Crude oil got the blame today for the big selloff in the stock market. It was as if a light bulb went off and there was suddenly great concern about high oil prices. The market has been rallying almost every day that oil has been making new highs but today the market suddenly paid attention? OK, if the pundits say so. It certainly is an easy one to blame for a market selloff.
Oil had spiked down this morning on the crude inventory report showed inventory gains but then traders decided it was just a short term blip and that there really is a shortage and the speculation on higher prices continued, driving oil to another all-time high. As I'll review in the oil chart, it's just possible we're seeing a major top being put in right now. Or at least a top that will lead to a larger pullback before proceeding higher for one last fling to the upside.
Today's economic reports had very little impact on the markets. The productivity report out this morning showed a stronger improvement in the productivity numbers while labor costs dropped so that's good for businesses. But the good feelings didn't last as the market started selling off shortly after a quick pop up at the open (equity futures were already depressed though). Then home sales numbers for March showed a -1% decline but that was expected and it was a slight improvement to February's.
This afternoon we got the Consumer Credit numbers and they show the consumer digging deeper into debt--$15.3B deeper as compared to +$6.5B in February and more than twice what was expected. When people are paying mortgages with their credit cards you know this is not going to end well. The good news though is that the growth in consumer debt has slowed down some from last year (e.g., November was +$25B).
The following chart is from a report that Linda forwarded to me from John P. Hussman, Ph.D., and an article he wrote on May 5th, providing his market analysis. Sorry the chart is hard to read but I had to squish it to fit this document:
Household Debt as a % of GDP
The chart runs from 1952 to the end of 2007. Other than the flat period from 1965 to about 1985, consumers have been increasing their use of credit and particularly so since 1985. It now stands at 102% of GDP. The 55-year mean is 55%. This is a graphic representation of how much the consumer has supported the economy through borrowed spending (like our government) and how difficult things could become for our economy if one, the consumer can't afford to take on more debt and two, if the consumer starts defaulting on current debt.
Dr. Hussman provided an interesting analysis on the stock market that I thought was worth quoting (the full article can be found at this link):
"Well, having declined nearly 20% from its peak, the S&P 500 has recovered about half of its loss in a period of several weeks, taking the index within about 10% of the all-time high it registered in the mid-1500 range a few quarters ago, with the Dow Industrials down even less. Transportation stocks, in particular, have enjoyed a scorching rally in recent weeks, bettering their prior bull market highs. Despite the fact that our most reliable recession indicators registered a clear warning late last year pointing to an oncoming economic downturn, the unemployment rate stands only about a half-percent above its lows and remains modest on a historical basis. The option volatility index has declined significantly, while credit spreads and advisory bullishness are on the mend. All of this suggests that market participants believe the worst is over, thanks largely to the actions of the Federal Reserve. For our part, the Strategic Growth Fund has achieved positive returns since the market's peak. Still, the Fund has not participated in the recent advance, and remains a few percent below its all-time high, but we are willing to take a more constructive position if market internals improve.
But enough about January 2001."
The last line is obviously the key point. Some things don't change much in this market. Dr. Hussman then went on to compare the decline into January 2001 and the subsequent bounce and how it got so many people thinking the bottom was in and that happy days were here again. The market proceeded to significantly disappoint the bulls from there with some volatile swings in 2001-2002 before doubling its loss into the October 2002 low. As he said in his article, we're not doomed to repeat the past but the analogy holds. The market's rally off the January and March 2007 lows is based on hope that the worst is behind us but these assurances are coming from the likes of Hank Paulson, Treasury Secretary, who also told us the subprime problem would be small and contained.
We haven't even begun to see the unraveling of the credit problem yet and the jobs numbers are actually much worse than currently being reported (they're inflated by the birth-death model that the Bureau of Labor uses which are wrong at major economic turns). We have never avoided a recession when the economy sheds jobs and yet there are many who are declaring the recession is already over before it's officially started.
