figures failed to support the markets, the supply of crude is no longer the primary focus, but rather it's refining capacity, as detailed by Jim Brown last night in his Market Wrap. The impact of a possible hike to $5.00 in gasoline prices on consumers and businesses also remains a primary concern, particularly in the wake of those increasingly hawkish Fed head statements. This week's economic numbers finally showed some inflationary effects of higher energy costs. Those effects may work to decrease demand for petroleum products, some speculate, with the DOE figures noting a decline in demand. Most believe that the slackening in demand will not be enough to offset the effects of decreased production, and won't significantly depress prices, however.
That slackening in demand was enough to push the OIX sharply lower, however, knocking its recent support out from underneath the SPX. The materials-related issues such as Phelps Dodge also were hit, PD also suffering from an analyst downgrade.
Annotated Daily Chart of the SPX:
Some charts show the potential for follow-through tomorrow toward the 1190 level on the SPX, but that's a level that many have been charting for weeks. Dip-buyers could step in at any point. With a bearish formation, a failure to touch the top of the formation on the last approach to the top and the precipitous nature of the decline, bearish entries on bounces and rollovers might prove less risky than possibly countertrend long entries on bounces. Many do plan long positions on tests of that support, but those wary of potentially countertrend plays might think long and hard before considering long entries before that knife has stopped falling. Those in bearish positions should keep profit-protecting plans in place now, and should perhaps take profit on at least partial positions from Wednesday's closing level down to 1190, then look for new entries on tests of the 100-sma or the neckline of that H&S forming since May. Make sure there's a rollover in progress first before taking new bearish entries.
An SPX break below about 1188-1189 presents the possibility that it's breaking down out of that rising wedge. New bearish positions might be entered there, but only if traders keep tight stops. The possibility of a fake-out move exists. Exit if there's a quick reversal.
Unless the Dow just overran targets near the close Wednesday, it appears weaker than some other indices.
Annotated Daily Chart for the Dow:
While the bearish features of the previous charts prove easy to discern, the Nasdaq's charts offers more questions than answers.
Annotated Daily Chart of the Nasdaq:
Today, Mercury Interactive (MERQE) and ADC Telecommunications (ADCT) both trimmed earnings outlooks, perhaps offering a warning that not even techs are safe. Both were hammered early in the day, although ADCT managed to climb off its low of the day. Too many tech warnings like this, and the Nasdaq may swoon, too.
A study of the SOX's chart also presents as many questions as answers.
Annotated Daily Chart of the SOX:
Markets had to fend off the noisy clamoring of other troubling economic releases today, too, although the first releases of the day proved benign enough. The Mortgage Bankers Association released mortgage applications for the week ending September 30. The association deemed the data to show a steadying from the previous report, although some might question that conclusion, with the composite index decreasing 1.1 percent on a seasonally adjusted basis and 1.2 percent on an unadjusted basis. This index measures mortgage loan application volume. The purchase index dropped 1.9 percent and the conventional index fell 1.8 percent, but the government index rose 11.4 percent and the refinance index climbed 0.1 percent. The average contract interest rate for a 30-year fixed-rate mortgage climbed to 5.55 percent from the previous 5.44 percent of the week earlier. Even calling this data benign wasn't enough to rescue the DJUSHB, the Dow Jones Home Construction Index. It plummeted, too, although it showed relative strength in its bounce back to the 200-ema and almost to the 200-sma.
Challenger, Gray and Christmas released its monthly tally of planned layoffs by major U.S. corporations, also deeming their release as showing as steadying over the previous month's figures. For the year, layoffs climbed 8.2 percent, with about a third of the planned layoffs coming from the auto, airline, retailing, and accounting industries. Monthly layoffs fell 33 percent from the year-ago level and quarterly layoffs, 2.5 percent from the year-ago level. The outplacement firm said that the transportation and retail sectors led the number of planned reductions in work forces for September. Motorola's announcement today that it would trim 1,900 jobs across the globe perhaps also soured sentiment, but MOT's staff will actually remain stable, because the company intends to add staff in other areas.
The retailers may be leading in the number of planned reductions of workers, but the RLX did not produce a new low below September's, unlike the Dow, SPX and OEX. It's been rattling around between the 50% and 61.8% retracement of its rally off the spring low into the summer high for several weeks, and ended right on that 61.8% retracement. Its formation looks like a bear flag rising off the September low to retest a neckline for a H&S confirmed in September, so an eventual downside breakdown might be the best guess, with the RLX likely to carry the OEX with it, at least. An RLX break above its 200-sma at 441.32 might have more beneficial effects for the OEX and for other indices.
