Sunday, December 17, 2006

CPI gives investors an early Christmas present

SUMMARY:
- CPI gives investors an early Christmas present, but they almost act as if they want to return it.
- Transition in progress, trying to beat the Christmas rush?
- Soft landing approaching? CPI growth slowing for second month even as retail sales solid.
- Stocks still set to move higher into Christmas despite lukewarm response to CPI.

CPI shows promise, market plays coy.

The big news of the day was the CPI, showing a flat growth rate overall and at the core level. That helped push the core year/year down to 2.6% from the 10 year high hit in August. Time to celebrate and have a good time. Indeed, that news trumped all other in the morning, including some warnings from BDK and ITW (sure seems like a lot for so early in the season), higher oil (attacks on Shell in Nigeria, continued OPEC blustering), and lower capacity readings. Stocks gapped higher, continuing the Thursday breakaway move after a lateral move in December.

What looked to be 'the' news the market needed to really extend its gains, however, was trumped itself. Not by any news story, but by a monthly event, expiration Friday (and maybe, just maybe, a bit of top-heaviness). NASDAQ gapped to the November high while SP500 and DJ30 moved to new post-2002 and all-time highs respectively. Nonetheless, it was over in an hour. The early gains were solid, but hardly impressive (69 points on DJ30, 16 points on NASDAQ, 6 points on SP500). Maybe they shot their ammunition on the Thursday jump. The indices are well into their run and they have had a hard time making upside moves stick.

That could explain the fade after the morning surge, but there was also expiration at work. It tends to keep the market on edge and volatile at some point during expiration week. After the move higher Thursday, expiration was prime time to give some back. Looking at the big volume surges on both NASDAQ and NYSE that was the main influence in the pullback. It was no reversal; the indices mostly finished positive and holding the Thursday move. It was expiration Friday following a relatively quiet expiration week and a big move Thursday.

The expiration action makes a technical read rather murky but you have to look at these sessions in context with the overall market picture. There was the big volume related to expiration and narrow breadth with the large cap indices the only ones holding gains. Lots of stocks were moving, but they were moving all over the place. All of this is typical of expiration and thus we don't want to read something into the tea leaves that is not there. That is an urge you always have to fight; let the market speak and don't see shadows or sunny skies that are not there. The Fed did that in the late 1990's just as it did in the 1920's when it saw stock gains and interpreted them as inevitably leading to inflation. It acted on an incorrect assumption and the results are indexed in history books under 'P'; not for prosperity but for poverty.

Friday did nothing to change what the market is doing: rising in an uptrend that is aging and is thus showing some signs of age. That does not mean the rally from July is terminal nor the overall rise ready to fall. It may be middle aged and showing some related signs, but middle aged is not on the deathbed.

Some dormant large caps coming to life.

Indeed, the 4 year bull run spurred by renewed economic growth is by comparison fairly old. The leading indicators that matter are starting to show some renewed growth down the road, and that is one reason grow indices such as NASDAQ and SP600 have recovered with the small caps indeed hitting a new all-time high in the past month. The age of the run suggests that the large caps will take over similar to what was seen when this latest rally started, when the small caps stumbled while SP500 and DJ30 led the way higher.

Thursday and Friday saw some of the large cap leadership returning while the small caps lagged the move. Stocks such as C and GE, dormant for years, have suddenly jumped higher. That is an indication that the big money that moves the market is allocating money into large caps of all kinds (leaders and laggards) in preparation for the new year. It could also mean that the world liquidity is looking for anywhere to go, and is now looking to laggards.

That could spell trouble as it suggests things might be getting a bit overcooked as money seeks anything that could turn a profit. It could also represent storm clouds for other areas of the market such as when this current rally started and the small caps took a back seat. They did not breakdown, however, they just moved from leader to follower. Moreover, they recovered and moved to a new high, and as noted above, that indicates good economic action to come as they are growth oriented stocks.

Thus, with liquidity in the world still very high with China, OPEC, and others needing to find homes for that money, perhaps what we are starting to see is simply a further spreading out of the advance. A survey of investment in US equities last week showed more foreign buyers of US stocks than US buyers. Further, the net foreign purchases of US debt and equities released Friday surged to $82.3B, blowing past the consensus of $69.5B and September's $70.2B (revised higher from $65.1B). Part of the low bond yields is the foreign appetite for US treasuries as a place to park oil money (of course no one has a definitive answer as to how much that is driving lower rates, but it is not the major force as even Greenspan admits).

It takes money to drive economies and markets, and with record US profits and high world liquidity there is money available. We will have to see if this turn toward laggard large caps occurs at the expense of the smaller cap and mid-cap growth indices or if it lifts all boats once more. On Friday the smaller cap indices definitely lagged, turning in negative performances. Overall, however, they are not lagging anymore having both put in new all-time highs this month. In that sense they are leading the SP500 and of course are well ahead of NASDAQ and SOX.


THE ECONOMY

CPI slowing, making Bernanke look like a genius compared to Greenspan's first year.

We thought CPI would come in less than expected, and it indeed did. Overall consumer price growth has slowed the past four months, even declining in September and October before the November flat reading (+0.2% expected). Lower energy prices drove most of that decline as the core (ex food and energy) stubbornly held its ground. In October, however, the series of 0.2% gains slipped to 0.1%. November fell to flat. That dropped the year over year rise in core inflation to 2.6% from the 10 year high at 2.9% in August. That is still above the 2% cap the Fed wants, but it is getting substantial, and these trends tend to pick up speed as they progress. Indeed, over the past three months core CPI growth rose 2.2% versus 3.5% in July. In three or four months we could see yearly core CPI skipping along the 2% range.

Of course that does not mean a rate cut is imminent. The slowing growth in core inflation merely affirms the Fed's decision to pause. With the core year/year still well above 2% the Fed is not about to cut rates. Indeed, the bond market seemed to finally get that on Friday. With each indication inflation and the economy were cooling at a 'soft landing' pace, bonds have rallied, pushing yields lower and raising the expectations of a rate cut in March. That expectation peaked at 82% just a couple of weeks back. Since then economic data in the service side as well as in jobs reduced that expectation to just 12%. When the news hit Friday bonds rallied and pushed the 10 year back close to 4.50% (4.51%) but bonds then reversed and by the close the 10 year was where it started the day at 4.60%. Even with the core inflation rate finally following what the leading inflation indicators have been saying, bond traders realized all this means is the Fed is going to hold steady well into 2007.

Economic activity set to pick up in second half 2007.

ECRI's leading indicators continue to rise, hitting yet another yearly high. This long leading indicator looks well down the road, measuring forces that combine to generate growth just as its inflation indicator measures forces that combine to generate inflation 6 months or more down the road. This continued rise still does not eliminate some interim slowing, but it bodes well longer term.

The wildcard is the Fed and how it reads any indications of economic strength. It has so engendered the public over the years with the idea that economic growth leads to inflation that it has hard time doing what is right for fear of confusing everyone with its actions given the economic indicators it claims to use. Former Fed president McTeer summed it up a couple of months back when he noted that growth actually helps REDUCE inflationary pressures. Unfortunately McTeer is no longer on the Fed and his replacement, after sounding good at the start, is basically a wing nut.


THE MARKET

MARKET SENTIMENT

VIX: 10.05; +0.08. Volatility spent another week declining, and as noted the past couple of weeks, the volatility geeks are out warning the sky is falling because volatility is approaching the late 1993, early 1994 lows. Lions and tigers and bears, oh my. Volatility can indeed suggest tops and bottoms in runs, but it is a fickle indicator. Sometimes the correlation sets up and works, sometimes it does not. This is a cycle where it does not. Just as in the early to mid-nineties, the market embarked on a long run even as volatility touched near record lows. When volatility rose dramatically . . . in late 1999 and early 2000 . . . the run was over. The point: low volatility in and of itself does not necessarily mean anything. In this case it has been low, well below the historical range that indicates complacency that can indicate market tops. It has not moved in sync with the market's ups and down, just hugging the bottom. A correlation can always set up, but it has not done so yet on this cycle.
VXN: 15.15; +1.06
VXO: 9.97; +0.39

Put/Call Ratio (CBOE): 0.74; +0.1


Bulls versus Bears: Bulls eased a bit but remained well above the key 55% level. Bears fell this week, coming closer to 20% considered bearish. Not a great development but as of yet there is still enough money coming in to feed the bulls. That is really the import of this reading: if you get too many bulls, there is no ammunition on the sidelines to keep shooting the market higher. With all of the liquidity in the world (OPEC nations making billions a day), it has to go somewhere. Markets around the world are benefiting from that money, and the US, despite the naysayers, is still a favored destination because of our rule of law, stability, and of course, year in and year out economic growth.

Bulls: 59.6%. Slipped fractionally from the prior jump to 59.8%. It has been a steady move higher from 58.5% and 56.4% the week before. Fourth straight week the bullish advisors topped 55%, the level where the market is viewed as overdone and some corrective activity can enter. A sharp jump from 52.1% the week before and closing in on the January peak at just above 60%.

Bears: 21.3%. Big drop in bears, down from 23.9% after a bounce higher just before that. It is now coming close to that 20% level considered bearish. This is well off the 37.1% hit in July (the highest level in this entire cycle), now so far in the distance you can barely see it. Hit a new post-2002 high in that late June move, eclipsing the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005).

NASDAQ

Stats: +3.35 points (+0.14%) to close at 2457.2
Volume: 2.147B (+10.74%). Explosive volume, the highest in over a month, as NASDAQ closed out expiration. Lots of movement and thus lots of volume. Not calling it accumulation, not calling it distribution. Just expiration. Bigger picture NASDAQ has suffered some distribution and churning bouts the past month, though obviously not enough to sink it.

Up Volume: 1.521B (+91.806M)
Down Volume: 827.673M (+410.294M)

A/D and Hi/Lo: Decliners led 1.1 to 1. Large cap techs led as the index posted a gain while breadth was negative.
Previous Session: Advancers led 1.47 to 1

New Highs: 78 (-29)
New Lows: 11 (-15)

The Chart: http://www.investmenthouse.com/cd/^ixic.html

Gapped higher on the CPI news, clearing the November high (2469) but unable to hold it, starting the selling within the first hour of trading. NASDAQ lost ground all session but managed to close with a modest gain, hanging on to the Friday break higher from its lateral consolidation. NASDAQ needs to hold the breakout and then continue from there. Clearing that November high will be key for a run on into Christmas.

