Tactical Trading Outlook - Daily Outlook #1690, 02/08/2007

The stage was set for a push lower on Thursday and that is exactly what we got. All the indices moved lower from the open. However, the buy the dip crowd was waiting in the wings and quickly snatched up the bargains. Then, a tectonic round of program buying hit the market at 2:45 PM and that really saved the day. While Thursday was a rare down day for all the indices, for the most part, initial support levels were tested and held. Unless or until we see important support levels broken, it is just a pullback.

The Dow broke below key support at 12,620. It came within 3 points of the downside Fibonacci extension line at 12,572 and promptly bounced. Wow! That was a hum dinger of a correction, almost 130 points in about 6 trading hours. That's pretty crazy stuff after being stuck in a 60 point range for five days straight. 12,580-12,600 remains the support level of importance and Thursday it was bent but not broken.

12,540 is a dividing line and now it appears 12,640 is also a dividing line. Below 12,640 the bears appear in control on a very short-term basis while regaining 12,640 will feel like another backhanded slap in the face to the bears. The Bears needed an immediate crack to the downside and they got it. Now, to remain in control, they can't allow the recovery to push above 12,670. In short, the bears really need a lot more weakness and they need it quickly. Considering the size of Thursday's afternoon buy program, it there is a lot of money waiting to buy the dip.

Friday is another light day of economic data and the bulk of the week's remaining earnings come out Thursday night. The market has been in need of a correction and we now have a little one. It played out over two trading days and the end result has a muted visual appearance. I think it is too early to proclaim the correction is over, but as we know is the case, everyone wants to buy the dip. It will take a measurable close below Thursday's low will significantly alter the buy the dip mentality.

Here's why:

The Dow was never up on the day. It fell a stunning 91.01 points to its low of 12,575.86, 125 points from Wednesday's high. However, from the morning low it rallied over 61 to close at 12,637.63 down just 29.24 points. While the 91 point decline was an attention getter, losing less than 30 points on the day doesn't do much for me. They say things are starting to thaw out up north; maybe that will free the market to wiggle around a bit more.

At about 2:45 PM, a buy program hit the market big time. The Tick index shot up to +1490. I don't have numbers in front of me, but I can tell you it doesn't get that high very often. The huge buy program added only 30 points to the Dow, and that isn't much. A while back, the buy programs could typically drive the Dow 50 to 80 points in an hour's time. While 30 points doesn't seem like much, when you are working within a 130 point range I guess it isn't that bad.

Thursday's low came close to the Dow's daily trend line. At this point the flat then down pattern is repeating and that suggests we should see at least one more day of downside action, if not several. Now the question going forward is whether or not we will see the typical bounce off the obvious up trend line. Note, in most cases there are two days where the trend line is challenged before a measurable pop higher. The trend line passes through about 12,560 on Friday. A measurable and sustained break of 12,560 on Friday will reflect very poorly on the bulls. In light of the sharp comeback on Thursday, if the pattern is going to hold, for now, the buyers should prove to be early.

On a break of 12,560, look for a support at 12,500, which is a Fibonacci downside extension level based on the two day 125 point decline.

While the Dow was breaking 12,600 support the S&P 500 was moving lower too. However, the SPX held 1442.81, well above the 1440 or 1438 support levels that are deemed important. For this to look like a convincing break down, the SPX is going to have to fall below 1438 and it closed 10 points above there on Thursday. Excluding January 25, you have to go all the way back to November 27 to find a day when the S&P 500 fell more than 10 points on a closing basis.
The current market does not scare easily so a close on Friday below 1438 seems unlikely. Since it seems so unlikely, if it happens it will carry a heavy message.

The NASD traced out an inside day, and that doesn't mean much at all. Yes, the Dow was beat up pretty good at its lows, but the NASD looks like it is consolidating after a healthy push higher. A break of 2485 will be an initial sign of trouble while a break of about 2470 will break the main uptrend line. It is still an "unless or until" something really breaks type situation and the NASD does not appear in significant technical trouble at this time.

One Follow up: The Dow Transports has worked its self into a tight wedge and is set to break hard one way or the other. In light of the overall overbought condition I am leaning towards lower, but I say that knowing that lower has not been the popular option of late.

The Dow, S&P 500, and NYSE all turned their daily trends down with a couple of minor daily sell signals. Both the Dow and S&P closed above their daily sell signal price points.
Friday all the 3-day trends can turn, either up or down. For downturns all of the recovery rally has to be given back. For the NASD and NDX to turn their trends up, they just need a little more rally since they went out just off their highs of the day. The message coming from the trend table remains generally constructive as we still are not seeing any important levels break. But they will. In time the important support levels will break. They might be higher than they are now, but eventually they will break. They always do.

