Here is the Deal:
Retail sales were weak, and WMT lead the way
with comps down 3.5% vs. expectations for up 1.1%. The
expectation is loosely based on guidance from the company, but
anyone that drives a car knows what happened to gas prices in
the month of April, right? Seriously, I thought about
mentioning this, that Wal-Mart’s sales along with a lot of
other retail reports could be a lot softer than expected due to
higher gas prices, because we all know that higher gas prices
hurt lower income people the most, and Wal-Mart’s clientele
fall predominantly into that segment of the population. But
with no rate cut from the Fed, the news was not well received.
One down day does not make a down trend. At
this point the Dow is simply off its highs by just over 1.1%,
which is virtually nothing. However, Thursday was the worst
down day since March 5. If the bears are in control the Dow has
no business going back above 13,280 – 13,000. Should prices
fail to hold 13,200, which at this point, if reached probably
shouldn’t hold, then look for support around 13,150’ish.
After a huge run higher, if we see some profit
taking really set in, then look for another remarkably weak
day. Bottom line, Thursday’s decline had a distinctively
different character to it, which tells me the rally has run its
course.
The PPI report on Friday morning will set the
early tone. If, despite a huge surge in gasoline and food
related commodity prices, the government says there is no
inflation, the market should react favorably as that will
increase the odds of a rate cut. After almost two months with
no downside follow through, Thursday we saw some action that
can be considered downside follow through. But one day does not
make a trend. We need at least two down days for that to
happen.
Here’s why:
On Tuesday, right up until the last five
mintues of trading, the Dow was never up on the day, but a
surge at the very end of the day in an effort to “set a record”
resolved the matter. There was no saving grace on Thursday. For
the first time since March 28, the Dow was never up on the day.
It was down 151.97 points at its low of 13,210.90 and it closed
at 13,215.13 down 147.74, virtually on the low of the day. It
was the worst point loss since March 13 and the one day loss
wiped out a week’s worth of gains. Thursday was clearly
something different.
Wal-Mart & High Gas prices translate in
to a problem. In August 2005 Katrina hit and gap prices
instantly soared out of control. The high price of gas takes
consumer dollars away from Wal-Mart and they get spent at the
gas pump. In 2006, the price of gas surged from March and
didn’t come down until July. In 2006, WMT suffered a sharp
breakdown in late June, well after the 2006 May peak. Gas
prices have risen back near the same record high levels seen
the summers of 2005 and 2006. For a stock that doesn’t move
very much, WMT should have risk from its current price near 48
down to support at the $43-44 level. Then again, since the
government says there is no inflation and the cost of food and
energy are of less importance, maybe it won’t matter this
time…but I doubt it.
WMT is situated for a breakdown, and if it
does break down then it will likely take a significant break in
gas prices for a recovery to develop. In short, profits for XOM
come out of Wal-Mart’s bottom line, and stock price.
The S&P 500 fell below the obvious support
line at 1508 on the open. It rallied from the opening low
and tested the underside of the 1508-1510 area, but could not
regain it. Upon breaking the opening low, the SPX cascaded
lower falling through a myriad of support lines. It finally
found support at the top of the previous consolidation area,
about 1495’ish, and even that didn’t hold at the end of the
day. With one down day, the gains from two weeks have been
given back.
This is the first time in a while where the S&P moved lower,
bounced then took out the early low in a measurable fashion
since the first of April. One down day does not make a trend,
but Thursday’s move lower displayed a different character
relative to recent action. Since the first of April every
round of selling has quickly been met with buying. This time,
the buying failed to develop. Falling below Thursday’s lows on
Friday targets lower support at 1475 to 1485, and of 1475 gives
way, Ouch!
The Russell, it wasn’t a breakout. On
the open it touched 826, which should have caught everyone’s
attention. After a brief yet hopeful rally, 826 gave way
resulting in a break of Tuesday’s lows. The next line of
support is 808 to 810. Technically the Russell is still holding
the bottom of the consolidation area, but due to the fact
massive buying failed to show up on Thursday after the down
open, which we have seen virtually every time for over a month,
watch for another step lower.