However, neither of those MBA and Challenger releases was as closely watched as the September ISM services index, and it hammered the headachy markets.
September's decline in the services ISM was the steepest ever recorded, one article noted. It plummeted to 53.3 percent from August's 65.0 percent, with the prices-paid component soaring to a record 81.4 percent from August's 67.1 percent. Fifty-eight percent of reporting firms claimed they paid higher prices in September, no surprise to those who have been watching the impact of higher energy prices. Terms such as "out of control" were used to describe the rising costs, especially those attributed to energy costs. New orders dropped to 56.6 percent from August's 65.8 percent. The employment component fell to 54.9 percent from 59.6 percent. Despite claims of "aberration" by the more optimistic among the market pundits, this was not welcome news to markets still reeling from too much hawkish Fedspeak yesterday.
Markets opened, hesitated a few moments, and then began the day's plunge. Internals worsened all day. By the end of the day, NYSE and Nasdaq adv/dec ratios stood at 693/2540 and 688/2281, respectively. Sectors were almost uniformly lower. The IUX had shown some bounce potential at one point, but ended lower. Big caps such as Caterpillar (CAT), General Motors (GM), and Hewlett-Packard (HPQ) had special reasons for declining, beyond the general market woes. Jim Brown detailed some of the pressures on HPQ in last night's Wrap so I won't detail those again. Speculation built that Delphi could declare bankruptcy this week, with all that's standing between Delphi and that event is the possibility that GM and the UAW could hammer out some kind of multibillion dollar bailout for the company. That possibility pressured GM.
Analyst upgrades did help financials Marsh & McLennan and AON (AOC) to post small gains, but both left spinning-top candles beneath resistance, so their charts don't prove particularly encouraging to bulls, either. Also in the financial sector, AIG, AXP, and FRE outperformed some other stocks, if not all showed gains for the day. In the restaurants, YUM moved sharply higher this morning after it beat analysts expectations but perhaps the in-line guidance for the fourth quarter and the full year failed to cheer investors. YUM closed in the red, leaving behind a long candle shadow that had pierced the 200-sma but a candle body that formed beneath it. Wendy's (WEN) did post a gain, and some other restaurants such as MCD and DRI at least outperformed the rest of the markets, if not all closed positive.
However, no effective palliatives were to be found for the hung-over markets. Tomorrow's economic releases begin with the usual 8:30 release of jobless claims. The DOE updates on natural-gas inventories tomorrow, with natural gas having hit a record $14.75 per million British thermal units today, so that number has the possibility of providing that palliative or hammering markets further. Many making predictions forecast a rise of between 41-45 billion, but one analyst suggested that the climb could be as low as 25 billion.
Charts present the possibility tomorrow for more follow through to the downside, with SPX 1190 and Nasdaq 2080-2100 perhaps serving as price magnets. All will be watching those numbers, however, and some choppy trading could ensue as those numbers are approached and dip-buyers get braver. Since there was no bounce by the cash close Wednesday, prevailing sentiment would be that the follow-through could happen tomorrow morning, but if markets instead bounce, watch for the bounce and rollover entries detailed above. An SPX drop straight through about 1188 could suggest that it's breaking through the rising wedge support, and tentative and risky new bearish positions could be entered at that point, but limit risk by limiting position size and keeping stops tight until the risk of a quick reversal has passed. My best-guess expectation is for some choppy, difficult to trade, attempts to rise, perhaps after an initial drop. If the advdec line (QCharts value) opens near -1600 and begins to drop rapidly, my best guess would be for an initial drop. If it opens near that and begins rising rapidly, my best guess would be for an initial bounce, followed perhaps by a rollover. This is speculation at its purest, however, ahead of tonight's events and a look at how futures behave overnight.
Whole Foods Mkt - WFMI - cls: 129.62 chg: -5.89 stop: 133.01
Why We Like It:
BUY PUT NOV 130.00 FMQ-WF OI=1065 current ask $6.80
Picked on October 05 at $129.62
BP Prudhoe Bay - BPT - close: 75.40 chg: -2.10 stop: 73.99
We are still sitting on the sidelines with BPT. The stock continued to decline with the rest of the energy sector. We're curious to see if shares of BPT will bounce from support near $74.00. Our suggested entry point to buy calls is at $80.11 but we are considering an alternative entry if BPT manages to bounce from its rising 100-dma.