The housing contraction, slowdown in consumer spending and massive credit inflation that needs to be deflated are all going to make the recession last longer and potentially deeper, than the hope-filled bulls would like to believe. I'll show some charts of the housing sector below and you'll see it doesn't paint a pretty picture. But those are some fundamental reasons I believe the bounce off this year's lows will not hold up.
From a technical perspective the price pattern of the bounce is also indicative of a correction and not the start of a new bull market. Waning momentum and bearish divergences are appearing and it says bulls need to be cautious now. If you like playing the short side I believe your opportunity is quickly approaching. Right now, for me, it's a matter of figuring out where the bounce could end and the next leg down begins. After today's decline it's possible we've seen the high.
Starting with the 30,000 foot view of the market, the monthly chart of the SPX is one I've shown before when I pointed out the importance of the 18-month moving average:
SPX chart, Monthly
When I last showed this chart I mentioned the 18-month moving average has done a good job over the years showing when we're in a bull and bear market. The MA has dropped to 1402 and is being tested last week and this week. Once the MA has been broken, up or down, it's common for it to be testing several times before the major trend continues. In this case I'm looking for a continuation of the down trend.
SPX chart, Weekly
There a couple of things that I'm watching on the weekly chart. The broken neckline of last year's H&S topping pattern is currently near 1430. On the daily chart below note that the 200-dma is also at 1430. The 50-week moving average is at 1442. On the daily chart the broken uptrend line from October 2002 is near 1443. Therefore, if the market pushes a little higher, keep an eye on SPX 1430 and then 1442-1443 for a possible high.
I've drawn the downtrend line on the weekly chart from October through this week's high in order to create a parallel down-channel and show where the next leg down could head to. Assuming for now that we've seen the high, two equal legs down from October (to the January low) is just under 1117 which crosses the bottom of the channel in August. The potential is for a faster decline and to much lower levels so use this only as a guide to what the next leg down (assuming of course we get another leg down) could do.
SPX chart, Daily
We didn't get a new high today for SPX so today's candle is not exactly a bullish engulfing candle but it's close. Therefore it could be considered an outside down day (which is what we've got on the Trannies). Price closed back below the downtrend line from October. If the decline continues tomorrow, watch for support at the May 1st low near 1383 which is also where the uptrend line from March is currently located.
Key Levels for SPX:
SPX chart, 120-min
A little closer view shows SPX closing back below the February 1st high near 1396 and its downtrend line from October. I have a key level to the downside at 1380 because we could be in the final move of a larger a-b-c pullback from the May 2nd high and the leg down Fibs out to 1380. A break below 1380 would also be a break of the uptrend line from March and therefore makes that level doubly important. The a-b-c pullback interpretation would mean another leg up in its rally (shown in pink) which is when I'd be looking to see how it does around 1430 and then 1441-1443.
Based on the pattern of the decline I'm thinking we'll see a bounce tomorrow that will set up a short play. The broken uptrend line from April 15th is near 1409 which would also be a 62% retracement of the decline from Tuesday's high. If the market rallies tomorrow morning, watch to see if price stalls up there.
DOW chart, Weekly
The DOW's weekly chart shows price tagged the 50-week moving average and has now pulled back and closed back below the uptrend line from October 2002 (using LOG scale on this chart). Notice the very long term uptrend line from 1974 which is where the January and March lows found support. This is obviously an important trend line and will be very important to watch if we get another pullback. Assuming we've peaked in the A-B-C bounce off the January low, another leg down that matches the October-January decline would have the DOW dropping down to 10569 and that crosses the bottom of a parallel down-channel at the end of August. I show this only for planning purposes in case you'd like to try a longer term short position (such as LEAP puts). As noted on the chart that level is also near the 2006 lows. A break of this level could usher in much stronger selling. But we've got lots of time to evaluate that possibility should the market start back down.
DOW chart, Daily
The DOW dropped back down to its broken downtrend line from October. Therefore if you're feeling bullish about the market this is an ideal spot to try a long. Resistance turned support is the idea for the play. A little lower is potential support at the uptrend line from March, currently near 12740. If the DOW pushes back up and gets past last week's high near 13133 then I suspect we'll see 13500 area next.
