Sunday, October 30, 2011

Spending Posts a Solid Increase

SUMMARY:

- To the flat line as market nurses its party hangover.
- Supposed reemergence of European worries blamed for stock stall.
- Spending posts a solid increase but incomes again stagnant.
- Michigan sentiment rides market bounce higher.
- Weak earnings outlooks versus strong outlooks: which is right?
- A breakout test likely a good buy thanks to seasonal trends and fund buying.

A slow, flat, and normal session on the heels of a big upside break.

It was a week that saw the indices break out of the old trading range indeed, two trading ranges and into a new range. It was the last one below the April and May highs that mark the zenith of the rally off of the March 2009 lows. I want to take a moment to backtrack and see where we are. The market was running into the beginning of 2011. That was on the heels of QE2 that broke the stock market higher beginning in late August and early September of 2010. A very powerful run up into early 2011. At that point the Fed was saying that QE2 would be removed in June, and the market started to pitch a bit. It moved laterally, trying to make a breakout in late April with earnings trying to assist it. It could not hold the move, however, and it faded back into June.

What happened? It tried to bounce again to end May. In June when there was no renewal of Quantitative Easing, the market sold off. It tried again, deciding it did not need the Fed. Perhaps it thought maybe things had turned enough where the market could break out to a new high and continue to the upside. That would show that the economy was picking up. It did not happen, and it fell back. What happened right after that? All of the issues in Europe came to the fore. We knew all along there were problems in Europe, but they came to a head in July and August. There were fears of a total meltdown, and we took those gains out of the market through mid-August.

After that, it looked like the crisis might have been averted. The dive was enough to get the heads of state in Europe to start talking about the problem. That was a giant leap forward, and the market started to bounce up and down. After there was word that there would be a deal made and this was the final deal, of course the market found its bottom, reversing off a false breakout on SP500, and rallied in October. Indeed, if this move holds through Monday, this will be the best rally in October ever. That is how powerful this move was. It was a powerful move to the downside as the Europe problem was factored into stock prices, and stocks rallied in anticipation when it was believed that a deal was in the offing. When a deal was announced on Thursday, stocks exploded higher, breaking into that new range. This is the final one before the indices can test that late April/early May high.

That will truly be the lick log moment. We may get some trading in this range, but getting up to the top and breaking out would tell a lot of stories. What do I mean? If stocks can break out, that would mean better economic times ahead. Why would they do that? Nothing has changed other than time. But time, as they say, does heal all wounds. But is it going to heal these wounds? Has enough time elapsed since the credit crisis hit? We have been in this for three years. It surely seems as if enough time has gone by. But we have problems such as ECRI saying that a recession is baked into the cake. Things improved this past week in the cycle, but that really does not matter. The indicators are as such that a recession is considered something of a done deal at this point. It is just a question of how deep or significant it will be.

Indeed, ECRI has been saying that we could have negative GDP by Q1 of 2012, if not sooner. GDP came in at 2.5% on Thursday for Q3. If it was sooner, that would mean it is happening this quarter. It may not happen because things have been looking a bit better. That is the irony of the ECRI. Oftentimes the CEOs will see business looking great and say, "What do you mean we will have a recession?" But the numbers are what the numbers are. The ECRI guys say, "That is what you are paying us for." They pay them to tell them what the cycle is. We will have to see how that actually turns out. The lick log point is up at these prior highs. What will propel the market higher? We have Europe taken out, and we have Europe put back in. Now we have to focus on U.S. domestic issues. Is there enough to drive the market higher? I will talk about this later. Who is right? Is it MMM and WHR who have dour outlooks? Or is it the other side of the equation like PNRA and CAT who say things look solid? That is the sixty-billion dollar question, no doubt.

Getting back to the session and the week itself, we saw the indices break out into a new range. A powerful week nearly ending a powerful month we still have Monday to factor in. We had the huge move on Thursday. There was the rush up higher on the Deal of the Century in Europe. This may be the deal that actually solves the problems. A lot has to be worked out. As I said last night: Short on fact and long on promises. We will see what happens. There was a big run on the Europe news and the fact that the U.S. data was better. Even though Europe's actual data has been worsening, the deal makes the difference. Then we had a hangover on Friday. After the stock market parties up 3% and more on the indices, it is hard to continue that kind of action even on a Friday. Maybe I should say especially on a Friday after a big move.

As you can see from the intraday chart for Friday, stocks were very flatline. They opened weaker, bounced, and then traded laterally the entire day in a narrowing range. At the end of the day, it was a wash. There were a few above the flatline and a few below the flat line.

SP500, 0.04%; NASDAQ, -0.05%; Dow, +0.2%; SP600, -0.6%; SOX, +0.15%.

You see the point. Flatlining, comatose, whatever you want to call it. The market had no stomach to continue the upside, and that is perfectly normal after such a huge move to the upside.

What was blamed on the day for the stock market going nowhere? If you read the headlines, it was the supposed reemergence of worries about Europe a day after the deal supposedly resolves all of the problems with Europe. Friday saw some new data. The UK confidence level fell precipitously. Spain's unemployment rate came out at 21.5% on Q3. That was high, and you just have to feel for them. Italy had some bond auctions, and it had to pay a record level of interest rate for a bond auction. That just shows you that things are not well in Europe even with the bailout. Maybe it is true what some people are saying. They say we had a big rally on this deal, but just what was the deal and how will it fix these problems? Debt problems fixed by more debt? Some people are thinking that, and that is good. You have to keep on open mind, right?

Blame whatever you want, it was really a technical issue. The market factored in a European collapse, and then over the past month, it has taken that back out. Stocks have bounced back up to where they were before that news became a serious concern. That leaves us now looking at what the U.S. will do. Do we have enough to drive us forward, or are we just back to where we were, looking for QE3 perhaps to take us higher? The market was struggling after QE2 ended. It did not have any reason to move higher. Maybe the economic data is enough to take it upside. We will have to see just how the market reacts to this range and, indeed, the peaks from July and April/May.


OTHER MARKETS

Dollar: 1.4161 versus 1.4189 euro. The dollar broke, and it broke big. It held the line for the entire month of August before it finally broke higher as the European worries skyrocketed. Then on Friday the dollar plummeted. Against the euro, it actually gained. Against the other currencies, however, it dove lower as the DXYO shows. Big drops. It is still hitting lows against the yen, and those other currencies weighed down the dollar even though it was up slightly against the euro.

http://investmenthouse.com/ihmedia/dxy0.jpeg


Bonds: 2.32% versus 2.38% 10 year U.S. Treasury. Bonds rebounded modestly. They broke on Thursday below support. There was a modest rebound Friday that did not change anything about the break. This was an inside day technically, therefore it really means nothing. This first move is still in control.

http://investmenthouse.com/ihmedia/tlt.jpeg


Gold: 1,747.20, -0.50. Gold took the day off. Virtually flat after a very strong week. Broke to the upside, perhaps on some fears of more inflation. There is not really any fear in Europe, right? That is all gone because the deal has solved it. But it has rallied somewhat, maybe on some inflation fears. This was an unexpected move, as noted. Inflation is what explains the move since fear was falling.

http://investmenthouse.com/ihmedia/xgld.jpeg


Oil: 93.32, -0.64. Oil prices backed off on Friday after a strong week. Oil has bounced through the $90 resistance range. It is now bumping up against the $96 range that acts as some resistance. Very strong move. A little lateral movement and backfilling. That is totally expected after such a good break to the upside. The question is will it break out over the May to July resistance? If it does, gasoline prices will surge.

http://investmenthouse.com/ihmedia/xoil.jpeg


TECHNICAL SUMMARY

INTERNALS

After a very strong Thursday, Friday was a sleeper.

Breadth. Breadth was 1.3:1 decliners over advancers on NASDAQ. Breadth was 1.3:1 advancers over decliners on the NYSE.

Volume. NASDAQ saw volume fall 35% to 1.8B shares. NYSE trade fell 30% to 900M shares. Definitely not a banner internal day. It was a flatline on the markets, so that is expected.


