Here is the Deal:
After two down days for the broad market,
including Tuesday’s outsized negative reversal, the futures
were strong in pre-market trading and in no time the market
gapped smartly higher. This was not a surprise, and in no time
the early gains vaporized, which also was not a surprise. Then
the question, would the support buyers come in and rally the
market or would prices continue the breakdown that started on
Tuesday? Needless to say, the support buyers came in right on
time and from a price stand point, right on schedule with the
S&P just above 1500. With the Dow correcting about 117 points
from its high, the action remains very consistent.
The Dow continued waving its superiority in
the face of many market segments, but there was some broader
market recovery on Wednesday. The key level for the Dow
revolved around 13,440. After thrusting above 13,440 on a tick
spike of +1357, for the most part, the Dow held above 13,440
and accelerated higher regaining all of Tuesday’s reversal with
seemingly little effort. The uptrend ramp did not shift to the
right this time.
At the end of the day, the Dow held the 13,375
level listed last night and rallied through to the end of the
day closing at a new all time high. Evaluating the current
situation based on the Dow yields one conclusion, an extended
market on shaky internals. Focusing on broader indices yields a
significantly different conclusion, consolidation ready to
breakout to the upside. This is an uncommon enigma.
Upside Fibonacci targets are 13,540. Also note that moves
higher have carried about 150 to 170 points above the previous
important high. For the Dow the last important high was
Wednesday May 9 at 13,369. Add 170 yields ~13,540.
Thursday we get the Philly Fed index at noon
and the report has caused a bit of a stir in the past, but
right now all news is good news. Dow component HPQ reported
after the close and is trading higher, which should goose the
Dow higher Thursday morning, the day before options expiration.
The rest of the week’s action should be tied to expiration,
which at this point clearly has an upward bias.
Here’s why:
The Dow was down 19.91 points at its low of
13,363.93. That makes for a total correction of 117 points,
which is about average for corrections since late March. And,
it did that without closing down for a day. From Wednesday’s
lows the Dow rallied 125 points to the late day high of
13,487.53 whish is where it closed, 103.69 points. The Dow has
closed higher for four consecutive days.
Last night I saw the
end of “From the Earth to the Moon.” It was the episode about
Apollo 1, which burned on the launch pad killing all three
astronauts. At the end the engineers were talking and one of
the lead guys said, “You have to leave the ‘if’s’ behind.”
In this business it
is easy to get caught up with expectation scenarios and so on
and so forth. But to quote another movie “A good pilot is
compelled to evaluate a situation and learn from it.” While
trading seems to be a never ending process of learning, once
you put the ‘if’s’ behind you, the lessons become clearer.
The Dow has gone 34 trading days without a two
day decline. There are only four such strings ever that lasted
longer.
See the weekend report for the summery. That said; at
present the Dow’s current run is showing very few signs of
capitulation.
The S&P 500 reversed but held 1500 and
that’s all there is to it. After the morning gyrations that
saw a test of 1500 support the SPX blasted higher. It churned
around 1510 late in the day before a final surge pushed the SPX
to 1514.14, just below Tuesday’s high. The important thing is
the S&P is now solidly above 1510 and closed above it. The SPX
is ready to challenge its 2000 closing high of 1527. After
consolidating for almost two weeks, and with the market closer
to oversold than overbought, the overall conditions are
supportive of a rally from the two week base formation.
The Russell Rallied: After a very ugly
Tuesday the Russell put on a much better performance. If the
Dow had moved in line with the S&P 500 or similar to the
Russell 2000; we would be looking for a late May low, and
possibly the start of a summer rally. But the Dow’s anomalous
run has skewed the picture.
The Russell tested the top of 810-808 support level and bounced
from a slight oversold condition. At the end of the day the
Russell is higher, and Wednesday was a positive upside
reversal. This is where it gets complicated. With the market a
little oversold plus the reversal pattern, one can argue a low
is forming and the Russell is ready to blast higher from
current levels. Other indices have consolidated over the past
week or two and support the argument for a rally. The catch is
you have to ignore the position of the Dow.