Key Levels for DOW:
DOW chart, 120-min
Not discussed on the SPX 120-min chart but it's the same on the DOW's chart--the bearish divergences at the new price highs since April 18th has been a warning that the new highs were probably not going to hold. But the bears need to get the DOW below 12740 before they can start dancing. In the meantime, this choppy market that's been full of whipsaws says be careful assuming anything. We could just as easily see another run for the roses to a new high for the move up from March.
If we get a bounce tomorrow watch for resistance at the broken uptrend line along the lows since April 22nd, currently near 12910.
Nasdaq-100 (NDX) chart, Daily
The techs have been in a stronger-looking pattern and the pullback today hasn't damaged its chart at all (other than the nasty looking bearish candle from resistance just under 2000). The Fib projections for the move up from March lined up from 1994 to 1999 and that's where price failed. A little higher, if it can get another rally leg, is the 62% retracement at 2021. But at this point, while the chart doesn't look all that bearish, it has met its requirements for an A-B-C bounce off the March low. Therefore it's a good setup for the short side.
Key Levels for NDX:
Nasdaq-100 (NDX) chart, 120-min
NDX broke down from the rising wedge pattern for the rally from April 15th so that looks bearish. You can also see more clearly the Fib projections just under 2000 where the rally stopped. The new highs were showing bearish divergences. But notice where price found support today--at the mid line of its parallel up-channel from March, the same line that supported the pullbacks since April 22nd. A push back above 2000 should have NDX testing the 2021 level (62% retracement of the October-March decline). Otherwise I'm looking for a bounce to get short.
Russell-2000 (RUT) chart, Daily
The RUT struggled with the February 1st high near 732 for the past week. It's also the level where the 2nd leg up for the bounce off he March low was equal to 62% of the 1st leg up. It broke below the uptrend line from March so that's bearish but it found support at its broken downtrend line from October so that's potentially bullish. I'd look for a bounce to short but if it manages another rally leg then upside potential is to its 200-dma at 750 and then 761.64 for two equal legs up from March (I have my doubts about that one).
Key Levels for RUT:
Russell-2000 (RUT) chart, 120-min
Watch for a bounce tomorrow to see if it does a retest of its broken uptrend line from March, perhaps around 721. If it recaptures its uptrend line be very cautious about the short side. As explained for the others, the 3-wave pullback from May 2nd may have completed the correction to the rally and we'll see another rally leg get started.
BIX banking index, Daily chart
The banking index almost made it out of the descending wedge pattern. Hope is alive and well in this sector as people attempt to pick a bottom. Nothing has changed and I expect this index to work its way lower over the next several months.
Brokers (XBD), Daily chart
I like to show the brokers every now and then because they will often be leaders in a new bull market so I've been watching how they do against the downtrend line from October. Right now I'd say the brokers will remain inside their down-channel and head for new lows. I've got a Fib target just under 103 which could get hit in June if it plays out as I've depicted. If it instead manages to push a little higher, watch for resistance at its downtrend line from June 2007, currently near 205.
U.S. Home Construction Index chart, DJUSHB, Daily
The little sideways choppy consolidation over the past few weeks suggests lower prices. It looks like a little bear flag. So the next big move in the home builders should be to the downside and I continue to like the 216 area for a final (maybe) low. If it manages to push a little higher first then it should be able to rally up to the top of its rising wedge pattern, currently near 430 (and perhaps a little throw-over finish), before heading back down again.
To get a sense of how strong the housing bubble had become, the following chart shows the long term uptrend (1975-2000) for home prices and how far above the trend line prices had skyrocketed into the 2007 peak:
Home Price Index
These longer term trend lines tend to be mean reverting. That means when prices move above or below the trend line they tend to overshoot in the other direction to get back to the longer-term trend. But just to get back to the trend line home prices need to drop -34%. If we're going to see a drop below the line, which would be typical, then the drop in home prices will likely be more like the 40%-50% that many housing experts are talking about. This chart is not current so I have the Case-Shiller Index showing prices since 1987:
Case-Shiller Index, 1987-2008
The first chart above has the index at 100 in 1975 but Case-Shiller have 100 at January 2000 so the two charts are a little different. But if we take the Composite-20 (third line from the top at the right side of the chart) and figure 34% off its high near 170 we get 112. It's currently at about 145 or "only" about -15% off its high so far. Therefore I think it's safe to assume we've got some more pain ahead for home prices.