Detailed Trend Report on Web & CLX Count and Weekly Signal Counts & NYSE & NASD 5-day up and down volume charts

Total breadth was -156 at the end of the day. It was as low as -1700 at the opening lows. It is worth noting that breadth did not make a lower low as the Dow made its lower price low just before 11:00 AM. From there it was a dip buy's heaven. At the end of the day, internally it was a flat day with a slight negative bias left over from the morning weakness.

Total volume contracted on the day of weakness. Overall volume has been running very light since the FOMC meeting.

Even with a down day on Thursday, most of the 5-day RSI readings are at or above the overbought 70 level.

Internally the market remains overbought. Bottom line, over the past week we have seen a fall off in buying and virtually no pick up in selling and or selling pressure. The week of consolidation has not done much to relieve the existing overbought condition.

Internally the market remains set for a couple more days of corrective action and this is where it gets interesting. From a price stand point, several indices are running out of room for more than one or two more days of weakness. Meanwhile, the internals are set such that it is likely to take another week for them to reach an oversold state. A week of corrective price action will likely result in some important trend lines giving way. But for now no important support levels have been broken, which leaves the bullish patterns in tact.

If the Bears are in control the Dow has no business going above 12,670. And, from a pattern symmetry stand point, the counter trend move should be about over. So for a second day in a row, the bears really need to take control of the action very early in the day if they are going to convince anyone a bigger correction has begun. For now, support on the Dow was bent, but not broken. On other indices, support wasn't even tested. That means the overall up trends remain in tact. Despite the deep freeze, the up trends appear to be on thin ice.

Most Obvious chart resistance levels:
Dow ~~12540~~, 12,700, 12,750, 12,863
SPX ~~1435,~~ 1452, 1480-1489
NASD ~~2465-2480,~~ 2501, 2536 (minor Fib) 2570
NDX 1810, 1844-1850, 1877 (minor Fib), 1910 (Major Fib Level)
NYSE ~~9300-9320~~, 9365, 9503, 9650

Most obvious Chart Support levels:
Dow 12,620, 12540-60, 12450, 12350, 12,260, 12,200, 12,080, 11,890, 11653
SPX 1439, 1434, 1418, 1403, 1390, 1378, 1362, 1354, 1345
NASD 2455, 2422, 2400, 2360, 2290, 2225, 2000,
NDX 1790, 1772, 1745, 1700, 1650, 1465
NYSE 9290, 9110, 9060-9080, 8960, 8800, 8690, 8575

Here's where we are now:

NASD 100 Index (NDX) Trading System, trade the QQQQ:

Amazing, the NDX closed at 1810 again.

The bears can take another shot at it going short now looking for a breakdown. Falling below Thursday's 1800 low should transpire into a more meaningful decline. Than again, based on the past week, a meaningful move is only a hand full of points.

S&P 500 (SPX) Trading

From 01-28-07: This is a longer-term recommendation, meaning I expect holding this position for several weeks to several months: Buy the SDS (ProShares UltraShort S&P 500 ETF) which closed at 58.24 on Jan 28. The SDS should move 2x the S&P 500 on an inverse basis. If the S&P 500 rallies to 1450 then we will move to a 200% long the SDS position.
Added 2-2-07 after the close: The SPX reached 1499 today. If the S&P 500 reaches 1452 then add another 50% to the SDS position bringing it to 150%. We will hold off on the remaining 50% for either higher prices or a breach of a key support level.
>>>> 2-6-07 the SPX pushed above 1452 today allowing us to add another 50% of our SDS short position at 56.15 today.

The break of 1450 proved somewhat meaningful as the SPX fell almost another 8 points. 1450 is resistance. Below 1450 the bears have a semblance of control. Breaking 1445 will be the first sign of difficulty for the S&P 500. In light of the recent action, it is hard not to believe there are a tone of folks waiting to buy between 1438 and 1440.

Current Positions

ATML rec Long 01/04 @ 6.17 stop 5.63 close, Target >8.50, closed at 5.70
ICLR rec Long 01/24 @ 39.53 stop 34 close, Target >46, closed at 38.94
LOGI rec Long 02/06 @ 28.96, stop 26 close, Target >35, closed at 28.97
DAKT rec Long 02/06 @ 36.69, stop 31 close, Target >44, closed at 37.39

PSMT (Pricesmart Inc) has pulled back to support at about $15. They announced a secondary on Jan 29^th and the stock has consolidating between $15 and $16.50. In these situations it is best to wait until after the secondary. I can't find a pricing date at this time. I am keeping an eye on PSMT, looking to buy on an upside break of its current down trend line, currently running through ~$16.

CBEY tested lower support at 27.50 and has rebounded to resistance at about $31. CBEY should ultimately head higher and I am watching for a breakout above $31.

Here is the Deal:

Here's why:

Here's where we are now: