I'm going to do something a little different for tonight's review of the market. Instead of focusing on what's going to happen tomorrow or the next day (although I'll certainly offer my opinion on that) I wanted to give the "30,000 foot" view to see what patterns we can glean from the market. I'm then going to look at some of the DOW component stocks to see if there are some other clues from them. It's not that I think the DOW is necessarily the correct barometer of the broader market but it is certainly the most widely watched. It's also a key for the DOW theorists.
Speaking of the DOW theorists, there was a brief article that came out on MarketWatch yesterday from Mark Hulbert (http://tinyurl.com/2rj2td) in which he discussed Richard Russell's "conversion". The title of the article was "A Superbear Turns Bullish" which was subtitled "A Dow theorist sees an 'unprecedented world boom'". To be fair, Hulbert shouldn't have called Russell a superbear since he's probably one of the most unbiased analysts out there and simply reports what he sees from a Dow theory standpoint.
Regardless, it was an important shift for Russell, who has been consistently warning that the rally has lacked confirmation, from a Dow Theory perspective, and that bulls should be worried. After seeing the DOW Industrials, Transports and Utilities averages all make simultaneous highs on April 20 and April 25, something Russell calls extremely rare (never before seen in his 58-year writing career), Russell feels the market (and the DOW Theory) are telling us that "an unprecedented world boom lies ahead." Pretty heady stuff for bulls.
Let me throw just a bit of cold water on this before you run off and mortgage the house and sell your first born so you can invest in the market--I think it's a sign of the top, or topping, rather than the start of something bigger to the upside. And my opinion is just that and clearly against the DOW Theory on this. Due to the unprecedented explosion in money supply, primarily due to a parabolic increase in debt (credit), the world is awash in liquidity and everything is up. I forget where I read it but I understand every stock market in the world is up except Venezuela and Zimbabwe. We know why Venezuela is in trouble and his name is Chavez.
I've mentioned this before--all asset classes have risen and this time around a price correction will likely hit all asset classes (instead of seeing gold do well while stocks do not, as an example). If I believe this to be true then it's not at all difficult to believe that all indices are rising together and all will fall together. So to get the 3 DOW Theory averages to rise in synch is part of the problem and not an indication of a superbull market ahead of us. That of course remains to be seen and clearly I'm becoming the very lonely wolf howling at the moon, surrounded by bulls anxious to gorge me.
But back to my week in review--for the DOW to continue to make headway to the upside then we should see strong price patterns in the individual DOW component stocks. Since the DOW is price weighted then it will be worth reviewing the expensive stocks to see where they might be headed and see if we can get some clues from them. So I'll first review the charts I normally cover and then do a DOW review following that (so lots of charts tonight). If you are particularly interested in one of the shorter term charts that I normally show, and do not get the Market Monitor, just drop me an email at Contact Support and I'll be happy to send you an updated chart.
Getting the economic reports out of the way first, nothing really mattered except for the FOMC announcement, and the market was clearly on hold all day waiting for it.
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Crude inventories were up 5.6M barrels to 341.2M which puts them just below the upper end of the average range for this time of year. Gasoline supplies were up 400K barrels to 193.5M. This follows a drop of 34.1M barrels over the past 3 months. Distillate inventories (includes heating oil and diesel fuel) were up 1.7M barrels to 118.8M.
FOMC policy statement
They did acknowledge the weakening in first-quarter growth and that "adjustments in housing were ongoing". "Nevertheless, the economy seems likely to expand at a moderate pace over coming quarters". The Fed made no changes to its inflation outlook, saying core inflation remains "somewhat elevated" and "although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures."
Interestingly, Bernanke said the risks have grown on both sides of its forecast. This says they're worried that growth could be lower and inflation higher (notice he didn't use the 'S' word--stagflation). Recent data has shown inflation to be persisting and even if not growing (at least the core rate but I can tell you it sure has for food and energy) it has remained above the Fed's comfort level. Combine that with a slowing economy--real GDP grew only 1.3% at an annual rate in the first quarter--and a slowing in consumer spending and the worry about stagflation will start to register on the stock market.