Oil chart, Oil Fund (USO), Daily
Oil rallied again today and has many continuing to scratch their heads in wonderment. There's very little fundamentally driving oil higher right now but as in most commodity rallies, the end of the rally goes longer and higher than expected. But as I show on the chart for USO, I think this is as good a place as any for oil to top out and reverse back down. The Fib projection at 98.62 has been achieved and price pressed up to the top of its uptrend line from last year and the trend line along the highs since March, both crossing where price hit today.
It can certainly continue to rally but the bearish divergence against the April high helps confirm the wave count that calls the leg up from May 1st as the 5th wave for the rally off the low at the end of March. That says at a minimum we should get a pullback to correct that leg up and more bearishly we're finishing the longer-term rally and will start a much larger decline.
*** I like the setup here for a short play but obviously I'm attempting to pick a top and we know how dangerous that can be. If we get a pullback tomorrow just use today's high as your stop level.
Oil Index chart, Daily
The oil stocks have a similar setup as oil but in this case it looks like stocks could be a day ahead of the commodity. I like a short on this index with a stop at yesterday's high. Whether we get just a pullback or something more can't be known yet but I like the odds for a deeper pullback.
Transportation Index chart, TRAN, Daily
The Transports are flashing a warning sign after today's bearish engulfing candlestick (outside down day). So far the index has found support at its March 2003 uptrend line that it recovered five days ago. If it closes back below this trend line it will look like a head fake move (bull trap).
But if today's decline finished an a-b-c pullback from May 2nd then we should get another push higher in which case I would look for a move to the top of its parallel up-channel from March, currently near 5550. A Fib projection for the 3-wave bounce off the January low is also up near there (wave-c = 162% of wave-a) and makes for a good upside target.
U.S. Dollar chart, Daily
The US dollar has managed to rally up to the Fib projection at 73.687 where the bounce off the March low has two equal legs up. The high on May 2nd was 73.698. It's also at the top of a parallel down-channel from last year's highs. Therefore it's possible we'll now see the dollar start back down to a new (and I believe final) low. It needs to get above 75.40, the early-January low to negate that possibility and indicate we've already seen the low for the dollar.
Gold chart, Gold Fund (GLD), Daily
The US dollar has had a 3-wave bounce and so far gold has had a 3-wave pullback. I am bearish gold and therefore have to be bullish the dollar so obviously I'm watching both carefully for signals here. If GLD pushes above 89 and breaks its downtrend line from March then I suspect the dollar will be heading for a new low. But until that happens I'm thinking GLD will work its way down to 79 and potentially lower to its uptrend line from July 2005, near 74.
Economic reports, summary and Key Trading Levels
There is nothing in tomorrow's economic report schedule that is expected to move the market (Friday either). It will be left on its own to fret about the price of oil and the potential impact on inflation.
If oil does start to pullback more significantly tomorrow then one could make the argument that it will make the stock market feel better and it will rally. But I think the stock market is not paying much attention to oil. It's a handy excuse or reason for why the market does what it does when the pundits can't figure out anything else to say.
It's a tough call for tomorrow and Friday. My first reaction is that today's decline, being impulsive as it was, was the sign of a trend change and based on that I will be looking for a bounce tomorrow to short. I provided some levels to watch for potential short entries. But because of the possibility that today's impulsive decline was the end of a 3-wave pullback from the May 2nd high, I suggest not getting stubborn about shorting the market. Try it, keep your stops tight and if the market keeps rallying against you then switch sides. Anything more than a 62% retracement of the decline from Tuesday's high would have me thinking new highs are coming.
