Daily Newsletter, Thursday, 07/31/2008
We had another volatile day today in the broader markets. The S&P 500 traded within 20 point while the technology heavy NASDAQ 100 traded within a more violently 50 point range. At first blush the markets looked as though it was going to be another up day in the market. S&P futures were up about 2 points while NASDAQ futures were up about 6 points in the pre-market prior to the preliminary second quarter GDP reading that showed the economy only grew at an annualized rate of 1.9%. The market had anticipated the second quarter growth rate to be 2.3%. The good part of the report is that the report showed better growth that the first quarters 0.9%. In addition to the GDP report the initial jobless claims for the week ending July 26th totaled 448,000 versus the widely anticipated 393,000. The prior weeks claims were revised downward to 404,000. The futures dropped to negative 12 on the S&P and about negative 20 on the NASDAQ prior to the NYSE bell.
The internal measures on the New York Stock Exchange (NYSE) show that 1222 issues advanced and 1947 declined on total volume of 1,815 million shares. Todays volume was slightly greater than the 50 day average of 1,598 million shares traded. There were 29 new 52-week highs and 59 new 52-week lows. The Arms Index or TRIN advanced to 1.32 but not high enough to signal an overnight long signal. I prefer to see the TRIN close above 1.50 with extremely high volume and at least a 1 to 2 advance/decline ratio to signal that the days action was an exhaustive sell off.
The NASDAQ Composite fell 4.17 points today on 2,368 million shares traded. The advance decline ratio was nearly even but with a slight negative bias with 1393 issues advancing and 1513 declining issues. 41 new 52 week highs were overshadowed by the 79 new 52 week lows.
The Market Today
Prior to the open Altria (MO) reported positive earnings and beat the $0.45 estimate by $0.01 and their revenues increased 4% year over year. MO also reaffirmed their FY08 guidance.
Another Dow Jones component, International Paper (IP) reported revenues in line but beat the $0.39 consensus estimate by $0.17. IPs revenues rose 9.8% year over year to $5.81 billion.
Exxon Mobil (XOM) missed their 2nd quarter earnings estimates by $0.25 by reporting earnings of $2.27. Revenues rose 40.4% to $138.07 billion. Exxon Mobil increased investments across all business lines to help meet global demand for crude oil, natural gas and finished products. Capital and exploration project spending increased to $7.0 billion in the second quarter, up 38% from last year. XOM provided much resistance for the Dow Jones today by closing down 4 points.
Other notable stocks include Imclone (IMCL) getting a bid of $60 per share by Bristol Myers (BMY). IMCL closed up $17.31 at $63.93 today. It appears as though the Biotech sector is in play and assumed to be undervalued. As the chart below shows the Biotech Index ($BTK) has been somewhat insulated from the overall market declines seen in almost every sector. The weekly chart shows that there was some initial weakness in the sector earlier this year. However, the 200 week moving average (red line) provided the necessary support. Over the last month the sector has really advanced primarily on Genentech (DNA) and Imclones (IMCL) takeover offers and Biogen Idecs (BIIB) earnings beat and osteoporosis drug success. Amgen has been the most consistent advancer since the beginning of June.
The daily chart below shows that biotechs have been consolidating since April and really began to move up when earnings season began. The RSI is in overbought territory but the Stochastics is showing that the $BTK still has room to advance before becoming overbought.
S&P 500 5 minutes per bar representing todays trading range
The chart above shows the intraday volatility of the SPX starting with a open gap down to 1281 then followed by the index further dropping to 1273.5 by 9:35 AM. By 11:00 the open gap had been completely filled by the SPX reaching into slightly positive territory at 1284.93. Then in less than an hour and a half the market dipped below the opening lows before making another attempt at positive territory. The afternoon high correlated with the beginning of Mr. Gloom and Doom, a.k.a. Greenspan, discussing that there is still only a 50% chance of a recession and that the housing market still has room to decline. He must be short housing futures since he left office because he keeps twisting the knife in the economys back. The SPX dropped about 17 points in the last hour of trading.
Crude has apparently lost its inverse influence on market direction over the last couple of trading sessions. For instance, the market ran up yesterday when crude oil advanced three points to $126.77 a barrel and declined today when crude oil declined about 2 points today.
The April breakout and May support level of $120 per barrel seems to be providing support this week. Wednesdays advance took oil just above the 89 day moving average (SMA) of 126.26 and the 23.6% Fibonacci retracement level of 126.72. However, that level didnt hold. A break of the 120 support may put oil down to 110 - 112 a barrel. I wouldnt be surprised to see a bounce back to the 50 day moving average (blue line) of $133 which coincidentally is the 50% retracement level before finally selling off on reduced demand.