A review of the stock market during the 1970's will show you that you wanted to be a trader and not a buy-and-holder. This is one of the reasons I'm suggesting we could see a quick trip back down to the October 2002 levels, just as was done in 1973-74 right after the DOW made a new all-time high that followed the crash into the 1970 low.
Now for a review of the usual charts. I'll show the DOW charts from monthly down to 60-min to show how I'm dialing in closer to see how the short term pattern fits the longer term but due to the number of charts I want to show tonight I'm only going to do this with the DOW. For the others I'll show just the weekly charts. You can email me if you'd like to see my closer view of any of the other charts. At the end I'll then do a review of some of the more important DOW stocks. First the monthly DOW chart:
DOW chart, Monthly
After the October 2002 low we have basically a 3-wave "bounce" where the market rallied strongly in 2003 and made a high in January 2004, labeled wave-A on the chart. There are a few ways one could count the choppy price pattern in 2004 and I'm showing one way where the 3-wave correction into the April 2005 low finished wave-B. A 5-wave move up from there forms wave-C and equality between A and C is at 13367. We're there. It doesn't mean the rally will stop here but it does mean I should be alert to that possibility.
If I use the October 2005 low as the end of wave-B (sideways triangle to that low) the equality in the move up is at 13713. And if I use the March 2003 low as the beginning of the rally (arguably the end of the bear market leg down) then I get equality at 13493. So there's a wide enough range in those Fib projections to not be terribly helpful except again to be aware that we may have hit the one that counts at 13367. Dialing in closer on the weekly chart I'm looking at the leg up from October 2005, and using that low as the start of the 5-wave move up for wave-C.
DOW chart, Weekly
The 5-wave move up is very clear on this and a very common target for the 5th wave is where it equals the 1st wave. That projection is shown at 13453 which is less than 100 points away. A decent rally on Thursday could easily accomplish that. It would be a throw-over above its parallel up-channel so watch for the possibility that that level will get tagged and then price drop back below 13350. If that happens it would be a pretty good sell signal. Otherwise stick with the uptrend here. The weekly oscillators are into overbought and while they could flatten out again like they did during the November-February rally I'm thinking the bulls won't be so lucky this time. The daily chart zooms in closer to look at the final leg up from March, wave-5 on the daily chart.
DOW chart, Daily
The rally from the March low can be counted as nearing the end of a 5-wave move which suggests this is closer to a top than to a bust-out-the-top move. Price has been moving up under the top of the parallel up-channel and pressed up against it again today. Daily oscillators are threatening to roll over but nothing significant yet and nothing that I could call a sell signal. I just wouldn't want to buy it here. Now zooming in even closer to look at the final 5th wave of wave-5 on the daily chart you can see there may not be much left to this.
DOW chart, 60-min
Final 5th waves often create little ascending wedges since the rally is continuing but on lower momentum and the churning (distribution vs. new buyers) causes more of a choppy price pattern. Negative divergences are usually associated with 5th waves. And that's what we've got here. Since there was an under-throw below the bottom of this pattern post-FOMC, there will likely be an over-throw of an equal amount. That would take the DOW up to a little over 13400 for a top to this pattern. And that's where I'd be interested in my first short play. A heads up that something more bearish is happening would be a break below this afternoon's low at 13281. The only question at that point is whether we'd get just a corrective pullback, as per the light green wave count, or the start of a much bigger decline, as per the dark red wave count.
SPX chart, Weekly
SPX has pushed up to the top of its parallel up-channel for the rally from last July. It could stay pinned there just like last November-February, especially if there's going to be a concerted effort to make a new high out of this index. If it does manage to make it there (1552 all-time high or 1527 closing high) I'm thinking double top.
