That's what the headlines are after today's rally. Believe it or not, it's actually better for the bulls if the rally sneaks up on the market. These fast sharp moves higher actually smack of short covering, as in too many bears were caught on the wrong side of the market in their post-FOMC expectations. But that's just a heads up for what today's market might have been.
Let's not throw cold water on the bulls yet. They had a great day today and should enjoy it. The DOW, up 217 points today, had its biggest up day since April 2003. If you'll remember, March 2003 marked the low for that year. The Nasdaq had its biggest up day, +62 points, since the March 2003 low, and the same is true for SPX, +27 points today. The SOX, after testing its 200 weekly moving average yesterday, had a very big day--up +17 for a 4% gain today. The Transports were up +160 for a 3.3% gain. All in all it was a very bullish day.
The internals of the market supported today's prices, mostly. Advancers handily beat decliners almost 5:1. Advancing volume beat declining volume better than 10:1 (that actually borders on blow-off). But interestingly, new 52-week highs were beat out by 52-week lows 227 to 233. These kinds of numbers tell me this is probably a bear market rally instead of the start of something bigger to the upside. That's a heads up to those who are long the market.
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The plus for the bulls today was the fact that the equity put/call ratio was higher than normal. This says there were a lot of non-believers in today's rally, which is exactly what the bulls want to see. At best I think we're in for a choppy rise through the summer. At worst (for the bulls) the current rally is an end to a 3-wave advance off the June low and we're getting ready to resume the decline that started from the May high. The very negative setup, if this bounce is all we're going to see, is that we're getting ready for a very hard down move (from an EW perspective).
I will once again update the SPX weekly charts at the end of this report to show where we are in the bigger picture. While we don't have an answer yet as to what we can probably expect for the summer. The completion of the 3-wave advance will be when we watch carefully for the next move. It'll be the next move--choppy sloppy pullback or sharp decline--that will give us the clues we need for what follows.
First let's get to today's economic reports, of which there were a few. Starting off we had the unemployment numbers. New claims were up 4K to 313K which was slightly above forecast for 310K. The previous week's number was revised up to 309K from 308K so actually the new claims were up 5K but what are 1000 unemployed people to government bean counters. The 4-week average was dropped by 6,000 to 305,500 which is the lowest number since February. Continuing claims rose by 54K to 2.41M but the 4-week average dropped by 2,750 to 2.40M. That's the lowest number for the average since January 2001.
Help-wanted ads in U.S. newspapers fell in May to 33, down from 35 in April and also less than the expected 35 for May. That compares to 38 a year ago. I'm not so sure this is an accurate measure anymore. Perhaps they should look at places like Craigslist.com and of course the other online sites. But if the measure is correct, it's an indication that businesses may not be as optimistic heading into the 2nd half of the year. The ads declined in al nine regions of the U.S.
The final number for GDP for the 1st quarter showed a strong growth rate of 5.6%, the fastest rate in 3 years. This follows an anemic growth rate of 1.7% in Q4 of last year. Economists are expecting growth to moderate some and come in closer to 3% for the next few quarters. The improved growth rate was helped by the mighty consumer, business investment in equipment and software, an improvement in the trade deficit and higher federal government spending.
Consumer spending rose 5.1% making it the fastest pace since Q3 2003. It made up 3.5% of the 5.6% GDP growth. Spending on durable goods rose 20.3% after dropping by 16.6% in Q4 so that was a nice reversal. Business investment increased at a 14.2% rate in Q1, which was the fastest growth in 6 years and it contributed 1.5% to GDP. Corporate profits were up 11.9% for the quarter as compared to a year ago, and up 28.5% year-over-year, the fastest annual growth rate in 22 years. This obviously helped them improve their investment picture. Exports were up 14.7% while imports were up by a lower amount of 10.7%. This is what helped our trade deficit picture. The accompanying chain deflator, a key measure that the Fed uses to check inflation, came in lower than expected at 3.1% vs. 3.3%.
The big news for the day was obviously the FOMC interest rate announcement. No surprise they raised rates .25%, the 17th in a row, to 5.25%. Many economists expect they'll raise rates again in August or September to 5.5%. There were significant changes made to the FOMC statement which basically stated they will be forward looking and not as concerned about what has happened in the past. This was probably done to assuage the market's concerns that the Fed is going to go too far, as they've always done (and will probably do again). Whether this sounded bullish to the market, or whether the market was just ready to rally regardless (which is what I believe), equities shot higher after the announcement and it had already been up nicely. There was no sell-the-news event post-FOMC this afternoon.
