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Here is the Deal:

The good news came from Iran. There is hope the UK sailors can be returned through the diplomatic process. The bad news came from Fed Governor Pool, who pretty much said that because inflation is running as high as it is, the chances of a rate cut any time soon are very low. Fortunately, the good news came out after the bad news came out. The resulting softness in oil provided the market with a minor lift, but….

Overall the first day of the quarter was very quiet. A lot of folks are off for spring break on this holiday shortened week. The Dow pressed overhead resistance and on the back of the good news out of Iran and managed a slight break the week long down trend. While the close above 12,375 is constructive, it wasn’t much of an upside move. Monday was very slow and for now the whole 12,375 to 12,400 area remains resistance. Powering above 12,400 will look healthier but the bulls need to put on a better show. It is one thing to see a big rally show coming up off a low as we saw on Friday. It is an entirely different thing when prices press higher from a well known overhead resistance level. Aside from the FOMC gap higher and several news driven spikes, all the rallies have begun from short-term oversold points, which shows a lack of true bullish conviction. Very short-term, a break of Monday’s 12,324 low will be the first warning flag for the bulls.

Monday’s inside action is not a big surprise. Breaking 12,325 will suggest a likely test of the main support at 12,260. Seeing the Dow above 12,420 will give the bulls a serious upper hand, but it has to stay up there.

Tuesday we get car and truck sales for March and they are unlikely to do much for the market. For now we are seeing very limited first of quarter action, but keep an eye out for earnings pre-announcements this week. We got a nasty one from a bank stock that carries some potentially negative implications.

The positive seasonality will quickly dissipate as will a minor oversold condition over this four day week. The market is closed on Good Friday, April 6.

Here’s why:

The Dow was down 30 points at an early low of 12,324 and then rallied a not so impressive 70 points to its high of 12,394 when it was up 40. After Friday’s 174 point range, Monday’s inside day is not a big surprise. The Dow closed at 12,382.30 up 27.95 points on a somewhat quiet day.

The big news was the BIX and financial sectors. MTB was the culprit as they pre-announced a serious earnings shortfall. According to the headlines, their shortfall was due to some issues specific to them and a few other financial institutions. Rationalize it all you want, but when push comes to shove, weak bank stocks are bad for the market.

The Transports are holding and consolidating, but it looks a lot like a pause within an unfinished near-term trend, which in this case remains down.  

The BIX closed at 381, well below the 385 support level and just one point above the March closing low. This is not a constructive situation for the financial sectors. While some financial sector indices performed better today, it was largely a factor of whether MTB is in the index or not. But, even the ones without MTB closed down on an otherwise positive market day.

The S&P 500 didn’t do much on Monday. Like most indices, it was an inside day and the only thing that moved prices around was the Iran news and oil prices. I view the weakness in the Financial stocks are a much more relevant factor. The sideways action over the past three days doesn’t look very bullish. Watch for a possible fake out punch to the upside that is quickly reversed, which is actually the most bearish way things could play out. A false breakdown followed by a strong rally will be equally bullish.

The NASD carries the same message. It looks like it wants to hold support, but it is not moving very convincingly. However, the NASD does look like it wants to disrupt its current down trend before breaking lower. The NASD Daily trend has been pointing down for six days. Odds are it will turn up before the next leg lower develops.

Despite the contained action, the NYSE managed to turn its daily trend up and give a minor daily buy signal. The Daily trends on the NASD and NDX have been pointing lower for over a week and are likely to turn up before we seen another measurable leg lower.

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

Total breadth was +825, but it was all on the NYSE. The NASD closed flat on the day and showed no directional preference internally. Total volume contracted significantly from Friday’s end of quarter level.

The 10-day metrics remain overbought while the 5-day metrics are somewhat oversold. However, the 5-day metrics will reverse their oversold condition very quickly over the next two days baring very weak action. Effectively, the market is no longer oversold on a 5-day internal basis. The 5-day RSI metrics reflect this as they are for the most part, neutral just off the even 50 mark. The real problem is the week long consolidation has done little to relax the 10-day overbought condition, which should also dissipate substantially over the next two day.

