Here is the Deal:
Well I’ll be a monkey’s uncle. While I had a
typo in the date of last night’s subject, it read ‘…History
says lower now.’ Son of a gun, the Dow dropped over 100 points
from an early high as if on cue. So, is it making any noise?
With the NASD up on the day (supported by semiconductor stocks)
and the S&P 500 holding at support we’ll call it quietly making
noise. The Dow broke 12,700 and the break lasted for more than
a few minutes. However, it was just a sell program. In fact, a
couple of sell programs hit on Thursday and they were countered
by a couple of program buys. While the Dow was down, with the
SPX down only 1.25 neither side (bulls or bears) gained an
advantage.
With the downward move I added a new set of
Fibonacci extension lines. Interestingly, the first downside
target worked out to 12,655, which is within five points of the
Day’s low. The next stop is targeted around 12,565, but there
is actually a zone from 12,600 down to 12,565. Look for the Dow
to hold closer to the upper end of the zone because of the
longer-term trend line. In addition, the last weekly low and
weekly sell point is 12,536. A measurable break there (which is
not quickly recovered) will suggest a much stronger corrective
move has begun.
Any recovery attempt at 12,700 should be short
lived. In keeping within our historical context, Friday should
also be a down day that draws the Dow closer to the defining
trend line near 12,620. Fibonacci support is 12,560 to 12,600,
but ideally for the pattern sake, it won’t go that low. Then
again, if we are going to see a negative departure from the
pattern then we will see material and sustained breaks of key
support levels.
With no economic news on Friday the market is
left to fend for its self. After several rounds of program
selling and buying, and a healthy backdrop on the NASD, it is
officially a mixed bag. If the historical pattern remains in
control then we are still looking at price weakness into early
next week. However, the lack of downside participation outside
of the Dow leaves an unsettled picture. I am sticking with
history and that means prices should work lower through early
next week. And, there is still potential for a major crack of
support.
I will have a mid-day comment on Friday.
Here’s why:
The Dow was up 25.32 points at its early high
of 12,763.73. That’s only 30 points off the all time high. It
then fell a whopping 113.12 points to its low of 12,650.61 when
it was down 87.8 points. The 113 point daily swing was the
biggest since the 130 point swoon on the 9th when
the Dow was in the midst of its last slide to test the defining
uptrend line. The last two hours were interesting. At 2:30 PM
Dow was not in position for a 2:30 PM Turn window low. So, they
hit it with a program sell to set up a late window turn. (The
2:30 PM Turn window refers to the market’s reliable ability to
change direction between about 2:20 and 2:55 PM on important
days.)
The Dow was unable to regain the early
afternoon highs despite rallying for the last hour of trading.
The Dow closed at 12,686.02 down 52.39 points and a healthy 35
points off the low. The Dow has corrected 100 points on a
closing basis.
History says as history does. As if by magic,
the Dow did what history said it was supposed to do. I’m just
sure if I am impressed, amazed, or spooked by the action.
Regardless, until it doesn’t work, stick with it.
Of course, the main concern remains whether or not the Dow will
hold the defining trend line again. With an air of complacency
in the air, meaning everyone expects it to bounce off the line;
will anyone actually do the work necessary to make it bounce?
It doesn’t look like anyone did any selling on the way down, so
there may not be much dry powder to blast it higher when the
magic moment arrives. (Note: 5-day down volume remains very
low.)
The Dow has not reached the line yet. Friday
the trend line runs through 12,631.
OK, this thing is playing out frighteningly
well so let’s push the precedent. This should be way too cute
of an expectation. >> Friday the Dow dips down to 12,600-20
(bend but no break) and rallies off the low to close down about
20 points. That will bring the pullback to about 120 points on
a closing basis, in line with history. Monday we see a minor
bounce. Then Tuesday starts out weak (due to economic data) and
falls below Monday’s low but it bottoms at or above Friday’s
low. From there it is another turnaround Tuesday with another
successful test of the defining trend line.
IF the Dow breaks from tradition and goes
below 12,600, for more than 20 minutes….unless or until
something important breaks, its just a pullback.
When GM is one of the top stocks on the board
you know the market is officially acting screwy. GM currently
has a 12-month PRS Rank of 92, the highest in at least the past
11 years. It reached 90 in the summer of 1999 and then the
stock corrected from the high 70’s to the low 60’s, and that
was during a bullish market. History says GM will have a tough
time maintaining its luster over the next few months.
The reason I stuck this chart in is that I
find it fascinating that a company that is losing market share
at an alarming clip, is cutting production, slashing its
workforce, and closing factories, is one of the top performers
over the past 12 months.
The SPX pushed to another ever so
slight new high of 1461.57, about a point higher than the last
one. Then it turned lower falling 11 points. Thursday was the
fifth daily range greater than 10 points over the past nine
sessions. Despite the commotion, the SPX held at 1450 support
and finished the day virtually unchanged. Note the SP 500 is
the most heavily program influenced index. Unless or until 1450
breaks for real, it is just a noisy consolidation, but it
should turn into a pullback. Technically the SPX remains within
the historical frame work. A break of 1438 at any point going
forward is outside the historical box and indicate greater
downside potential.