The FOMC announcement said that further rate hikes would depend on their outlook for inflation and growth. They believe "some inflation risks remain," even as economic growth cools. They look at productivity improvements and the slowing in the housing market as having a cooling effect on inflation and growth. This is what prompted many to believe that that means the Fed is going to stop their rate hikes while they wait to see what happens next. But isn't that what the market thinks after each rate increase? Pardon my cynicism about the market's expectations. Like I said, I think the market just wanted the FOMC announcement out of the way so it could get on with its buying. After all, we've got some window dressing to do and get it done quickly before the month/quarter ends tomorrow.
Every DOW component was in the green today. The laggard, Big Air (Boeing--BA) was up only 0.43% while the leader was McDonalds (MCD) which was up 5% after getting an upgrade. Let's see what the charts look like.
DOW chart, Daily
Just as I will show two different scenarios, one more immediately bearish the other intermediate bullish, at the end of this report, I'm showing the start of the intermediate bullish scenario with this chart (the next chart, SPX, shows the more immediate bearish wave count). Notice the pullback from the May high is clearly a 3-wave move. That's the definition of a correction, in this case a correction of the longer term rally. This says we'll see the DOW work its way higher through the summer to new market highs. The first thing the DOW needs to do though is get through some potentially tough resistance. Obviously the 50-dma, which is where the DOW stopped today, needs to be recaptured. A kiss goodbye here would be very bearish. The market moves in measured steps and if we look for where we'll have two equal legs up from the June low that's at 11355 so if the 50-dma doesn't stop the rally I'll be looking for that level as an upside target for now.
SPX chart, Daily
SPX has a similar looking chart to the DOW but a tad weaker. As opposed to the EW count for the DOW I show a very bearish setup here. Instead of a 3-wave pullback from the May high, this wave count shows a 1-2, 1-2 wave count to the downside. This says get ready for a very fast and very hard decline right around the corner. I don't know yet which will happen--the DOW's wave count or SPX's--but we should be close to getting some clues after this bounce finishes. For now SPX has resistance where it stopped today--at its broken uptrend line from March 2003. Just above is its 50-dma at 1276.74. And unlike the DOW, the SPX is already close to the point where it will have two equal legs up in its bounce--at 1276.94. Therefore the 1273-1277 area is tough resistance by few different measures and the bulls will have their work cut out for them. A decline from here, or after a touch of the 50-dma would look very bearish (kiss goodbye against solid resistance) and the bearish wave count on this chart says you do not want to be long this market. Now we wait for some clues.
Nasdaq chart, Daily
The COMP continues to look weaker than the DOW and SPX because it's under both its 50 and 200-dma's, with the 50 crossing down through its 200. Not bullish. Two equal legs up in its bounce off the June low is at 2175 so from there up to its 50-dma, currently at 2213 but dropping fast, could be tough resistance for the bulls.
QQQQ chart, Daily
The Q's look like they're set up for another drop to a new low but I don't get the same bearish picture out of this as I do for SPX or the COMP. The way this will turn more bearish is if it consolidates sideways for another month or so. But so far it's looking to me like a new low should be followed by another larger bounce. The SOX gives me a similar impression.
SOX index, Daily chart
The leg down from April did a near-perfect tag of its Fib projection at 422, and also tested its 200 week moving average yesterday at 425. I don't show that here but take a look at a weekly chart with that average and you will see that over the past several years that has been a very important average to keep your eye on. It has either used it for support or resistance and it's currently acting as support. A drop below 425 that stays there on a weekly closing basis would be a strong sell signal. But until that happens I actually like the setup on this chart for a long play. The problem is there is a lot of disagreement between important indexes, and like the picture between the DOW and SPX, or between the two weekly charts of SPX at the end of this report, we'll need some more clues to help establish a better picture for what the market might do this summer.
BIX banking index, Daily chart
We'll get to see if the banks are going to ping-pong between the 200-dma, which it bounced off of at the June lows, and the 50-dma just above at 378.31. The bulls will want to see price consolidate at/around the 50-dma. The bears will want to see a sharp rejection of price there.
Securities broker index, Daily chart
This chart is one of the cleanest from an EW perspective. The decline from its April high to the June low looks like a clean 5-wave move. That's impulsive and that sets our trend--down. The current bounce should be a correction to that decline and then we should get another leg down to at least match the April-June leg. After breaking the steeper uptrend line at the end of April, and then testing it in early May, we had an ideal sell signal there. Now we could be setting up for the same signal at the most recent broken uptrend line from May 2005, currently at 214. Just above this line is the 50% retracement of the decline at 216. The 50-dma is at 217. These combined will make for a very difficult time for the bulls. I would say of all the charts I reviewed tonight, this one makes me the most immediately bearish. Based on this chart, and using it as our canary in the coal mine, I'm seeing the canary starving for oxygen here and is about to keel over.
