Monday, December 21, 2009

Market Looks for Santa Claus Rally

SUMMARY:
- Expiration, S&P rebalance drive volume, but overall market themes remain.
- Dollar, oil close out a strong week.
- Indices bumping at breakouts, but to this juncture unable to close the deal.
- Growth continues to lead as market looks for a Santa Claus rally.

Lots of movement but all markets continue their trends.

It is difficult to get a read on a session that contains both quadruple expiration and an S&P Index rebalance. There will be the normal issues associated with expiration, particularly at year-end following a solid rally. Positions and options will be rolled out, some will be canceled and closed. On top of that, there is an S&P rebalance where all the S&P indices are reconfigured to move some stocks in and some out. Therefore, the index funds have to reshuffle their lineup, which leads to a lot of buying and selling, so the volume or breadth cannot be trusted. In other words, the internals mean nothing and that casts doubt on whether the entire session meant anything. Something that you can always look for is whether the underlying themes behind the market remain. It is easy to say in this case that they did. Not only the stock market, but the other markets (the dollar, gold, commodities, etc.) all maintained their relative trends as well. There was no real impact overall on the market. It is just a session that is hard to read, and we will take it for what it was.

Oil initially spiked higher on news that Iran made an incursion into Iraq and surrounded an oil well or an oil field (the reports were varied and many). Iran is coveting some of Iraq's oil fields, and it is concerned that Iraq may be able to put more oil onto the line soon, to 1M+ barrels a day. That could affect world price, and Iran wants to keep prices higher because it needs to fund its terrorist activities and fight off the insurgency in its own country that the youth are posing to it. That news raised oil, spiking it up well over $1.00 as oil continued its run. It could not hold onto the gains to the close though; indeed, it was just up a few cents ($73.02, +0.37). Nonetheless, this was a best week for oil in about a year. It made a tremendous move, up 4% on the week.

The ORCL and RIMM earnings out Thursday evening drove a lot of the action with techs. There was strong action with those two stocks, and they set the pace for NASDAQ. RIMM gapped higher and NASDAQ was clearly in the lead, and ORCL gapped to a new rally high as well. They lead techs higher, but it did not change anything in the market. It maintained the trends, but it did not cause any serious breaks (NASDAQ is threatening, however).

Late in the day, there was a Copenhagen climate agreement. They heralded this as a great accomplishment as some of the developing countries of the world were involved, but no one had to sign anything as they did with Kyoto. They pushed off a meeting in Mexico next year where they were supposed to sign a formal agreement to instead discuss in another meeting what they should do in 2016. This great accomplishment that put untold millions of tons of carbon pollutants into the air the very thing they are worried about accomplished nothing. That is good for the United States because we would otherwise be sending our money away to countries that are our competitors and are rising faster than we are in manufacturing. It is a plus for the United States that we got out of there with an agreement that was just another paper tiger.

The dollar was up fractionally (1.4336 Euros versus 1.4342 Thursday), but the action on the chart was equivocal. It finished strong and ran higher, and now there is a doji on the session. With all the expirations, that probably does not mean anything. There have been interim dojis along the way that were just that: continuation dojis. The DXY0 has now moved into a key range of resistance, from 77.25 up to 78, and it bumped there on Thursday and faded back. It broke over it on Friday and faded back. You would expect it to sidestep laterally before it tries to continue higher, as it did at 76 when it ran into the September low as well as two consolidation ranges in October. This is a key level. This is the 78-79 range with a descending 200 day EMA on top of it that will start exerting some influence on the index. It could run out of gas. I still view this as a relief bounce. This has been a sharp move, but when a market or stock becomes deeply oversold, it tends to have very sharp snapback rallies. When a stock market is in a recession or bear market, it tends to have sharp snapback rallies that are vicious because they are short covering. The snowball starts rolling, more and more people have to cover, it shoots higher, but then it burns itself out and comes back down. This is going to be a key area over the next two weeks as the dollar tries to move higher. We will see if it does. I think it is an oversold bounce on the dollar. There is no real substance here because the Fed has okayed the continuation of free money to the banks and the printing of trillions of dollars. That has not changed the picture overall economically other than some belief that there is going to be an economic recovery. This is a short squeeze, and I anticipate it will end and come back down. It could very well end up in the 79 range after a lateral move and another attempt to break higher. This has been a great move for the dollar. It needed to come back, and now it has made a sizable bounce and will have to prove if it has the mettle to continue the rally.