Picked on October xx at $ xx.xx <-- see Trigger
Broadcom - BRCM - close: 47.33 chg: -0.32 stop: 44.49
We are honestly amazed at BRCM's relative strength today. The stock lost a minor 32 cents while the SOX fell 1.37%. While BRCM's strength is encouraging almost every stock will turn lower when the major averages are crashing. We would look for BRCM to test support near the $46.00 level. We're not suggesting new positions at this time.
Picked on September 25 at $ 45.05
Bear Stearns - BSC - close: 106.89 chg: -0.81 stop: 102.49
BSC actually rallied higher for most of the session before falling sharply in the last two hours of trading. We are not suggesting new plays at this time. Readers can watch for potential support at the 10-dma (106.70) or at the $106.00 level, where we have been suggesting BSC might bounce.
Picked on October 02 at $109.75
Cardinal Health - CAH - close: 62.65 chg: -0.97 stop: 59.85
CAH was not exempt from the profit taking today and shares look poised to test minor support at the $62.00 level. If $62 breaks the next level is support near $61 from two weeks ago.
Picked on September 25 at $ 61.95
Cameco Corp - CCJ - close: 53.00 chg: -2.02 stop: 49.49
The market-wide sell-off certainly sparked some profit taking in CCJ. Shares lost 3.6% on strong volume. The stock is still trading with a bullish trend of higher lows... but more conservative traders may want to seriously consider exiting early right here to minimize any losses.
Picked on September 18 at $ 53.30
Cigna - CI - close: 116.05 change: -3.25 stop: 111.49
Today's action in CI should not come as a surprise. We've been suggesting that CI will pull back from resistance at the $120 level for a few days now. The $116 level did hold up as support and the real question will be if this level can hold up tomorrow. If the $116 level breaks down then the simple 50-dma near 113.40 is CI's next level of support.
Picked on September 29 at $116.51
Harman Intl - HAR - close: 101.34 chg: -1.29 stop: 98.99
Shares of HAR are still hanging in there. The stock did see some weakness today but not as bad as it could have been. We would expect the stock to retest the $100.00 level as round-number support soon. We are not suggesting new plays at this time.
Picked on October 03 at $102.39
Intuitive Surg. - ISRG - close: 72.82 chg: -2.33 stop: 70.99
Our more conservative readers may want to consider an early exit here too. ISRG has been somewhat volatile lately and it now looks poised to test technical support at the 50-dma near $72.25 soon.
Picked on September 28 at $ 75.11
Altria Group - MO - close: 74.08 change: -0.08 stop: 69.90
MO is still showing relative strength but if shares do succumb to the market weakness we would expect the $73 level to act as the first level of support.
Picked on September 18 at $ 73.14
Black & Decker - BDK - close: 78.85 chg: -2.59 stop: 83.05*new*
BDK showed its true colors today and broke down under support at the $80.00 level on big volume. The stock looks poised to hit our target in the $78.00-77.00 range soon. Readers can prepare to exit. We are lowering the stop loss to $83.05.
Picked on September 14 at $ 83.31
Ryland Group - RYL - close: 64.26 chg: -1.79 stop: 68.75
Homebuilding stocks got whacked again as Wall Street reacted to inflation fears. The DJUSHB index lost another 3.2% today. Shares of RYL turned lower as well with a 2.7% decline on strong volume. The move to $65.70 (our trigger) this morning opened the play for us. Our target is the $60.50-60.00 range. Please see Tuesday's play description for more details.
Picked on October 05 at $ 65.70
Someone e-mailed me this morning (Wed.) asking about what technically might have tipped us off to this recent rout. In my last Index Trader column I had been bullish, although I had some qualifications about the S&P 100 (OEX) needing to get above it's 21-day moving average and a note on prior tops in the Nasdaq 100 (NDX) that had to be cleared. My 'Index Trader' is seen only on the OIN web site (although you can click to it in the Sat/Sun OIN Newsletter). Anyway GOOD QUESTION!
And it leads me in turn to ask, as I did to this person and I ask now of any Subscribers who would e-mail a response, how many are keeping an eye on HOURLY charts. If you have either an online charting application or one residing on your PC and you connect to a data feed, I assume you can view an hourly chart covering at least the last 30-days. YES?