SOX (+0.03%) scratched out the bare minimum gain, still trying to get off the 50 day EMA it sold to the past week. Modest double top over the past month sent it down to near support. Still some important chip stocks performing well (e.g. WFR, NVLS), and we will see if they can lead the nation of chips to breakout land.


SP500/NYSE

Stats: +1.6 points (+0.11%) to close at 1427.09
NYSE Volume: 2.102B (+34.1%). Volume hit a 2.5 month high Friday as the last expiration before year end ran its course. As with NASDAQ, no real distribution or accumulation, i.e. no reversal session even though SP500 closed off its high.

Up Volume: 977.771M (-200.422M)
Down Volume: 1.066B (+691.625M)

A/D and Hi/Lo: Decliners led 1.15 to 1. A large cap day at the NYSE as well as the large cap indices were up but breadth was negative.
Previous Session: Advancers led 1.76 to 1

New Highs: 152 (-162)
New Lows: 5 (+1)

The Chart: http://investmenthouse.com/cd/^gspc.html

SP500 rallied higher early as well, managing to continue rallying even after NASDAQ already peaked out in the first half hour. The writing was on the wall, however, and SP500 slid back all afternoon, failing a mid-afternoon rebound attempt. It managed to hold a modest gain and of course Thursday's strong break higher. The large caps are getting attention again and that could be very good for them on into Christmas and into 2007.

SP600 (-0.24%) struggled as the small and mid-caps did not attract the money the large caps enjoyed. There was no lump of coal in the stocking, however, just a pullback from the new high hit to start the month. Still in solid shape and still looking for a continued break higher.


DJ30

Volume shot off the scale, posting the highest trade in 7 months. With stocks such as GE, C, JPM and friends jumping higher on strong trade, this was not all expiration volume but some real buying in the large caps. DJ30 is still as extended as a college student at the end of the month before the parents' check comes, but just as the college student, it keeps finding ways to keep going.

Stats: +28.76 points (+0.23%) to close at 12445.52
Volume: 417M shares Friday versus 253M shares Thursday. As noted, the strongest volume in 7 months as expiration and some real buying in some large caps pushed trade higher.

The chart: http://www.investmenthouse.com/cd/^dji.html

MONDAY

CPI was big last week along with retail sales and the FOMC meeting, and the data barrage doesn't slow much this week with housing starts, PPI, final GDP, personal income and spending, and final Michigan sentiment being the highlights. In addition, earnings from some well known stocks such as MS, ORCL, NKE, FDX are on tap, and 'tis the season for earnings warnings as well with January just two weeks away.

Is the news as good as it is going to get?

There is a confluence of positives hitting the market of late. The economic data has a positive turn despite the sub-50 ISM, the Fed gave a nod at that slower manufacturing rate and noted the housing slowdown was 'substantial,' leading indicators are pointing toward more growth, and at the same time consumer inflation is finally starting to turn. As noted in one of our alerts Friday, the news is getting about as good as it can. With earnings season coming and a dozen quarters of growth, the likelihood of some disappointment is higher. Already we are seeing warnings from chips (NSM and others), and Friday saw more from other sectors as BDK and ITW warned.

The market finally broke higher once again last week after working laterally all month even as the good news hit. The inability to rally on the good news was a concern, and the Thursday break higher was good to see. Now it needs to extend that break with a move higher this week. With large caps getting some new money ahead of the new year the momentum is there to carry stocks on into Christmas.

We still have to be wary of any shifts in the various market sectors. For the most part they are all rising together (though chips are struggling). We don't want to see the small and mid-caps deteriorate as that calls into question the growth prospects for 2007. Want to see that money continue to move into all areas of the market, large and small caps, indicating this overall rally out of the bear market still has significant legs to carry it higher.

Even in that event, there will still likely be a correction of some sort near the first of the year if stocks can continue this move. There will be some redistribution of capital for the new year and a 5% or more correction would not be out of the question. That is an educated assessment of current market condition and historical trends; it is not anything written in stone. As always the market will tell us the direction it is going to take.

We are going with the same game plan: look where the money is flowing and getting in on those stocks starting moves or stocks that are testing good moves and giving us new buying opportunities. That way we will ride the current move as far as possible. As for current positions, we are letting them move as high as they will on this run higher. Positions that have been lagging and not moving with the market are getting closed; if they did not break higher with the market and cannot do so on any further upside moves, we will take the money off the table and use it to focus on those that are getting the money and are moving.


Support and Resistance

NASDAQ: Closed at 2457.20
Resistance:
2468.42 is the November 2006 high
2477 from January 1999
2493 is an interim peak from February 1999

Support:
2438 is the July up trendline
The 18 day EMA at 2435
2412 from June 1999 low
The 50 day EMA at 2385
2384 is an interim peak from January 1999
2379 is the October high.
2376 is the April high, the former post-2002 high
2368 is the early October handle high.
2333 is the top of the Q1 2006 trading range (the January and mid-March 2006 highs)
2316 from interim tops in January and March 2006 trading range
2300 represents some price support

S&P 500: Closed at 1427.09
Resistance:
1444 from February 2000
1475 from peaks in December 1999 and January 2000

Support:
1425 is an interim high from November 1999
The 10 day EMA at 1414
1408 is the November high
The 18 day EMA at 1408
1401 is a low from April 2000
1397 is the July up trendline.
1390 is the October high.
1389 is a low from November 1999
The 50 day EMA at 1385
1378 is a low from May 2000
1371 to 1373 is the December 2000 peak and the January 2001 peak
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February
2002 low at 1360.

Dow: Closed at 12,445.52
Resistance:
At a new all-time high. Back to 8.5% above the 200 day SMA, about the point where DJ30 started to struggle in late October.

Support:
12,361 is the November 2006 high
The 10 day EMA at 12,339
The 18 day EMA at 12,297
October high is 12,167
The 50 day EMA at 12,118
11,986 is price support from mid-October and the early November low.
11,865 from the early October consolidation
11,750.28 is the prior all-time high
11,723 is the January 2000 closing high
11,670 is the May intraday high
11,642 is the May 2006 closing high
11,488 is the early September high.

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

December 18
Current account, Q3 (8:30): -$225.0B expected, -$218.4B prior

December 19
Housing starts, November (8:30): 1.55M expected, 1.486M prior
Building permits, November (8:30): 1.540M expected, 1.553M prior
PPI, November (8:30): 1.2% expected, -1.6% prior
Core PPI, November (8:30): 0.2% expected, -0.9% prior

December 20
Crude oil inventories (10:30): -4.295M prior

December 21
GDP, final Q3 (8:30): 2.2% expected, 2.2% prior
Chain deflator, Q3 (8:30): 1.8% expected, 1.8% prior
Initial jobless claims (8:30): 315K expected, 304K prior
Leading economic indicators, November (10:00): 0.0% expected, 0.2% prior
Philly Fed, December (12:00): 3.0 expected, 5.1 prior

December 22
Durable goods orders, November (8:30): 1.0% expected, -8.2% prior
Personal income, November (8:30): 0.4% expected, 0.4% prior
Personal spending, November (8:30): 0.7% expected, 0.2% prior
Michigan sentiment, December revised (10:00): 90.2 expected, 90.2 prior

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

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Wednesday, November 15, 2006

Stocks rally into the FOMC, stall, manage to hold some gains ahead of CPI

SUMMARY:
- Stocks rally into the FOMC, stall, manage to hold some gains ahead of CPI
- FOMC seeing inflation around every corner.
- CPI takes on a bit more importance in wake of FOMC minutes.

Indices extend breakouts though FOMC minutes splash some water on the fire.

Some more merger talk (USAir/Delta), some decent earnings, and a strong NY PMI (26.7 versus 14 expected) helped keep the momentum from the strong Tuesday move brewing. Stocks ran higher out of the gates once more, shook off a mixed oil inventory report (oil more than expected, but gasoline & distillate about a million light & refinery runs down to 86.1%), and then sprinted higher to the FOMC minutes almost as if they had a death wish. You knew the FOMC was not going to be kinder and gentler, and sure enough, when it came out basically saying inflation was just around every corner, stocks were challenged to hold their moves.

Nonetheless they did manage to hold some gains into the close with some solid NASDAQ volume and decent breadth. Technically it was not a powerful session; the close off the highs spoke to that as well as the NYSE volume that slid a bit lower on the continued gains. Despite so-so internals, the indices continued their breakouts, putting some more nice gain in the bank as they stretched their moves. Really liked seeing that; last time NASDAQ broke out it gave it back so a few good moves strung together shows the buyers have a bit more staying power. Also, it is good to see these other indices come to the fore and help broaden out the rally just when the large cap NYSE stocks started to struggle a bit. Again, not bad action given a Fed that from its written word is pretty much scared of its shadow.

All of this is a prelim for the CPI out in the morning, and with the Fed clearly (at least in writing) trying to tell the market not to expect rate cuts, a strong number could do some damage. Of course, it seems as if the bond market is the only market worried about the future as the inversion Wednesday came close to 20 BP.


THE ECONOMY

Fed warns that all members are worried about inflation.

The minutes were chock full of fear of inflation. The Fed went out of its way to note that 'all participants' were concerned that inflation expectations would get out of hand if the core inflation rate (as measured by the CPI and PCE) remained outside of the Fed's comfort zone. What is driving this is a belief that the economy is overall strong and going to get stronger after this slowdown, yet inflation has not fallen with the decline. Well, as history shows us, inflation is not tied to economic strength. Inflation was high in the Great Depression, at least before deflation took over. In the 1970's the economy was a cesspool but inflation surged. Inflation depends upon how much money is in the system vis- -vis the economic strength. If there is too much, weak economy or strong, inflation crops up.

The problem the Fed has is that its dogmatic focus on a lagging indicator boxes it in with respect to its solutions. It gets into the perceptions game as it is now, i.e. worrying that the world won't think it is tough if it recognizes history and looks to leading, less understood indicators of inflation. The fact is, inflation peaked a year ago, and while the decline has been slow, it has continued its decline.