U.S. Home Construction Index chart, DJUSHB, Daily
As expected, the home builders have been consolidating near the low and the current bounce is a very choppy sideways/up correction (bear flag). This is a classic correction of the decline. It has found resistance at the bottom of the down-channel that it fell out of. This is very typical. This is a short play waiting to happen.
Oil chart, August contract, Daily
Looks bullish to me. The longer term uptrend line held the test while the shorter term downtrend line, and the 50-dma, has been broken to the upside. We could see a pullback to retest either the 50-dma or broken downtrend line but if it holds, and I suspect it will, it will be a good place to buy oil.
Oil Index chart, Daily
If I'm leaning bearish the broader market (which I am) how can I be bullish on the oil stocks, as the price depiction on the chart shows? Good question. It's one of the reasons I'm not whole-hog bearish the market. There are too many indexes like this one that challenge my bearish opinion. It's why I'm keeping myself honest and waiting for the next move (explained more at the end of this report) to give me some clues for the summer. But based on this chart I'm thinking a consolidation will follow and that will be a time to buy. Stay long if you're already long.
Transportation Index chart, TRAN, Daily
And here I thought we had seen the high for the year in the Trannies. But nooo, it has to pull a bullish rabbit out of the hat and give us only a 3-wave decline from the May high. By rallying above the bounce high from early June, it has confirmed the pullback from the year's high as just a correction of the longer term rally. That says we should expect new highs. We might form a big sideways correction that lasts months but regardless, we should expect new highs in this index (and that should be the last one, really really this time). This is another index that's keeping me from getting super bearish the broader market.
U.S. Dollar chart, Daily
As expected, the US dollar tested its broken uptrend line and found it to be resistance. Nice kiss goodbye there with a sharp drop today post-FOMC. We should now see the dollar start another leg down and we'll see if the $83 area provides more solid support which is what I'm thinking will happen. The decline in the dollar may help give gold, and other commodities (like oil and oil stocks), a lift. Gold certainly got a nice bounce today.
Gold chart, August contract, Daily
On the daily chart gold's $20 bounce today doesn't look like much. That's because it's being compared to $150 swings before it. The trouble I see for gold bugs is that the bounce off the June low is looking like a correction to the hard decline. I'm thinking it will fail at or below its broken uptrend line from November 2005, currently near $560. Whether it finds support at its uptrend line from last year, which would be a retest of the June low, or drops to a Fib projection at $531 is hard to say but I don't expect much lower before we see a much larger bounce back up.
Results of today's economic reports and tomorrow's reports include the following:
Tomorrow's economic reports could be market moving if they come in much different than expected. But it'll be Friday, a summer Friday at that, and after today's strong rally there's a high probability that no one will care about the reports. A consolidation day would be a typical day tomorrow.
Sector action today was all bullish--not one red sector on my list. Leading the pack to the upside were gold and silver, networkers, oil service (OSX), securities brokers, SOX, biotechs, airlines, Transports and many of the tech indexes. At the bottom of the green pile, pulling up the rear were utilities, banks, retail and the oil index. But even the laggards were up better than 1% with some approaching 2%. Everyone caught some money showering down on them today.
It's time for our big picture update. I'll continue to monitor both EW scenarios, using the SPX weekly charts, until one becomes the winner. We could be close to getting the clues we need in order to determine the winner. First up is the bearish picture.
SPX chart, Weekly, More Immediately Bearish
Referring to the daily chart above, it has a bearish wave count that says the decline from this year's high is a 1-2, 1-2 wave count to the downside. That calls for a 3rd of a 3rd wave down and those are the fastest and strongest waves of the bunch. It will border on a market crash. From a weekly perspective, the price depiction on the above chart is what it would look like, maybe worse. I show a wave count that says we'll see a larger degree 1st wave down of the new bear market that will get us back down to the April 2005 level near 1050 and it would likely happen before the end of the summer. From there we'd see a huge corrective rally (wave-(2) on the chart) that takes us into early 2007 and probably back up to around 1150 before setting up another very large decline into the rest of 2007. Here's a little closer view of this, using the daily chart.
SPX chart, Daily, More Immediately Bearish
Looking at the weekly chart with a closer view I show what the decline might look like. If it becomes more certain that this is the path we're on I'll use this daily chart to track our progress through the summer. But the bullish alternative says this scenario just isn't going to happen.