Nasdaq-100 (NDX) chart, Weekly
Oversold oscillators with bearish divergences as price pushes up against the trend line from January 2004 could be the recipe for a top. If price keeps going and manages to use 1900 as support then it will be very bullish and you'll want to be long the market until proven otherwise. But watch for a poke above here followed by a close back below 1900 as that would say we've had a throw-over finish to the rally.
Russell-2000 (RUT) chart, Weekly
The small caps have some room to run by the weekly chart. While there may not be much room to run I wouldn't be over anxious to be short this index. That first trend line along the highs is near 845 so be aware of that one if you have some bear call spreads. Much higher than that and I suspect we'll see this index pushing towards 860 quickly with 875 doable after that.
NYSE (NYA) chart, Weekly
The NYSE continues to push up underneath its broken uptrend line from last July. This market really likes to do this. And as seen on RSI it is making new highs with bearish divergences. I won't show the charts tonight but there's been no change in the negative divergence in the internals such as new 52-week highs or advance-decline line while the index makes new highs. With the oscillators into overbought I think this one also is telling us we're a lot closer to a top than to a breakout move.
BIX banking index, Weekly chart
The banks have become a little more bullish lately and if that keeps up then the broader market should benefit from that. So far the bounce off the March low is a 3-wave correction to the Feb-Mar decline and I don't expect to see a new high out of this index. The only thing I'm wondering is whether it will make it back up for a retest of its broken uptrend line from last June, currently up near 412.50. With the February high at 414.84 that would be close enough to call a double top.
U.S. Home Construction Index chart, DJUSHB, Weekly
The weekly oscillators for the home builders support the idea that we could get another leg up in the bounce off its April low. The last bounce failed at the 200-dma at 661 (which is where the 50 week average (pink) is currently near). As long as that remains resistance from here I think this one is heading lower sooner rather than later.
Oil chart, ETF (USO), Weekly
The oil fund broke its short term uptrend line from January, came up for a retest and has since dropped back down. The weekly oscillators support a continuation lower in price. I have the wave count for the move down from last July as an impulsive 5-wave move. That sets the trend (down) and therefore once the corrective bounce is finished (not sure if it is or is only part of a larger correction) oil will head to new lows. If that happens there will be little doubt in anyone's mind that the global economy is slowing down and that will be reflected in every stock market out there. Well, maybe Zimbabwe will continue to buck the trend and be rallying at that time instead.
Oil Index chart, Weekly
If oil is headed lower then very likely the oil stocks will also. They've been rallying/held up with the broader market but the index is facing resistance by the trend line across the highs since last July. Oil stocks have made new highs since last July while the commodity has not. That's non-confirmation and one of them is wrong. I'm betting stocks will join oil in its decline.
Transportation Index chart, TRAN, Weekly
The bearish divergences accompanying the new highs for the Trannies is the same as we see nearly across the board. A minor new high from here might do it for the rally but this one looks close to done.
U.S. Dollar chart, Weekly
A bullish descending wedge with oscillators bottoming/turning up--the US dollar should rally out of this pattern. A rising US dollar would depress the prices of commodities (another reason I'm bearish oil and oil stocks) including gold, which it seems everyone is currently bullish on.
Gold chart, StreetTrack Gold ETF (GLD), Weekly
The choppy rise in the gold pattern is typically an ending pattern (unless it's setting up a very strong rally in which case I would take a rally above last year's high very seriously). By the wave count I've got a completed a-b-c correction to last year's initial decline. The next leg down as part of a larger pullback against the gold rally should have it dropping to the low $50s and possibly as low as $40. Multiply by 10 to get an approximation for the metal itself.
Results of today's economic reports and tomorrow's reports include the following:
There's very little in tomorrow's economic reports that should move the market so it will be left to its own devices and we'll see how the bull/bear debate unfolds. Friday's reports will be market moving since the retail sales data will show how well the consumer is continuing to spend that which he does not have and how much inflation there is in our economy. If the slow growth/higher inflation data continues to exist then the stock market may not take kindly to it this time around.