CHARTS

SP500. SP500 tested the 200 day EMA on the low. It broke through that on Thursday, and it rebounded back up to close flat on the session. That still keeps it in its range. It still wants to bang around in there and perhaps move up to the top and break out. But it surely will have to prove that to us and virtually everyone on the planet.


NASDAQ. NASDAQ showed the same action. A gap lower, reversed to close flat. It, too, has broken into the final range before that April and May peak. It has some interim highs at July that it has to deal with as well. It is in the range. It made a big gap upside, and it could test and then continue on. Nothing wrong with that. We will see if it can hold the move.


SP600. The small caps were down on the session a bit more, but they are holding right at the 200 day EMA after surging up to that level on Thursday. They were right at the bottom of their March and June lows that mark the upper range that leads to the July peak. That is where the small caps hit their high versus April and May.


SOX. SOX sported some very good earnings this past week and Thursday it gapped above the down trendline out of February. Very solid action. It also gapped above the June and July lows that acted as resistance points. It is a double break of double resistance, so to speak. It did not go anywhere on Friday; it just broke some big overhead resistance. Taking a day or two off is normal. Semiconductors look decent. You always love to see a trendline break, although there is still some serious resistance at 420. But that is a nice run from here as the index closed the week out at around 396. Plenty of room to run just as there is room to run in the other indices back up to the prior peak.


LEADERSHIP

Leadership from the week was across the board. A lot of stocks rebounded. I will not go through all of them tonight because it was such a broad move. We have seen some of those little rounded bottom breaks to the upside that set up and broke higher this past week.

BRKS in the semiconductors equipment area is one that shows us somewhat of the typical pattern. The downtrend, the rounded bottom, a little double bottom. It formed the handle and then broke higher. It gave us a great buy and is surging. This is what we see not only in the semiconductors area, but in tech, retail, metals (not as much, but we are seeing it), and in a plethora of sectors across the market.

It is not really a question at this point of one or two sectors leading the move. That happened on the initial run with stocks such as AAPL or CERN moving higher. Now those stocks are fading back and testing. They are not necessarily breaking down, but they are testing while the other stocks that formed that little bottom and started to break higher are making the runs for us now. Stocks such as TRV in the insurance business formed that rounded bottom, the handle, and then broke to the upside. As noted, we see them across the market. We moved into quite a few of them last week, and now we will be waiting for a pullback. If we get it, we can move into these. Why do we want to do that? I will talk about that as I discuss Monday's session.


THE MARKET

SENTIMENT INDICATORS

VIX: 24.53; -0.93
VXN: 25; -1.28
VXO: 24.21; -0.44

Put/Call Ratio (CBOE): 1; +0.09


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 does not have the cash to drive it higher.

Bulls: 40.0% versus 35.8%. Big jump in bulls as the cross back above bears. It could not last forever and with the surge in October just a matter of time. Did its work, however, as the market surged off the readings below 35%. 35% is the threshold measuring bullish versus bearish action. Six weeks the bulls were below bears. A powerful sentiment signal. Solid move lower from 49.5% in late July. Highs from April and December (60% readings spanning December through early May 2011). The 5 year high is 62.0. The crossover level at 29% bulls from July 2010 is long gone. 35% is the threshold level suggesting bullishness. To be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 37.9% versus 45.0%. Backing off hard as Bulls recover hard. As with bulls, an expected move given the rally. Just now crossing back below bulls after six weeks of bears over bulls and seven weeks over the 35% threshold considered a bullish indicator. For more 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: -1.48 points (-0.05%) to close at 2737.15
Volume: 1.823B (-34.54%)

Up Volume: 999.51M (-1.48B)
Down Volume: 851.39M (+488.24M)

A/D and Hi/Lo: Decliners led 1.27 to 1
Previous Session: Advancers led 4.9 to 1

New Highs: 61 (-49)
New Lows: 24 (-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: +0.5 points (+0.04%) to close at 1285.09
NYSE Volume: 902M (-30.08%)

Up Volume: 2.46B (-3.8B)
Down Volume: 2.03B (+1.666B)

A/D and Hi/Lo: Advancers led 1.26 to 1
Previous Session: Advancers led 7.01 to 1

New Highs: 76 (-104)
New Lows: 21 (+14)

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

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


DJ30

Stats: +22.56 points (+0.18%) to close at 12231.11
Volume DJ30: 163M shares Friday versus 251M shares Thursday.