If we get another rally leg started I'll be watching SPX which I think has some better upside targets to watch than the DOW. SPX 1430 and then 1441-1443 are the upside levels to watch. NDX 2021 is another level I'd watch. But be careful if playing the long side--trade it now and be ready to bail. The signals from the charts tell me we're close to topping out for either a pullback or something much more bearish. Protect profits in any long positions and you can always get back in. It doesn't make much sense to let the market move against you if you can take some money off the table. Even a retest of the March lows, which many are looking for, would be giving up a lot of gains. If the March lows don't hold, and I don't think they will, then it could get very painful for stubborn bulls.
This market is not rewarding stubbornness. Those who are making money are those who are regularly taking profits off the table. It can be frustrating watching the market continue without you when you've removed yourself from a trade but we all know it's a lot more frustrating giving your profits back. And of course never ever let a profit turn into a loss. Bad trading discipline if you let that happen.
Good luck and I'll be back with you on Wednesday.
Key Levels for SPX:
Key Levels for DOW:
Key Levels for NDX:
Key Levels for RUT:
Play Editor's Note: The markets suffered a widespread sell-off today but the general trend remains higher. If you're looking for a new bullish candidate take a glance at NCS, which looks poised to move higher. Meanwhile we came very close to adding Hitachi (HIT) as a new short tonight. The stock has broken down sharply from a bear-wedge pattern. A stop loss just above $68.00 might work. HIT appears to have support near $62.50 and then $60-59.
New Long Plays
New Short Plays
Long Play Updates
Peabody Energy - BTU - close: 65.31 change: -0.50 stop: 61.49
Coal stocks did not escape the market-wide profit taking today but shares of BTU definitely out performed the broader market with smaller loss. We are suggesting investors buy a dip in the $63.50-63.00 range. Our target will be the $69.50-70.00 range.
Picked on May xx at $xx.xx <-- see TRIGGER
Citi Trends - CTRN - close: 20.36 change: -0.60 stop: 18.99
CTRN has been looking vulnerable the last couple of days. The stock lost 2.8% today and hit an intraday low of $20.16. We are suggesting readers buy a dip in the $20.05-19.50 range. If triggered we will have two targets. Our first target is the $22.40-22.50 range. Our second target is the $24.00-25.00 range. We do not want to hold over the late May earnings report (still unconfirmed date). The P&F chart is bullish with a $29.00 target. FYI: In the news today after the closing bell CTRN announced a 13.5% increase for its first-quarter sales but only a 0.3% rise in same-store sales. The retail sector could be volatile tomorrow as investors react to a parade of same-store sales figures and guidance.
Picked on April xx at $xx.xx <-- see TRIGGER
Excel Maritime - EXM - cls: 42.97 chg: -2.09 stop: 39.95
Caution! We're urging a lot of caution in EXM tonight. A number of the shipping stocks struggled today and we're seeing potential bearish reversals. EXM has produced what might be a bearish double-top pattern and a bearish engulfing candlestick pattern. The stock looks poised to retrace lower toward the $40.00 region. We are NOT suggesting new positions at this time. More conservative traders may want to exit early right now. You could always jump back in later. Our target is the $49.00-50.00 range. We do not want to hold over the May earnings report. Our challenge is that the report date us unconfirmed. One source suggests that EXM might report as early as May 15th. This could be a very quick play since we will try to avoid holding over earnings.
Picked on May 04 at $43.12
Kohl's - KSS - close: 48.72 change: -0.09 stop: 48.49
KSS continued to drift sideways under resistance near $50 and its 200-dma. We are waiting on a breakout higher. Right now our suggested entry point to buy KSS is at $51.05. This is going to be a short-term play as we don't want to hold over the May 15th earnings report. If triggered at $51.05 we have two targets. Our short-term target is the $54.90 mark. Our secondary target is the $58.00-60.00 zone. The P&F chart looks very bullish with a $67 target. FYI: The retail stocks could see a lot of volatility tomorrow as the market reacts to the latest same-store sales figures.
