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Here’s the Deal:

Trouble in Shangri-La....Monday wasn’t a particularly bad day, in fact, many indices closed higher. But the action at the short end of the Treasury curve is somewhat disturbing with the IRX having fallen to a low of 24 on Monday. That is less than ½ the current Fed Funds rate of 5.25%. This is remarkably abnormal activity and the message is clear. Bond traders have no idea what to do, what anything is worth, and or who to trust. As a result they are parking money in T-bills waiting for the coast to clear. While the Fed’s stupendous actions on Friday gunned the stock market, debt traders remain highly unsettled.

Friday’s conclusions: Watch for some post expiration weakness, August is notorious for that. Any pull back that does develop should hold above Friday’s mid-day lows. Falling below those levels, especially if the moves have an urgency to them, will set a potentially very damaging new tone.

After a surprisingly firm open, prices fell off as expected. But I have to confess, most indices held up remarkably well, holding well above Friday’s mid-day consolidation range. The late day thrust higher enabled most indices to take out Friday’s highs, but generally speaking it was not a broad move higher. The Dow enjoyed the greatest benefit. 13,150 – 13,200 remains the resistance area to watch with a Fibonacci target line at 13,216.

The biggest shelf of overhead supply is from 13,150 to 13,200. For now we are still looking for some additional backing and filling after the huge, yet brief, rally late last week. Ideally the Dow will continue to make only brief excursions below 13,000 9if at all) and continue to return and close above 13,000. With the right mix of news, a jump up to 13,350 should not be too difficult. But keep in mind that at this point we do not believe THE LOW is in place.

With no economic data on Tuesday and Hurricane Dean out of the market’s way for the most part, we will have to away overseas reactions. A couple of retailers, including TGT, report on Tuesday. If TGT has something more constructive to say than WMT, it could set a much more constructive early tone.  

Here’re the Details:

The Dow was up 53 at its early high of 13,132, fell 149 point to the low of 12,982. The Dow then rallies an impressive 198 points from low to the high of 13,181 when it was up 100.
The Dow closed at 13,121.35 up 42 on the day. That is 138 off the low of the day, but a disappointing 60 off the day’s high. It was a somewhat constructive day following Friday’s huge move.
IBM subtracted 13 from the Dow while BA, CAT, AA, and HON added a collective 41. Four stocks accounted for all of the gains while the other 25 offset one big decliner.

And this just in: Atlanta Falcons (soon to be ex) quarterback Michael Vick will entered a plea agreement in his Dog Fighting case, and is expected to go to jail for at least one, possibly as much as three years. Even this superstar wasn’t fast enough to out run his perpetual youthful indiscretions.

Interest rates, T-Bills, T-Bills, and more T-Bills: When in doubt, buy T-Bills. There is a lot of doubt right now and as a result, T-Bills are in huge demand. The 90-day rate was driven down to a low of 24.00 and a close of 29.50. In the day’s and weeks ahead, even if the Fed cuts rates, the IRX should return to the mid to high 40 area. Meanwhile the TNX remains at about 50 give or take a half.
Note: In 1998 we saw a similar drop in the IRX as it fell from 48 to 35. Well, up until Monday, that is what the IRX had done. Then Monday it craters from 35 to 25, Ouch! Oh yea, it took the IRX from August 28, 1998 until October 16, that is seven weeks, to go from 48 to 35. This time it has all happened in just 7 DAYS!
One of my favorite says is “Nothing ever changes but the date and the weather, and the speed of global communications.” But information isn’t moving that much faster. Fear Driven, yes, but looks like something is still broken.

S&P 500, late day rally driven by program action fades into the close: The Tick index reached about +1300 around 3:15 and the rally peaked about 5 -10 minutes later with a lower tick reading. Once the programs had run their course, prices quickly came in with the SPX dropping about 8 points in about 15 minutes. A sure fire sign of program driven activity. It is clear the quant funds are not out of business.
1450 is looking like a brick wall at this time, but with three shots at it, it should get through. It either happens on the open, or after another round of backing and filling Tuesday morning.
1430 remains a formidable line of support, but I am still watching / looking for a test of 1425’ish (maybe a little lower) just to shake things out. As long as the move isn’t urgent looking with horrendous internals, 1425 – 1430 should contain any pullbacks. We expect higher prices on this move. If 1460 is reaches then 1426 becomes the 38% retracement leve.

The Russell 2000 wasn’t as strong as the Dow: With total breadth never very strong the Russell struggled to gain any traction. 790 remains a resistance line followed by top of the range resistance at 800. Until the Russell gets above 800, the potential for a reversal remain heavy. Support is 777 and then the bottom of the gap at 769.