Gold was up modestly ($113, +5.60) and has been very volatile the last few sessions. There was a sharp selloff, and that happens after strong moves. We moved in after the sharp selloff, and it gapped higher looking solid. It gapped lower on Thursday as the dollar exploded higher, but it came back on Friday and it is holding this range. It may try to hold or it may come back. We will buy into more positions as it hits support levels and makes higher lows. Gold had a tough week. It will likely struggle a bit more based on the Thursday action, but there are still buyers out there and it will find its way back up. I am still looking for gold to go to $1,500 over the next six to nine months.

Bonds faded somewhat (10 year closing 3.54% versus 3.48% Thursday). There are some big swings in bond yields, and they are still moving higher after the selloff. We will have to see how bonds end up performing. Remember bonds were flashing a very solid "Economic Trouble Ahead" sign earlier in the year, and then they had a selloff as some of the economic data became better and the dollar started to rebound. Everything rallies and tests. The dollar became oversold and it is bouncing. Gold became overbought and it is selling and correcting. Bonds were a bit too strong and negative on the economy, and they have been correcting. No matter what you are trading, every market will have these sharp corrections in an overall trend when too many people crowd into the trade. Overall, the trends have not changed whether you look at the stock market, the bond market, the dollar, gold, or commodities. They have only gone through a correction to each of their trends of late, and Friday did nothing to change that.


TECHNICAL

INTERNALS

The internals did not mean a thing. Volume exploded, up 25% on the NYSE to 2.1B, and up 48% on NASDAQ to 2.7B. That is impressive volume, but it is all related to rebalances, triple, and quadruple witching.

CHARTS

NASDAQ was able to match its prior closing high, and that keeps it in the upper echelon of its ascending triangle and still trying to make the break higher. The interesting thing is that it has been unable to do that. It has had the reasons to make the break: the Fed keeping the money supply free and easy, ORCL and RIMM producing great earnings, and generally improving views with respect to technology. It has a great pattern and one would presume it will make the break, but it just has not done it yet. That will be key moving ahead. There is the Santa Claus rally next week, and it should break out and rally up into the end of the year. The question is whether it will make the move and if it can hold it.

We gave the NASDAQ top billing because it truly was the leader with its 1% + gain on Friday. That knocked SP500 off its perch, but it was no slouch. It is back up mid-range in its range. There was big volume due to expiration on Thursday, and then expiration and the SP rebalance on Friday. It makes sense that there was a lot of volume and horse trading going on with respect to this index. It is in the mid-range and it is somewhat struggling. It is up and down, could not make the break, and it sold off. This is with energy having a very good week. The oil services ETF had a great two-week run, but SP500 was still lackluster and stuck in the middle of its range. Financials were down. The XLF has trended lower since December. The financials were not helping SP500 any (it is heavily weighted with financials), but even with a positive energy sector and other areas that were improving, SP500 still could not make a significant move. That leaves us asking the same question we did with NASDAQ: Can SP500 make the breakout? It has every reason to do so, but it cannot make the move. There is rotation out of some of these stocks, and that is hamstringing the SP500 somewhat. That makes it a less interesting case than NASDAQ, which has every reason to rally. Nonetheless, if SP500 moves, its weight is on the rest of the market as well.

The real star of the week was SP600. It broke over its November peak, tested and held it (even on Thursday), bouncing off the low. Friday it moved up and put in a new closing high over the November peak. That puts it right at a September peak, another key resistance level; indeed, it is just entering a new range of resistance, from the September peak up to the October peak. The small caps are looking very strong. There is money moving into those stocks as it moves out of some of the commodities, financials, and industrials over the past two weeks. They are showing good buying, they still have good patterns, but they also have an issue trying to make the breakout. No one wants to be the rabbit to run for the rest of the market and drag everyone else with them after making the breakout. That is part of what I was discussing earlier with some fund managers happy with where things are and wanting to sit on their gains. Then, as more than one reader has suggested, there are others that want to keep the status quo and take some gains after the year is over. They will take some gains on rallies, and that has been undermining attempts to make breakouts. Others would like to run it higher and put more gains on the books for their year-end prospectus.

The mid-cap SP400 is another rebalance index and is in a great position, similar to NASDAQ. It is holding up beautifully. It is in the upper quarter of its range, holding over the November peak, ascending triangle, and ready to make the breakout. There is money rotating into smaller stocks and setting up a nice move.

The SOX was the leader in December. It broke out and continued to move higher, and it lost many of its spectacular attributes late in the move. It is nonetheless putting in new closing highs and continuing higher as the growth area of semiconductors is improving. ORCL and RIMM are moving higher. They make devices and have the software to run devices that technology produces, so the entire technology sector is performing pretty well. The charts are still in great shape.