The daily charts Bollinger bands above show how volatility has expanded nearly two times since the July 11th peak. Stochastics consistent move upward supports my theory that oil will rise. RSI isnt really helping my theory though. If oil advances tomorrow enough to raise the RSI above Wednesdays 39.80 close then there is a chance that of me being right about oil reaching 133. Another barrier is that oil needs to close above the 8 day exponential moving average (EMA) near 125.5 followed by a close above the 21 day EMA at 129.7 (coincidentally the 38.2% Fibonacci retracement level)before breaking up to 133. My wife drives a Yukon Denali XL to transport the kids everywhere so I would love to see oil drop a lot. But there are still trading set ups that look like a decent long entry might occur if crude closes above the 8 day EMA.
The Bigger Picture
Now that I covered a little of the news that moved the markets lets look at the broader perspective of the S&P 500 and the NASDAQ 100. We could also look at the S&P 100 ($OEX) to see where support and resistance is at but most people follow the $SPX or Dow Jones.
The SPX: In previous articles I wrote about how strong the resistance was at 1291 on the SPX. Just to review there was the late June highs near 1291 established when the SPX tried to rebound and also the May high to July low (drawn above) 38.2% Fibonacci retracement level of 1292.04. Last weeks high of 1291 reiterated that resistance level for yesterdays high only reaching to 1284. If the SPX takes too long the 50 day EMA (orange line above) will become added resistance at 1290. Failure to break above the 50 day SMA (blue line above) may result in the SPX retesting 1200 and possibly breaking to new lows.
I believe there is a decent chance for a breakout in the next few days. The higher low along with the 8 day EMA about to cross above the 21 day EMA provides support for this assumption. Furthermore, the lower Bollinger band is beginning to move upward. The volatility as measured by the difference between the upper and lower Bollinger bands is shrinking. As volatility contracts (or squeezes) and then spreads outward a move in the direction of the momentum is about to begin. In this case momentum is advancing and therefore indicates a break upward.
The NDX: Over the last five months the NASDAQ 100 has traded from 1650 to 2050. There have been gap ups and downs; some of which have not been filled yet. For instance, the 1752 horizontal line represents the gap up support level. There is a gap down at 1910 from June 26th that represents an upside goal for the NDX. However, there recent range of 1760 to 1874 has to be broken before either gap is filled. Todays high of 1874 reiterated the range while simultaneously touching the 50 day EMA. When there are two or more price levels at resistance those levels are hard to break above. Todays action followed by a close lower on greater than average volume suggests that the NDX may need to drop further and regroup before breaking up and out.
The chart below of the Bollinger bands and Stochastics paints slightly less bleak view of the NDXs potential. For instance, the NDX closed slightly above the 21 day EMA while holding above the 8 day EMA though out the days action. While another close down will turn the 8 day EMA downward, it is still moving toward a cross of the 21 day EMA. As with the SPX the Bollinger bands are showing a contraction in volatility that may be followed by a sharp move in the direction of the momentum (Up). Stochastics is showing that there is still room to advance before the NDX becomes overbought. RSI isnt providing much clarity though. The NDX will need to break out with strong momentum to also move the upper Bollinger band high enough to also fill in the 1910 gap resistance level. Another support for a break upward is the higher lows and slightly higher highs throughout July (see trend lines below).
The TNX: The Ten Year Treasury bond yield is losing upside momentum. The yield, now below 4% at 3.98%, appears to be headed toward 3.83% on slower economic trends. There might not be a need to increase rates as early as previously thought to shore up inflationary pressures of oil and agricultural commodities prices reduce. The problem with this market is that very few sectors are making money. Standard asset allocation between fixed income and equities hasnt worked because the credit crisis is the reason equities and bonds are losing money. On top of that, real estate remains in a down trend. Modern portfolio theory may help you increase your odds of success by allocating assets in non-correlating investments. To do this, invest globally in equities, bonds and commodity related asset classes. Proshares just released two Ultra Short treasury ETFs that trade inversely to the bonds. For instance, if you want to go short the yield (long the bonds) you would go short the Ultra Proshare to make money from the inverse price and yield relationship. If you dont need to hedge your bonds you can replicate a diversified corporate and Treasury bond portfolio with ETFs that are also optionable. Selling calls to hedge or puts to replace outright owning the ETF are among the available strategies. There are multiple optionable domestic and international equity ETFs to fill the portfolio. Finally, I prefer to have an allocation with a combination of sector specific and commodity related ETFs to help diversify the portfolio.