Now I want to look over some of the bigger DOW components. The reason this exercise could be important is because of the rotation in money that we've seen among the various DOW stocks in an apparent effort to raise the DOW industrial average without the need to buy all 30 stocks. In the April 29 weekend Wrap I had cited some data (thanks to John who had provided it) that showed only a small number of DOW stocks exceeding their previous highs while the DOW keeps chugging higher to new all-time highs. As a review, only 9 companies had have exceeded their 2000 highs--MMM, CAT, UTX, PG, XOM, BA, AXP, JNJ and MO. I think it's more than coincidental that these companies are the highest price stocks in the index. The only ones missing are IBM and AIG.
By concentrating the buying in these largest of the large caps in the DOW they've been able to push the DOW into record territory to make the market appear more bullish. Never mind that the DOW hasn't kept up with inflation, people just read and hear about new all-time highs and they feel bullish and therefore invest more money in the market. But their personal portfolios are very likely still well below the January 2000 highs (assuming they left their money alone since that time).
Considering the strength of these stocks that have driven the DOW to new highs it's worth looking at their individual patterns to see what each might look like. I'll start with the biggest and move down and I'll just offer some quick commentary, as if I was quickly flipping through a 100 stocks to review and forming a first impression. First up is IBM, leader of the board at 104.38, today's closing price.
International Business Machines (IBM), Weekly
IBM has been very strong the past 3 weeks and has been very successful in lifting the DOW higher. As the highest-weighted stock in the DOW it could be said "as goes IBM so goes the DOW". So watch the price action here as it's either breaking out above the trend line along the highs from November 2005 or this is a little throw-over that marks the end of the rally. A close back below 103.50 would be enough to suggest to me that it might be failing. As goes IBM...
Boeing Co (BA), Weekly
Little wedge pattern with bearish divergence while price struggles at the top of the pattern. Looks like a failure waiting to happen.
3M Company (MMM), Weekly
3M looks like it has a little more upside here--the trend lines cross near 87 and two equal legs up off last July's low is at 87.70.
Exxon Mobil (XOM), Weekly
XOM is pressing up towards the top of its ascending wedge (near 82.75) with bearish divergences and a falling commodity. XOM makes good money from refining operations so that could keep this one up a little longer but the chart says look for a top soon.
Caterpillar Inc (CAT), Weekly
CAT has a 3-wave bounce off the January low and could be completing a corrective bounce at any time. No strong opinion on this one.
American International Group (AIG), Weekly
AIG has a little more room to run before resistance at the top of its ascending wedge pattern, which looks like a correction to the decline from the 2004 high. This pattern suggests a fast break lower below its 2005 low. But first there's upside potential to just shy of 75.
United Technologies (UTX), Weekly
Another ascending wedge pattern with bearish divergences. A slight push higher to near 70 would have me looking to short this one.
Altria Group (MO), Weekly
Smokers just coughed up a fur ball on MO. The little throw-over above the top of the ascending wedge has been followed by a drop back inside the pattern. That's a sell signal. Bearish divergences support the bearish outlook on this one and there should be a relatively fast retracement of the rally off the 2004 low.
Johnson and Johnson (JNJ), Weekly
No strong opinion on JNJ. But if price drops back below that long term uptrend line again, look out below.
American Express Inc (AXP), Weekly
A tad higher and AXP will run into resistance at the top of its pattern. Maybe 65 out of this one.
After a quick review of the 10 biggest DOW component stocks I count 8 out of 10 where I see either a top or close to a top and in potentially very bearish patterns. Based on this assessment I don't see much life left in the DOW. Even if the other 20 stocks are able to do well, which I don't see (a couple more are reviewed below), it's unlikely they'll be able to overpower selling in the big dogs. This confirms for me the impression I get from the DOW itself and that is that it's very close to putting the finishing touches on its rally. And by that I mean the rally from 2002. The next big move will be the start of the next bear market leg, even if I'm now going against Richard Russell.