The NASD did little to impress anyone on Monday. It held in a tight range relative to Friday, call it an inside consolidation day, which is supposed to be a technical positive. 2525 remains the resistance area the bulls much drive through to set a more positive tone.

There were no changes in the trend table on Monday. The daily buy points remain a healthy distance away on all indices. Odds are the daily trends turn down before daily buy signals are given.

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

Total breadth was +699 with the NASD almost flat on the day and total volume contracted substantially. There was more buying pressure than selling pressure, but overall, pressure was reduced on Monday.
The CQI index remains below one suggesting at least a near-term low is developing
The Dow is up 275 over the past two days and its 5-day RSI is neutral. Note: When the Dow bottomed, its 5-day RSI did not reach a lower level despite the magnitude of the move.
The Trin-5 metrics remain high and should come down further over the next few days.
And, the VXO buy signal has come down from 100%, which is when the signal is given. The action in the VXO suggests the worst is behind us for now.

Internally, Monday was a quiet consolidation day with an upward bias. That is about what the bulls wanted to see. The market is three days into the current rally and if we are going to see a Key Follow Through Day (up big on strong volume) it will ideally come on the fourth through the seventh day of the rally. That means we have until the end of the week, otherwise it will come too late and that carries a different meaning.

Monday was a constructive day for the bulls in the sense that the market held up over the balance of the day. The action in the T-Bill market has become a bit alarming though. For each and every action there is an opposite reaction, and I doubt we have seen the reaction that will result from so many t-bill buyers.

We are looking for choppy strength for the next couple of days. We are watching for a key follow through day but for some reason, maybe because it is August, I don’t think we will see it. Is there such a thing as being too obvious? The market was on the brink of collapse and the Fed races to the rescue, and suddenly all is well…in August. If we get a key follow through day I will believe it, but for now I remain skeptical regarding the importance of last week’s low.

Jim Patterson

Most Obvious chart resistance levels: (Gap levels)
Dow  13,000, 13150, 13,210, 13,285, 13,350, 13,490, 13,580, 13,630, 13700, 13,825
SPX 1420, 1439, 1450, 1460, 1474, 1489, 1496, 1505, 1517, 1527, 1535, 1547, 1562
NASD 2490, 2500, 2520, 2558, 2580, 2605, 2629, 2649, 2664, 2680, 2700, 2735
NDX 1855, 1895-1900, 1920, 1945, 1954, 1962, 1988, 2000, 2018, 2045, 2056, 2100
NYSE 9189, 9340, 9395, 9470, 9520, 9620, 9730, 9860, 9920 10,000,
RUT-2K 765, 772, 785, 794, 802, 813, 824, 832, 838, 842, 848, 854-856, 861, 876

Most obvious Chart Support levels:
Dow 13,735, 13,580, 13,490, 13,350, 13,240, 13,150, 12,985, 12,815, 12,677, 12,547
SPX   1483, 1475, 1470, 1455, 1441, 1428, 1418, 1400, 1395, 1380, 1360
NASD 2655, 2635, 2606, 2592, 2578, 2562, 2551, 2518, 2490, 2450, 2423, 2400
NDX  2014, 2000, 1973, 1965, 1957, 1948, 1943, 1933, 1920, 1875, 1860, 1838, 1810
NYSE 9800, 9720, 9620, 9585, 9520, 9455, 9350, 9220, 9186, 9025, 8925, 8800
RUT-2K 834, 828, 820, 808- 810, 803, 794, 782, 776, 772, 765, 760, 746, 736

Here’s where we are now:

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

The Dow and S&P are above the early week lows while the NASD and NDX are stuck below the lows from early last week. The near-term down trends have been broken, but supply remains immediately overhead. We are looking for some choppy yet higher action over the next few days. The NDX should run into trouble in the 1940 area that is if it can sustain a move above 1900.

Long-term 3-peaks and domed house pattern target, 1720.

S&P 500 (SPX) Trading

We went long the SSO on Wednesday 6/13 on the back of the Rare Buy signals with an entry price of 94.42.   Entry #2 @ 93.00 Entry #3 @ 80.80
The SSO closed at 86.25

Monday we saw a milder pullback than expected and a reasonable recovery. We are still looking for 1460 to close one SSO position.

Tactical Stock Trading Powered by Patterson Relative Strength

BBD rec long 5/31 @ 25.39, stop 23, Target 29.5, closed at 22.98
CHINA rec long 6-14 @ 8.56, stop 8.01, closed at 8.18

** PRS Open Actives making noise:
IBD 100 Review: Today I reviewed the new additions to the IBD 100 list and found a couple of stocks that have pulled back to interesting entry points.

BTJ, quickly pulled back from the high 50’s and is holding support in the high 30’s. 50-day average is 44.75 and it needs to close above there to suggest all is clear.

