Here is the Deal:
Survey says??? Buy the rumor and sell the
news. At least that is what we have seen so far when it comes
to Dow stocks reporting earnings. Of the seven that have
reported this week, all were rallying or flat going into their
reports, and all traded down after their report, with the
exception of KO.
With a plethora of data to wrestle with over
the course of the day, all the major indices turn lower with
the Dow testing support below the 13,875 line before recovering
into the end of the day. Note: it was the first down day for
the Dow in over a week.
If the Dow is unable to hold Wednesday’s lows, the next line of
support is about 13,775 while a 38% retracement of the recent
move will bring the Dow down to 13,816. At this point we still
need to see a break of 13,650 to suggest any sort of important
high may be in place. However, with IBM looking strong in after
hours, these lower levels probably won’t be a near-term factor.
Sub-Prime worries continue to weigh heavily on
the market, especially the financial sector, which makes up a
very large percentage of the whole market. Typically a weak
financial sector is a troubling signal for the stock market as
a whole. The question I am wrestling with though is are
financial companies in operating trouble, or did they simply
use poor judgment having over exposed themselves to low quality
assets? I am leaning towards the latter, which while
unfortunate, is something they can and will recover from.
IBM reported after the close. After seeing the
reactions to earnings so far this week, I am surprised everyone
wasn’t buying the 110 puts expecting the stock to sell off on
their report like all the Dow stocks so far. I hope you didn’t
do that because IBM reported solid numbers setting the stage
for a healthy start on Thursday. We have a lot of earnings
reports yet to come but the stage is set for strength into
expiration.
Here’s why:
The Dow was never up on the day. It was down
148 at its low of 13,823 and it rallied 94 points off the low
to close at 13,918 down 53.
MO, UTX, INTC, JPM, and PFE, the five components that reported
between Tuesdays close and Wednesday’s open; took a combined 44
points out of the Dow accounting for almost the entire day’s
loss.
Interest rates:
One of the pictures I
have on a wall in my office is a chart of interest rates: “200
years of United States Interest Rates.” Like all charts, it is
just a squiggly line that my daughters think looks like a
snake. Fortunately, a 200-year chart offers a unique
perspective on things something like interest rates. If you can
get past the details (read: people were just as greedy and
paranoid back then as they are today) and just look at the big
picture, there are two distinct phases. There are extended
periods of generally rising rates and major periods of
generally falling rates.
Major periods of Rate
Rises in the US:
1825 – 1861 = 36 years
1898 – 1920 = 22 years
1946 – 1981 = 35 years (note: the late 70’s to the early 90’s
is the only period when rates were significantly above 8%)
Major periods of rate
decline in the US:
1798 - 1825 = 27 years
1861 - 1898 = 37 years ***
1920 - 1946 = 26 years
1981 - ???, now, 2004, = ~23 to 26 years.
*** If you are
willing to gloss over a brief rate spike during the Civil War
period, one can argue that the real decline started in ~1871
meaning that period of rate decline was more like 27 years, in
line with the other two known periods of rate decline.
Why is this long-term
analysis important? Simple, when it comes to hedge funds that
are leveraged beyond their eyeballs in the debt market, a
generational shift in interest rate direction throws a monkey
wrench into their PhD Driven academic models.
When prices have been rising for 25 years, do you really think
anyone has a contingency plan in case the 25-year trend
reverses? Me either…moving right along….
The good news: I have
another chart titled “When the Fed tightens Bad Things Tend to
Happen.” This chart shows the Fed Funds rate from 1972 to
present and highlights some of the more memorable events in the
debt markets. In each case, the Fed Funds rate rose up to the
mentioned event, and then turned lower.
1975, Franklin
National Bank fails, Fed Funds rate starts to comes down;
1982, Mexico/Brazil/Venezuela Default, Fed Funds rate starts to
comes down;
1989, S&L crisis, Fed Funds rate starts to comes down;
1995, Orange County, Fed Funds rate starts to comes down;
1998, LTCM, Fed Funds rate starts to comes down (a little);
2001, The label on the chart is “Train Wreck,” Fed Funds rate
starts to comes down
After the last label,
2001, the Fed Funds rate dropped below 2% and then started to
rise again. And it is a pretty big rise. In fact, most of the
rises of equal distance on the chart have a label at the top of
them pointing out some sort of debt failure. In light of the
sub-prime issues at hand, it is probably time to add another
label to the chart. This is important because after each label,
there was at least a minor drop in the Fed Funds rate. I don’t
see the Fed cutting rates anytime soon, but this oversimplified
analysis is a strong argument for the Fed to at least hold
rates steady for some time to come.
The TYX moved lower, down towards the gap
defined support line at 51.00. Thus, the potential for a move
down to support just below 50 has increased.
S&P 500 challenged 1541 support, call it
bent but not broken: I said to keep an eye on 1541 and the
test came much quicker than expected. At the end of the day it
appears we have a completed corrective pattern in place. 1547,
described as support last night, is now the obvious upside
supply line that must be regained to put the bulls back in
control. Since I don’t believe in triple tops, I guess that
means I think the SPX is set to move above 1547 and higher over
the balance of the week.
The very short-term cycles are ready to turn higher. The last
similar very short-term cycle setup was on June 22. The
comeback rally stalled below a support line equivalent to the
current 1547 band of resistance. In short, if the rally stalls
and or is unable to sustain a move above 1547, then we will
likely end up re-assessing our overall near-term expectations
for higher prices.
Bottom line, Wednesday’s action was the sort of “freak them
out” type move I was trying to describe last night.