While the ISM was a little weaker than expected, especially after the surprising Chicago PMI, the market shook it off. Pool basically told the market no to get its hopes up for a rate cut any time soon as inflation concerns remain his primary focus. And oil prices backed off a bit. With that, at the end of the day prices advanced a fraction in subdued trading. Then after the close the futures sold off which detracts from what little strength we saw. The market wants to go up but for now it lacks the conviction needed to drive prices higher once they recover from a low level.

Monday’s action did little to sway my overall expectations for a full re-test of the March lows. The weakness in the financial sectors is a grave concern for the near-term bulls. Should we see more pre-announcement from banking related companies it should weigh very heavy on a precarious market situation.  

Jim Patterson

Most Obvious chart resistance levels: ()
Dow 12,380, 12,450, 12,532, 12,600, 12,790, 12,863
SPX 1426, 1435, 1458, 1463, 1480-1489
NASD 2435, 2459, 2510, 2538, 2570
NDX 1780, 1800, 1825, 1841, 1847 (high), 1877 (minor Fib)
NYSE 9350, 9400, 9503

Most obvious Chart Support levels:
Dow 12,270, 12,180, 12,100 to 12,136 (fib range) 12,000, 11,890, 11653
SPX 1413, 1397, 1373, 1362, 1340 (50% retracement)
NASD 2415, 2400, 2385, 2335, 2316
NDX 1755, 1738, 1710, 1695 (Fibonacci 38% & Nov 06 lows,) 1650
NYSE 9212, 9135 to 9155, 9050, 8980, 8850, 8690, 8575

Here’s where we are now:

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

Look for the NDX to take out Monday’s 1779 early morning high on Tuesday. Note that the NDX reached its high for the day in the first thirty minutes of trading and then fell off sharply. Watch for a change in that pattern, but until it closes above 1779, it remains a downtrend.  

S&P 500 (SPX) Trading

>> 3-16-07: With strength on the open it made sense to hold off on the SDS purchase for an hour or so. The SDS bottomed at 60.55, well below the 60.80 I am using as an entry price. We have a full position in the SDS with an entry of 60.80. 3-20 we added another 50% position to the SDS when the SPX pushed above 1407.

100% @ 60.80 + 50% @ 59.60 = Avg cost 60.40.

The SDS closed at 58.21.

With the futures quick to weaken after the close, look for a weak open on Tuesday. But, another successful test of 1412 will become enticing for the buyers.

Tactical Stock Trading Powered by Patterson Relative Strength

ICLR rec Long 01/24 @ 39.53 stop 34 close, Target >46, closed at 42.55
CBEY rec Long 02/20 @ 31.31, stop 28 close, Target >38, closed at 29.58

3-30 > Long-term Put AAPL October 100 Put Entry @ $12.00 | AAPL closed at: $93.65
* Dropping DRM (Digital Rights Management or Copy Protection) from purchased / downloaded music is the wave of the future. The truth is, it is annoying, it doesn’t work well, and it is highly frustrating. It may bring some customers back.

AAPL is simply the first to take this expected step. It is a non-issue as others will soon follow. The result is less control for AAPL, which is highly dependent on maintaining total control over their proprietary products and services in order to protect their margins.

** PRS Open Actives making noise:
AMX put on a strong breakout show thrusting above 48.5 and closing at 50.10. While it wasn’t a huge volume day, it was a solid volume breakout.

Jim Patterson
Editor
Tactical Trading Outlook

Here is the Deal:

Thursday night I said the odds of a big decline on Friday seemed low because it was the end of the quarter. Well, for a moment, I thought I was going to be wrong. But, we should never under-estimate the power of the end of the quarter. Regardless of the news, the bulls were not going to let this one slip out of their hands, especially after vigorously defending support all week long.

After a hollow morning bounce prices weakened and around 11 the market was jarred by trade news that set off a massive wave of selling. The Dow fell over 150 points in about 90 minutes, but the decline was recovered. By the end of the day the market is starting to take on that buy it because it didn’t break down character. You have to give credit to the bulls for bringing the market back from such a sharp intra-day breakdown, but there are two issues of concern. First, the financial stocks did not recover with the BIX losing a noticeable -0.5% on the day. Second, it is easy to blame the recovery on end of quarter window dressing.