I wanted to look at just a couple of other DOW stocks since they appear at this time to have some interesting setups. JP Morgan is potentially important because it represents the financial/brokerage area.
JP Morgan Chase Co (JPM), Weekly
JPM likes wedgies--the bullish descending wedge to the 2005 low led to the rally into today's high. But that rally has formed a bearish ascending wedge with the bearish divergences to go with it. Price it up against the top of the wedge. Whether or not we see a little throw-over this one is about to have a fork stuck in it.
They say if you can eat it, drink it or smoke it you should buy it. But I'm not so sure I'd want to buy Coca Cola here.
Coca Cola Co (KO), Weekly
Nice double top! The weekly candlestick so far is a shooting star at resistance with very overbought oscillators. What can I say but short this one.
Merck is not one of the heavy weights (it's #16), but it's a chart that looks like a nice bearish setup and thought some of you might like to try this one.
Merck Co Inc (MRK), Weekly
Nice clean 5-wave move up from October 2005 and price is pressing up against the top of its parallel up-channel. Slightly higher is a Fib projection for where the 5th wave would equal the 1st wave (53.50). Just below that is the 38% retracement of the 2000-2004 decline. If MRK makes it up to this $53 area, short it. This is a very pretty setup and I'd be a buyer of some LEAP puts on this one.
That should be enough for now. Just for those 13 DOW stocks reviewed tonight I get 11 out of 13 at or very near a sell setup. While it's certainly possible we'll see one after another punch through resistance and strongly rally I'm not so sure I'd want to bet that way. With weekly oscillators back into overbought as these stocks hit upside targets/resistance it's usually not a good recipe for a continuation of the rally.
So if the heavy hitters run out of steam now, my guess is so will the DOW. I continue to believe the DOW is closer to a top than a huge blow-off move. I provided some upside targets for the DOW and we're basically there--anywhere from today's closing price up to about 13453. While 100 DOW points sounds like a lot, it's pretty tiny compared to where it is and how much it's rallied. Is the potential gain of 100 points worth the downside risk? Obviously I think not but those of you who do should believe that the DOW will not stop here (or 13453) and that 14K is in the market's sights. Again, based on what I see in the individual components I don't see that happening.
I'll continue to warn of the possibility that we could see a nasty surprise hit this market at any time. It'll be a nasty surprise because, well, no one will be expecting it. The music hasn't stopped yet and everyone is depending on someone else to be willing to buy even higher. But everyone also knows how stretched we are to the upside and they have their fingers hovering over their sell buttons. Selling could take hold in this market and get relentless in a hurry, and really for no apparent reason other than other people are selling. That's why bubbles pop quickly and drastically.
But if you're long, continue to enjoy the ride. The fastest gain in a bull market usually comes from the last 10% in a very fast move--we're there. But you have to be fast to take those gains off the table so watch carefully now. Post FOMC may be as good an excuse as any to start some profit taking. Keep an eye on that exit door and don't let someone shut it. Good luck, stay vigilant and if you want to try shorting this market I think we're close. The safest thing to do is wait for support levels to break. Just be aware that you may have to jump aboard a fast-moving southbound train and hope it doesn't spike back up against your position and shake you out. That's a big reason why I prefer picking tops and for the DOW the first opportunity will be 13400 and then watching carefully if it continues on up to 13453. I'll be back next Wednesday on the Market Monitor where I'll try to catch the top or at least the first bounce after the top.
New Long Plays
Arch Coal - ACI - close: 38.44 change: +1.69 stop: 35.89
Why We Like It:
Picked on May 09 at $38.44
New Short Plays
Long Play Updates
Aracruz Celulose - ARA - close: 56.65 chg: +0.91 stop: 53.95
Bullish reversal alert! Traders bought the dip in ARA near its 200-dma this morning and the stock rallied to a 1.6% gain. Today's move has produced a bullish engulfing candlestick pattern, which is normally seen as a bullish reversal. We see it as a new entry point to go long the stock. More conservative traders may want to tighten their stops toward $55. Our target is the $62.00-62.50 range.