There is a diverse group of companies reporting earnings tomorrow that can move the markets. For instance, Chevron could pull the oil service sector down and General Motors could announce negative news regarding their balance sheet. Sun Microsystems and Nortel arent that big of players anymore but they could make statements that affect the semiconductor industry. I like the exchanges because they make money from the increased volatility. Therefore, NYSE Euronext will be interesting to follow.
There are eight important economic reports being released tomorrow. The July
Payrolls, Unemployment Rate and Hourly Earnings are among the most influential.
The market is expecting the unemployment rate to increase from June. I believe a
match of Junes report will spur confidence in the economies resilience. I also
believe we are in a good news is good news scenario. We want economic growth
because it will cause rates to increase and the carry trade to reduce. Then the
strengthen. Good trading to all.
Play Editor's Note: I'm not adding anything new ahead of tomorrow's jobs report. Trying to pick a direction ahead of the number is a coin toss. My bias is bearish, especially after today, but I know some market pundits are expecting the market to rally even as the jobs number comes in lower than expected. Right now estimates are for a loss of 75,000 jobs.
New Long Plays
New Short Plays
Long Play Updates
Buckle Inc. - BKE - close: 51.50 change: +0.03 stop: 48.45
The RLX retail index looks like it's going to roll over into a new leg down again. This should make traders more cautious on BKE. Even though BKE is out performing its peers if the RLX crashes or the S&P 500 begins a new trend lower then BKE will more than likely follow. We're not suggesting new bullish positions at this time. Our target is the $57.50-60.00 zone. FYI: The Point & Figure chart is bullish with a $66 target. BKE has a high amount of short interest about 21% of the 15.5 million-share float. If BKE can hit a new relative high it could see a short covering rally.
Picked on July 22 at $51.69
iShares China 25 index - FXI - cls: 44.64 chg: -1.98 stop: 44.99
Yesterday the rebound in the FXI and the breakout above its 50-dma looked bullish but we were concerned about resistance with its trendline of lower highs. The FXI failed to see any follow through higher and reversed back under the $45.00 mark. This is very short-term negative and if the FXI trades under $44.00 more nimble traders may want to consider bearish strategies. Right now our suggested trigger to buy the FXI is at $47.65. If triggered our target is the 52.00 level or the 200-dma (currently $52.24) or whichever the FXI hits first.
Picked on July xx at $xx.xx <-- see TRIGGER
Market Vectors Coal - KOL - cls: 49.22 chg: -2.38 stop: 47.95
We were expecting a pull back into the $50-49 zone and we got it. The KOL slipped to $48.82 and bounced several times near $49.00. The top edge of our suggested entry range was $50.10 so the play is now open. If you're still looking for an entry point use a bounce from here to open positions. More conservative traders may want to tighten their stops a little more. We have two targets. Our first target is $54.75. Our second target is $58.50.
Picked on July 31 at $50.10
Masimo Corp. - MASI - close: 37.77 change: +0.27 stop: 36.24 *new*
MASI out performed the broader market and continues to trade with a bullish pattern of higher lows. We are adjusting our stop loss to $36.24. Our target is $41.25. We do not want to hold over the August 4th earnings report.
Picked on July 27 at $37.57
Terra Industries - TRA - cls: 54.00 chg: -1.72 stop: 49.95
Target achieved! TRA tagged a new all-time high at $57.64 today. Our first target was $56.00. Readers should have taken some profits today. Please note that the sharp pull back from TRA's highs is short-term bearish and looks like a bearish reversal. TRA could retrace back to the $50 zone before bouncing again. We're not suggesting new positions at this time. Our secondary, more aggressive target is $59.85.
Picked on July 28 at $51.30
United States Nat.Gas - UNG - cls: 42.60 chg: -0.79 stop: 40.99
I don't watch NASCAR but I know that the yellow flag means there is a hazard on the racetrack. We're waving the yellow flag on UNG. There was no follow through on yesterday's big bounce and today's decline puts the brakes on yesterday's bullish reversal candlestick. We would still buy a bounce from here but traders need to be nimble and cautious. More conservative traders might want to inch up their stops even further. I want to warn readers that trying to pick a bottom in the commodities lately has been pretty hazardous. Our target is the $48.40-50.00 zone.
Picked on July 30 at $43.39
Short Play Updates
Nordstrom - JWN - close: 28.74 chg: -0.45 stop: 31.51
Good news! The trading in JWN produced another failed rally near $30.00. This is another entry point traders to open bearish positions. If you prefer more momentum then you may want to wait for a new low under $28.00 before initiating positions. Our short-term target is the $25.05 mark. More aggressive traders may want to aim lower. We do not want to hold over the mid August earnings report.
Picked on July 27 at $28.94
Closed Long Plays
Closed Short Plays
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