The Dow easily bettered 12,375 on morning economic news-driven spikes higher but it couldn’t hold. Overhead Resistance (12,375) was bent but not convincingly broken. The ensuing reversal was massive with the Dow breaking all support levels including 12,260. But like just like the overhead level, 12,260 was bent but not broken as prices snapped back rapidly. At the end of the day we are left with a wild and crazy consolidation. All week long the market very aggressively went nowhere. However; the week long down trend remains in tact for now.

Hit the reset button. Resistance remains 12,360 – 380 while support remains 12,260. Until one is broken on a sustained basis in terms of both time and distance, the market remains in wide ranging aggressive consolidation.

Monday we get the ISM index at 10. After a very strong Chicago PMI, look for a better than expected report. Friday’s PMI produced a pathetic rally attempt that seemed artificial, like someone was waiting to hit the buy button as soon as his clock read 9:45:03 AM.

Going into the end of the quarter it seemed as though every tidbit of news was an excuse to hit the program buy button and ram prices higher. Yet, despite a plethora of heavy program buying, we saw some nasty bouts of selling. The question is whether the buying at support was related to saving the end of the quarter, or genuine big money buying support. If the latter, then in a couple more we should have a clear buy it because it didn’t go down, situation.

Currently it is too early to make that call as the balance of evidence still points towards a re-test of the March lows. The first couple of days of the month are seasonally biased to the upside and surprisingly, the first half of April tends to be better than the second half. We also have to watch for a rapid easing of global tensions if the UK Sailors are released as that could catalyze a powerful relief move.  

Here’s why:

The Dow opened flat but managed to run 68 points higher from 9:45 to 10:05 on the Chicago PMI and construction spending reports. Then it fell 174.08 points to its low of 12,242.60 when it was down 106 points. That was around 11:40 AM and prices battled back an impressive 112 points. The Dow closed up just 5.6 points at 12,354.35 on a very eventful day.

On three of the past five days the Dow rallied on average, almost 100 points off its low of the day. On Monday and Friday the Dow was down over 105 points and managed to close up on the day. All week I have been asking, is good news good or is bad good or is it the other way around. The aggressive back and forth action confirms one thing, the market has no idea what kind of news it wants, but it is clear that it did not want to break down this past week.

Monday, Wednesday, and Friday, we saw the tick index spike up to +1400. Each time, the remarkably high tick reading marked the end of a rally that in the first two instances was completely retraced. Also note that the rally late Thursday + Friday AM is remarkably similar to Monday’s late day move. Both have a parabolic look to them and both were fully retraced. Rallies that end with a parabolic look and with a massive tick spike are more likely short covering panics than healthy rounds of buying.

If Friday’s recover that culminated with a tick spike above +1400 follows the pattern then it should result in a sustained break of the key 12,260 support level.

The S&P 500 traced an outside day yet closed virtually unchanged. This is not something we see very often and it tells us the market is dazed and confused. Prices continue to probe the 1405 – 1410 support zone, but for now it is holding. Unless or until we see a close below 1400 the bulls retain an advantage. However, a close below 1400 will be remarkably bearish and should bring / confirm that the expected full test of the March lows is in progress.

The low on the NASD was above Thursday’s low, but Friday still goes down as another test of 2400 support. Like the S&P, a close below 2400 will be significantly bearish.

The chart of the transports looks a little more bearish than the main index charts. It has left two upside tails (bigger than the downside tails) on the candle chart. This reflects an inability to hold onto an intra-day advance and suggests the down trend is likely still in force. A close below 4724 should bring in a full test of the March lows.

The BIX was never strong on Friday. Even when the Dow was racing higher the BIX was still lagging and weak banks / Financials usually means a weak overall market. 385 will either turn out to be the right shoulder of a reverse head and shoulders pattern, or the key breakdown point on a long slide lower. Note: I have little faith in the reverse head and shoulders pattern because most of the time, they don’t work out. Additionally, the neck line of said pattern is all messed up due to the FOMC driven reaction last week. This remains a precarious situation.

The trend table tells the story, and it is confusing. The daily trends on the Dow and S&P 500 turned up with the morning rally while the NASD and NDX failed to better Thursday’s highs. With the sell off, the Dow, S&P, and NYSE turned their daily trends back down. While the NASD and NDX did not break Thursday’s lows, their daily trends never turned up. With the breakdown, the 3-day trends turned down except for the NASD. The trend table is conveying a very mixed message with a significantly downward bias.

