Big picture posture

I don't normally look at the Dow too heavily, but with all of the talk about global expansion and the industrials outperforming due to their exposure to overseas growth, it's interesting to consider the Dow in addition to our normal go-to indexes.
Though the breakout to recent highs did breakdown and ultimately "fake out" fairly quickly, there is still a strong and in tact long term uptrend with a trend support line just below us. If that doesn't hold, the next likely area of support would be 12,750. After the recent craziness and fear as high as I can remember in recent years, is the Dow really likely to fall another 500 points in the coming weeks? Remember, the crowd usually gets it wrong, or so they say. I suppose it's possible this level will break and the quick drop to 12,750 could happen. After all, it's really only 4% and would actually finally achieve the 10% correction that so many have longed for. But again that is a strong and healthy long term uptrend in 30 mammoth stocks that don't just get going or turn on a dime. Even if we are destined to test that area for an "official" correction of 10%, the past two weekly candles are pretty major inverted hammers, showing an inclination to bounce. We shall see.


SPX is also still in good looking long term uptrend, though the breakdown after the fake out of the trading range at the top does seem a bit more severe. The trend line from the mid '06 lows is pretty much broken. But there is almost surprising support from the old channel resistance line in blue. Also the weekly candle shows an inverted hammer like the Dow. If this area doesn't hold, the next likely area of major support is 1,380. After that, all the way down to 1,325. The first level would be roughly an 11% correction from the top, the second would be almost 15%.


For a closer look at the SPX, I'm going to be a bit obnoxious and put up a chart with way too many indicators and lines. Basically, I just don't want to do a third SPX chart. One thing that I think is quite interesting, though I'm no Fibonacci pro, is that the low from last week that provided intraday support again this week is right on the 38.2% Fib retracement line, the first of the most significant retracement levels. The 200 MA is also providing support in addition to the diagonal and horizontal support lines present on the weekly chart. In total, there are 5 support lines of one kind or another, including the fib line, around the current price.
The Market Forecast indicator is actually quite bullish, save for the longer term sentiment indicator, which is heading down with plenty of room to go. But after last week's cluster, the intermediate term green line has exited the lower reversal zone for the official green light on playing the cluster. To strengthen the bullish argument being given there, the momentum and near term lines are lining up for a nice "Intermediate term confirmation" signal, another of the signals Investools teaches on these indicators. In short, the two shorter term indicators line up to be the wind at the back of the intermediate term line.
In short, I'm expecting a bounce here. But the real test will be when the index tests the bottom side of the old support and recent resistance line at the 1490/1500 area. If that holds as resistance, we'll likely see some serious sideways choppy action for a while or possibly another leg down and potential beginning of an intermediate term downtrend.


I think I showed VIX with a weekly chart last time, so I'll just stick to the daily. It's rocketed only higher and seems very likely to come in some. Even if it is destined to go higher, there needs to be some kind of retest of the new range support. I just can't imagine the VIX going parabolic without a true market crash happening. Regardless, it is clearly telling us that fear is high right now. It's also telling us to be on our toes for a peak, as once it is high and then turns, THAT is the time to buy. So my take is that this is very close to being a bullish indicator right now. One point of interest from this past week is Wednesday's action. Though the SPX had a big strong up day, the VIX did not have an impressive down day and actually couldn't break below the recent support/old resistance level at the 20 area. I took this at the time to mean that the up day in the SPX was not to be trusted because people were still buying puts heavily. But really, just look at that Doji star hanging up there. Can it really go higher in the next few days? Of course it can. But is it likely? I doubt it.


The Russell 2000 small caps index has shown much relative weakness in recent weeks, but this week was quit strong. With what we could call a bullish engulfing weekly candle, it seems to not want to give up these support lines, both diagonal and horizontal.
With all the talk about how strong the Big Caps are, could this be the time to get into small caps? The long term view seems to indicate so.


Again, I'll leave the Nasdaq up to you. But here's my thinking. The Dow still shows the most relative strength. The SPX, with many more components to it, is still strong in a long term sense, but the short term is looking a lot more shaky. If the Russell and the small caps bounce from here, the small caps may finally wake up and actually provide a bit of support to this market. I would think that would only help the SPX regain its composure next to the Dow.
Take a look at the Nasdaq versus the Nasdaq 100(NDX). The NDX looks stronger than the composite as a whole, which makes sense considering the NDX is the 100 big boys. If the smaller guys, many of which are surely in the Russell 2000 can get it together, perhaps the Nasdaq composite can work its way through the congestion of "overhead supply" it has to deal with.

Any comments? I dare you.

Bueller?

