Here is the Deal:
I expected a gap open and at 8:25 it looked
like a gap lower. Then the CPI data came out and it turned into
a gap / early thrust higher. The plethora of data Tuesday
morning gave the market reason to move, but it was hardly an
even advance. The broader indices never confirmed the Dow’s
strength. Add in that everything reversed sharply lower
and it looks flat out ugly on a near-term basis.
Up until Tuesday we have been in stealth
consolidation with many stocks flat to down since mid-April
while the Dow advanced over 5%. Tuesday morning it changed from
stealthy to flagrant as the Dow waved its supremacy in
everyone’s face. At the highs the Dow was up almost 1% on the
day while the Russell 2000 was virtually flat. It reeks of a
blow off move and it was a MAJOR sign of flagrant trouble. With
the Dow’s strength the perception has been that the market has
been sailing higher. The reality is the bulk of the market has
been consolidating and or working lower. The greater perception
deviates from reality, the greater the opportunity and or the
risks become.
The Dow came within 10 points of a higher
Fibonacci extension line at 13,489 highlighted last night. Then
it turned lower. It bounced at 13,420, an easily spotted wave-4
support level, but failed to hold. With total breadth
collapsing it never had a chance. It did manage to hold 13,380
into the close. From a pattern stand point, 13,385 is a very
important level and if prices are going to rebound it should
happen very quickly. This is options expiration week and a lot
strange things can happen during expiration week, but Tuesday
looked an awful lot like an over extended exhaustion blow off
type top for the Dow with the broader market already in
retreat.
13,375 is the main level to watch. If the Dow
moves materially below 13,375 the near-term pattern will turn
negative suggesting a likely test of 13,220. Falling below
13,280 will confirm a probable test of 13,220 with lower
potential from there. So falling below 13,375 is a major
near-term warning flag, breaking 13,320 spells trouble and
breaking 13,280 targets last week’s lows.
The internal divergences I have discussed at
length in the Full TTO report are catching up to the market
fast and history holds to form, it will take a significant bite
out of the Dow once a change of trend is confirmed. When
selling comes into an already narrow market the potential for
significant short-term damage is significant, and it won’t be
different this time.
Wednesday we get housing starts, building
permits, and my favorite industrial production and capacity
utilization. Weak housing starts won’t be well received while
the other two reports are not typical market movers. But a high
utilization rate strengthens Bernanke’s inflation concerns.
Here’s why:
The Dow was up a staggering 134.82 points at
its high of 13,481.60. That is the biggest intraday advance
since April 25. Despite being up that much, the Dow reversed
falling more than 100 points off its high late in the day and
then closed at 13,383.84 up just 37 points on the day. That is
a new record high and a new all time closing high, but the
close is also almost 100 points down from the high. That is a
lot considering the largest high to low correction since late
March is only 165 points. In other words, if the Dow falls
another 70 points it will be the biggest pullback since the
rally began back in March. Developments of that nature are
often considered a significant change of trend. That makes the
13,315 level that much more important.
The top of the Dow’s 21-day 2% trading band
was 13,381 on Tuesday, still rising about 25 points or so per
day. The Dow closed two points outside the band. With that the
middle of the band is 13,119 and the projected intersection is
now targeted close to 13,150.
Dow components HD and WMT both missed
earnings and issued soft guidance. I know expectations were not
high, but at one point both stocks were up on the day. Gas
prices and a soft home building market are taking a toll on
both retailers. Now maybe it will be different this time and
the stocks of both will grind higher while their sales grow
slows, but I doubt it will be different this time.
WMT has broken its near-term uptrend and is in
the process of leaving the $48 level behind. In keeping with
comments made on 5/10 (link) WMT should approach the low $40
level over the next one to three months. The June 45 puts look
attractive at $0.25 for the aggressive folks out there.
The S&P 500, a reversal of magnitude:
The SPX cleared 1508 and in keeping with Fibonacci tradition,
it jumped up to a new high of 1514.83 on the back of a round of
program buying. The problem with all the program buying is that
they only generate near-term follow through when coming up off
lows. This tells us there is little demand for stocks at higher
levels at this time. In addition, the significant pullback
shows a bit of supply too.