Picked on May xx at $xx.xx <-- see TRIGGER
Contango Oil - MCF - close: 81.25 change: -0.45 stop: 76.75
MCF pulled back to the $79.20 level but bulls bought the dip. The afternoon rebound back above $80.00 looks like another entry point to buy the stock. More conservative traders might want to tighten their stops toward $78.00. Our target is the $88.00-90.00 range. FYI: One risk is earnings. We can't find a good earnings report date for MCF and we would not want to hold over the announcement.
Picked on May 06 at $81.70
Terra Ind. - TRA - close: 40.78 change: -0.77 stop: 37.95
The popular fertilizer stocks could not maintain their gains and the group turned lower as the market headed south this afternoon. TRA lost 1.8%. A bounce at $40 or anywhere in the $40-38 zone can be used as a new entry point for bullish positions. This can be a volatile group so expect some big swings. Our target is the $47.00-48.00 range.
Picked on May 04 at $40.03
S&P SPDR Homebuilders - XHB - cls: 22.29 chg: -0.71 stop: 21.69
The homebuilders continue to bounce around their trading range. The XHB slid lower all session but held above the $22.00 level and its pattern of higher lows. More conservative traders might want to tighten their stops closer to the $22.00 mark. We have two targets. Our first target is the $24.40-25.00 range. The $25.00 level will probably be resistance. Our second, much more aggressive target is the $27.00-27.50 range. The Point & Figure chart is very bullish with a $35.00 target.
Picked on April 24 at $22.67
Short Play Updates
Closed Long Plays
Credicorp - BAP - close: 83.19 change: +1.05 stop: 79.99
Oh so close! BAP soared to $84.64 this morning and then slowly faded into the closing bell. Our target has been the $84.75-85.00 range. It was our plan to exit tonight at the closing bell to avoid earnings. We will keep an eye on BAP for another entry point given the stock's strong bullish trend.
Picked on April 28 at $80.51 */exiting early
Citigroup - C - close: 24.48 change: -1.39 stop: 24.50
Financials were already weak but an afternoon press release from the SEC just poured fuel on the fire and the losses accelerated in the banking stocks. C had been drifting toward the $25.00 level and then just plunged through $24.50 hitting our stop loss. Evidently the banking stocks did not react kindly to a new SEC rule that requires financial institutions to disclose their capital and liquidity levels. Financials stocks plunged as investors feared another huge wave of losses and write downs would be needed. What's really frustrating for us is that C had hit a high of $27.35 several days ago. Our initial target was $27.50.
Picked on April 21 at $24.50 */stopped 24.50
Lowe's Cos. - LOW - close: 24.93 change: -0.48 stop: 24.99
Home improvement retailers like LOW and HD both turned lower today. LOW was holding above the $25.00 level until the market's sell-off picked up speed late this afternoon. Shares of LOW eventually hit our stop loss at $24.99. The intraday chart now shows a potential (bearish) H&S pattern over the last several days.
Picked on April 27 at $26.02 /stopped 24.99
PowerShares India - PIN - close: 25.60 chg: -1.08 stop: 25.95
After three weeks of steady gains it looks like traders panicked a little and sold off the PIN investments except that volume was low. That suggests there were some sellers coupled with a real absence of buyers. The PIN lost more than 4% and hit our stop loss at $25.95. Broken resistance at the $26.00 and $25.75 levels should have been support but it's possible there just isn't enough of a history yet for support and resistance to truly develop and influence this equity.
Picked on April 24 at $26.39 /stopped 25.95
Wachovia - WB - close: 28.71 change: -1.37 stop: 28.89
Yesterday when WB said that they would restate earnings and raise their first quarter losses by 80% it seemed the worst was behind them and investors bought the stock. The bounce failed today. Financials were weak all day and the sell-off in banks picked up speed this afternoon after a new SEC rule was announced requiring additional disclosure of capital and liquidity levels. WB broke down under short-term support near $29.00 and hit our stop loss at $28.89.
Picked on May 06 at $30.08 /stopped 28.89
Closed Short Plays
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