Monday, January 25, 2010

Indices at Key Support

Earnings were not necessarily stupendous, but there were not a lot of terrible misses. There were good beats on the top line and bottom line, but that was no salve with respect to what the future holds. Earnings are about looking in the rearview mirror. When there are worries about a double dip in Europe, worries about China overreacting, and then the US overreacting to an election that went against the party in power, then that creates a lot of worry and fear. You can hear it time after time on the financial and news stations. Very intelligent economists and market analysts said what the administration is doing is extremely dangerous. It took a loss, it cannot handle the loss, and it is afraid of losing its agenda. It is now pandering to populism where people are upset that the banks made a lot of money. I am upset that banks made a lot of money as well: they are getting free money and able to turn it into 4-5% gains in overseas investments. That bugs me as a taxpayer. I am never going to see that money come back, but I will not let that cloud my judgment and say we should regulate them out of business. We are trying to help them recover, so the regulations make no sense. The incongruous actions being taken will lead to serious problems.



The VIX surged 23% on Friday, and this is a massive move. A one-week move from the 17 level up to 28 is huge. That does not mean that volatility is a problem, and it does not mean the market is oversold. When you get in the 40 and 50 range, it is majorly oversold. This was an aberration because the world financial systems almost collapsed. I was getting calls late at night to put all my money in a safe deposit box and these were smart, sane arbitrage players telling me this. You understand how difficult and crazy it was back then and why volatility was so high. This is a high level, and we are at 28. 28 used to be considered high in the range from 20-30; that was normal. I hate to use the term "new normal," but that is what this essentially is. The new normal is not 20-30. The new normal is anywhere from 15-50. Seriously, you can have low readings of volatility for a long time and not be in trouble. It does not necessarily mean anything other than it could be due for a selloff. You can have volatility decreasing down to 11 or 10 levels and still have the market in long-term rallies. The thing to worry about is when volatility spikes as the market rallies. That is when a serious market rollover is coming.

The breadth was again quite negative at -2.7:1 on NASDAQ versus -2.9:1 on Wednesday. There was not much improvement. Note that I said breadth was starting to show big swings over the last week and a half. That was a precursor. It was showing its own internal volatility, and now volatility picks up in a number and it does not matter what it is. It does not have to be the VIX it can be in any kind of measure. Then you can anticipate trouble ahead or a change coming. On the NYSE, it was massively negative at -4.2:1 after -3.5:1 on Thursday. Really negative action.

The volume shows that there was another serious selloff. This is the second day of very high volume on the NYSE. After very low volume in late December and most of January when NASDAQ volume was spiking, the NYSE finally took off to the downside. Indeed, the three big spikes were on the downside. There was similar action with the NASDAQ. There was higher volume, but the big downside was related to the big volume spikes. There were four out of five days with big volume to the downside. That means lots of distribution, and that tells you they are simply dumping stocks. Distribution begets more selling or it has selling, maybe a pause, and more selling afterwards.


All the large cap indices are already at or below the next important support level I talked about on Wednesday and Thursday. SP500 is already inside in November-December range. It blew through the tops of that level, and now we are looking at the bottom of that range and the September peak around 1085-1080. That is the range of key support. You could extend that down to 1075 if you wanted to because that is the closing point. It is in a range of support. It could sell a day or two more and find the bottom. The move down has been so sharp, and the question is what it will do when it gets there.

NASDAQ has had high-volume selling, and it is right at its level of support at roughly 2015-2000. It has an entire range it could sell off to down to 2165. It will try too hold at the top of this range or at least it touched it and bounced back a bit on Friday. I do not know if it will try to hold yet, but it is at a level. We could see some slowing in selling over the next couple of sessions if it is going to try to hold. It is a key level, and you would expect it to show a bounce attempt. It may try to undercut it and then reverse; it comes in many forms. Sometimes they bounce off the level, and sometimes they undercut it and reverse. We will have to see how it plays out. We can expect some kind of bounce in this range, whether from the Friday close or a bit deeper into the range.

As noted earlier, the SOX was a horrible disappointment. It turned tail and fled, and it has crashed all the way down to the bottom range of the next support level. SOX and semiconductors go into everything we make these days, and if the economies of the world will struggle, the chips are out the door quickly. The interesting indices were the small and mid caps. They sold, but they are holding the 50 day EMA. That is the start of a range of support down to 325 from the September peak. It also held in mid-December. They look decent because they are not selling as hard, although that is a dubious honor given the size of the selloff.

The SP400 had similar action. It is holding the 50 day EMA and is above the October peak. It is an awfully sharp fall, and it is not planing out at all. They can turn on a dime as we saw on the trendline in November. We will have to see how it plays out. They are holding up, but are not that strong. I am not yet convinced that they can turn on a dime.