Again, the NASD failed to get the memo. While
the NASD took a hit when the Dow slid lower, it came back with
a vengeance to close higher. Suddenly the NASD is the hottest
index and it even looks an upside breakout. The NASD pushed
further into the overbought zone Thursday, and with the listed
side of the market set to crack, a measurable NASD pullback
will make it extremely difficult for the Dow to hold its
defining trend line. Heck, NASD weakness could even pull the
mighty SPX lower. Note: aside from Tuesday, the volume driving
the NASD is muted at best.
The SPX and Dow were the only indices to turn
their daily trend down. The NASD turned its 3-day trend up. Now
all the 3-day trends can turn on Friday. Sliding below
Thursday’s lows will turn them down.
Detailed Trend Report on Web &
CLX Count and Weekly Signal Counts &
NYSE & NASD 5-day up and down volume charts
Total breadth was +53 with a little weakness
on the NYSE and a little strength on the NASD. It looks like a
draw to me. Bottom line, total breadth bottomed at -1550 early
in the day and recovered over the balance of the day. The best
way to describe it: after the morning weakness, traders go out
to lunch. They come back and see prices have not broken down
further. That emboldens them to start buying as there is little
perceived breakdown risk. The end result is buying into the
close. Plus the shorts have to cover to book what meager
profits the day’s action allows.
Total volume was in the lame category again.
Overall volume is running at a reduced pace in 2007.
Directionally it was mixed with NYSE weakness offset by NASD
Chip related strength. Overall selling pressure remains
extremely muted and has so for a week.
The 5-day RSI readings on the NASD and NDX are
both above 80. The NASD Trin-5 actually stepped higher from
Wednesday, yet it remains extremely low. The fact it is working
higher suggests the thrust of the NASD advance is behind us.
The SOX was up more than 2.5% and should be
viewed as a possible red flag. The chips tend to do a better
job leading the market higher out of a low rather than taking
over leadership duties after a prolonged advance. And we
haven’t seen a low in a long time.
At this point the NASD is extended to the
upside and the market is significantly undersold and has been
for a while. Internally the market is positioned for a fall off
in buying and an increase in selling, that should last more
than the two or three days allowed for in our historical
pattern. Unless or until it breaks an important level, it is
just a little pullback.
We remain in a time window for the indices to
work lower towards their defining trend lines. Stick with
history; look for weakness until Monday or Tuesday. However, if
important support levels are broken and not quickly recovered,
an important change of character could be upon us.
I will have an intra-day update on Friday.
Jim Patterson
Most Obvious chart resistance levels:
Dow 12,700, 12,780 to 12,800, 12,863
SPX 1458, 1463, 1480-1489
NASD 2501, 2510, 2527, 2538, 2570
NDX 1841, 1847 (high), 1877 (minor Fib), 1910
(Major Fib Level)
NYSE 9503, 9650
Most obvious Chart Support levels:
Dow 12,700, 12640, 12,540, 12,437,
12350, 12,200, 12,080, 11,890, 11653
SPX 1450, 1442, 1416, 1403, 1390, 1378,
1362, 1354, 1345
NASD 2500, 2480, 2450, 2422,
2400, 2360, 2290, 2225, 2000,
NDX 1819-1824, 1810, 1790, 1772, 1745,
1700, 1650, 1465
NYSE 9400, 9360, 9290, 9110, 9060-9080, 8960, 8800,
8690, 8575
Here’s where we are now:
NASD 100 Index (NDX) Trading System,
trade the QQQQ:
I liked the NDX as a short at 1839 and I like
it better at 1846. We are too late in the cycle for the chips
to lead the market measurably higher, still looking for a test
of the 1800 level.
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 1452
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 bring us to 150% short the SDS.
>>>> 2-22-07 The SPX isn’t really going anywhere. I
still like the position but we will continue to hold off on the
last 50% until a support level breaks.
It’s the second half of the week and the SPX
worked lower. The recovery was supposed to be difficult but it
managed to close down only 1.25 points. Stick with history, go
short looking for a test of 1440-1444. That’s a whopping 12
points below Thursday’s close.
ICLR rec Long 01/24 @ 39.53 stop 34
close, Target >46, closed at 43.12
LOGI rec Long 02/06 @ 28.96, stop 26 close, Target >35,
closed at 28.71
DAKT rec Long 02/06 @ 36.69, stop 28 close, Target >44,
closed at 29.31
CBEY rec Long 02/20 @ 31.31, stop 28 close, Target >38,
closed at 31.38
LNUX rec Long 02/20 @ 5.35, stop 4.60 close, Target>
6.50, closed at 5.34
LNUX reported inline numbers after the close
and there does not appear to be any reaction.
CBEY reports on March 1, next week.
DAKT is going to take a while to
recover, but it seems to be holding well after the gap.
**
PRS Open Actives making noise:
HOC popped higher, but looks for a near-term pullback to
buy.
TWGP popped higher breaking out of a two week
consolidation, looks great
GROW is up about 8% in 2 days. It hasn’t quite done
enough work, but looks like it is in the recovery process. It
is still a Wall Street darling.
Jim Patterson
Editor
Tactical Trading Outlook
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