With the turn of the quarterly calendar, the Quarterly Turn points have shifted to higher levels. When the Quarterly Trends turn down, watch out. About 20% of the time the ensuing quarterly low is less than 2% below the downturn point, the March lows in this case. Excluding those best cases the average move to the subsequent quarterly low is about 5% to 7% while about 35% of Quarterly Trend Downturns are followed by an additional decline of 10% or greater.

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

While the indices were mixed, breadth was positive at +746. It ranged from +2000 in the AM to -1000 at the lows. Being the last day of the quarter, it is worth noting that total breadth jumped from -250 at 3:40 to +746 in the final 20 minutes of trading. The large late day jump reflects the impact of end of quarter window dressing. Whether it is legal, allowed, or frowned upon, it happens.

Total volume was running well below Thursday until the final 20 minutes of trading when we saw an abnormally large late day surge in volume.

Internally the overall condition is mixed. Short-term (5-day) metrics are oversold while the 10-day metrics remain closer to overbought than oversold. In fact, the 10-day metrics ticked higher on Friday. So, while we have seen a corrective week, on a 10-day basis, the action has done very little to alleviate the overbought condition. Price based metrics like the 5-day RSI are pretty much neutral at this point.  

With the onset of a new Quarter, once we get past the early week seasonally positive bias, it will be very interesting to see how willing the bulls are to defend current support levels. Ten days ago, going into the FOMC meeting, I thought the counter-trend rally was over. However, the market reacted to the FOMC policy statement with a huge rally with the spin, the Fed is closer to easing than raising. Since then, aside from housing data, the economic data appears strong and the bond market has generally been working lower since the FOMC (rates have moved steadily higher.) While it took a week, but the FOMC gap has been completely given back.

Looking forward, I remain of the opinion that we will see a full re-test of the March lows though we may see some strength related to positive first of month seasonal tendencies.

Jim Patterson

Most Obvious chart resistance levels: ()
Dow 12,380, 12,450, 12,532, 12,600, 12,790, 12,863
SPX 1426, 1435, 1458, 1463, 1480-1489
NASD 2435, 2459, 2510, 2538, 2570
NDX 1780, 1800, 1825, 1841, 1847 (high), 1877 (minor Fib)
NYSE 9280, 9350, 9400, 9503

Most obvious Chart Support levels:
Dow 12,270, 12,180, 12,100 to 12,136 (fib range) 12,000, 11,890, 11653
SPX 1413, 1397, 1373, 1362, 1340 (50% retracement)
NASD 2415, 2400, 2385, 2335, 2316
NDX 1755, 1738, 1710, 1695 (Fibonacci 38% & Nov 06 lows,) 1650
NYSE 9212, 9135 to 9155, 9050, 8980, 8850, 8690, 8575

Here’s where we are now:

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

Impressive rally efforts continue to fail. Unless or until the NDX can close above 1787, but bulls will continue to struggle.

S&P 500 (SPX) Trading

>> 3-16-07: With strength on the open it made sense to hold off on the SDS purchase for an hour or so. The SDS bottomed at 60.55, well below the 60.80 I am using as an entry price. We have a full position in the SDS with an entry of 60.80. 3-20 we added another 50% position to the SDS when the SPX pushed above 1407.

100% @ 60.80 + 50% @ 59.60 = Avg cost 60.40.

The SDS closed at 58.34 down just 3¢

1412 was bent but not broken on a sustained basis. Should that happen, I expect prices will cascade lower. For now we are sitting tight. But, the buy it because it didn’t break down ideal is a minor near-term concern.

Tactical Stock Trading Powered by Patterson Relative Strength

ICLR rec Long 01/24 @ 39.53 stop 34 close, Target >46, closed at 42.60
CBEY rec Long 02/20 @ 31.31, stop 28 close, Target >38, closed at 29.33

3-30 > Long-term Put AAPL October 100 Put Entry @ $12.00 | AAPL closed at: $92.91

** PRS Open Actives making noise:
 

Healthy chart patterns in an otherwise challenging market: KND and PRXL.

KND is holding in a tight consolidating between 31.75 and 33.

PRXL broke out two weeks above moving above $35 and is consolidating after the upside breakout.

Jim Patterson
Editor
Tactical Trading Outlook