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Here is the Deal:

Today’s FOMC statement seemed to make it clear the Fed has no intention of changing interest rates any time soon, which is what I have been thinking for some time now. With the FOMC meeting out of the way we can now focus on Q2 earnings season, which begins in earnest during the third week of July. It is worth noting that so far we have not seen much in the way of earnings pre-announcements, which is encouraging. Stocks seem to be reacting positively to good numbers of late, which again is encouraging as we look towards the third quarter.

The FOMC statement generated an interesting reaction. They say the first reaction to an FOMC statement is often in the wrong direction, which I think is a polite way of saying you should expect volatility.
The first reaction carried the Dow up to 13,480 resistance and was followed by a series of violent swings as traders digested the news. 13,380 to 13,400 is now the initial support level to watch. Provided we have truly begun a new leg higher, it should hold. However, a break of the 13,350 support line will disrupt the current pattern in the manner we are counting it and should be viewed as a serious warning flag for the bulls.  

Friday is the last day of the second quarter. During generally bullish periods, the last day of the quarter is generally stronger rather than weaker. See the Seasonal chart for year seven in the main section.
As long as the Dow holds above 13,350, game on for the bulls.

Friday we get the Chicago PM for June at 9:45 AM. This is a big one as it is one of the very first reads on the June economy. However, with bonds racing higher on inflation worries, one has to be skeptical as to which is preferable, a strong economy that will drive earnings, or a soft economy that will allow inflation to abate. When push comes to shove, I prefer the stronger economic numbers, especially since the market is getting over that whole…the Fed’s going to cut…thing.

Here’s why:

The Dow was down 38 early and rallied 109 points to the high of 13,489.29 when it was up 70. After the FOMC we saw some big swings and the Dow finished at 13,422.28 down 5.45. That is a not so subtle 76 points off the day’s high.

Year 7 Seasonality: In a perfect world, the Q1 correction would have been subtle and lasted for four to seven weeks, rather than five days. That aside, the balance of June is a typically flat period. Since the Dow is contained within a range, we can call it a flat period for now.

The rest of the year is going to be interesting. July is typically a powerful rally period during years that end with a 7. 1907, 1917, and 1977 are the only year 7 Julys when the Dow did not push higher.

The problem with year 7s is what happens after July. As year specific seasonality goes, August Through October is one of the most consistently down periods of them all.  

Interest rates pushed higher Thursday as bond traders did not like the hawkish remarks from the Fed. A solid economy is one thing, but inflation worries are difficult for the bond market to shake off.

When looking at inflation from a mega macro point of view, there is only one thing that really drives inflation, energy. Hundreds of years ago, the worlds energy was food in the sense that people moved the world, and those people had to be fed. If grain prices rose dramatically, inflation would ensue.

Today, energy is oil, and we all know what oil prices have done. The last major inflation problem in this country was in the 70’s and early 80’s. The price of oil quadrupled during that time and remains the most corollary causality of inflation. In 1999 oil was below $20 and today it is at $70, which is virtually a quadrupling of oil prices, and it is going to have an impact in the “Food and Energy” component of inflation.

Energy is also rapidly becoming corn, as in ethanol. And it is proving to be a problem because corn goes into almost everything we eat. Go through your kitchen and pick items at random; it seems they all have something corn related in them. Oh yea, milk, cheese, and a lot of meats have corn in them too because they feed corn to cows.

The problem with this kind of inflation is once prices have shifted to a higher level, they tend to stay up there, permanently. Baring some significant changes, the FED is likely to remain on hold for some time to come.

S&P continued building a positive pattern: The morning action helped established 1505 as near-term very minor wave 4 support level. The thrust higher after the FOMC statement completed the move higher that began on Wednesday. After running over 25 points a minor correction is not a surprise. For now the correction should run its course by the end of Friday, the last day of the quarter. Provided the S&P holds above the 1504-1505 support line, the market should be well positioned for strength over the holiday week. Breaking 1500 is a warning flag and breaking 1496 is flat out, very bad, for the bulls.

The Russell 2000 is ready to break the near-term consolidation: Pushing above and closing above 848 will break above the clear wedging pattern. If prices fail to break higher in the next few days, then we will have to allow for a return trip to the week’s lows over the coming week and then a rally to new highs should commence. That said, I am leaning towards higher now rather than later. 838 remains a key mid-line pivot level to watch. A break there opens up the downside door.