If not, get something else to chart with! If you look at charts online, it can be impossible to, for example, see more than a 10-day hourly chart. A bit of a handicap this. I keep a year's worth of intraday price data so I can view very long-term hourly charts. WHY? Sometimes you see a top looming, or 'building' that you DON'T see, or see as well on a daily chart. Just like you sometimes see things on a weekly chart, like a break of a major trendline that you don't see, or see as well, on a daily chart.
I had a technical analyst friend at PaineWebber, who covered individual stocks (where I covered the indexes mostly), who kept an hourly chart on the walls of his office. It went round and down and up and down. He kept pasting more graph paper to extend it. I was wondering when it (this hourly chart) was going to go out into the hallway!
As I've often said, reversal days tend to come on Tuesday and Thursdays often enough to notice it again this week. WHY? No earthly reason that I know of! But, by using BOTH daily AND hourly charts, there are few times that you will not see a top or bottom forming. Even if you only able to look at the charts at night after work. (Few are professional traders, but some can look at the market pretty often during the day.)
While hourly chart and trendline analysis showed a top forming, they did not quite tip us to the STEEPNESS of the drop that followed. By recent tops having TWO different trendlines, of different types, as I'll show (what I call 'DOUBLE' trendline resistances), this can be a tip off to a major reversal point.
Fundamentally, oil prices had been moderating but the FED was not 'moderating' according to some recent press. That coupled with recent analysis that the housing rate-of-increase was SLOWING, was the key I believe to what has spooked the market so much.
I would also note that I usually ONLY buy calls or puts when I see bottom or top chart patterns forming, especially at the tops and bottoms of trend channels in order that my RISK is limited relative to my entry, as these are the points where I can set a close-by exit or STOP. Linda Piazza, had a good read in her Trader's Corner article of 9/24 on determining stop/exit points.
HOURLY CHARTS versus DAILY:
S&P 500 (SPX) DAILY CHART:
Tuesday's drop fell under 1220, breaking the dashed blue trendline above, which I had kept on the charts as all closes but one had held above. However, trendline 2 (T2) was the lower up trendline to work withy. The break of 1210-1212 took prices through T2 and suggested a reversal. The close under the prior low at 1200 is probably conclusive for a technical reversal (of the trend). HOWEVER, IT IS THE HOURLY CHART THAT 'SHOWED' THE TOP
S&P 500 (SPX) HOURLY CHART:
UNTIL that is, the rally reversed at BOTH the dashed (red) down from the early-Sept top AND the third trendline (T3) drawn through the recent hourly tops connected to the late-Aug low; this was showing a 'line' of resistance or the top of an (hourly) uptrend channel. The 'double' trendline resistance is at the red down arrow. The rally failure was really from where these two trendlines intersected.
I use an hourly RSI, with 'length' set to '21' (i.e., a 21-hour Relative Strength Index) to show when an overbought/oversold condition exists in the short to intermediate-term.
S&P 100 (OEX) DAILY CHART:
The most that the RSI on the daily chart was showing us was a pattern of declining 'Relative Strength', as each peak of the RSI was less than the preceding one.
S&P 100 (OEX) HOURLY CHART:
Last week's rally failed at the juncture around this hourly down trendline AND the line coming up off the last-August bottom, connecting the recent hourly highs. The sideways drift then led to the point where the bottom fell out.
DOW JONES INDUSTRIALS (INDU) DAILY CHART:
Still, this price action was not conclusive for a top, although the decisive downside penetration of the 21-day moving average was a (trend-reversal) warning which became conclusive with today's follow through fall below the low end of the uptrend channel and break of the prior lows to boot, by the close.
Still, the top formation was BEST seen on the hourly chart.
DOW JONES INDUSTRIALS (INDU) HOURLY CHART:
NASDAQ COMPOSITE (COMP) INDEX DAILY CHART:
NASDAQ COMPOSITE (COMP) INDEX HOURLY CHART:
NASDAQ 100 (NDX) INDEX DAILY CHART:
It does remain to be seen what happens at the lower channel line on the daily chart above; today's close was just under this key up trendline. The close on the lows was not encouraging, but there is not a conclusive reversal of the trend until 1550 is pierced again.
NASDAQ 100 (NDX) INDEX HOURLY CHART:
The top pattern had a related RSI 'signal' by the overbought '70' reading seen on the 21-hour Relative Strength Index above. To get ONE good 'confirming' signal on an indicator like this makes its use completely worthwhile!
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Today's Newsletter Notes: Market Wrap by Linda Piazza, Trader's Corner by Leigh Stevens, and all other plays and content by the Option Investor staff.
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