GSOL, in the high teens down from mid-20’s, closing above $19 will crack its near-term down trend line.

GPOR needs to close above $18 to break its near-term down trend line but overall presentation remains threatening.

WFR, they are still making chips and they need lots and lots of wafers. WFR has good support at about 50-52. A close above 57 cracks the near-term down trend line, but 56 to 58 is an obvious band of resistance. If WFR can get above $58 it will become much more attractive.
WFR closed at 56.89 up 2.62 on Monday, certainly a step in the right direction.

AVT is in an interesting position. I would like to give this one a bit more time. It is a classic PRS entry configuration with high 12-month PRS ranks while its short-term rank dipped below 40.
AVT closed at 38.80 down 0.26 as it struggled just below its 50-day average at 40.23.

Jim Patterson
Editor
Tactical Trading Outlook

Here’s the Deal:

In the Mid-day comment I said I was looking for some weakness going into the 2:30 – 3:00 PM turn window, which should set up a run higher into the close. We didn’t see much in the way of weakness but the expected last day strength did develop as prices pushed higher into the close and that was the more important aspect / development of the day.

The Fed cut the Discount Rate! Yippee! So, what do we do now…besides get ready for some horrendous August Home Sales data and on a more immediate front, brace for Hurricane Dean. The good news is Dean appears on a track through the very southern gulf where it should be much less of a concern.

Friday’s open was a bit overdone but that tends to happen when the Fed announces a surprise rate cut at options expiration. 13,100 is an obvious level of resistance which the Dow spent most of the day just below. The important thing is the Dow is back above the psychologically important 13,000 level. Falling back below 13,000 is flat out bad for the bulls.

The short-term down trends were broken. Now it is all about the recovery and the quality of the recovery. At this point the recovery looks technically very sound. One thing we are watching for is a key upside follow through day later this week to confirm the low is in place.

This week is a slow week for economic data. Monday we get Leading Indicators, but that report isn’t likely to carry much weight. Friday’s New Home Sales report for July will be very interesting. With only a trickle of earnings reports, a great deal of attention will likely remain on the debt and mortgage concerns at hand. The good news is Hurricane Dean is expected to be less of a factor to US interests as it is expected to remain well to the South.

Here’re the Details:

The Dow was up 321.9 at the very early high of 13,167.68. It closed at 13,079 up 233, towards the top of the day’s range. Overall it was an impressive day but I can’t help but wonder exactly how much of the opening strength was panic driven and or expiration related stuff. Then again, with Wednesday’s late day drop and the sudden rebound, we can almost look at the past few days as an island reversal.

I have one final follow up comment regarding 1998: The Fed cut rates on October 15 just before options expiration. In hind sight, it is clear the Fed was waiting until expiration for maximum impact. It is also important to note that by the time rates were cut, the market had already successfully re-tested the late August lows.

Interest rates, things that make you go hum….: The change in the discount rate had very little impact at the long end of the curve. The TYX remains in a consolidation around 50. The 10-year (not shown) has been pulled lower with the short end of the curve.
The only similar move in the IRX was in October 1998. The rate cut in 1998 was one big step and that was it. After a few quarters, the Fed moved rates higher.
Nine Years later, we appear to have a similar reaction, IRS from 50’ish to 35’ish. This time it has been much more rapid.

S&P 500 more or less followed the script: We were looking for a rebound consolidation and then higher. The size of the moves was a bit more than expected with the SPX coming close to 1450 resistance on the open, consolidating, and rallying into the close. The track was on the mark.
1420 is now the clear support level to watch. Be ready for a pullback that challenges 1420 support. With a rate cut already in hand, should prices pull all the way back to 1420, 1420 should hold.

The Russell 2000: We have two very different recoveries here. The Russell has rallied back near its August highs while the NASD is stuck just below overhead resistance around 2510 to 2530. If the Russell can sustain a move above 800 it will be the first real upside move indicating an important low is in place. For some reason I just don’t think it will be that easy. Support is the gap, 770 to 775.

The NASD quickly reached back above 2500. The good news is we now have some solid overlap, which eliminates the horrendously negative pattern alternatives. The very short-term down trend should be broken this week. The question is what happens when we get to the longer-term down trend lines.

All of the 3-day trends turned higher on Friday.

Three of the Quarterly trends are pointing down. This is important because over the past 45 years, the S&P has turned its quarterly trend down 35 times, which means there are 35 quarterly lows. Only 4 of them were in the Month of August and one doesn’t really count because a lower low was reached two months later in October.
It is highly uncommon for the market to bottom in the month of August, especially in years ending in 7.
Point / counter point >> In 2006 I was looking for a 4-year cycle low during the normal August – November time frame and there was no noticeable weakness from August through December when it should have bottomed.