The NASD came within 0.4% of its 52-week high before reversing lower. Bottom line, the NASD looks like it is going higher. But I have to confess, that upside tail isn’t very pretty. For now I view Thursday as a consolidation day that played out odd due to the FOMC meeting. We can allow for additional backing and filling, but generally speaking as long as the NASD is holding at or above 2600, the bulls remain in control.

The rest of the Daily trends turned up on Thursday, but the buy signals levels are still a healthy distance away for the listed indices. The 3-day trends will turn higher on Friday if we take out Thursday’s highs. The OTC indices will have to almost make new highs for that to happen. However, if the daily trends turn down on Friday the 3-day trends won’t be able to turn up until Thursday of next week.

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

Total breadth peaked at +2000 just after the FOMC announcement. It settled back to +581 at the end of the day. Internally the market never seemed very solid. Before the FOMC, the ticks were contained, but the market almost seemed fragile at times. It never moved much, but with no negative tick spikes it just seemed fragile and unsure.
After the FOMC we saw some heavy rounds of selling that knocked prices lower, but prices were fighting back until a big one hit with 20 min to trade.

Total volume fell off after a couple of busy days. If you ignore the wide ranging action, internally Thursday looked a lot like a normal consolidation day.

The Light Buy signal remains in force until Friday’s close.

The current configuration of indicators suggests higher prices to come. With the last day of the quarter we are looking for some contained price action, which will actually be healthy base building type action. The Dow has traded in a 100 point range 7 days straight, and that’s a lot. Quite action on the last day of the quarter is a healthy setup for strength as we move into July. Let’s just hope everyone likes their iPhone.

Jim Patterson

Most Obvious chart resistance levels: ()
Dow  13,480, 13,560, 13690, 13,790, 13,845, 14,350
SPX 1505, 1514, 1522, 1528, 1532, 1542, 1546, 1551 (ATH) 1562
NASD 2565, 2585, 2595, 2605, 2622, 2647, 2668, 2710-2730
NDX 1890, 1900, 1916, 1926,1934, 1940, 1957, 1961, 1972
NYSE 9850, 9910, 10,000, 10,060, 10,160
RUT-2K 826, 832, 838, 842, 848, 854-856, 867, 876

Most obvious Chart Support levels:
Dow 13,580, 13,530, 13,480, 13,350, 13,280, 13,220, 13,131, 13,050
SPX 1514, 1500, 1496, 1491, 1487, 1483, 1475, 1436, 1397, 1373, 1362, 1340
NASD 2608, 2587, 2565, 2558, 2548, 2525, 2480, 2455, 2425, 2400, 2385, 2335, 2316
NDX 1934, 1920, 1918, 1903, 1895, 1875, 1855, 1840  
NYSE 10,000, 9980, 9900, 9800, 9780, 9690, 9620, 9510, 9400, 9350, 9280
RUT-2K 850, 844-846, 840, 836, 830, 820, 808- 810, 803, 790, 760

Here’s where we are now:

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

The NDX touched 1945 on Thursday. That should be enough to signal a likely test of higher target levels, 1965 and 1982. It may come down to the iPhone reaction. However, CSCO is breaking out to new highs while MSFT is building a very large handle like formation. If those two get going, the NDX will skyrocket.
The NDX remains the market leading index for the time being.

The NDX easily took out 1920 setting the stage for continued rally. Taking out 1945 will target higher levels, 1965 and 1982. The NDX was up two times the Dow on a percentage basis. This move suggests the NDX will be the leader over the course of the next rally phase.

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 94.49

We will maintain our current position.  

Tactical Stock Trading Powered by Patterson Relative Strength

PDA rec Long 5/14 @ 33.12, stop 37.37, target 40, closed at 40.44
UNCA rec Long 5/22 @ 16.98, stop 14, target 20, closed at 16.42
DK rec long 5/31 @ 23.85, stop 24.87, Target 29, closed at 26.88
BBD rec long 5/31 @ 25.39, stop 23, Target 28, closed at 24.06
CHINA rec long 6-14 @ 8.56, stop 8.01, closed at 8.41

PDA rec Long 5/14 @ 33.12, stop 32, target 38, closed at 39.88;
2^nd Target at 40.44 reached for 21% gain, book it.

New long
SVVS rec long 6-28 @ 50.55, stop 47.75, target 59, closed at 50.62

We bought AAPL July 110 Puts @ $6.60 on 5/16
 

** PRS Open Actives making noise:
 

Jim Patterson
Editor
Tactical Trading Outlook