FED relief

The FOMC released their statement today at 2:15 PM and decided to keep the target fed funds rate at 5.25%. It seemed a foregone conclusion that they would not cut rates, but judging from the action in the markets starting at 2:15, I'm thinking what people needed to hear was that there wouldn't be a rate hike. Even if slower, the economy is still growing and the bulls seem to want to run further. Look at today's chart with 15 minute candles for the SPX, Nasdaq composite, Dow Jones Indusrials (Thinkorswim doesn't support the ticker for the dow, so the DJX is the same thing at 1/10 the size) and the Russell 2000 small cap index. The red line is drawn before the 2:15 candle.
(click image to see it bigger)


Look at the total volume New York Stock Exchange for the past 4 days broken down into 15 minute chunks. The cross hairs on each day show the level right before the 2:15 period began. Today's trading increased significantly as the market pushed rapidly higher in the last hour and forty five minutes of trading. Perhaps that seems like a silly and obvious observation to make, but it is a good piece of confirmation for the upside sentiment.
(I still can't figure out why this Total volume chart doesn't' show the same numbers we see for total volume on the NYSE home page or Yahoo. Nevertheless, it gives a good relative picture.)

Though the Nasdaq and especially the SOX still look somewhat questionable in their technical strength, the Dow is back working on a new high and the SPX has jumped back above the 1431 resistance line I've shown on recent posts. So it seems the breakout may get another chance.
But most of all, I like the look of the Russell 2000 moving above it's relatively orderly period of sideways consolidation. This would indicate that small caps would be good stocks to look for buys, or you could just play the IWM, Russell 2000 ETF. Remember that even if you're wrong about a bullish stance, it's best to get in near support so you know where to get out for a small loss. It did come in more than the other indexes off the high of the day, but strength tomorrow could be a great entry. I would look to 79 for new support and aim for a target of 81 judging from the height of the sideways channel.


Notice that the FOMC statement mentioned tentative signs of stabilization in the housing market. The housing stocks have been rising steadily since September and were up nicely today even before the statement and more so after. Our KBH is looking well on its way. 55 may yet be a point of resistance in the short term, but 60 seems like an inevitable destination.


I'm kicking myself over ISE, which I discussed briefly in the last post. If had stuck to my original plan to give it room up 'til 47.50, I'd be feeling very good right now. I guess this is one nof the major realities of options trading. The massive swings in option price can really bring out the emotions. This is why we have to examine what we as individuals are comfortable with. Mine was a good analysis and the exit was not such a horrible decision either based on what I was seeing. But the added pressure of time decay and the leverage of the option are more what weighed on my decision, emotionally, than my certainty that it was going to go upward, the wrong direction.
I don't know what happened today, as there's no major news, but the stock is down on big volume. The ideal bearish entry to make here would have been on the first lower high after second of equal highs. That also was a bouncing down off the MA and had 3 red arrows. Would have been much easier to sit through the turbulence during which I bailed out. Double GRRRRRR!
That this stock had such a down day with no obvious news when the market rallied strongly does not say good things for it at all.


Happy Hunting. If the market is going to start a another leg up, this is the place to be looking for entries. The VIX, by the way, feel lower again today for a definitive lower high.

Ding Ding Ding

Well, that's it. The markets are closed for 2006. I know I learned a lot this year. I hope you did too. 2007 should see the fruits of our labor and study. Of course, it's a never ending process and we must always be pressing forward.

I'm glad to have started this blog and am thankful that people take the time to read it. It is beneficial for me to articulate and show my ideas and the lessons I'm learning and hopefully it is helpful to any readers as well. If you have any thoughts or recommendations for the blog that you'd like to share with me, please leave them in the comments area or email me from the Profile page.

As this is an appropriate time to review our progress and current state, I'd like to make a few adjustments in our Watch list. Mostly just to ensure that we're dealing with leaders in their respective groups. We do have some really great ones among us, but others seem to be showing themselves as laggards. For example, ISE looks relatively weaker than some of the other exchange stocks while ICE looks much stronger than the bunch. For a simple comparison, look at where they sit in relation to a moving average. We can talk about this in the next meeting.

Before the commencement of trading again on Wednesday (Monday off for New Year's, Tuesday off in honor of President Ford), I will do a long term analysis of the market for a bit of perspective going into the New Year.

In the meantime, here is a look at the major indexes for the last three months of 2006 with weekly candles. Which one of these things is not like the others?
(Click it for a bigger picture)

Indexes and some of our list.

I hope everyone had a good weekend. I'll be going to an Advanced Technical Analysis workshop in near D.C. this week, so postings will probably be on the less frequent side. However, I've put together a pretty lengthy post here which should give you plenty to chew on for a while.