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

Total breadth was +4500 at the morning high and it was +3844 at the end of the day. There was some weakening as early morning profit taking set in, but relatively speaking it wasn’t that much. Internally Friday was a very strong day and it makes a powerful statement. The fact that volume contracted a bit from Friday is typical and normal. We still need a key follow through day in the second half of next week to confirm an important low.
Total volume was down from Thursday, but that is the way it is supposed to be after a capitulation low. All internal metrics were solid to the upside.

Wednesday’s Rare Buy signal runs through next Friday. With nearly a 40 point move in hand, taking steps to protect gains is recommended.

Internally speaking, the market made a positive divergent lower low this week and has begun a recovery rally. In terms of points moved, it is possible a large chunk of the move has already taken place. However, from an internal stand point, we should expect generally more constructive internal action for three to ten days as the excesses are worked off. From an internal stand point there should be little risk of a sudden downside reversal over the next one to three weeks. However, that does not mean we will see a significant move higher from current levels.

Expiration week played out as expected. We were looking for a reversal around mid-week with strength into the end of the week. The low was on Thursday rather than Wednesday, the action was volatile, but on track.

Looking ahead: The Fed’s rate cut should put debt worries on the back burner for a couple of days. It’s a good thing because Dean has the potential to become a real thorn in the market’s side. Vist: http://www.nhc.noaa.gov/index.shtml to keep up with the storm. By mid-week Dean or whatever is left of it, should be somewhere in the gulf. Fortunately the track is currently to the south and at this time appears to be less of a threat to assets of significant interest (read: gulf oil platforms and the coast of Texas.)

Watch for some post expiration weakness, August is notorious for that. Any pull back that does develop should hold above Friday’s mid-day lows. Falling below those levels, especially if the moves have an urgency to them, will set a potentially very damaging new tone. For now, consolidate the late week recovery and then continue building higher later in the week.

Jim Patterson

Most Obvious chart resistance levels: (Gap levels)
Dow  13,000, 13150, 13,285, 13,350, 13,490, 13,580, 13,630, 13700, 13,825
SPX 1420, 1439, 1460, 1474, 1489, 1496, 1505, 1517, 1527, 1535, 1547, 1562, 1593
NASD 2490, 2500, 2520, 2558, 2580, 2605, 2629, 2649, 2664, 2680, 2700, 2735
NDX 1855, 1895, 1920, 1945, 1954, 1962, 1988, 2000, 2018, 2045, 2056, 2100, 2142
NYSE 9189, 9320, 9395, 9470, 9520, 9620, 9730, 9860, 9920 10,000,
RUT-2K 765, 772, 785, 794, 802, 813, 824, 832, 838, 842, 848, 854-856, 861, 876

Most obvious Chart Support levels:
Dow 13,735, 13,580, 13,490, 13,350, 13,240, 13,150, 12,985, 12,815, 12,677, 12,547
SPX   1483, 1475, 1470, 1455, 1441, 1428, 1418, 1400, 1395, 1380, 1360
NASD 2655, 2635, 2606, 2592, 2578, 2562, 2551, 2518, 2490, 2450, 2423, 2400
NDX  2014, 2000, 1973, 1965, 1957, 1948, 1943, 1933, 1920, 1897, 1860, 1838, 1810
NYSE 9800, 9720, 9620, 9585, 9520, 9455, 9350, 9280, 9186, 9025, 8925, 8800
RUT-2K 834, 828, 820, 808- 810, 803, 794, 783, 776, 772, 765, 760, 746, 736

Here’s where we are now:

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

Relatively speaking, the NASD and NDX are the lagging indices.  Both closed at or slightly below resistance from early in the week while the Dow and S&P closed above similar levels. The 1900 level remains a significant obstacle for the bulls. If this rally is to continue it should easily push higher. The more the NDX struggles to get through 1900 resistance, the more likely this rally is to fail.

Long-term 3-peaks and domed house pattern target, 1720.

S&P 500 (SPX) Trading

We went long the SSO on Wednesday 6/13 on the back of the Rare Buy signals with an entry price of 94.42.   Entry #2 @ 93.00 Entry #3 @ 80.80
The SSO closed at 86.37

From a trading perspective, we should see generally constructive price action over the coming week. We are alert for a test of 1420 at some point. If the SPX reaches 1460 then close one SSO position.

Tactical Stock Trading Powered by Patterson Relative Strength

BBD rec long 5/31 @ 25.39, stop 23, Target 29.5, closed at 22.86
CHINA rec long 6-14 @ 8.56, stop 8.01, closed at 8.44

** PRS Open Actives making noise:
Momentum Movers:
Stocks with accelerating upside Momentum and or just off a momentum peak:

These are very attractive looking stocks that have held up remarkably well through the correction.

Jim Patterson
Editor
Tactical Trading Outlook