SPX chart, Weekly, Intermediate Bullish
This weekly chart shows an larger ascending wedge from 2004 and the need for another 3-wave move up to finish it (all of the 5 internal waves of a triangle consist of 3-waves and that's why wave-(v) on the chart will be a 3-wave move). These patterns are filled with choppy price action and I know we'd all agree that's all we've seen for more than two years now. If this depiction is correct we can expect more choppy price action through the summer as the market heads for new highs into the fall. That would then be the end of the bull market but for now, if this one is correct, it's too early to think long term short.
I'm waiting for some clues as to which scenario is playing out. If the "intermediate bullish" scenario is playing out then the current bounce will be followed by a choppy sloppy sideways/down pullback. That would tell us to expect higher and it would increase the chances for a bullish summer (hard to trade but bullish). On the other hand if the current bounce is followed by a sharp decline that takes out this week's low (1237 for SPX), then the "immediately bearish" scenario gets the nod. If that happens you will not want to be long this market. Get short, stay short into the fall, and enjoy the ride of your life. Hopefully we're close to getting our answer
For tomorrow I don't expect much. After a big rally like today it's common to get a consolidation of the move. It being a summer Friday will only add to the potential boredom for the day. The move up from this week's low looks like it needs a consolidation followed by another new high (could be an equal or minor new high) so I don't like the setup for shorting it here (for scalpers). But next week, after this leg up is finished, that's when I'll be watching carefully for clues as to the above longer term question. Good luck tomorrow and I'll see you either on the Monitor or back here next Thursday.
Allegheny Tech. - ATI - cls: 70.01 chg: +4.11 stop: 64.95
Why We Like It:
BUY CALL AUG 65.00 ATI-HM open interest=301 current ask $ 9.20
Picked on June 29 at $ 70.01
Burlington N.Santa Fe - BNI - cls: 79.09 chg: +1.78 stop: 74.90
Why We Like It:
BUY CALL AUG 75.00 BNI-HO open interest= 130 current ask $7.30
Picked on June 29 at $ 79.09
Goldman Sachs - GS - close: 152.20 chg: +5.71 stop: 146.45
Why We Like It:
BUY CALL AUG 150.00 GPY-HJ open interest=1753 current ask $6.80
Picked on June xx at $ xx.xx <-- see TRIGGER
Union Pacific - UNP - close: 91.54 chg: +2.09 stop: 87.45
Why We Like It:
BUY CALL AUG 90.00 UNP-HR open interest= 713 current ask $4.70
Picked on June 29 at $ 91.54
Wynn Resorts - WYNN - close: 73.64 chg: +2.95 stop: 69.75
Why We Like It:
BUY CALL AUG 70.00 UWY-HN open interest=206 current ask $6.50
Picked on June 29 at $ 73.64
Bear Stearns - BSC - cls: 139.51 chg: +4.10 stop: 132.49*new*
Thursday was a very strong day for the broker-dealers. The XBD index closed up with a 4% gain. Shares of BSC added 3%. The stock hit our trigger to buy calls at $137.51 before the release of the FOMC decision on interest rates. Now that the play is open our target is the $144.50-147.50 range. If you don't feel like chasing BSC here then look for a pull back toward $138.00-137.50. We are raising the stop loss to $132.49.
Picked on June 29 at $137.51
Chipolte Mex Grill - CMG - cls: 60.85 chg: +0.90 stop: 57.45
CMG experienced a little bit of volatility this morning but traders bought the dip at $59.25 above its rising 50-dma. This looks like a new bullish entry point to buy calls. Our target is the $67.50-70.00 range. We do not want to hold over the late July earnings report.
Picked on June 18 at $ 61.76
Google - GOOG - close: 417.81 chg: +11.70 stop: 389.99 *new*
GOOG turned in a strong session adding 2.88%. Driving the price were positive analyst comments and the announcement that GOOG's checkout (online payment) service was now open for business. We are raising our stop loss to $389.99. More conservative traders may want to place their stop near $395 or $400. Our target remains the $440-445 range.
Picked on June 21 at $401.00
Marathon Oil - MRO - close: 83.55 chg: +1.75 stop: 77.55*new*
It was another very strong day for oil stocks. Crude oil topped $73 a barrel. The OIX index added 1.9% and the OSX oil services index added 4.25%. Shares of MRO tacked on another 2.1% on rising volume. We are raising our stop to $77.55. More conservative traders may want to seriously consider taking some profits right here with MRO up $6.00 from our picked price. Our target is the $84.00-85.00 range. The Point & Figure chart's bullish price target has jumped from $85 to $106.
Picked on June 27 at $ 77.55
Reynolds American - RAI - cls: 115.18 chg: +1.31 stop: 109.69*new*
Target achieved. RAI has not only hit our conservative target at $115.00 but shares closed over this level on above average volume. More conservative traders may want to lock in some profits here. Our second, more aggressive target is the $119 level. We are adjusting the stop loss to $109.69.
Picked on June 15 at $111.15
United Tech. - UTX - close: 63.29 chg: +1.96 stop: 59.95
UTX turned in a very strong day adding more than 3% and breaking out above its 50-dma to close at a new three-week high. Currently our target is the $64.00-65.00 range. More aggressive traders may want to aim higher.
Picked on June 08 at $ 60.13
Apple Computer - AAPL - close: 58.97 chg: +2.95 stop: 60.05
Our put play in AAPL is in trouble. The very strong, widespread market rally sparked a 5.2% rebound in shares of AAPL. Investors did not seem to care that AAPL has become the latest company to be investigated for the backdating of stock option grants to executives. If there is any market follow through higher tomorrow then AAPL could easily hit our stop loss. We are not suggesting new plays at this time. The best case scenario here would be to see a failed rally under $60.00.
Picked on June 28 at $ 56.85
Amgen Inc. - AMGN - close: 65.10 chg: +1.16 stop: 67.25
It looks like we should have taken our own suggestion to exit early ahead of the Fed decision. Shares of AMGN bounced for a 1.8% gain and closed back above support/resistance at the $65.00 level and its 10-dma. More conservative traders may want to exit immediately before any more unrealized gains vanish.
Picked on June 05 at $ 67.48
Digital River - DRIV - cls: 40.10 change: -0.43 stop: 42.05
We cannot find any news to account for DRIV's relative weakness this morning. Shares dropped to $37.70 before bouncing back and eventually closing back above the $40.00 level. Volume came in very strong by the closing bell. We are not suggesting new positions and more conservative traders may want to tighten their stops (maybe $41.00).
Picked on June 19 at $ 39.45
Group 1 Auto - GPI - close: 56.29 chg: +0.95 stop: 58.46
The rebound in GPI is slowly eating away at our early gains. Today's breakout over the $56.00 level looks like bad news for the bears. We are not suggesting new plays at this time.
Picked on June 11 at $ 58.46
Intl. Bus. Mach. - IBM - cls: 77.59 chg: +1.03 stop: 79.05
The strength of the market rebound is a concern for any bearish position even IBM, which remains inside its bearish trend. More conservative traders might want to exit early if the stock trades over or closes over the $78.00 level.
Picked on June 06 at $ 78.75
IDEXX Labs - IDXX - close: 75.22 chg: +0.97 stop: 78.05
The BTK biotech index produced a very big 3.7% gain and looks poised to breakout over its 50-dma. That's a big warning sign for bears in IDXX. While we are encouraged that IDXX under performed its peers and the broader market today and the fact that IDXX is still under its 10-dma, we're not feeling very confident right here. More conservative traders may want to exit early or tighten their stops toward $76.00.
Picked on June 12 at $ 77.95
Oshkosh Truck - OSK - close: 47.69 chg: +0.67 stop: 50.51
Shares of OSK did not see much volatility today. The stock turned in a slow, oversold bounce higher. We remain bearish but we're not suggesting new positions. Our target is the $45.50-45.00 range. The P&F chart points to a $34 target.
Picked on June 13 at $ 49.49
Express Scripts - ESRX - cls: 70.94 chg: +2.20 stop: 70.10
We have been stopped out at $70.10. ESRX was strong from the start this morning with a spike toward the $70.00 level but it wasn't until after the FOMC decision that the stock broke out over $70.00. Our conservative target at $65.25 was hit days ago.
Picked on June 08 at $ 69.59
Sears Holding - SHLD - cls: 157.94 chg: +4.79 stop: 154.36
Today's breakout over $155.00 in SHLD has probably put the kibosh on any bearish plays. This rebound from the $150 level and its 50-dma and bullish breakout looks more like a bullish entry point to buy calls. Aggressive traders might want to buy calls here with a target in the $165-167.50 region. Our strategy was an attempt to catch a breakdown with a trigger at $148.99 so the play was never opened.
Picked on June xx at $xxx.xx <-- see TRIGGER
Today's Newsletter Notes: Market Wrap by Keene H. Little and all other plays and content by the Option Investor staff.
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