The Russell 2000 is doing it the hard way:
The Russell opened below 848 and gave us a solid test of
last week’s lows. From a pattern stand point, the action is
corrective, which tells us the RUT still hasn’t begun a real
move higher. The strong late day recovery looks bullish, but it
needs to keep going. 848 remains a defining pivot level. Above
848 shows the bulls are in control. Below 848 shows the bulls
are not in control, but I won’t go as far as saying the bears
are in control. If the Bears really had traction, prices
wouldn’t have come back as much as they did on Wednesday.
The NASD remains for the most part in a high
and tight corrective pattern after last week’s thrust higher.
We expected some difficulty on Wednesday on the back of the
INTC reaction. With that behind us and a four day consolidation
in place, the potential is there for a much broader rally to
get under way. The key line is about 2694 and the NASD closed
above that level. Key point to watch, on the next move higher
we need broad participation.
Longer-term cycle considerations: Longer-term
cycle momentum trough on Tuesday June 17, Longer-term cycles
bottom on the 22nd with a momentum peak and high on
Friday July 27th. Thursday August 2, and Friday
August 10 are cycle momentum troughs with a major cycle
momentum peak on August 15. The series becomes very choppy from
July 29 through August 27. Generally speaking the series works
lower to an important low on the 27th with the
momentum trough leading into that low on the 21st.
The dates mentioned are the most significant looking points
during the choppy period.
All the daily trends turned down with the NASD
triggering a daily sell and the NYSE turned its 3-day trend
down. The action confirms the correction we are currently
seeing. However, the good news is the indices all closed well
above their turn points suggesting these are only minor turning
points.
Detailed Trend Report on Web &
CLX Count and Weekly Signal Counts &
NYSE & NASD 5-day up and down volume charts
Breadth has been an issue for the past few
days and Wednesday it finally blew it out. Total breadth
bottomed at -3300 around mid-day and improved to close at
-1689. The mid-day low was a total wipe out reading, but the
truth is many stocks were never down very much, which is why it
was able to come back as much as it did.
Total volume was very strong at 2.8 Billion and it was all
solid to the downside.
The 10-day AD lines have moved to oversold
levels while the five and 10-day volume metrics are neutral.
Internally the market is slightly oversold and well positioned
to support a positive move.
With the recent decline the Light Buy
signal light is now on. This signal series has been working
very well over the course of the rally during the past year. (I
hope I don’t regret mentioning that.)
The way this signal works is if the buying / selling pressure
condition improves and the market isn’t up big on Thursday,
then we will have a buy signal as of Thursday’s close. If the
market is weak on Thursday the light will likely stay on in
which case we will want to wait another day before going long.
If the light goes out and the market rallies big time on
Thursday, (>1.3%) technically the signal is given, but we pass
on the trade because on an end of day basis we end up missing a
big chunk of the gain.
Bottom line, we have a Light Buy signal now. If the market is
weak Thursday hold off for one more day, if it is strong, go
with it, but technically the entry price will be Thursday’s
close. It is a 3-day Buy signal meaning a long on Thursday’s
close will exit at Tuesday’s close.
IBM should goose the market higher Thursday
morning. Finally, a stock is reacting positively to good
earnings. A complex corrective pattern has played out over the
past few days and the stage is now set for the very much intact
uptrend to continue going into options expiration. The one
thing to watch for is a total failure of early strength on
Thursday, which is not really expected at this time.
Jim Patterson
Most Obvious chart resistance levels:
()
Dow
13,580, 13,620, 13690, 13,775, 13,845, 13,950,
14,030, 14,160, 14,350
SPX
1526, 1535, 1542, 1547,
1555, 1562,
1593, 1613
NASD
2605, 2629, 2652, 2662, 2672, 2700, 2735, 2745
NDX
1957, 1961, 1972, 1982, 2000, 2024,
2056, 2100, 2142
NYSE
10,000, 10,020, 10,060, 10,165, 10,230, 10266,
10,363
RUT-2K
826, 832, 838, 842, 848, 854-856,
861, 876
Most obvious Chart Support levels:
Dow
13,950, 13,875
13,760, 13,660, 13,520, 13,480, 13,350, 13,280, 13,050
SPX 1546, 1541,
1535, 1526, 1518, 1504, 1496, 1487, 1483, 1475
NASD
2694, 2680, 2655, 2640, 2625, 2602, 2586, 2558,
2525, 2455
NDX 2026, 2017, 2000,
1973, 1965, 1948, 1934,
1920
NYSE
10,223, 10,145,
10,000, 9940-60, 9820, 9720, 9690, 9510, 9400, 9350, 9280
RUT-2K
848,
844-846, 838, 836-3, 828, 820, 808- 810,
803, 790, 760
Here’s where we are now:
NASD 100 Index (NDX) Trading System,
trade the QQQQ:
The NDX tested 2026 support. While bent, it
was not broken thus setting the stage for prices to continue
their rebound. The NDX only lost 3.8 points on the day, not bad
all things considered. We continue to look for higher prices to
2056 with higher targets after that. Sliding below 2014 will be
out right bad for the near-term bullish case.
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
The SSO closed at 99.52
We got the scary pullback we thought we may
see and at the end of the day, the SPX held 1541 on a closing
basis. The futures are trading higher after the close on IBM
upside thus setting the stage for higher prices. With the Light
Buy signal on, we are going to hold our two long positions.
Tactical Stock Trading Powered by Patterson Relative
Strength
BBD rec long 5/31 @ 25.39, stop 23, Target
29.5, closed at 27.89
CHINA rec long 6-14 @ 8.56, stop 8.01, closed at 9.41
SVVS rec long 6-28 @ 50.55, stop 47.75, target 59, closed at
47.46 Below our stop price.
SVVS closed 7-18 @ 47.75 for 5.5% loss.
**
PRS Open Actives making noise:
Cautious during earnings season
Jim Patterson
Editor
Tactical Trading Outlook
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