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Daily Newsletter, Wednesday, 11/30/2005

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

The Numbers

The day started out bullish and we all thought today was going to be another bear slaughter. Then things started to get choppy and traders knew the tide was changing and sure enough both SPX and DOW were making new daily lows. Traders were very leery about those lows though because they had all been here done this before and had their heads handed to them if they became too bearish. Then to add to the confusion the small cap index $RUT was not making new daily lows and was exhibiting relative strength.

Around 2:00 EST SPX and the DOW started a slide downward and the bulls were never able to regain a footing.

The DOW ended up losing -82.29 points to close at 10805.87 but finished the month up +365.8 points. The S&P fell 8.00 points for a 1249.48 close. The Nasdaq composite did eke out a small +0.11 gain to close at 2232.82. The Nasdaq 100 (NDX) lost a little more -4.28 and closed at 1672.56.

The NYSE traded 2.1 billion shares, 1567 stocks rose and 1739 fell. The Nasdaq Stock Market traded 1.8 billion shares, 1770 stocks advanced and 1292 declined.

Nyse had 102 new highs and 79 new lows whereas the Nasdaq had 126 new highs and 47 new lows.

The 30-year Bond lost 5/32 to close at 1122. The 10-year lost 5/64 to close at 10817. The 30-year yield dropped -0.11 to 4.74% and the 10-year yield fell -0.34 to 4.43%

Crude made a small gain on the electronically traded market of 0.90 to close at 57.40.

Economic reports

At 8:30 this morning the Commerce Department released its 2nd report on the 3rd quarter GDP, the output of goods and services produced by labor and property located in the United States. The GDP estimates released today are based on more complete source data than were available for the advance estimates issued last month.

The revised growth rate, 4.3% annual rate July through September, was higher than the originally estimated 3.8% and better than the second quarter's 3.3% rate and first quarter's 3.8%. This was the strongest quarterly gain in GDP since an equal, 4.3% move up in the first quarter of 2004 and the fastest pace of the year since last summer.

The strong GDP report was another sign that economic growth has stabilized over the past two years, which has fluctuated between 3.3% to 4.3%.

Unfortunately the good news from the GDP report could reignite rate fears but then again the economy may be growing at a pace strong enough to endure more rate hikes.

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The National Association of Purchasing Management-Chicago said today manufacturing in the Chicago area expanded for a third straight month in November. The PMI, based on a survey of executives in the region, fell to 61.7 from October's 62.9 but higher than analysts estimates of 59.9. Readings higher than 50 indicate growth and the Novembers number was above the 60.5 average for this year. A measure of orders backlogs was the highest since July 1994.

Heating-oil futures fell to their lowest level in six months today because the weekly distillate inventory reports revealed the biggest increase in distillate stocks since July. The rise in distillate stocks was due to an increase in U.S. refinery production utilization to 89.3% from 88.1% in the previous week. The DOE showed a 4.2 million-barrel drop in crude inventories for the week ended Nov. 25 down to 317.6 million barrels, which is 10.3% above the year-ago level. The decline in crude in was bigger than most analysts expected.

The Federal Reserve said in its latest beige book report, from mid-October to mid-November the U.S. economy has been steaming right along in most regions of the country as hiring picked up and price pressures intensified.
While housing and auto sales slowed in many districts, manufacturing activity and retail sales were up in most districts.

Daily chart of the SPX:


The SPX is kind of interesting because it is so easy to read, which doesnt happen all that often. The rally we have seen off the October 13th lows has to take a breather and make a retracement. If the retracement crosses the 10 EMA you are going to hear all the pundits spouting off that the SPX is on its way down because it has crossed its 10 EMA something it has not done since October 31st. But give me a break, when was the last time you saw the SPX stay above its 10 EMA for an entire month so this index needs to make that cross to regroup the troops before it can make another run at yearly highs. This is where Fibonacci comes in handy. Place a fib bracket on the rally from the October 13th lows to the November highs. Now if the SPX retraces a shallow 38% (1232), across the 10 EMA by the way, and then bounces the chances that the yearly highs will be breached are pretty good. Now if the SPX retraces 50% (1220) the chances of a new yearly high become less likely. And finally if the SPX retraces 62% (1207) then I would say forget about new yearly highs.

But you cant just stop there when the retracement is over and you see how deep it was you will also need to start reading the swing highs and lows. If the SPX retraces back to say 1220 and takes another run at yearly highs but doesnt make it and makes a lower high then all bullish bets are off.

Then you also have to keep an eye on the MACD and see if it is following the price patterns. If the SPX does indeed make a higher high but the MACD makes a lower high then that higher high is suspect.

It takes a lot to make a bull market doesnt it? But that is exactly what has happened since the beginning of this rally, a continuum of higher highs and lows and a MACD that confirms each and every one. This is why I have remained a bullish as I have. If the rally from the October lows was a weak rally you would at least be seeing it in the MACD.

Daily chart of DOW:

Same story here as for the SPX since the DOW and the SPX have a tendency to mirror one another considering the influence the stocks that are in both indexes have on each of the markets. Once again if the 10 EMA is breached dont put too much emphasis on it because it needs to make that break to take a breather.

I think a retracement to the September 12th swing high (10700) and the 38% (10650) retracement zone would be a spot from where you could start looking for new long trades.

The DOW did close below its 10 EMA today and the MACD has crossed so the retracement has started and how you need to watch the indicators mentioned in the SPX commentary.

Daily chart of the Nasdaq composite:

The chart of the COMPX is giving us a very good idea that the 38% retracement will hold because it is also a swing high from August 12th so I would be watching for a bounce from this zone as well. So far though the 10 EMA has held but dont go getting too bearish if it does not. Just like all the other markets it needs to break so this index can take a breather and regroup.

Daily chart of the Russell 2000:

This is a much weaker chart because the swing high made on November 23rd was not a new yearly high like it was on the big caps indexes. And you can see that the $RUT has closed below its 10 EMA already back on November 16th. But even this weaker market did not break its 10 EMA today.

Daily chart of the SOX:

The $SOX did not break its 10 EMA mid November like the $RUT did but it also has not made a new yearly high like the large cap indexes so this chart fits somewhere in between the weaker $RUT and the stronger large caps indexes. Now compare the MACD to the price and you will see a very nice bullish divergence.

Daily chart of the $TRAN:

Last but certainly not least is the chart of the Transportation index. This one is more bullish than the other charts but there is bearishness creeping in that needs to be watched. Notice the small MACD bearish divergence (magenta lines). This kind of divergence is one of the first signs you will see when a top has been formed and since the $TRAN index has been the most bullish of the lot and has been a market leader this bearishness could mean the others will follow suit and do the same.

Tomorrow's Economic Reports

Tomorrow we have the weekly Jobless claims report out at 8:30EST for the week ending November 26th. The Consensus is for 325,000 claims down from the previous week of 335,000.

Also at 8:30 is October Personal Income and Spending. Consensus is for Income to drop to 0.5% down from Septembers 1.7% and spending to drop to 0.20% from Septembers 0.5%.

Next on the agenda is October Construction Spending at 10:00. Consensus is for 0.50% the same as September.

Then rounding out the docket of reports is the 10:00 November ISM. Consensus is 58.0 down from Octobers 59.1.

This week is turning out to be bearish and from a day traders point of view that is good but if you are long this market and not a day trader I would not be bailing on my long positions just yet. The rally from October lows needs a breather as I have stated ad nauseam and this week we are witnessing that breather. Stay calm and watch the indicators mentioned earlier and you should be fine.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None None None

New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 

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