There were very sharp drops, and there is no sign of slowing yet. We will have to wait and see whether they can make a sharp turn at the support levels (such as on NASDAQ), or if they need to plane out a bit more or test and make smaller drops before making the turn. This is almost too fast of a decline to get a real feel for when exactly they will turn. We will talk more about what we can expect come Monday, and what we will be looking for in order to get that turn.


BUCY gapped down and held similar to a small cap. There is interest there. TEX had the same type of action, showing a hammer doji at the 50 day EMA. There are possibilities there, especially when you juxtapose them with others such as JOYG or DE that look as if they are in freefall. Energy had a rough session, and these two tough days cast them down. They looked like they were trying to hold. APA was down hard. HAL is at its 50 day, but it was selling hard.

Metals were mostly down. FCX had a very tough week and gapped below support on Friday, but it did manage to hold. MTL showed a hammer doji at support, so not everything was down and out. I am trying to point out some positives in a market that was down overall.

Techs were a virtual wasteland on Friday. The selling got ugly on stocks such as AAPL, CSCO, INTC, and MSFT. Those are sharp selloffs and the very definition of trouble patterns. Biotechs are stable right now. DNDN came off the 50 day EMA with above-average volume. It could not hold the move, but it shows it was not selling. CELG was also trying to hold its end up and still make a new breakout.

Airlines were surprisingly strong. CAL was not up, but it held up well. LUV was not up on the session either, but it held up very well. TKC, a foreign telecom we sometimes look at, is not selling off sharply. It is holding above the prior peak in October. It is not all doom and gloom, but there are not a lot of pretty pictures out there right now. Nearly all sectors were lower. There were pockets of strength, but most sectors were beaten up severely because investors are uncertain about the future.



VIX: 27.31; +5.04
VXN: 28.37; +5.18
VXO: 26.05; +4.86

Put/Call Ratio (CBOE): 1.07; +0.14

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: 48.3%. Once again bulls have peaked out near the 50% level. Bulls have bumped at 50ish since late August 2009, falling to 45ish and then rebounding. Thus for now this is more of the same as bulls get a bit pessimistic as the indices rise again and VIX falls. Hit 52.2% three weeks back, 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: 16.9%. Virtually in a flat line the past 6 weeks, down from 28% in mid-November. No sign of real worry based on this reading. 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.


Stats: -60.41 points (-2.67%) to close at 2205.29
Volume: 2.764B (-3.06%)

Up Volume: 448.265M (-479.888M)
Down Volume: 2.367B (+411.212M)

A/D and Hi/Lo: Decliners led 2.7 to 1
Previous Session: Decliners led 2.89 to 1

New Highs: 44 (+44)
New Lows: 16 (+14)





Stats: -24.72 points (-2.21%) to close at 1091.76
NYSE Volume: 1.472B (-1.91%)

Up Volume: 161.408M (-33.84M)
Down Volume: 1.299B (-80K)

A/D and Hi/Lo: Decliners led 4.19 to 1
Previous Session: Decliners led 3.49 to 1

New Highs: 115 (-79)
New Lows: 47 (+4)




Stats: -216.9 points (-2.09%) to close at 10172.98
Volume DJ30: 323M shares Friday versus 304M shares Thursday.



The market should not have sold as hard as it did based on the earnings and economic data, but there is the regulation fear and uncertainty driving the selling. With such a hard selloff into the close on Friday, Monday can be ugly. Tuesday can be ugly after that. Historically, a very negative Friday close during serious selling can bleed over into Monday and Tuesday. With that in mind, we were closing positions late in the day even though there is a chance for a bounce. The ones we closed had given up support and were not coming back. We did not want to see them get in any worse shape if the selling continued on Monday. That is why we took a lot of gains off the table on the way into earnings. We typically do that, but in all honesty, I did not anticipate such a violent pullback, primarily because we did not anticipate the government coming in and re-upping more regulation. That took the market down in a spiral lower.

I am concerned about the two hard days of selling, as well as the potential for more hard selling on Monday and possibly Tuesday. As a result we are not in a hurry to buy any upside positions, but that does not mean we will not be looking. There are good stocks holding up quite well in leadership areas they are out of step with the rest of the market and are showing the kind of strength you like to see. We will be looking at those and seeing if they can hold. The selling, too, may end sooner than later, and they would be good purchases as they would be in excellent shape to rebound.

We are in the middle of earnings season, and one would hope earnings would have more of an impact. Generally, if stocks are up ahead of earnings, they typically sell off when earnings first come out. If they are down when going into earnings, they tend to rally as earnings start. Then, a couple of weeks into earnings when everyone knows the gist of the story line, the earnings start running out of their mojo and the market quits rising on every result. Then the selloff starts.

Since stocks are down at the start of this earnings season, you would expect the good results could catch up eventually and send stocks higher. Maybe that will be the case with earnings providing the catalyst to turn things back up. That is often the pattern, but investors are going to have to resolve and digest the eco-political news that is upsetting the market for now. Maybe Barney Frank will speak out again to help calm things down after the President ruffled everyone's feathers. On the other hand, maybe something worse will come out the state of the union address is ahead this week and stocks continue lower.

Regardless, the market will probably sell more and further test the support. These are serious times and some new serious issues have arisen. This is, however, the market we have to work with right now. We will be patient and pick up positions when they present themselves, but I do not want to jump in on the first show of a turn because it likely will not be the case.

As I said in the Friday post-market alert, I am going to go in the cellar this weekend to find a nice bottle of wine. I am going to open it up, let it breathe, and I am going to sip it a lot. These kinds of days are why we took a lot of gain off the table on the way up. You cannot stop playing the game. You just close out positions when you get in trouble, and that is what we were doing. While the market can sell at any time, this type of selloff was rather unanticipated as the new war against financial institutions was more than anticipated as well. This too shall pass, however, and we will recover. Then we will have more opportunities. For now, we should stay in the bunker for a bit and see how the market reacts to the sharp Thursday and Friday decline. If a bounce higher that fails, we will play some downside off that. If there is a real turn that shows some buying, and the earnings are good and supporting the move, we can pick up some upside as well. Make moves in increments, not loading the boat all at once; we can always add more when the move tests and confirms itself.

Support and Resistance

NASDAQ: Closed at 2205.29
2210 (from September 2008) to 2212 (the July 2009 closing low)
2218 is the August 2005 peak
The 50 day EMA at 2276
2245 from July 2008 through 2260 from late 2005.
The July/November/December 2009 up trendline at 2274
2275 - 2278 from the February 2008 and April 2008 lows
2292 is a low from January 2008
2319 from the September 2008 peak
2326.28 is the January high
2324-2370 is a range of resistance from early 2008
2382-2395 from 2008
2412-2415 represents a series of peaks and lows in 2007, 2008
2453 is the August 2008 peak

2205 is the November 2009 peak
2191 is the October 2009 peak
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
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

S&P 500: Closed at 1091.76
1101 is the October high
1106 is the September 2008 low
The 50 day EMA at 1112
1114 is the November 2009 peak
The July/November/December 2009 up trendline at 1116
1119 is the early December intraday high
1133 from a September 2008 intraday low
1150 is the January 2010 peak
1156 is the Sept 2008 low
1185 from late September 2008
1200 from the July 2008 low

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
The 200 day SMA at 1007
992 is the August 2009 consolidation low

Dow: Closed at 10,172.98
10,365 is the late September 2008 low
The 50 day EMA at 10,394
10,496 is the November 2009 high
10,609 from the Mid-September 2008 interim low
10,963 is the July 2008 low

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
The 200 day SMA at 9373

Economic Calendar

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

January 25 - Monday
Existing Home Sales, December (10:00): 5.90M expected, 6.54M prior

January 26 - Tuesday
Case-Shiller 20-city, November (09:00): -5.00% expected, -7.28% prior
Consumer Confidence, January (10:00): 53.5 expected, 53.3 prior
FHFA Home Price Index, November (10:00): 0.1% expected, 0.6% prior

January 27 - Wednesday
New Home Sales, December (10:00): 370K expected, 355K prior
Crude Inventories, 1/22 (10:30): -0.471M prior
FOMC Rate Decision, 1/27 (14:15): 0.25% expected, 0.25% prior

January 28 - Thursday
Initial Claims, 01/23 (08:30): 450K expected, 482K prior
Continuing Claims, 01/16 (08:30): 4600K expected, 4599K prior
Durable Orders, December (08:30): 2.0% expected, 0.2% prior

January 29 - Friday
GDP-Adv., Q4 (08:30): 4.6% expected, 2.2% prior
Chain Deflator-Adv., Q4 (08:30): 1.3% expected, 0.4% prior
Employment Cost Index, Q4 (08:30): 0.4% expected, 0.4% prior
Chicago PMI, January (09:45): 57.4 expected, 58.7 prior
University of Michigan, January (09:55): 73.0 expected, 72.8 prior

By: Jon Johnson, Editor
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Jon Johnson is the Editor of The Daily at

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