There were some hiccups toward the end of the week, but that has a lot to do with quadruple expiration causing volatility. At the end of the session on Friday, there was classic volatility after a selloff. There was a rally back and then the surge late on the SPYders as many of the SP stocks were shuffled. After the close, they were trying to sort out all of the market on close orders as the indices and ETFs put in their orders to sell and buy the various SP stocks. There are so many SP indices that had to be reshuffled; it will take until Monday to figure out what happened.
LEADERSHIP

One of the maligned areas this week was financials. We took gain on GS. It is trying to bottom and we will see what happens here. It looks like it could be doing that because other financial stocks look the same way. JPM has come down to a support line just over 40 and is trying to put in a bounce. It looks like it could do that. MS is also the same it had the snot knocked out of it over the past month, but it has come down and showed a hammer doji that happened on the 200 day EMA on the low. It is holding right at support at 29, and we could get a bounce out of MS. We could get a bounce out of many of these. If you like bounce plays, these are setting up to do that, but whether they will have a lot of strength behind them is the another question. You might be able to make a play up to 32 off 29 on MS. That is not a huge move, but it is very solid on a bounce play.

AAPL is still holding the triangle it is trying to form up, and it is not bad. It recovered from the Thursday dump. There are many other good stocks in technology that are holding up well. QCOM is one that could be a bounce play. It was trying to set up something of an ABCD pattern, but it carried on and lost a lot of that luster. Overall, it has formed something of a triangle. If it could make a break higher, it could be interesting. It is not on the top of my list, but I am looking at it. I like is QLGC, but this is a dangerous pattern even though it does not look dangerous. This is not necessarily a bad thing in a bull market, but you should watch for these if there is a transition going on (I am not saying there is one, other than NASDAQ has been unable to make the breakout from a good pattern). They can run out of gas. It is trying to set up a triangle, but then it gets extended and cannot figure out what to do. If MACD is running out, it has lost momentum. Be careful of these. It can make the break higher but could just as easily make the break lower. Know your market and where you are in the life cycle. That tells you a lot about whether you want to step into a pattern.

The chips still look good. We have a position in CY. It has made a nice rally and come back to a nice test. It is in an excellent position to run higher, and you see this a lot in semiconductors. KLAC has an interesting pattern, and it could make the break higher. MACD is rising note how in QLGC it was heading lower. We have rising MACD, so this could be an interesting play. A similar play in CYMI: a double bottom, bounce, handle, rising MACD, and showing good upside volume. It showed a doji on Friday. I do not know if this volume means anything since it was expiration and SP rebalancing, but it has that same look. I like this one a bit better than KLAC. MFLX is another I have been looking at. It has the pullback, kind of a handle, a break higher. Nice rally into it and trying to form something of an ABCD, but there are a bit too many letters in the alphabet here as well. It fell apart, but there is something of a cup with handle, and it is trying to make the break higher with rising MACD. There are some positives there.

Energy had a better week. APA is always a good one to watch. It had a nice rally, is moving laterally, and it set up another one of the cup with handle patterns. APC rallied back and is testing the 50 day EMA. It is not the same clear, nice pattern, but it could make a bounce up as well. It is not in great shape or in terrible shape. HAL rallied all week, gapped higher, and reversed on Friday. I do not know what that means because of the expiration, but it had a great recovery. It is not a great pattern at all. There is the double top and lower MACD, but it did rally and had volume as it came back up. Energy is mixed, but it had a good week overall. There are some good setups there.

FCX, in metals, is trying to hold. It started to sell hard on Thursday, was trying to hold on Friday, and I still think it is coming lower. BHP is the same type of scenario, but it has more support. Metals, like commodities, are varied. Some are performing better than others.

Healthcare still looks good, and money is still moving in. CNMD has been setting up and trying to make the break. It IS making the break as a matter of fact, we bought some of this on Friday. BABY is one I like, and it is very interesting. It could give a neat run from the 14 range up to 17, the prior high. It is a cool pattern. It is not perfect, but even a perfect pattern can fall apart on you.

Retail had a good day. PZZA had nice volume, a break higher, a nice test, and then a new break back up over the downtrend. I like those kinds of patterns. DBRN had a test and is moving back up and getting some volume. It is not all candy and roses, however. BBY is all of a sudden having a hard time. You thought it might want to hold up after it gapped down and touched a support level, but it is giving it up and going down big time. That is not good. It had decent earnings, but apparently, they were not good enough. This is a concern about the holiday season, but more about what comes after the holidays. It seems like investors feel that retailers may be using up their bullets on this holiday season similar to how the Fed has used up all of its bullets. If a major upheaval comes along, the Fed has no bullets left, and you get that sense looking at the way some of the retailers are acting. That is not all of retail, and a lot of them performing just fine.