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


MONDAY

There is a lot of economic data. It is, of course, the first Friday of the new month, so we will have the employment data late in the week. Everything will be geared toward that piece of information. We do have a lot of other salient economic reports ahead of that. On Monday we have the Chicago PMI, the precursor to Tuesday's overall national ISM manufacturing number. It is expected to climb after hanging on at 51. We have seen the regions go both ways some negative and some holding positive such as Chicago with its 60 reading the prior month. It is expected to continue a bit of improvement. That would be good news for everybody.

There will be the precursors to the jobs report coming out on Wednesday: Challenger Job Cut Report and the ADP Employment Index. There is a little thing called an FOMC rate decision on Wednesday. No one expects much. Watch out for things that no one expects much from. The market stalled out before June in anticipation of the end of QE2. Nothing has been done in Congress with respect to any kind of jobs initiative. I wish the Republicans would come out with their own jobs initiative, pass it, and then let the Senate work on it. Just try to do something. The President said he will write some executive orders and do a few things with student loans etc. to try to push his agenda. To me that means that Bernanke may have the green light to try something on his own as well. QE3? If that happens, that will start a new, powerful rally to the upside. That is a big long shot at this point. We will have to see. On Thursday we have the usual Jobless Claims and also the ISM Services for the month. Friday is the Jobs Report, of course.

There are two real areas to look at. The third is the wild card of the FOMC and a QE3. If that is announced, it throws everything out the window and we have a powerful rally. It may not solve any problems, and it may kill the dollar even more. Maybe the dollar is anticipating it, and that is why the dollar is in total freefall, from the looks of it, on Friday. But there are two other issues to deal with. Number one is the competing earnings reports. We have seen some great guidance from companies such as CAT. It is looking super, rallying to the upside and announcing great guidance ahead. It is basically the shining star in the earnings picture for the rest of the market. There are others that have done very well and announced great earnings. INTC has done super. It looks great heading forward.

Then there are others that are not really helping the cause. It is not because they are not making some money now; they just do not see the business down the road. TXN was having a problem. MMM did not have a good outlook at all. It was having cost issues, and they are saying that it is an execution problem. On TXN they said they must not been doing something right because everyone else is reporting great earnings. Then there were our old friends. AAPL surprised with a miss, and no one really knew what was going on with that. With AMZN everyone said it was just a retooling. They said they just have to spend more money, and they have done this from time to time. I frankly believe that is the case, but it is another one that did not have such great guidance. On Friday WHR announced terrible results, a bad forecast, and said it will lay off 5K workers. That is a downer.

Who is right? What is going on here? We have a battle of the weak earnings outlooks versus the strong earnings outlooks. The answer has to be that no one really knows. But we do know one thing: When there is volatility in the market or in anything, that usually presages some change in the trend. We have had a series of strong quarters with ever-increasing earnings. The outlooks have been great. Now we are seeing outlooks that are not so great. In other words, we are getting volatility where there was no volatility for several quarters. That shows you that something is changing. That brings up the specter of ECRI and its forecast for things being so much worse that they are calling for a recession. One thing about ECRI that is different from all other leading indicator reports is that it has never called a false recession. It is gotten them all right. That is just a fact.

We have that worry out there and we see strong, solid companies saying that things are not as great as some people are saying. It is easy to blame execution, but these are good companies. We will see if it is execution or not. That is something to be concerned about. I will reiterate, however, that volatility typically suggests a change in the trend. Strong earnings were the norm all during the run higher, and then we had sudden volatility. Seriously negative outlooks could stall out the indices as they get back toward those prior highs. Remember, they have to have some reason to break through these. QE2 carried the market up to the April highs. Now it needs a new catalyst to carry it further. Either QE3 or some kind of notion that the economy will improve even more and thus make stock prices more valuable down the road.