After the high the SPX retreated to 1500 support and a 14 point
decline stopped dead in its tracks. 1498 to 1502 is the support
area that has held for the past few days and 1500 remains an
obviously important pivot level. Watch for the support buyers
at current levels, but if they run out of mojo or for some
reason lose their nerve, last week’s lows are just around the
bend. Moving below 1495 targets last week’s low of 1491 and
ultimately 1475. At this point, until the S&P gets above and
stays above 1510, it is just a little flurry of program buying.
Then again, it hasn’t broken down yet either.
The Russell was barely up when the Dow was
up 1%, Ouch! The Russell made a strong early attempt to
rally and regained 826 briefly. But the broad weakness was
significant despite the Dow floating in never never land.
Seeing the RUT fall back below 826 was an ominously important
sign. In conjunction with the rapid deterioration in breadth it
was clear the day would end ugly.
The R2K broke down below key support of last week’s lows at
820, and finished near its lows of the day. The low from two
weeks ago, 808, is now under assault and breaking that level
will trigger a weekly sell signal. Lower support comes in at
800 then 790. The Russell is now in a clear and distinct down
trend. Regaining 826 will look good, but suddenly that is a
long way away.
The NASD broke a parallel trend line it had
held for three days. Bottom line, last week’s main line break,
with authority mind you, is the main feature on the chart.
There is support at 2510, but if the Dow corrects as expected,
the NASD should challenge 2500 with ease. In short, when a
trend really breaks, it is broken and prices move in the
direction of the new tend. The next few days will tell the tail
of the tape, which for now looks bad for the bulls.
The NASD and NDX turned their daily trends
down AND turned their Weekly trends down too. Seeing a couple
of weekly trends turn down is a notable development as they are
all overdue to turn down. We continue to expect the S&P to turn
its weekly trend down this week by falling below 1491.
Amazingly, the Dow, S&P, and NYSE have not turned their daily
trends back down yet. The S&P and NYSE actually gave daily buy
signals before reversing lower in authoritative fashion. Their
inability to hold the daily signal level reflects poorly on the
bulls. The broad market foundation continues to erode and it
shouldn’t be long before the major indices cave in upon
themselves. Note: the NASD can turn its 3-day trend down on
Wednesday.
Detailed Trend Report on Web &
CLX Count and Weekly Signal Counts &
NYSE & NASD 5-day up and down volume charts
Total breadth was +1850 on the open. When the
Dow reached its peak it had fallen to +1550. It finished at
-2010, the worst level of the day. We now have two consecutive
days with the Dow up 20 or more points against total market
breadth of -2000. Now “That’s Incredible.”
Tuesday total volume ballooned after two very
quiet days with the balance on the negative side. 8-day selling
pressure is now ahead of buying pressure while the Dow is at a
new all time high. The internal divergences relative to the Dow
are staggering.
Internally, the market has fallen to its
weakest internal condition since the February decline.
Excluding that period, the condition is in line with the
weakest points seen in over the past year. In light of the
position of the indices and the terminally waning / negatively
diverging internal metrics, we should expect the internal
weakness to soon be reflected in the major averages.
The character of the internals telegraphs a
narrowing market with the Dow stocks as the remaining nifty
fifty. This is typically an end stage development and that
is something of a concern. The big picture expectation has been
for a correction to run its course through the second half of
April and into May. That’s happening with the broad market. The
problem lies in the Dow and S&P 500 strength. The major
averages are due for a correction lasting for more than one
day. Looking further out we should expect a recovery into new
summer highs. Then, being a year 7, odds are we will see a soft
third quarter with an important low reached in the first half
of the fourth quarter (read: September / October.)
Now it is time to
double second guess things: Everyone knows the year 7 pattern
and the potential for disaster in the second half of years 7.
1987 often comes to mind. However, since the turn of the
century we have seen a number of important lows in June, July
and August.
- April 2000 high
followed by Late June 2000 low,
- May 2001 high
followed by minor July 2001 low,
- May 2002 high
followed by Major July 2002 low,
- June 2003 high
followed by minor July 2003 low,
- June 2004 high
followed by August 2004 low,
- June 2005 high
followed by early July 2005 low,
- May 2006 high
followed by June / July 2006 lows.