Leadership is fine, and there is still a rotation ongoing. Medical is improving, retail stocks are decent, and there is the business software and business services starting to perform. On top of that, the semiconductors are moving higher, and technology is looking solid. There is plenty of leadership even though there are prior leaders being recycled right now. They are going down and being sold off, but then they will base and set back up. As the dollar dies out on its rally, then we could see these stocks make a comeback. Again, the next two weeks on the dollar will be important as it hits the 78-79.50 level. There is resistance there after a good corrective snapback rally. That will be one of the main drivers in the week ahead.


THE MARKET

MARKET SENTIMENT

VIX: 21.68; -0.83
VXN: 21.78; -1.06
VXO: 20.53; -1.31

Put/Call Ratio (CBOE): 0.98; +0.07

Bulls versus Bears:

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

Bulls: 52.2%. Rising again after a slight dip the prior week. This is the highest level on this run. Still well over the 35% level that is the threshold for what is considered a bullish climate. It does not mean things are necessarily bearish; that takes a reading in the 60% range. Hit a high of 47.7% mid-June on the run from the March lows. Again, to be seriously bearish it needs to get up to the 60% to 65% level. Dramatic rise from 21.3% in November 2008, the bottom on this leg. This last leg down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator.

Bears: 16.7%. Holding basically steady for the past three weeks, down from a 17.6% reading. Bears are down but still skeptical as the lateral slide indicates. This is the lowest level of the entire rally and is at a bearish level. Peaked near 28% on this round, falling short of the 35.6% hit in July 2009. For reference, cracking above the 35% threshold considered bullish. Hit a high on this run at 47.2%. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.


NASDAQ

Stats: +31.64 points (+1.45%) to close at 2211.69
Volume: 2.755B (+48.96%)

Up Volume: 2.174B (+1.76B)
Down Volume: 664.846M (-804.493M)

A/D and Hi/Lo: Advancers led 1.5 to 1
Previous Session: Decliners led 2.73 to 1

New Highs: 115 (+45)
New Lows: 42 (+1)

NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg

NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg

SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg


SP500/NYSE

Stats: +6.39 points (+0.58%) to close at 1102.47
NYSE Volume: 2.147B (+25.26%)

Up Volume: 1.833B (+1.644B)
Down Volume: 800.856M (-701.04M)

A/D and Hi/Lo: Advancers led 1.37 to 1
Previous Session: Decliners led 2.63 to 1

New Highs: 225 (+65)
New Lows: 36 (-3)

SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg

SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg


DJ30

Stats: +20.63 points (+0.2%) to close at 10328.89
Volume DJ30: 480M shares Friday versus 198M shares Thursday.

DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg


MONDAY

It is a short week with Christmas on Friday, which means the market will close early on Thursday. The indices are well positioned to make a Santa Claus rally. Even NASDAQ is in a great pattern and should make a nice Santa Claus rally. It is perfectly positioned to lead higher, and it can move along with SP600 and SP400 and plow into new rally ground into Christmas. The question is if it will do it. I think it might, and it could have a holdover toward January. This time of year tends to move with the trend, and the trend is solidly in place and solidly higher. You would expect it to continue higher. What we want to do is let our positions ride and move in toward the end of the year and see just how much they move up. We can consider whether to take gains or not and wait until January, but if I have a gain in hand and it looks as if it could be topping out on that move, I am not going to wait a few days until the next year. The options could dry up some if the move dissipates, and then if it starts to turn against you and go back down, you are losing all the money you would have made. I would rather have the money in hand and pay some taxes on it then have a good play go back down and not make as much money. I still have to pay tax on it, it is just whether I pay it this year or the next. A 50-70% gain on an option play now is much better than a 30% gain taken early next year. The tax considerations are not going to have as much of an impact on my trading scheme as they would in hedge funds or in the mutual funds that are managing billions of dollars those managers have to watch out for their clients.