That more than anything else is what has the Fed concerned. It sees inflation is falling, hence the comments a month and more back about how inflation was not falling fast enough (Lacker et al). They want to see it tank, but if the Fed acted to make it fall flat it would have to drain the money supply and that would have very bad affects on the economy. Given Greenspan left money supply growing way too long and indeed even as he raised rates, the Fed has done about all it can to curtail inflation and keep the economy from rolling over. Thus the harsh talk to try and keep everyone very aware the Fed is worried about inflation as it waits out the lagging data, hoping it will finally start softening.

CPI is out Thursday morning, and unfortunately, despite the impressive declines in the PPI, they won't likely repeat in the CPI just yet. Thus the market will have to interpolate the Fed's minutes with the new data as well as comments from Poole re how Fed policy is 'about right.' It indeed appears the Fed is telling the market it is happy with how things are going but not to get excited and expect rate cuts while the inflation rate is still hitting long term highs. In short, the Fed is saying be happy you got a pause while we wait for inflation to start its fade.


THE MARKET

MARKET SENTIMENT

VIX: 10.31; -0.19
VXN: 15.4; +0.04
VXO: 10.35; -0.54

Put/Call Ratio (CBOE): 0.83; +0.02

Bulls versus Bears:

Bulls: 52.1%. Ticking down from 53.7% last week and also below the 52.7% rung up the prior week. Still flirting with 55%, the level considered bearish. Has caught the April high and is moving closer to the January peak at just over 60%. 55% is considered a bearish indication.

Bears: 26.0%. Moving the opposite from the bulls, bears fell sharply from 28.4% and 30.1% before that, continuing the faster decline. Down from the 37.1% hit in July (the highest level in this entire cycle, easily clearing the 34.4% hit in late June back when bulls and bears kissed, just missing a crossover). It remains above the 20% level considered bearish but is back to heading that way with more speed. Hit a new post-2002 high in that late June move, eclipsing the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005).

NASDAQ

Stats: +12.09 points (+0.5%) to close at 2442.75
Volume: 2.147B (+6.31%). Another volume increase as NASDAQ and SOX pushed their breakouts further. NYSE volume is lagging, but that is because the large caps have rallied ahead of everything else and not as much money is heading their way now.

Up Volume: 1.379B (-48.173M)
Down Volume: 749.663M (+229.923M)

A/D and Hi/Lo: Advancers led 1.62 to 1. Decent breadth and not bad after the solid performance Tuesday.
Previous Session: Advancers led 2.13 to 1

New Highs: 320 (+89)
New Lows: 50 (-12)

The Chart: http://www.investmenthouse.com/cd/^ixic.html

NASDAQ pushed its breakout further, something we wanted to see versus its last attempt that was thrown back rather quickly. It closed off its high, giving up almost half its move by the close after the FOMC minutes hit. Strong volume, well above average, pushed the action. A solid two weeks when looked at as a whole, and NASDAQ is getting close to the point it needs a bit of a breather, but it still ash room higher inside its channel.

SOX (+0.42%) pushed its breakout a bit further as well, but its move was more problematical, showing something of a doji after the surge. Not unusual after breaking through a key level, but want to see more upside out of this move before a test. If the CPI comes in tame it may show us another surge before that rest.


SP500/NYSE

Stats: +3.35 points (+0.24%) to close at 1396.57
NYSE Volume: 1.697B (-0.85%). Volume remained above average even if it was lower as SP500 and SP600 extended the Tuesday gains. Still solid trade so not nitpicking the amount.

Up Volume: 1.14B (+1.013B)
Down Volume: 542.629M (+120.429M)

A/D and Hi/Lo: Advancers led 1.64 to 1. Was a solid 2:1 until late in the session.
Previous Session: Advancers led 2.9 to 1

New Highs: 362 (+42). Pretty solid as was NASDAQ.
New Lows: 16 (-8)

The Chart: http://investmenthouse.com/cd/^gspc.html

A push higher on solid volume that also gave back as many points as it gained, but with the FOMC minutes you could say it was not a ad session at all. This is particularly true when you consider it was really struggling before the Tuesday break to a new post-2002 high.

SP600 (+0.80%) was the leader, surging late as buyers looked smaller. Excellent surge that is carrying it toward the all-time high hit in May at 405.94 (closed at 402.31). Hard to complain about this move as it extends its nice Tuesday breakout.


DJ30

DJ30 gave back more than it gained on the session as the blue chips struggled to continue the Tuesday resumption of the upside break. As noted above, the blue chip NYSE stocks are still bit winded after their strong moves higher, and even with the Tuesday breaks to new highs it still has a lot of mileage behind it already. So, any continued upside is a bonus and we are looking at it that way.

Stats: +33.7 points (+0.28%) to close at 12251.71
Volume: 258M shares Wednesday versus 255M shares Tuesday.

The chart: http://www.investmenthouse.com/cd/^dji.html

THURSDAY

Thursday is pretty much all about the CPI and how stocks react to a reading that in all likelihood won't show the same kind of improvement as the PPI. If it does we would likely see a surge early that would create some windburns with the rush. Even with that there would likely be some profit taking after such a move. Thus we would use a rush higher to bank some more gain.

The more likely result is that the CPI is in the same range as before and the market will have to reconcile the continued inflation pressure and the Fed's grave concern about it. The likely conclusion: the Fed is not going to cut rates but it is likely to leave them steady in the hope that inflation will, by the turn of the year, start to soften. Thus even if CPI is in line at 0.2% on the core the market can deal with it. May not jump up with joy but it can deal with it.

In any event, we will be looking for opportunity to take some gain when the opportunity presents. On an upside surge we will let it run then take some off the table on those positions that have put in good runs. There is nothing to indicate that the run is over, particularly with the breakouts from NASDAQ, SP600 and SOX, and thus while we will protect gains, particularly on option plays, any pullback will likely provide more upside entry points once again.


Support and Resistance

NASDAQ: Closed at 2442.75
Resistance:
2477 from January 1999
2493 is an interim peak from February 1999

Support:
2412 from June 1999 low
2384 is an interim peak from January 1999
The 10 day EMA at 2395
2379 is the October high.
2376 is the April high, the former post-2002 high
The 18 day EMA at 2375
2368 is the early October handle high.
2333 is the top of the Q1 2006 trading range (the January and mid-March 2006 highs)
2316 from interim tops in January and March 2006 trading range
The 50 day EMA at 2312
2300 represents some price support

S&P 500: Closed at 1396.57
Resistance:
1398 is a low from January 2000
1401 is a low from April 2000

Support:
1390 is the October high.
1389 is a low from November 1999
The 10 day EMA at 1384
1378 is a low from May 2000
The 18 day EMA at 1378
1371 to 1373 is the December 2000 peak and the January 2001 peak
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February 2002 low at 1360.
1354 from the early October consolidation
The 50 day EMA at 1354
1339 is the late September closing high
1334 is an October 1999 peak
1326.70 is the May 2006 high
1324 to 1329 from the October 2000 lows.

Dow: Closed at 12,251.71
Resistance:
8% above its 200 day SMA. Has been struggling since it hit near 8% above that level previously in late October. Tends to start about 10%, so this is a bit early but it has been a long run.

Support:
October high is 12,167
The 10 day EMA at 12,146
The 18 day EMA at 12,097
The 50 day EMA at 11,879
11,865 from the early October consolidation
11,750.28 is the prior all-time high
11,723 is the January 2000 closing high
11,670 is the May intraday high
11,642 is the May 2006 closing high
11,488 is the early September high.

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

November 13
Treasury Budget, October (2:00): -$49.3 actual versus -$47.0B expected, -$47.3B prior (revised from -$47.4B)

November 14
Retail sales, October (8:30): -0.2% actual versus -0.4% expected, -0.8% prior (revised from -0.4%)
Retail ex-autos (8:30): -0.4% actual versus -0.3% expected, -1.2% prior (revised from -0.5%)
PPI, October (8:30): -1.6% actual versus -0.5% expected, -1.3% prior
Core PPI (8:30): -0.9% actual versus 0.1% expected, 0.6% prior
Business inventories, September (10:00): 0.4% actual versus 0.5% expected, 0.6% prior

November 15
NY Empire PMI, November (8:30): 26.7 actual versus 14.0 expected, 22.9 prior
Crude oil inventories (10:30): 1.28M actual, 435K prior
FOMC minutes, Oct. 25 (2:00)

November 16
CPI, October (8:30): -0.3% expected, -0.5% prior
Core CPI (8:30): 0.2% expected, 0.2% prior
Initial jobless claims (8:30): 310K expected, 308K prior
Net foreign purchases, September (9:00): $71.0B expected, $116.8B prior
Industrial production, October (9:15): 0.3% expected, -0.6% prior
Capacity utilization, October (9:15): 82.0% expected, 81.9% prior
Philly Fed, November (12:00): 5.0 expected, -0.7% prior
Housing starts, October (8:30): 1.680M expected, 1.772M prior
Permits, October (8:30): 1.625M expected, 1.638M prior

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

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Tuesday, October 31, 2006

Foreign markets fade on US GDP report, but US markets melt higher after weaker start

SUMMARY:
- Foreign markets fade on US GDP report, but US markets melt higher after weaker start.
- September PCE still not backing off much as consumers make more, spend less.
- October like September posts another gain, trying to set up for another move.

After Friday selling market overcomes a soft start, finishes mostly positive.

Stocks nursed a hangover from the Friday dump lower on the GDP and chip/PC story out of Taiwan, and futures were lower accordingly. Japan was down 2% and Europe was lower as well on the weak US report. WMT reported same store sales +0.5%, well off the 2% to 5% expected and the weakest showing in six years. Personal income was up more than expected, but spending was lower, barely scratching positive. Lacker was out after his last dissent stating consumer spending looks good. At least he is predictable, holding his line of reasoning regardless of what the data says.

Stocks took their lumps early with the indices fading below the Friday close, but the selling never got out of hand. Stocks bottomed within the first hour and began a drift higher pretty much into the close. Lower oil helped (58.38, -2.39) as always, giving stocks a reason to rise even when the buyers lacked any real strength. Volume was low and breadth was modest, but after the early pressure they drifted higher. It was basically a cessation of selling pressure that allowed stocks to revert to the trend, and that is still up.