Don't forget to check for the key economic events for the week ahead. You can find key events, earnings announcements and splits for the coming week in the "Week Ahead" page found in the left column on the "Strategies" page on the the Investools site. Otherwise, for a simple view of economic events, click here. There you can click on each event for a link to more info.

Taking a quick look at the major indexes, the SPX looks quite strong, continuing its trend with higher highs and higher lows. One potential bit of caution is Friday's shooting star which would be validated as a potential reversal point or resistance level with a gap and close down or big black candle for monday. This would be consistent with the current channel resistance.

(Click images to see them larger)


The VIX index has been very volatile since breaking the downward resistance line. Now it's back to lows and has used it as support on friday. Until this index makes a meaningful move above the 13 area, I won't get too excited about prolonged bearish action in the market.



I don't usually pay too close attention to the Dow or place a lot of weight on it as an indicator of market direction. Regardless, it is interesting to note that while it did break horizontal resistance to a new high this week, the old trend channel support may now act as potential resistance. There is also a shooting star of sorts, though not quite the ideal with its upper shadow less than twice the length of the body.


As for the Nasdaq, though not in the most convincing way, it did close above the recent lower high and the pennant formation. It doesn't seem to have great momentum at this point, but the bias remains up.



The Market Forecasters shows the intermediate lines on both charts moving up in the upper reversal area, so these are read as bullish. Regardless with the market trends still clearly in tact, this stochastic indicator is not yet quite ideal for these conditions.

From our list:

AAPL is in a good position for a low risk entry ( i.e. near support). However, "Apple Computer Inc. said Friday it has delayed filing its annual report with the Securities and Exchange Commission due to its ongoing investigation into stock option grants." So it wouldn't surprise me if investors were a bit lukewarm on the stock following this news.



BHI has broken decisively above the 75 resistance area. All those who bought in under that level have been validated and are now sitting pretty. Getting in now near the 75 area would be ideal on a test of support in coming days. The P/E of 11.3 shows a discount to the Group's P/E of 22.4. With growth expected at 23%, that gives us a PEG of about .5. Seemingly too good to be true. From what I can tell, there seems little reason this stock shouldn't revisit its high and likely go further. Very good also to see the group moving quickly up the Big Chart in the past few weeks.



Our other oil stock, UNT hasn't quite broken the longer term downtrend convincingly, so it's still in the dog house with me. There is also a bearish divergence between the higher high in price and the lower high on the MACD.



CRDN looks to have support at 55 and some potential resistance 56.30 or so, but nothing blatant until the high around 62.50.



COH appears to be easing its momentum a bit in keeping with its group rank on the big chart. However, it is still in a nice, healthy uptrend after breaking two significant resitance levels with volume. As it move into its uptrending support line and the 30 MA, this might be a very good place to look for a bounce entry to ride a run up in anticipation of its earnings announcement on Jan. 22. This could be a good time to look at buying options too as the Implied Volatility is at a low point and it will likely start to rise approaching the earnings announcement. This will inflate the premium in the options.



ISE somehow doesn't quite look like it's going to break through this ceiling. It's strangely back below the high from back in March and the big volume jump to a new high with volume on 10/25 after earnings didn't quite set off a new move. 55 remains as resistance. All that said, the uptrend is still in tact and we have just made a successful bounce off the support line. Good entry point using Friday's open as a support line and the trend line as an exit signal. Makes for a risk reward of 1/5. VERY GOOD. Also, a Jan 45/50 bull put spread for roughly $1.55 credit could be very successful using the same lines as an exit.


KBH will be a difficult one to play, I think. The homebuilders do seem to have put in a bottom for the time being and have pulled above that area with an accompanying rise up the big chart. However, Friday's Big Chart rank did show a slight pullback as there is considerable overhead supply with lots of potential resistence every step of the way. KBH may see the nice round number 50 as support now, but there seems resistance at about every $5 incriment as we go up. That's not necessarily a bad thing as long as we can get in near support levels and get out at each target. For now, I'll leave this alone and expect a more sideways bias.



NTAP broke back above 40 on Friday with considerable volume(see 11/21 for a "fake out"). Perhaps it will now hold as support. We've now got three fresh green arrows with recent volume spikes being buying days.



It will be interesting to see what happens with RIMM after its earnings announcement on Thursday. It's in a strong uptrend about to receive a third green arrow on the MACD.
This article makes for a case of overvaluation which seems quite believable seeing as the P/E is twice that of its group and it has a PEG of around 3. (Here's a good link for an explanation of P/E and PEG.) Perhaps we can watch this for a bearish play if it breaks the uptrend support.


Okay then. I think that's enough for now. I would love to see some comments on all this, if nothing else, just to let me know people are in fact reading, thinking about and questioning this all and not just glancing at it.
Have a great monday! :-)