That is the longer-term picture. This is what we have to watch out for when the indices bounce up to the top of this range and test the old highs (the head and shoulders on SP500). That leads us to the more near-term issues. We have to keep an eye on the long term, but right now we have had a great breakout. We have a lot of stocks in these neat bases that broke higher last week. We have a market that surged tremendously on Wednesday and Thursday. It is in need of a little pullback, and Friday it started to do that. If we get another pullback Monday and Tuesday and we get some new money coming in at the beginning of the month there will be funds playing catch up we could see stocks bounce right back up. We could use that to play the move in the range. We want to play the moves that are here at hand. We keep an eye on the macro situation, and then if the market breaks out, great. It breaks out and then our upside plays continue to run for us. If it does not, we take some profits and see what happens after that. Are we going to trade in a range again as we did from August into October? We will have to see how that plays out.

There are some interesting features driving this action. It makes it pretty cool for us at least for those who want to play it upside. You have the seasonal trends in place. Remember that the techs like the time around October. They start to rally and move higher toward the end of the year. They led the move up. They were the first to break out of their range. They were the first to test and break into the new range. Techs were showing the power that they should in the season. That part of the world is correct. We anticipate those seasonal trends to continue because they broke into the new range and they can rally up to the top of the range. Then everything will be just as it should be.

When we broke out of the trading range, a lot of people were shorting the market or thought it was going to fail. I was one of them; I thought it was going to fail, but it broke out. That forced shorts to cover. Then the test came, it held, and there was a new breakout. That forced shorts to cover more. Not only that, there are a lot of funds out there playing catch up. They have to make more money to the end of the year because they were not buying any of this move up. This is the one chance to grab hold, and they want to follow it through the end of the year and catch that seasonal trend. We have that as a backstop as well.

What does it mean? It means pullbacks are likely going to be backstopped by the big funds using them as buying opportunities to catch a continued move up toward the end of the year. They have our back, so to speak, and that is just fine with me. We can play that even if the market ultimately tops out at the July and April highs and rolls back over. We can play that move and make great money doing it. We can do it with a bit more confidence because those big funds have our backs.

With that, next week we will look for a bit more pullback and some stocks getting in good position to buy again after that big surge. Then we will anticipate the big boys coming in and pushing those stocks back up, driving our current positions higher, thank you very much. We can take some more gain. It will help us make some nice trades up to the prior high on the new positions that came back to test and those great patterns that broke higher. They will make us some money as well.

Sounds easy when you lay it out that way, but listen: Patience is the key. Let them set up, and do not chase the bus. A lot of people will do that. As soon as you start chasing the bus, however, things come back on you. I still do it all the time. Here in the trading room, we will have a play ones or twice a week where we make a buy just at the wrong time, of course. Then it turns on us. Discipline is the key. Fortunately we limit that to a single sacrificial one. I always say I am just trying to get the market to turn, so I will go ahead and do it. Then, sure enough, it will turn. But understand that is part of the discipline of trading. This is a trader's market, no doubt about that right now. Everyone here as figured that out.

In any event, be patient. Let the plays come to us. If they do, we have great entries and can make money. If you chase, you have to be just right. Have a little patience and let it set up. We have the big boys backstopping us probably for another month I hate to put a timeline on it, but this is the time of year where they should be doing that. If they will provide the backstop, that's great. We will play in that field and make some money. I will see you on Monday.

Have an excellent weekend!


Support and Resistance

NASDAQ: Closed at 2737.15

Resistance:
2759 is the mid-May low
2762 is the February low
2796 is the February gap down point
2816 is the early April peak.
2825 is the 2007 closing peak.
2841 is the February 2011 peak
2862 is the 2007 peak
2879 is the July 2011 peak
2888 is the May 2011 peak