Technically it was a better session of course, but as noted, it lacked much power. The low to high intraday action resumed once the sloppy early action abated and the sellers gave up. NASDAQ and SOX showed some renewed leadership with some individual solid moves, but they were hardly plowing new ground, still closing below the recent highs. There were some bounces in good, leadership quality stocks as noted, but mostly they are still setting up after NASDAQ tried the April high air and faded back. Indeed, NASDAQ remained below that April high it cracked last week, and it likely needs more work before it is ready to try again given it was pushed back rather quickly. Overall the bullish patterns remain in effect, though DJ30 and SP500, both still quite extended, struggled once more.

An interesting theme Monday was the rather bearish attitude expressed by most commentators. We heard 'overbought' quite a bit along with too many bulls and too long without a significant correction. Overbought is a relative term, but the latter two are both true. Bulls are getting higher, rising toward that 55% level considered bearish. The NYSE large caps have rallied since the July low and DJ30 is putting the moves on a 10% rise above the 200 day SMA. That suggests things are getting overdone.

At the same time all of that bearishness suddenly cropped up, and as we noted in the pre-market alert, even with the high bullishness among investment advisors, that sudden rush to the 'overbought' side of the ledger was in itself near term bullish. We note that it did not take much selling last week to jump the put/call ratio on CBOE over 1.0 on the close. While the overall view of the financial markets is getting more bullish with the average investor (at least 5 people last week started conversations with me with 'well, the market is up nicely, isn't it?'), there is still a hangover from the bear market. As soon as there is any hint of selling out come the comments that the run is over, time to clear out, etc. For now the market has not shown the kind of distribution that would suggest something serious is afoot; the market could easily consolidate more here, but again, at this juncture it is not broadcasting trouble.

The election might cause some bumps this week as investors try to figure out just how many seats the Dems win and how much to discount the changed rhetoric from Pelosi, Rangell and friends ('don't believe what I have done the past six years, believe what I am saying right now'), but as of yet the market is not showing the kind of choppy distribution that gets you on high alert for a decline. NASDAQ and its fight at the April high will remain the key battle point near term, and while techs were up Monday, they still look as if they have more work before they can really break higher regardless of the sentiment.


THE ECONOMY

September incomes up, spending falls, but still solid when adjusted for inflation.

Incomes rose 0.5% (0.3% expected) while spending rose a less than expected 0.1% (0.3% anticipated). When combined with the WMT report of weak weekly same store sales that fueled the slowdown talk and indeed the general bearish attitude to start the week.

Funny thing about numbers, however, is that you can look at them from many different ways and as we often see, the headlines often don't tell the story, at least not the one worth telling. Spending was down in part because of lower prices for gasoline, and when adjusted for inflation spending rose 0.4%. Many economists commented after the numbers that the results showed healthy spending that was not shutting down as many hypothesized due to slowing housing price gains and even housing price losses.

PCE drops modestly from August, still 'discomforting' to Lacker.

There was no major continental shift in the second of the measures of prices the Fed watches, but it was lower. The core PCE for the month rose 0.2%, less than the 0.3% in August and up 2.4% year over year. That was also down, falling from the 2.5% reading in August.

Lower, but not low enough for the Fed's designated protagonist Lacker. He was speaking Monday again, and noted that inflation was still 'discomforting.' Lacker has dissented the Fed's pause the past three meetings, and remains opposed to the current policy given his view on how inflation runs its course. Many said after the Friday GDP report that Lacker was dead wrong, and while we think he is as well, it is not for the same reason. Inflation doesn't decline because output declines; as McTeer noted, increased output helps reduce inflation pressures.

Declining GDP does not mean inflation will automatically follow; that is the common misconception, just as a rising economy fosters inflation. As seen in the 1980's and 1990's and the early 1960's, that is just not the case. Indeed, while those were upside years with low inflation, the economy showed the flip as well, i.e. the back breaking high inflation of the 1970's when the economy was stagnant, when the US was supposedly past its prime and no longer a world economic power.

We have noted the past month that the Fed May talk the PCE and CPI as its primary indicators, but it does not appear to be walking that walk. Monday we noted a few economists suggesting the same thing, i.e. that the Fed may just not put as much weight on this as it indicates. Remember, those were Greenspan pets and in order to form a more perfect transition, Bernanke stated he would follow the Greenspan policies. As we have noted, the pause when the Greenspan indicators were on the rise is not something Greenspan would do, and thus we conclude that the Fed is really looking elsewhere, easing the markets into its view of the world of monetary policy. At some point it will have to start showing its hand; indeed, it may have started just that with Poole talking about the Fed needing to follow markets in its policy decisions. A small step, but the start is always a small step.


THE MARKET

MARKET SENTIMENT

VIX: 11.2; +0.4
VXN: 17.99; +0.58
VXO: 10.65; -0.08

Put/Call Ratio (CBOE): 0.82; -0.21. Dropped back quickly, but again we note how easy it was for the ratio to jump back above 1.0 on the close at the first sign of any selling. Despite the bullishness that is now seeing the retail investor return, the ghosts of bursting bubbles and bear markets past are quick to rise in the investor psyche.

Bulls versus Bears:

Bulls: 52.7%, up modestly from 52.2% where it held for 2 weeks. Still advancing toward that 55% level considered bearish. Up from 49.5% and 47.4% before that. This has caught the April high and is moving closer to the January peak at just over 60%. 55% is considered a bearish indication.

Bears: 30.1%. Actually rose a bit from 30.0% as bears hold near 30% after dropping rather sharply from 35.4% before that and the 37.1% hit in July (the highest level in this entire cycle, easily clearing the 34.4% hit in late June back when bulls and bears kissed, just missing a crossover). It is still well above the 20% level considered bearish, and if it holds at a high level even as bulls move higher, it acts as a governor on the bullishness. Hit a new post-2002 high in that late June move, eclipsing the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005).

NASDAQ

Stats: +13.15 points (+0.56%) to close at 2363.77
Volume: 1.761B (-22.6%). Volume fell off the map, coming in below average as NASDAQ opened lower and then rebounded for a modest gain. The lower volume on the selling is good, but the low trade as it rebounded shows no real buying interest, just a lack of sellers Monday. That indicates NASDAQ most likely still has some work to do before it can make a run at the April high stick.

Up Volume: 1.308B (+540.414M)
Down Volume: 429.096M (-1.064B)

A/D and Hi/Lo: Advancers led 1.22 to 1. Modest is about the only way to describe this action.
Previous Session: Decliners led 2.02 to 1

New Highs: 120 (-47)
New Lows: 38 (+2)

The Chart: http://www.investmenthouse.com/cd/^ixic.html

NASDAQ bounced right back after a lower open, posting a modest gain on below average volume. It did not charge back from the Friday dump lower that gave back Thursdays break above the April high (2376), but it did rebound above the near support at the 18 day EMA. About all you can say about that is that it stemmed that selling attempt. Not a bad thing obviously, but the lack of volume indicates NASDAQ may have some more work to do to clear that April high and make the move stick. As noted above, this is the next key battle for the market as NASDAQ tries to join DJ30 and SP500 with a new post-2002 high. It had it in its hands Thursday but could not generate any additional momentum in the face of the Taiwan report about motherboard sales. If it can break higher quickly on strong volume again, that would be a solid positive as it would affirm the same reasons NASDAQ is at this crossroads in the first place.

SOX (+1.13%) rebounded as well, leading the market in its percentage gain. That is often the case, up or down, given its higher beta. Nonetheless it too held where it had to (the 50 day EMA at 451) and bounced, showing some good individual moves as it did. As with NASDAQ it has to show more, but also, it is showing enough as it held the 50 day EMA in the selling from last week and continued working on its base. That is exactly what we want it to do for now.


SP500/NYSE

Stats: +0.59 points (+0.04%) to close at 1377.93
NYSE Volume: 1.427B (-8.02%). Volume fell well below average as the large and small caps posted modest gains. No real volume to drive stocks higher but also no real interest in selling.

Up Volume: 669.318M (+281.873M)
Down Volume: 730.467M (-417.053M)

A/D and Hi/Lo: Advancers led 1.16 to 1. Basically flat on the session, matching the action.
Previous Session: Decliners led 1.82 to 1

New Highs: 163 (-92)
New Lows: 19 (+1)

The Chart: http://investmenthouse.com/cd/^gspc.html

SP500 was under pressure early along with the other indices, but held near the 10 day EMA (1374) on the low and bounced modestly. Not much of anything other than a test of the continuing uptrend and a hold at support. It remains extended but still in that strong uptrend as money continues to chase into large caps.

SP600 (+0.39%) struggled early, testing down toward the 18 day EMA (387) on the low and rebounding nicely to hold above the 10 day EMA (390) and post a modest gain along with the SP500 and SP400. The small caps broke higher on Thursday and then gave it back similarly to NASDAQ. Still solid, still looking for another break higher over that earlier October high (392.82).


DJ30

The blue chips came back from a test below the 10 day EMA (12,062), posting a modest loss on very low, below average volume. No distribution, just another test of the 10 day EMA that has acted as support for the past 5 weeks; before that the 18 day EMA also acted as support. It may make the break below the 10 day EMA that has held the latter part of this run, and if it does that will be noteworthy. The 18 day EMA (11,986) would still likely try to hold the move higher. That certainly would not jeopardize the trend unless the 18 day fell into as well.

Stats: -3.76 points (-0.03%) to close at 12086.5
Volume: 206M shares Monday versus 277M shares Friday.

The chart: http://www.investmenthouse.com/cd/^dji.html

TUESDAY

Employment cost index, Consumer confidence, Chicago PMI, and trick or treat. Monday stocks for the most part responded to the Friday worries about technology with a shoulder shrug and a drift higher. There was no conviction buying, but there was no selling with force either. Instead, stocks were shaking off the fog of a strong break higher Thursday followed by a quick fade Friday on growth worries mainly in tech. Even with that, NASDAQ remains perched near the April 2006 high, the post 2002 watermark (outside the Thursday close where it eclipsed that level for all of one day). That remains the key point for this most recent move as NASDAQ, after lagging the large cap NYSE stocks, is trying to join the fight, and the near term move for the market turns on whether it is successful.

As noted above, there may be some near term bumps from the election as the market really has to come to grips with a possible power change in Congress. To this point it has not only weathered that prospect, but it has prospered under it. The idea seems to be if the Dems take the House but the Reps can hold the Senate, some sort of standoff will ensue. There is this idea that gridlock is best for the market, but that is really a bogus analysis. They point to the 1990's under President Clinton as the example, but that was not gridlock. Gingrich on the republican side worked with Clinton and they cut spending, cut taxes on capital gains, and helped keep the prosperity rolling for a bit longer. The higher marginal tax rates ultimately played a role with the Fed draining money supply to choke off the economy, but the point is that it was not gridlock but actual compromise in order to move forward. If there is gridlock this time around what happens? The tax cuts expire and the Dems get what they wanted without taking affirmative action to look like tax hikers. As always, it is too easy to pigeon hole events, and often that analysis is wrong.

In any event, October is winding down and the market has escaped thus far with gains, just as it did in September. There was some last day selling in September and the first session of October, but that was just about it. That puts the market, as we heard all morning, overbought and overwrought. Somehow the market is not hearing it. This is all occurring because money keeps chasing stocks higher. At some point there will be a re-jiggering of this by on every pause mentality and a steeper correction will occur. If those chasing decide to wait for a pause, the pause will likely occur. The key is how far down they are willing to let stocks fall before they move back in.

There is a key mindset driving stocks higher right now as well, and that is the 'traditional' run to the year end. Of course that is often preceded by a September and October that show a bit of selling, something not seen in those months in 2006. Thus tradition can be upset by earlier success where there is usually some selling. It is a pickle, but as we have noted before, you don't want to buy DJX or OEX right now as they are indeed overextended. On the other hand, their pullback may be NASDAQ's breakout as money rotates around the market. Indeed, there has been no sign of vigorous selling that would indicate money leaving the market. Thus we anticipate that if money comes out of DJ30 and SP500 it will find its way into the techs and small caps until the big money buyers decide the large caps have pulled back enough to make the large cap industrials 'values' again.

Tuesday and the rest of this week we remain looking at NASDAQ and the SP600 and how they react around the recent highs. NASDAQ hardly looked ready to take on the April high Monday, rebounding yes, but not coming close to the April high or the kind of volume it will need to make the break stick. We saw some leaders move higher Monday, and we will continue watching those; as more start to make the break higher on volume, you can start to infer the indices will follow. That is why we typically are buying into the leaders as they break higher even though the market overall may be lagging that move initially. As long as the overall market continues showing healthy action we can step out ahead of things with some confidence. We were doing that some Monday and we will continue to do so Tuesday and then go have some tricks and treats.


Support and Resistance

NASDAQ: Closed at 2363.77
Resistance:
2368 is October handle high.
2376 is the April high, the post-2002 high. Just cracked through this level.
2384 is an interim peak from January 1999
2493 is an interim peak from February 1999

Support:
The 10 day EMA at 2351
The 18 day EMA at 2334
2333 is the top of the Q1 2006 trading range (the January and mid-March 2006 highs)
2316 from interim tops in January and March 2006 trading range
2273 is the recent September peak
The 50 day EMA at 2270
2250 is the March 2006 closing low.
2234 is the June 2006 peak (intraday)
2232 is the August 2004/April 2005 up trendline
The 200 day SMA at 2229

S&P 500: Closed at 1377.93
Resistance:
1389 is a low from November 1999
1398 is a low from January 2000
1401 is a low from April 2000

Support:
1378 is a low from May 2000
The 10 day EMA at 1374
1371 to 1373 is the December 2000 peak and the January 2001 peak
The 18 day EMA at 1366
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February 2002 low at 1360.
1339 is the late September closing high
The 50 day EMA at 1338
1334 is an October 1999 peak
1326.70 is the May 2006 high
1324 to 1329 from the October 2000 lows.

Dow: Closed at 12,086.50
Resistance:
Still climbing up the 10 day EMA but still struggling a bit. Back down to 7.5% above the 200 day SMA. It tends to begin struggling when it gets to the 10% level where it typically will start to falter.

Support:
The 10 day EMA at 12,062 has acted as support all the way up. When it breaks on the close that is noteworthy.
The 18 day EMA at 11,986. Likely to hold at least temporarily if the 10 day EMA breaks
11,750.28 is the prior all-time high
The 50 day EMA at 11,730
11,723 is the January 2000 closing high
11,670 is the May intraday high
11,642 is the May 2006 closing high
11,488 is the early September high.

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

October 30
Personal income, September (8:30): 0.5% actual versus 0.3% expected, 0.4% prior (revised from 0.3%)
Personal spending, September (8:30): 0.1% actual versus 0.3% expected, 0.2% prior (revised from 0.1%)

October 31
Employment cost index, Q3 (8:30): 0.9% expected, 0.9% prior
Chicago PMI, October (10:00): 58.0 expected, 62.1 prior
Consumer confidence, October (10:00): 107.8 expected, 104.5 prior
Trick or Treat (6:00 on)

November 1
Construction spending, September (10:00): 0.0% expected 0.3% prior
ISM, October (10:00): 53.0 expected, 52.9 prior
Crude oil inventories (10:30): -3.2M prior

November 2
Initial jobless claims (8:30): 310K expected, 308K prior
Productivity, Q3 preliminary (8:30): 1.1% expected, 1.6% prior
Factory Orders, September (10:00): 3.6% expected, 0.0% prior

November 3
Non-farm payrolls, October (8:30): 125K expected, 51K prior
Unemployment rate (8:30): 4.6% expected, 4.6% prior
Hourly earnings (8:30): 0.3% expected, 0.2% prior
Average workweek (8:30): 33.8 expected, 33.8 prior
ISM Services (10:00): 54.5 expected, 52.9 prior

End part 1 of 3 Begin part 2 of 3

New plays contained in part 3

CONTINUING PLAYS

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LEGEND FOR CONTINUING PLAY TABLE

DATE: date play first appeared on report.

PLAY: Denotes the type of pattern or play.
Upside play types: Asc Tri=Ascending triangle; BO=Breakout; Cup=Cup base; Cup hdl=Cup w/handle; DB hdl=Double bottom w/handle; Dbl btm=Double bottom; Flat=Flat base; FlyPlat=Flying Plateau; Pennant=Pennant; Rv H&S=Reverse head & shoulders; Saucer=Saucer base; Test 18=Testing 18 day MVA; Test 50=Testing 50 day MVA; Test BO=Testing the breakout (could be 10 day MVA test, etc.) Downside play types: CCall=Covered Call; Dsc Tri=Descending triangle; Dbl Top=Double top; H&S=Head & shoulders; Put (generic downside);

PIVOT=Buy point

Tgt=Target stock price for the play. Applies to stock and options.

Vol=Volume for the most recent session.

TgtV=Target volume to enter the play.

Stop=Stop advisory point. This is advisory and we may or may not exit a play if it hits this level depending upon Market conditions.

PLAY STATUS: Buy not hit (stock has not hit buy point); Buy not issued (stock has hit buy point but did not enter due to weak volume, poor intraday action, poor Market action); Current (ongoing play already entered); Entered today (entered the play that session); Exited (closed the position); Target hit (play hit initial target; will note if took all or partial gain or let run further); Trailing stop (exited using a trailing stop loss).

Upside Plays
Stock Date Play Close +/- Pivot Tgt Vol TgtV Stop
AAPL 10/12 DB hdl 80.42 +0.01 75.55 88.00 18M 32M 79.08

AAPL 08/21 Cup hdl 80.42 +0.01 68.12 78.00 18M 40M 78.35
Current. Bounced off the 10 day MVA on low volume. Moving up after routine pullback.

AKAM 10/21 Test 50 45.81 -0.64 47.20 55.95 5.9M 7M 47.45
Current. Gapped down showing a doji on the 50 day MVA on slightly above average volume. Should be ready to bounce from here

AOB 10/24 FlyPlat 7.20 +0.20 7.29 8.94 1.1M 700K 6.88
Current. Solid volume as AOB bounced off the 10 day EMA after the Friday test.

BEAV 10/24 DB hdl 26.11 +1.05 25.77 29.65 3.3M 1.4M 24.95
Entered today. Big gap up for a nice gain showing a doji on very strong volume surge. Filled the gap intraday. Came off the day's high of 26.94.

BONT 10/03 Cup hdl 35.56 -0.59 32.20 38.45 393K 370K 35.95
Current. Fell to the 18 day EMA on rising trade. This is where it has to hold the pickles.

BRCM 09/25 Test 50 29.94 +0.75 30.96 35.68 14M 17M 29.32
Current. Tested the 18 day MVA intraday and rallied back for a great move on lower below average volume. Moving up after testing support at 27.

BWS 09/21 Cup 39.32 +0.54 35.56 40.88 104K 296K 38.55
Current. Bounced off the 10 day MVA for a nice gain on low volume. Continue with the uptrend.

CHIC 10/14 FlyPlat 28.76 +0.22 28.94 33.95 134K 700K 27.48
Buy Not Issued. Tested the 18 day MVA intraday and rallied back on low volume. Meeting some resistance at 29.

CMG 10/23 Cup hdl 59.05 +0.63 57.12 66.98 720K 1M 56.98
Current. Tested the 10 day MVA intraday and rallied back on low volume. Continue with the uptrend.

CMRG 09/06 FlyPlat 14.92 +0.31 11.83 14.00 369K 460K 14.32
Current. Came back from the high volume Friday drop, rebounding and holding the high. Still solid.

COH 10/21 Cup hdl 40.00 +0.99 36.11 41.95 4.7M 4.5M 38.45
Current. Great move up the 10 day MVA on much stronger above average volume.

CRM 10/18 Test BO 39.78 -0.33 41.44 49.45 1.5M 2.2M 39.35
Exited.

CRM 09/12 Cup hdl 39.78 -0.33 36.61 42.95 1.5M 3M 39.48
Trailing Stop. Rebounded to hold the 18 day EMA on the close after undercutting that level early.

CWTR 09/16 Cup hdl 30.52 +0.31 29.16 35.35 664K 1.6M 29.52
Current. Continue to trend higher on low volume.

DIOD 10/23 Test BO 43.02 +0.26 44.55 52.95 351K 699K 42.38
Buy Not Hit. Tested support at 42 and rebounded though volume remained low.

FORR 10/11 Cup hdl 31.82 +0.40 29.94 34.78 108K 189K 30.39
Current. Continued higher though volume fell way off after the strong trade Thursday and Friday.

FTEK 10/14 Test BO 19.85 -0.81 18.35 21.98 489K 245K 19.32
Current. Faded from the Friday doji after gapping higher. Volume was lower though still well above average. Coming back to test the 10 day EMA.

GES 10/28 FlyPlat 56.15 +1.06 56.78 65.45 401K 850K 53.92
Buy Not Hit. Still low volume as it moves laterally in the plateau.

GME 10/21 Test BO 50.89 -0.75 52.21 60.45 1.3M 1.7M 50.22
Buy Not Issued. Pullback tapping 50.46 at the intraday low and rallied back holding the 10 day MVA on rising, but average volume. Meeting some resistance at 52. Still in the pattern.

GME 10/11 Cup hdl 50.89 -0.75 49.84 58.95 1.3M 2.1M 49.65
Current. Continues working laterally over the 10 day EMA as volume moved up to average.

GYMB 10/18 Test BO 46.65 -0.56 46.35 52.95 782K 1.6M 46.24
Current. Pullback holding the 10 day MVA on low volume. Typical pullback.

GYMB 09/19 Cup hdl 46.65 -0.56 37.52 44.68 782K 1.4M 44.22
Current.

HMSY 10/21 Cup hdl 13.53 -0.15 14.41 17.38 141K 331K 13.39
Buy Not Hit. Pullback holding the 10 day MVA on lower below average volume. Still forming the handle.

HOC 10/10 Dbl btm 47.73 -0.41 46.82 54.50 530K 1.2M 47.11
Current. Pullback tapping 47.16 at the intraday low and rallied back holding the 10 day MVA on low volume. Looking for a rebound from here.

HPOL 09/14 Test BO 6.68 -0.13 6.15 7.44 1.4M 330K 6.38
Current. Huge volume as it turned back some of the gains from Thursday and Friday. Not a breakdown by any stretch, but watching the trade as it comes back from that high.

IAAC 10/28 Test BO 29.80 +1.63 29.72 35.75 408K 358K 27.41
Entered today. Gapped higher on solid volume though closed off the high, unable to hold over 30. Would like to see it over there quickly.

ICE 10/18 Test 18 82.14 -2.32 83.64 94.95 1.5M 2.4M 80.32
Current. Pullback holding the 18 day MVA on rising volume. Should hold here and rebound.

IDCC 10/16 Cup hdl 35.99 -0.30 35.76 42.49 631K 1.4M 35.88
Current. Faded back to the 10 day EMA on the low but very low trade.

IM 10/25 DB hdl 20.64 +0.13 20.84 24.95 849K 1.5M 19.98
Current. Started lower but held the 10 day EMA on the low and rebounded for a gain albeit on lower, average trade. Par for the session.

INTC 09/26 Test 50 21.26 +0.16 20.51 24.75 39M 60M 20.89
Current. Low volume relief bounce from Friday. Critical time for INTC after failing to take out the early October high last week.

IO 10/05 Cup hdl 11.17 -0.01 10.77 13.00 416K 750K 11.18
Current. Nice doji that held the 10 day EMA on the close. Good low volume test and shakeout.

ISE 10/14 Cup hdl 51.96 +0.41 51.44 58.95 571K 833K 52.45
Current. Bounced off the 10 day MVA on low volume. Moving up after filling the gap.

IWM 10/24 Cup hdl 76.47 +0.33 76.20 79.25 50M 55M 75.77
Current. Gapped down at the open and rallied back on above average volume. Continue with the uptrend.

JCG 10/25 Test 18 30.90 -0.68 31.85 37.95 446K 400K 31.85
Exited.

JCG 09/30 Test BO 30.90 -0.68 29.94 35.55 446K 500K 31.95
Trailing Stop. Thought about hanging in with it but a bit too volatile even though a young stock and it was closing well off the 18 day EMA.

JCP 09/26 Asc Tri 77.06 +0.81 70.05 79.95 1.7M 4M 75.38
Current. Continue to trend higher on low volume.

LQDT 10/26 Test BO 17.62 -0.26 18.24 21.95 132K 200K 16.96
Buy Not Issued. Pullback on rising, but average volume. Typical pullback. Still in the pattern.

LTD 10/03 Cup hdl 29.45 +0.22 28.40 32.95 1.2M 3.1M 28.85
Current. Nice modest continued climb up the 10 day EMA. Volume still well below average.

MA 10/28 Flat 72.54 -0.10 73.11 8775.0 1.7M 2.3M 69.94
Buy Not Issued. Pullback testing the 10 day MVA intraday and rallied back showing a tight doji on low volume. Still in the pattern.

MDRX 10/14 Test BO 23.62 -0.52 24.20 28.38 770K 1M 23.62
Current. Gapped down and continued to move down below the 18 day MVA holding at some support on much lower, but average volume. Should rebound from here.

MDRX 09/19 FlyPlat 23.62 -0.52 22.31 26.55 770K 1.1M 23.62
Current. Gapped down and continued to move down below the 18 day MVA holding at some support on much lower, but average volume. Should rebound from here.

NICE 10/26 Test BO 30.82 +1.09 30.68 35.95 221K 300K 29.62
Entered today. Tested the 18 day MVA intraday and rallied back for a great move on rising volume.

NTLI 10/25 Cup 27.07 -0.16 27.62 31.95 1.7M 3.5M 26.38
Current. Volatile session tapping 28.48 at the intraday high, but gave it back on low volume. Still in good shape.

NVDA 10/03 Test 50 32.77 +0.39 28.26 32.50 7.9M 17M 32.32
Current. Bounced showing a doji on the 10 day MVA on low volume.

NVEC 10/14 Test 50 44.49 +4.44 33.75 40.00 1.9M 580K 42.45
Current. Great move up the 10 day MVA on excellent volume surge making a 52 week high.

OPSW 09/30 Cup hdl 9.14 -0.08 9.13 10.97 560K 950K 9.18
Current. Pullback holding the 18 day MVA on low volume. Looking for stock to rebound from here.

PLCE 10/11 Cup hdl 70.28 +0.76 66.56 76.75 729K 922K 68.31
Current. Continue to trend higher on strong volume surge.

PLCE 09/14 Test 20 70.28 +0.76 59.85 68.00 729K 800K 67.45
Current.

PRFT 10/19 Test BO 17.00 +0.05 17.31 20.74 482K 500K 16.35
Buy Not Issued. Pullback holding the 10 day MVA on stronger above average volume. Still in the pattern.

QSII 10/19 Cup hdl 42.42 +0.77 42.65 49.95 308K 426K 40.98
Current. Up but on low volume as it continues moving laterally over the 18 day EMA.

RNWK 10/05 Asc Tri 10.74 -0.17 11.67 13.98 1.4M 2.2M 11.11
Current. Managed to recover to hold the 50 day SMA on the close after a gap lower. This is its second test of this level with similar action. Needs to show the bounce here.

RVI 10/10 Cup hdl 17.22 +0.31 17.35 20.95 120K 500K 16.48
Buy Not Issued. Still working on the handle. Still.

SIGM 10/09 Cup hdl 20.42 +1.20 16.09 19.39 1.1M 928K 18.62
Current. Explosive move off the 10 day MVA on excellent volume surge making a new high.

SMSC 10/03 Cup hdl 31.25 +0.48 29.21 34.75 170K 504K 31.22
Current. Tested the 18 day MVA intraday and rallied back on low volume. Moving up after testing the 50 day MVA.

SMSI 10/18 Test BO 18.52 +1.63 17.77 21.38 2.7M 1.1M 16.75
Entered today. Tested the 10 day MVA intraday and rallied back for a great move on excellent volume surge.

SMSI 10/04 Rev HS 18.52 +1.63 15.23 17.98 2.7M 1.5M 17.77
Target Hit.

SPTN 10/24 Test BO 21.25 -0.02 20.85 25.38 150K 265K 19.98
Doji on the second day of the test of h lat week's break higher.

STLD 10/28 Cup hdl 60.05 -1.13 62.22 72.45 1M 2.1M 59.95
Buy Not Hit. Announced a split but had no traction on the session,
fading to test the 10 day EMA on continued below avg
volume.

SUPX 10/28 Test BO 44.70 +0.10 44.88 52.95 248K 250K 42.55
Buy Not Hit. Showing a doji on rising volume. Looking good.

TWGP 10/03 Test BO 35.70 +0.35 33.65 39.95 140K 250K 34.48
Current. Tapped 35.07 and rallied back on low volume. Moving up after testing the 18 day MVA.

UARM 10/19 Test BO 46.74 +0.12 45.85 54.95 600K 1M 45.95
Current. Showing a doji on the 10 day MVA on below average volume. Should continue to rebound from here.

ULTI 10/21 Test BO 24.89 +1.02 25.12 29.95 433K 287K 23.89
Buy Not Hit. Nice bounce on volume. Looks ready to make the breakout move.

End part 2 of 3 Begin part 3 of 3

Good Movers: BEAVA; BRCM; COH; IAAC; NICE; NVEC; SIGM; SMSI

Weekend play results:
GES: No volume
IAAC: Nice break higher
MA: Trying but not quite there
STLD: Announced a split, fell to the 10 day EMA
SUPX: Nice test still underway.

New Plays:

Upside:

Play Date: 10/30/2006
COL (Rockwell-Collins--$58.27; +0.37; optionable): Aerospace/defense
http://biz.yahoo.com/p/c/col.html
EARNINGS: 11-1-06 before the open
STATUS: Cup w/handle. Low, below average volume as COL continues to work laterally the past two weeks over the 10 day EMA (57.90). Nicely formed 6 month base that used the 200 day SMA (54.00) on the lows as support. Solid 6 to 4 accumulation in the base shows solid buying (6 up price weeks on rising volume to 4 down price weeks on rising volume). Money flow continues to move higher and we look for COL to make the breakout from this excellent pattern.
Volume: 568.6K Avg Volume: 693.755K
BUY POINT: $58.88 Volume=1M Target=$67.75 Stop=$57.24
POSITION: COL DL - Apr. $60c (52 delta) &/or Stock
http://www.investmenthouse.com/cd/col.html

Play Date: 10/30/2006
FCFS (First Cash Financial--$21.88; -0.29; no options): Credit services
http://biz.yahoo.com/p/f/fcfs.html
EARNINGS: Reported earnings 10-18-06
STATUS: Reverse head and shoulders. FCFS is bumping up against the breakout and a new all-time high, making what looks to be a higher low Monday with a tap toward the 18 day EMA (21.52) and a recovery to close above the 10 day. Nice, patient 6.5 month base from this stock that sports some of the top earnings growth rates in the market. Solid 6 to 4 accumulation in the base (6 up price weeks on rising volume to 4 down price weeks on rising volume) shows solid buying complemented by strong money flow rising ahead of price. Just waiting for the volume to jump as it makes the breakout move.
Volume: 196.079K Avg Volume: 306.548K
BUY POINT: $22.48 Volume=450K Target=$26.95 Stop=$21.35
POSITION: - Stock (no option chain)
http://www.investmenthouse.com/cd/fcfs.html

Play Date: 10/30/2006
JSDA (Jones Soda--$9.91; -0.28; no options): Soft drinks
http://biz.yahoo.com/p/j/jsda.html
STATUS: Cup w/handle. Working on a two week handle to its 22 week base, setting up nicely for the breakout toward a new all-time high. A new issue in November 2005, this is JSDA's first big base. Very nice action showing positive accumulation. Monday it reached down to the 18 day EMA on the low (9.55) and snapped back to close above the 10 day EMA. Good shakeout that you want to see during the handle formation. Now we just wait for the breakout move.
Volume: 320.524K Avg Volume: 223.854K
BUY POINT: $10.41 Volume=336K Target=$12.49 Stop=$9.68
POSITION: - Stock (no option chain)
http://www.investmenthouse.com/cd/jsda.html

Play Date: 10/30/2006
VTAL (Vital Images--$31.50; +0.86; optionable): Software
http://biz.yahoo.com/p/v/vtal.html
EARNINGS: 10-31-06 before the open
STATUS: Cup w/handle. Earnings are out before the open and volume was up Monday as VTAL moved off the 50 day EMA (30.15), setting up for the breakout from its 7 month base. Excellent action setting it up for a new all-time high. Looking for earnings to give it a boost higher and give us a buy point.
Volume: 215.8K Avg Volume: 130.291K
BUY POINT: $32.12 Volume=200K Target=$38.58 Stop=$30.05
POSITION: HXQ DF - Apr. $30c (65 delta) &/or Stock
http://www.investmenthouse.com/cd/vtal.html

Continuing plays ready to move:

Play Date: 10/21/2006
ULTI (Ultimate Software--$24.89; +1.02; no options): Internet software
http://biz.yahoo.com/p/u/ulti.html
EARNINGS: Reported 10-24-06
STATUS: Breakout test. ULTI surged out of a 5 month base in early October and then came back to test for two weeks, tapping at the 50 day EMA (23.36) on the low last week and bouncing. Volume rose Monday as it continued higher again. Excellent action that is ready to take it to a new all-time high.
Volume: 433.311K Avg Volume: 187.894K
BUY POINT: $25.12 Volume=287K Target=$29.95 Stop=$23.89
POSITION: - Stock (no option chain)
http://www.investmenthouse.com/cd/ulti.html


SUBSCRIBER PORTFOLIO: These are stocks subscribers suggest by vote that we put in a portfolio to track and move into the stocks if they perform well. If you have any suggestions for additions or deletions, email us. We don't cover them all each report, just when something interesting is developing.

AAPL, AKAM, CELG, DRIV, GME, GOOG, ISE, MA, MRVL, NVDA, WEBX

AAPL: Testing the 10 day EMA, holding that level for now.

CELG: Up after hours after a good session

ISE: Holding the 10 day EMA, looking ready to resume its move.

MA: Still looks ready

WEBX: Trying to hold the line at the 90 day MA.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

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Thursday, October 12, 2006

Tired market can't get past FOMC minutes, Cory Lidle plane crash

SUMMARY:
- Tired market can't get past FOMC minutes, small plane crash.
- FOMC minutes hark back to impatient Feds of old.
- Bond market a bit early on the rate cut rally.
- After trying to spark a rally Wednesday, chips are going to be a drag on lowered outlook

Market won't rise, won't sell.

Earnings had the market in a poor mood pre-market. Alcoa missed, Monsanto had some weak guidance, and DNA's strong report was questioned on some drug sales levels. North Korea was threatening another nuke test as well. With the FOMC minutes coming out in the afternoon, investors were not in the mood early on.

SOX, however, was trying to stir the pot. It was up early and jumped to a 2% gain, pulling NASDAQ along with it. SP500 and DJ30 struggled to advance, but moved higher as well. At 1:00ET, however, they peaked when the Fed's Lacker reiterated his Greenspan-like 'kill inflation at any cost' stance; Lacker wants to see inflation trending lower before the Fed stops hiking rates. That is very much Greenspan-like, but unfortunately it is the exact mindset that leads the Fed to overshoot 13 out of 15 times and send the economy into a tailspin.

On top of that the FOMC minutes came out and the theme was an inflation lament with some members trying out martyrdom with comments about the Fed losing its credibility if it didn't hike while inflation was outside the Fed's comfort range. That tossed cold water on the markets, equity and debt. Bonds sold, stocks sold. The market is tired of the Fed beating a dead horse; commodities have peaked, energy has peaked, accurate leading indicators show inflation has peaked. It is amazing how the Fed gets stuck in a perceptions game ('oh, the markets may think we are pussies if we don't hike rates until the economy stalls') versus doing its job.

In any event, stocks took an immediate hit, but they were on the comeback when a small airplane crashed into the twentieth floor of an apartment tower on 72nd street in NYC. The initial fear in NYC is always terrorism, and that pushed stocks lower. It became apparent fairly quickly, however, that it was a terrible accident as opposed to anything nefarious. The market rebounded, but the extra kick down on the plane crash news kept the indices from turning positive by the close. SOX was the holdout, but from the looks of some strong after hours earnings yet weak guidance from LRCX, it won't be the holdout on Thursday, at least to the upside.

Technically it was another nonevent for the most part. DJ30 and SP500 continued their lateral moves, refusing to give back any gains, tapping the 10 day EMA on the low and rebounding. NASDAQ showed a bit of the same action, once more stalling near 2320 on the high. Volume was up on both indices, a significant jump on NASDAQ. That shows a bit of churn after breaking higher last week and bumps against the top of the Q1 range. Some of that volume was attributable to the semiconductors taking the lead, but that cannot account for the entire increase. That is a bit of a concern, but overall the action remains solid. A bit overextended, but solid. It remains to be seen if the weak guidance by LRCX that sank the chip equipment makers late in the after hours session (after an early surge higher) will prove to be the final straw that sends some tired indices lower.


THE ECONOMY

FOMC minutes reflect recent hawkish Fed speeches.

Bernanke is the moderate, at least what we see in public. The September FOMC minutes did not reflect his rather sanguine commentary earlier this week, instead addressing what we heard from his underlings all week regarding inflation being too high and the Fed ready to hike if necessary. All in all it was a hawkish statement, at least for financial markets tired of having the Fed run roughshod over them for two years.

The Fed focused on two primary areas: housing and, of course, inflation. The Fed remains concerned that the housing slowdown will have deleterious effects on the economy, but it noted that the housing slide was not having spillover effects on the rest of the economy. It appears that though the Fed is concerned about housing, the fact that inflation is not dropping as quickly as some want appears to be trying many FOMC members' patience.

The Fed spent a lot of time on inflation, never a good signal. While prices had moderated since the spring, thanks mainly to energy, the Fed still saw inflation (based on its indicators) running beyond the Fed's stated comfort zone. That is a problem because in stating a level it wants inflation it has boxed itself in. Several members worried that the Fed would lose credibility if it did not attack inflation while it was above its target level. That is very bad news. When the Fed starts worrying about how it is perceived in doing its job as opposed to actually doing its job, it tends to make grievous errors. It starts casting one eye on the mirror instead of having both eyes on the ball. It tends to miss obvious signs of problems when it just focuses on inflation and its perception. We have said it before, the market doesn't care how stately the Fed looks; it cares about the results. Thus the financial markets responded favorably when the Fed paused despite perceived higher inflation. It was the right thing to do.

In an ironic twist for those complaining about the job market, the Fed noted labor shortages pushing up wages. Geez. The economy was trying desperately to generate some jobs all during the expansion according to many pundits, and with job creation at 130K per month it hardly seems to be draining the workforce. Could it be the Fed is looking at the unemployment rate, i.e. the household survey that it discredited during the Greenspan years? Talk about losing credibility. You find yourself saying 'there they go again' as they switch positions based on what they want to say. Jobless claims near 300K were bane to the Greenspan Fed but were no big deal in this recovery. All of the sudden we get labor shortages out of modest monthly jobs growth? As with the Greenspan, this Fed now appears to be looking for excuses. Again, that is a bad sign and rather idiotic for a Fed saying it is concerned about its credibility. How Greenspan-like. How disconcerting.

Looking at the whole release you get the feeling the thing keeping the Fed at bay was declining energy costs. Prices overall had declined but not as fast as they wanted. If oil had not tanked along with gasoline they might have raised, at least based on what was in the minutes. We don't know what exactly Bernanke is saying or not saying. The talk certainly reminded us of the Greenspan days when the Fed would get impatient and not let its policy decisions work, or at least not give them time to work before moving again. This is a common theme in Fed action, and what often leads to the overreaching that many Fed members were concerned about in late 2005 and early 2006.

It is in rather sharp contrast to Bernanke's public appearances, his stated monetary policy theories, and indeed the comments made by Poole this week about following the financial markets. Perhaps the Fed is trying to maintain its ability to pause even as inflation remains above the comfort level. Talk a tough game and try to stick to the plan. The Fed is assuming that people will think it is a slacker if it is not tough. Why not voice the plans, i.e. say that forward inflation gauges show inflation peaked and they are just letting things work through the system? That is what the Fed is doing with this pause, but with the PCE and CPI rising, it fears it will be viewed as weak. It apparently does not want to abandon the PCE and CPI as their main indicators, at least publicly.

Bond market retrenches some on FOMC minutes hawkish tone.