Some of those years
saw additionally important lows in September / October, but the
point is they all saw some sort of corrective low in June, July
or August, with uber rally in 2003 being the mildest. With this
in mind, there is potential for this year seven to follow a
skewed pattern because everyone is thinking, near-term
correction and then higher into the summer.
The significant
internal narrowing of the market that has me thinking late
stage bull market advance at this time. The internals are
screaming that an important near-term high is upon us. If the
internal signals prove significant, then the upcoming
correction, which is supposed to be brief, could easily morph
into something much more substantial. I mean really, is WMT
really a buy after missing earnings and guiding to the low end
of expectations? I don’t think so, but the market doesn’t care
about anyone’s opinion.
Bottom line, the
current bull move is being driven by stock buy backs and buy
outs. I have been at this for only seventeen years and can not
recall a market driven by buybacks. Buyouts yes, buy
buybacks…No. If any of old guys out there can recall a similar
time, I would love to hear some details.
Back to the near-term; the Dow closed higher
while the broad market suffered another setback. It is the same
old thing, but Tuesday’s massive intra-day reversal speaks
volumes. Many indices have closed down for a second day in a
row with the Dow clawing to a new all time closing high.
However, if the Dow falls another 70 points we will have the
largest Dow pullback from a high since the move higher began in
March.
As far as the Dow goes, we don’t even have a
down day, but with several indices now in clear down trends, I
expect the Dow to finally give up. Seeing the Dow break 13,280
should seal the near-term deal. Then again, someone might
announce an LBO of IBM at $500 per share on Wednesday…Now that
really would be incredible.
Jim Patterson
Most Obvious chart resistance levels:
()
Dow 13,323,
13,380, 13,405
SPX
1501, 1508, 1515,
1527, 1550
NASD 2560, 2575, 2601,
2643
NDX 1890, 1900,
1907, 1918, 1936
NYSE 9830, 9930,
10,000
RUT-2K 820, 826, 833,
841, 847, 855
Most obvious Chart Support levels:
Dow 13,320, 13,280,
13,220, 13,131, 13,050, 12980, 12,900, 12,825, 12,750,
12,000
SPX 1500, 1491,
1475, 1460, 1449, 1436, 1413, 1397, 1373, 1362, 1340
NASD
2563, 2540, 2520, 2480,
2455, 2425, 2400, 2385, 2335, 2316
NDX
1875, 1868, 1855,
1840, 1822, 1808, 1795, 1775
NYSE
9745, 9690,
9620, 9510, 9400, 9350, 9280
RUT-2K
820, 816, 808, 803,
790, 760
Here’s where we are now:
NASD 100 Index (NDX) Trading System,
trade the QQQQ:
Despite enjoying a little of the Dow’s morning
euphoria, Tuesday was a big time reversal for the NDX as it
slid below 1875 support, which turned its weekly trend down.
The new downside target is 1858, potentially 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 52.86
CRNT rec Long 5/8 @ 7.78, stop 6.50 close,
target > 9, closed at 8.08
PDA rec Long 5/14 @ 33.12, stop 28, target 38, closed at 33.07
New Option Position: This is a
checkered flag or crash trade meaning it works and
WMT falls significantly, or it
doesn’t work and the options expire worthless.
WMT Short
trade, Rec buying, June 45 Puts @ $0.25 or better.
With a significant change in perception
taking place, I would also like to add the
AAPL position back. We lost
$1 the first time going into earnings. For this trade to work
we will need to see the Dow close down for at least two
consecutive days. Bottom line, AAPL relies heavily on
consumer sales with their iPods and iTunes products. If
consumer dollars are shifting from goods to gas, that can’t be
good for AAPL’s premium products. Oh yea, the iPhone, buy the
rumor, sell the news.
AAPL short, Rec buying, July 110 puts @
$6.90 or better.
**
PRS Open Actives making noise:
NUAN made a smart move above
15.65 snapping a short-term down trend, and it did so on solid
volume.
Jim Patterson
Editor
Tactical Trading Outlook
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