Picked on May 06 at $56.29
British Amer. Tob. - BTI - cls: 63.02 chg: -0.34 stop: 61.45
BTI's relative weakness on Wednesday is a concern. We would wait and watch for a bounce above $63.50 or better yet a bounce over $64.00 again before considering new positions. Our target is the $67.50-70.00 range. BTI doesn't move very fast so this could take several weeks.
Picked on May 07 at $64.05
Anheuser Busch - BUD - cls: 49.96 chg: -0.44 stop: 48.95
Watch out! BUD produced both a failed rally at the 50-dma and a bearish engulfing candlestick pattern. This sort of move is a bearish reversal and shares appear headed lower toward the 200-dma and the late April low (near $49.20). While we do expect a bounce near its rising 200-dma more conservative traders may still want to consider an early exit to cut their losses now. You could always jump back in on a bounce. The stock remains inside its wide, rising channel. The stock doesn't move very fast so it could take several weeks before shares hit our target in the $53.85-54.00 range.
Picked on May 06 at $50.50
Dell Inc. - DELL - cls: 26.04 change: +0.02 stop: 24.69
The trend in DELL continues to look positive but the momentum is really struggling. Our target for DELL is the $27.25-27.50 range. We do not want to hold over the late May earnings report.
Picked on April 29 at $25.23
ENSCO - ESV - close: 57.78 change: +0.23 stop: 54.75
Tuesday's intraday rebound looked like an entry point but there was no follow through higher this morning. ESV dipped to $56.83, probably due to another decline in crude oil futures. The bounce back this afternoon is encouraging but our enthusiasm for the stock is cooling. More conservative traders may want to tighten their stops. Our target is the $59.85-62.50 range.
Picked on April 29 at $56.84
Georgia Gulf - GGC - close: 17.71 chg: +0.42 stop: 15.99
Traders bought the dip in GGC near its 50-dma this morning. The stock ended up with a healthy 2.4% rally but still failed to breakout past $18.00. This should be considered a more aggressive play since GGC does have plenty of overhead resistance to chew through. Watch for resistance near $18.00 and its 100-dma currently near $18.50. Our target is the $19.90-20.00 range.
Picked on May 07 at $17.35
McGrath RentCorp - MGRC - cls: 31.68 chg: +0.26 stop: 29.89
There is still no change from our weekend play description. We're watching for a breakout over very significant resistance at the $32.00 level. Our suggested trigger to buy the stock is at $32.35. More conservative traders may want to use a trigger above $32.50. If we are triggered our target is the $35.75-36.00 range. The P&F chart is bullish with a $50 target.
Picked on May xx at $xx.xx <-- see TRIGGER
Short Play Updates
Apt Inv. & Mgmt - AIV - cls: 54.65 chg: +0.14 stop: 56.05
AIV produced another failed rally today, this time at its sliding 10-dma. The trading today looks like another entry point for aggressive traders to consider shorts. We're waiting for a breakdown under $54.00. We're suggesting a trigger to short it at $53.99. If triggered our target is the $50.25-50.00 range. If AIV traded under $54.00 it would produce a new Point & Figure chart sell signal.
Picked on May xx at $xx.xx <-- see TRIGGER
Camden Property - CPT - cls: 69.12 chg: +0.90 stop: 70.05
REITs were generally higher today and CPT rallied toward the $70 level only to reverse course. This might turn out to be another lower high in a series of lower highs and thus a new entry point for shorts. However, we're sticking to our plan. We're suggesting a trigger to short it at $66.99. If triggered our target is the $60.50-60.00 range. We do expect some support near $65.00. The P&F chart looks very bearish with a $58 target.
Picked on May xx at $xx.xx <-- see TRIGGER
Closed Long Plays
Closed Short Plays
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