The Russell jumped back to 820, a key level in that it is last
week’s lows. Above 821 the Russell is in a stronger position
and of course regaining 826 sets the stage for an upside
breakout of the month long consolidation range. Failure to hold
820 is bad for the bulls but 810 is key. The Russell is in a
cup with handle formation with the handle between 810 and 830.
For now the short down channel remains in effect, but Wednesday
has many characteristics of a bottoming day. The Russell needs
to follow through on Wednesday’s recovery to the upside. Losing
810 support, while not expected, will looks bad.
The NASD is holding 2522 support. While
Wednesday is a constructive looking day, like the Russell, the
short-term down trend is still in tact. After falling close to
50 points the NASD was ready for a bounce. It is too early to
tell if this is a bounce or an important turn higher from the
2525 support line. At this point we have to give the bulls the
upper hand, and seeing the NASD continue higher Thursday will
fortify their position.
The NYSE turned its daily trend down at the
lows of the day and bounced. The NASD turned its 3-day trend
down. Note: Many 3-day trend downturns have marked near-term
lows for some time now.
Detailed Trend Report on Web &
CLX Count and Weekly Signal Counts &
NYSE & NASD 5-day up and down volume charts
Total breadth was +1374. That isn’t much for
the Dow being up 100 points, and it is below the morning high
of +1950. Total volume contracted on Wednesday, which is
typically the busiest day of the week. Overall volume was to
the up side and internally the condition remains neutral to
oversold for most metrics.
The internal condition is more in line with
the behavior of the Russell 2000 and it is totally out of whack
with the Dow.
- The big picture: I just want to go over
this to make sure I have it down.
- The economy slowed in the first quarter,
(probably weather related.) Not good for stocks, but that’s
ancient history now, not a problem for stocks.
- The economy is virtually at full employment.
Good for stocks
- The economy is capacity constrained. Good for
corporate margins = good for stocks
- Energy prices remain stubbornly high. Not good
for consumers, but the govt says there is no inflation so not a
problem for stocks.
- The economy is expected to accelerate over the
balance of the year. Good for earnings expectations = good for stocks.
- The FED is expected to cut interest rates
because of sub-prime lending even though the economy; is running at virtually full employment,
is capacity constrained, and is expected to strengthen over the
balance of the year. Good for stocks.
- Yes, I believe that pretty much sums up the current situation.
The broad market is rebounding off the bottom
of a one to five week consolidation range. The Dow corrected
its normal 120 points or so and is pushing higher. The last
higher high was only 50 points higher than the previous high,
but the average is close to about 160 points. That targets
about 13,520’ish for the Dow. Friday is expiration and prices
can easily get pushed around on a near-term basis for the next
two days.
Jim Patterson
Most Obvious chart resistance levels:
()
Dow 13,323,
13,380, 13,405, 13,489, 13,545, 14,350
SPX
1501,
1508, 1515, 1522,
1527, 1550
NASD 2560, 2575, 2601,
2643
NDX 1890, 1900,
1907, 1918, 1936
NYSE 9830, 9940,
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 1885, 1868,
1855, 1840, 1822, 1808, 1795, 1775
NYSE
9750, 9690,
9620, 9510, 9400, 9350, 9280
RUT-2K
820, 810, 808, 803,
790, 760
Here’s where we are now:
NASD 100 Index (NDX) Trading System,
trade the QQQQ:
The NDX tested 1868 support and that was it.
From there it rallied like there is no tomorrow.
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 52.02
CRNT rec Long 5/8 @ 7.78, stop 6.50 close,
target > 9, closed at 8.13
PDA rec Long 5/14 @ 33.12, stop 28, target 38, closed at 34.06
We are long WMT June 45 Puts @ $0.25 as of 5/16
We are long AAPL July 110 Puts @ $6.60 as of 5/16
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. They were
offered at $0.25 early in the day.
AAPL short,
Rec buying, July 110 puts @ $6.90 or better, they were offered
at $6.60 at 10 AM.
AMZN announced an Online Music store, and MOT
is pushing the music features of their new phone, which will
probably cost less than the iPhone.
**
PRS Open Actives making noise:
Jim Patterson
Editor
Tactical Trading Outlook
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