The bond market sold on the news as interest rates jumped (4.85% 2 year versus 4.78% 10 year) and the inversion widened to 7 points. Modest still, but also close to becoming the entrenched inversion where size does not matter (where have we heard that before?).

The hawkish tone forced the bond market to retrace some of its rate cut gains. Some of the Fed-speak turned a bit mellow this week (Yellen, Bernanke), so the hawkish minutes tone might be overdone a bit, but the bond market still gave back gains when the report issued.

The bond market did get ahead of the Fed based on history. After the Fed pauses it takes on average 7 months to start cutting rates. It paused in August, so that would make it early 2007 (February) before the Fed would cut. In 2000 the Fed hiked last in May and then cut rates at the start of January 2001; seven months. This is the 'usual' case because the Fed goes too far with its cuts as it tries to get inflation to fall faster as Lacker wants and others echoed in the FOMC minutes. It is absurd to think that rate cuts in August would get inflation to fall faster in October, but that simply underscores the usual Fed SOP, i.e. where it gets impatient and loses sight of history and its game plan. It continues to hike and typically increases the intensity. By that time, however, it is way too late to stop the slowdown. Thus Lacker, new to the Fed, is showing he is an amateur because he wants to see inflation falling before stopping hiking. Again, that would ensure a major economic slowdown. Just open the history books and check it out. When you are finished, highlight it and send it to the FOMC members.


THE MARKET

MARKET SENTIMENT

VIX: 11.62; +0.1
VXN: 18.51; -0.35
VXO: 11.08; +0.22

Put/Call Ratio (CBOE): 0.92; +0.09

Bulls versus Bears:

Bulls: 49.5%. Big jump from 47.4% where it paused for 2 weeks. Up from 42.1% and drawing closer to the 55% level considered bearish. Still below the peaks from January and April, and well below the 55% level considered bearish, but it is heading that way and getting too high.

Bears: 33.3%. Down from 33.7% where they held for 2 weeks as well. Down from 35.4% before that, but still well above the 20% level considered bearish. The 37.1% hit in July was the highest level in this entire cycle, easily clearing the 34.4% hit in late June back when bulls and bears kissed, just missing a crossover. Hit a new post-2002 high in that late June move, eclipsing the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005).

NASDAQ

Stats: -7.16 points (-0.31%) to close at 2308.27
Volume: 2.042B (+14.31%). Volume moved up sharply, rising above average once again after a low volume ascent by the index following last Wednesdays breakout. Not a great power move higher. Then a big doji Wednesday on sharply higher volume. Definitely some churn as NASDAQ bumps at the top of the Q1 range. Going to keep a close watch on this as the move progresses.

Up Volume: 840.059M (-79.291M)
Down Volume: 1.063B (+322.859M)

A/D and Hi/Lo: Decliners led 1.47 to 1
Previous Session: Advancers led 1.1 to 1

New Highs: 64 (-25)
New Lows: 19 (+3)

The Chart: http://www.investmenthouse.com/cd/^ixic.html

NASDAQ rallied toward the top of its Q1 range once more (2333, 2322 on the Wednesday high), but again it faded back. It was positive with a solid move higher up to the Lacker comments and then ran into the Fed and airplane trouble. The higher volume and doji on the candlestick chart indicate some higher volume turnover; investors were passing the stocks around in a game of hot potato. No crash yet, but worth watching. The breakout was strong and the chips will be strong again Thursday. We would like to see them spark a rally and continue NASDAQ's breakout move, this time showing some power similar to that on the breakout move.

SOX (+1.29%) put on a good performance though it closed well off its high, giving back half of its gains on the session. It has made a strong move one session each week the past month but has been unable to follow it up with another move. It looked as if it would put it together early after the close with the earnings out from LRCX igniting the chip equipment sector. Then LRCX said some quite negative things about the future of chip equipment such as flat orders for 'several quarters', and that stuck a pin in the move and likely any second day of a chip rally.


SP500/NYSE

Stats: -3.47 points (-0.26%) to close at 1349.95
NYSE Volume: 1.591B (+5.98%). Volume moved up to average as well on the NYSE as it bumped into the recent resistance, tested, and rebounded. A bit of churn here as with NASDAQ.

Up Volume: 663.541M (-249.342M)
Down Volume: 909.513M (+372.153M)

A/D and Hi/Lo: Decliners led 1.46 to 1. Middle of the road but stronger than the price declines indicate.
Previous Session: Advancers led 1.21 to 1

New Highs: 106 (-4)
New Lows: 5 (+3)

The Chart: http://investmenthouse.com/cd/^gspc.html

SP500 tried 1355ish once more and could not punch through, the same level it has bumped the past 5 sessions. Wednesday it tapped the 10 day EMA (1345) on the low and rebounded for a modest loss. The rising, above average volume indicates some churn setting in here as it tries to work higher but struggles. That shows shares changing hands faster, and that indicates the move is starting to get a bit winded as the buyers cannot push stocks higher and the higher volume allows the early money to exit while some late comers spend. It is still tired and in the fourth bounce after the breakout, so the easier move is lower for it from here to test again.

SP600 (-0.39%) gave back some ground but held up well, tapping the 10 day EMA (376.73) on the low and snapping back. It is holding above the September highs and is still solid in its base. Likely won't see much impact form the SOX as it continues to work on the base. That remains a solid underpinning for the economy as long as it continues building the pattern.


DJ30

Strikingly similar to SP500, DJ30 completed its fifth lateral session, holding a tight range as it refuses to give up its gains. That is a sign of strength in most cases, and there is no reason to doubt that here other than the move is getting long in the tooth. There was some churn here as well as volume moved up above average as it tapped the 10 day EMA (11,794) on the low and the rebounded to cut the losses. It still needs a test, but it certainly has not shown anything to suggest investors are selling out of the index.

Stats: -15.04 points (-0.13%) to close at 11852.13
Volume: 256M shares Wednesday versus 227M shares Tuesday. As with NYSE and NASDAQ, some churn as DJ30 works laterally after the strong run.

The chart: http://www.investmenthouse.com/cd/^dji.html

THURSDAY

Stocks weathered the Fed once more as well as a plane crash in NYC, and the key areas of NASDAQ and SOX looked ready to lead in the early after hours results. The gains posted on the big results dissipated and turned to losses in the chip equipment makers when the guidance came out. Chips were set up well to rally and looking for a trigger. Instead they are getting a bullet, at least as far as the chip equipment makers are concerned. It is hard to overlook them and write it off as sector specific. Other chip areas were not under heavy fire after hours, but for a sector looking for a trigger, this was an anchor.

We will have to see how the guidance impacts the rest of tech and semiconductors, but we are not expecting it to provide any boost. It is another issue the market has to deal with as the NYSE indices try to rest after strong moves while NASDAQ and SOX try to makes some strong moves themselves. Looks as if the money won't be rotating their way Thursday.

This may be the lead-in to the October dip we have written about; it is certainly not a reason to run out and buy in technology, but we will have to see what spin the market puts on the news. It is hard to see it as a positive at this juncture. Again, with SP500 and DJ30 in their fourth bounce post-breakout, they are ready for a test to set up a move to the end of the year. There was some churn Wednesday, and we will have to watch volume Thursday to see if it runs higher again. It was pretty strong Wednesday, and higher trade would certainly indicate conviction in the direction the market takes.


Support and Resistance

NASDAQ: Closed at 2308.27
Resistance:
2316 from interim tops in January and March 2006 trading range
2333 is the top of the Q1 2006 trading range (the January and mid-March 2006 highs)
2376 is the April high, the post-2002 high

Support:
The 10 day EMA at 2288
2273 is the recent September peak
The 10 day EMA at 2267
2250 is the March 2006 closing low.
2234 is the June 2006 peak (intraday)
The 200 day SMA at 2224
2222 is the August 2004/April 2005 up trendline
The 50 day EMA at 2213
2190 is the July 2006 high
2185 to 2182 is the September 2005 peak and interim high from November 2005.
2177 is the December 2004 high.
2168 is the August intraday high.
2158 from the May 2005 low.
2100 from the early and mid-2005 peaks

S&P 500: Closed at 1349.95
Resistance:
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February 2002 low at 1360.
1371 to 1373 is the December 2000 peak and the January 2001 peak

Support:
The 10 day EMA at 1345
1339 is the late September closing high
The 18 day EMA at 1337
1334 is an October 1999 peak
1326.70 is the May 2006 high
1324 to 1329 from the October 2000 lows.
The 50 day EMA at 1314
1311 is the April closing high.
1302 the recent August highs
1294 is the January 2006 high and 1297.57 is the February 2006 high.
The early June high at 1288
The late January peak at 1285
The 200 day EMA at 1286
1280.37 is the recent July peak.

Dow: Closed at 11,852.13
Resistance:
Has broken free and now we just look at how far above its 50 and 200 day SMA it gets to gauge how overbought it is. It is 6.2% above the 200 day SMA so it has some room before it gets to the 10% level where it typically will start to falter.

Support:
The 10 day EMA at 11,794
11,750.28 is the prior all-time high
11,723 is the January 2000 closing high
The 18 day EMA at 11,718
11,670 is the May intraday high
11,642 is the May 2006 closing high
The 50 day EMA at 11,510
11,488 is the early September high.
11,401 from the September 2000 peak and April 2001 highs
11,384 is the August intraday high.
11,350 from the May 2001 peak
The March 2006 highs at 11,329 to 11,335
11,279 is the late May closing high
11,243 is the early August peak closing high.
11,228 is the July closing high.
The 200 day SMA at 11,174

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

October 10
Wholesale inventories, August (10:00): 1.1% actual versus 0.6% expected, 0.9% prior

October 11
FOMC minutes, September 20 (2:00): Worried about looking like girly men as inflation is above their comfort zone as measured by CPI and PCE yet they are pausing.

October 12
Initial jobless claims (8:30): 312K expected, 302K prior
Trade balance, August (8:30): -$66.5B expected, -$68.0B prior
Crude oil inventories (10:30): +3.35M prior
Fed Beige Book (2:00)

October 13
Retail sales, September (8:30): 0.2% expected, 0.2% prior
Retail sales ex-autos (8:30): 0.0% expected, 0.2% prior
Michigan sentiment, Oct. Prelim (9:45): 86.5 expected, 85.4 prior
Business inventories, August (10:00): 0.5% expected, 0.6% prior

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

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