We will let our positions run. If we get one that is topping out or hits a target and we want to take some gain, we are going to act as usual. We will take partial gain and let the rest of it run. On the other hand, if it has made a tremendous move and we do not think it will go any further, then we can take the whole thing off the table. We will continue to look for upside because I still think one of the themes, even going into early 2010, is going to be the small and mid-caps still rising and having a good January effect move. I do not think there will be a lot of selling to start the year that will send every sector tumbling down. There may be selling in those that moved up in the SP that are struggling now. We may see that rotation continue, but that would not affect the stocks that we are moving into versus those that have made their run and are selling back. We will basically keep the same strategy because we see the same events unfolding where we can take advantage of the smaller caps rising. It may be a different story after January, but we will watch and see how it plays out. Right now, I am seeing good stocks making good moves and giving the "buy me" signal, so that is what we are doing.

Have an excellent weekend. We will play the shortened holiday weekend for what it gives us, but not get too wrapped up in it because there are other things more important this time of year.


Support and Resistance

NASDAQ: Closed at 2211.69
Resistance:
2210 (from September 2008) to 2212 (the July 2009 closing low)
2218 is the August 2005 peak
2245 from July 2008 through 2260 from late 2005.
2275 - 2278 from the February 2008 and April 2008 lows

Support:
2205 is the November 2009 peak
2191 is the October 2009 peak
The 18 day EMA at 2185
2177 is a low from March 2008
2169 is the March 2008 closing low (double bottom)
2168 is the September 2009, intraday peak
2167 from the July 2008 intraday low
2155 is the March 2008 intraday low
The 50 day EMA at 2150
2143 is the October 2009 range low
2099 is the mid-September 2008 closing low
2070 is the September 2008 intraday low
2060 is the August peak
2048 is the early October 2009 closing low
2016 is the early August peak
1984 from late September
1962 is the bottom of the August 2009 range.
1947 is the October gap down point
The 200 day SM A at 1906
1897 is the October post gap intraday high.
1880 is the June peak
1862 is the July peak


S&P 500: Closed at 1102.47
Resistance:
1101 is the October high
The 18 day EMA at 1103
1106 is the September 2008 low
1114 is the November 2009 peak
The March/July up trendline at 1137
1133 from a September 2008 intraday low
1185 from late September 2008
1200 from the July 2008 low

Support:
The 50 day EMA at 1085
1083 is the 2007 down trendline
1080 is the September 2009 peak
1078 is the October range low
1070 is the late September 2009 peak
1044 is the October 2008 intraday high
The August peak at 1040
The early October 2009 closing low at 1025
The early August intraday peak at 1018
The November 2008 peak at 1006 closing 1007.53 intraday
992 is the August 2009 consolidation low
The 200 day SMA at 969
956 is the June intraday peak


Dow: Closed at 10,328.98
Resistance:
10,365 is the late September 2008 low
10,496 is the November 2009 high
10,609 from the Mid-September 2008 interim low
10,963 is the July 2008 low

Support:
The 50 day EMA at 10,173
10,120 is the October 2009 peak
9918 is the September 2008 peak
9855 is the early September peak in its lateral range
9835 is the late September 2009 peak
9654 is the November 2008 high
9625 is the October 2008 closing high
9620 is the August 2009 peak
9430 is the early October low
9387 is the mid-October peak
9116 is the August low
9088 is the January 2009 peak
The 200 day SMA at 9038
8985 is the closing low in the mid-2003 consolidation
8934 is the December closing high
8878 is the June peak
8829 is the late November 2008 peak


Economic Calendar

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

December 22 - Tuesday
GDP - Third Estimate, Q3 (08:30): 2.8% expected, 2.8% prior
GDP Prices - Third E, Q3 (08:30): 0.5% expected, 0.5% prior
Existing Home Sales, November (10:00): 6.25M expected, 6.10M prior

December 23 - Wednesday
Personal Income, November (08:30): 0.5% expected, 0.2% prior
Personal Spending, November (08:30): 0.7% expected, 0.7% prior
PCE Prices, November (08:30): 1.6% expected, 0.2% prior
PCE Prices - Core, November (08:30): 0.1% expected, 0.2% prior
Michigan Sentiment-Rev, December (09:55): 73.7 expected, 73.4 prior
New Home Sales, November (10:00): 439K expected, 430K prior
Crude Inventories, 12/18 (10:30): -3.69M prior

December 24 - Thursday
Initial Claims, 12/19 (08:30): 470K expected, 480K prior
Continuing Claims, 12/12 (08:30): 5175K expected, 5186K prior
Durable Goods Orders, November (08:30): 0.5% expected, -0.6% prior
Durable Goods Orders, November (08:30): 1.0% expected, -1.3% prior

By: Jon Johnson, Editor
Copyright 2009 | All Rights Reserved

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

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