So much for the trend line support at 2555,
when the NASD reached 2555 it tried to hold, but the downside
momentum was overwhelming. The bids were few and far between on
Thursday. Major support is 2500 to 2510, which covers the lows
for the past few weeks and includes the February highs.
All the indices gave daily sell signals. The
NYSE and NASD gave the most valid signals because they did not
make higher highs on Wednesday. With lower daily highs and
daily sell signals, we have the definition of a down trend.
This is considered more reliable than the straight down move of
the Dow and several other indices.
The rest of the 3-day trends will turn down if we see virtually
any weakness Friday. And, if we consider the positions of the
Weekly trends in conjunction with their extended high-to-high
time spans, odds are high that even if prices rally on Friday,
this week’s lows will be broken at some point next week. The
current weekly trend configuration argues against the sort of
rapid rebound we have grown so accustomed to over the past two
months.
Detailed Trend Report on Web &
CLX Count and Weekly Signal Counts &
NYSE & NASD 5-day up and down volume charts
Total breadth was really bad at -3562. That is
the worst since the mega down day on March 5, over two months
ago. We have seen breadth dip this low on an intra-day basis
several times over the course of the rally, but it always
recovered. It is the lack of recovery today that suggests the
ominous change in character. No cavalry came to the rescue.
Amazingly, volume was just a little higher than on Wednesday.
Of course it was all to the downside with huge selling pressure
readings. But 8-day selling pressure remains below buying
pressure on the NYSE, which says it still isn’t much of a sell
off.
One down day does not make a trend, but if
this is the start of an actual down trend, the negative
internal divergences that developed over the past month could
have an alarming impact. Internally the market is neutral and
at least a couple days away from becoming oversold on a 10-day
basis. The same goes for the 5-day situation too.
With Thursday’s decline it looks like we have
a complete rally effort bookended (is that a word?) by FOMC
meetings. As I have repeatedly said, one down day does not make
a down trend, but Thursday was more than a down day. It was a
huge down day and we saw notable changes in the way traders
reacted to prices moving lower. With a potential shift in
attitude in the air, a long overdue correction is likely under
way during the often weaker month of May.
If the PPI numbers are not well received
Friday morning, expect lower lows Friday with the potential for
some real fireworks. Then again, the Dow would have to close
down two days in a row for that to happen.
Jim Patterson
Most Obvious chart resistance levels:
()
Dow 13,323, 13,380, 13,405
SPX 1501, 1510, 1515,
1527, 1550
NASD 2560, 2575, 2601,
2643
NDX 1888, 1900, 1907,
1918, 1936
NYSE 9830, 9930, 10,000
RUT-2K 835, 841, 847,
855
Most obvious Chart Support levels:
Dow
13,240, 13,131,
13,050, 12980, 12,900, 12,825, 12,750, 12,600, 12,480, 12,350
SPX
1508, 1500, 1495,
1475, 1460, 1449, 1436, 1413, 1397, 1373, 1362, 1340
NASD
2563, 2550, 2520, 2480,
2455, 2425, 2400, 2385, 2335, 2316
NDX
1888, 1868, 1855,
1840, 1822, 1808, 1795, 1775
NYSE
9740, 9700, 9620, 9510, 9400, 9350, 9280
RUT-2K
826,
816, 808, 803, 790, 760
Here’s where we are now:
NASD 100 Index (NDX) Trading System,
trade the QQQQ:
1890 is now the resistance level that must be
regained, otherwise the NDX is heading a lot lower.
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
We moved to 200% long the SDS with the addition at 54.00. That
brings our average cost to 58.8.
The SDS closed at 53.44
Thursday we saw amazing action in the SPX
falling over 21 points on the day. Let’s see if we get a second
down day in succession. The weekly trend is still a factor,
which suggests even if there is a minor rebound on Friday, we
should see lower prices next week.
CRNT rec Long 5/8 @ 7.78, stop 6.50 close,
target > 9, closed at 7.80
**
PRS Open Actives making noise:
GES did a pretty good job of
holding its gains from Wednesday on a very difficult day.
Jim Patterson
Editor
Tactical Trading Outlook
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