Support:
2706 to 2705 is the April 2011 low and the February 2011 and consolidation low (bottom of the trading range) 2723 to 2705 is the range of support at the bottom of the January to May trading range
The 200 day SMA at 2691
2686 is the January 2011 closing low
2676 is the January 2010 low
2645-2650ish from December 2010 consolidation
2643 is the September 2011 high
2612 is the late August 2011 peak
2603 is the March 2011 intraday low (post-Japan low)
2599 is the June 2011 low
2593 is the November intraday high
The 50 day EMA at 2587
2580 is the November 2010 closing high
2569 is the November gap up point through the April 2010 peak
2555 is the mid-August 2011 peak
2546 is the early September 2011 gap down point
2540 is the early November 2010 lower gap point
2532 is the early August gap down point
2512 is last week's gap down point
2469 is the November 2010 low
2331 from October 2010 low and the August 2011 intraday low
2305 from the August 2010 peak (summertime base)
2139 is the May and June 2010 low
2123 is the August 2010 gap down point
2100 from the August 2010 lows


S&P 500: Closed at 1285.09
Resistance:
1295 to 1294 is the April 2011 low and the February 2011 consolidation low (bottom of the trading range)
1313 from the August 2008 interim peak
1318.51 is the May low
1325-27 is the March 2008 closing low and the May 2006 peak.
1332 is the early March peak
1340 is the early April 2011 peak
1344 is the February 2011 peak is being challenged again
1357 is the July 2011 peak
1364 is the March 2007 low
1370 is the August 2007 low
1371 is the recent May 2011 peak

Support:
1275 is the January 2010 low, early January 2011 peak
The 200 day SMA at 1274
1258 is June 2011 intraday low
1255 is the late December 2010 consolidation range
1249 is the March 2011 low (post-Japan)
1235 is the mid-December 2010 consolidation low
1231 is the late August 2011 peak
1227 is the November 2010 peak
1220 is the April 2010 peak
1209 is the mid-August 2011 high
The 50 day EMA at 1208
1196 is the November 2010 consolidation peak
1178-1180 is the October 2010/November 2010 consolidation low
1131 - 1127 from August 2010 base peak.
1119 is the early August closing low
1109 is the mid-September 2010 gap up point
1101 is the August 2011 low
1075 is the October 2011 intraday low
1099 from the mid-July interim peak
1090 is the early September 2010 gap up point
1040 from the August 2010 lows and May/June 2010 lows
1011 is the summer 2010 low


Dow: Closed at 12,231.11
Resistance:
12,283 is the March 2011 peak
12,391 is the February 2011 peak
12,754 is the July intraday peak
12,876 is the May high
13,058 from the May 2008 peak on that bounce in the selling

Support:
12,110 from the March 2007 closing low
12,094 is the April 2011 low
The 200 day SMA at 11,973
The June low at 11,897 (closing)
11,893 from March 2008 closing low
11,867 from the August 2009 high and peak on that bounce in the selling.
11,734 from 11-98 peak
11,717 is the late August 2011 peak
The August low at 11,700
11,555 is the March low
The 50 day EMA at 11,501
11,452 is the November 2010 peak
11,178 from November 2010
10,978 is the bottom of the November 2010 consolidation
10,750 from September 2010
10,720 is the August closing low
10,705-710 from January 2010 peak
10,694-700 from August 2010 peak
9938 is the August 2010 low


Economic Calendar

October 25 - Tuesday
Case-Shiller 20-city Index, August (9:00): -3.80% actual versus -3.5% expected, -4.21% prior (revised from -4.11%)
Consumer Confidence, October (10:00): 39.8 actual versus 46.0 expected, 46.4 prior (revised from 45.4)
FHFA Housing Price Index, August (10:00): -0.1% actual versus 0.0% prior (revised from 0.8%)

October 26 - Wednesday
MBA Mortgage Index, 10/22 (7:00): 4.9% actual versus -14.9% prior
Durable Orders, September (8:30): -0.8% actual versus -1.0% expected, -0.1% prior
Durable Orders -ex Transportation, September (8:30): 1.7% actual versus 0.4% expected, -0.4% prior (revised from 0.0%)
New Home Sales, September (10:00): 313K actual versus 300K expected, 296K prior (revised from 295K)
Crude Inventories, 10/22 (10:30): 4.735M actual versus -4.729M prior

October 27 - Thursday
Initial Claims, 10/22 (8:30): 402K actual versus 402K expected, 404K prior (revised from 403K)
Continuing Claims, 10/15 (8:30): 3645K actual versus 3700K expected, 3741K prior (revised from 3719K)
GDP-Adv., Q3 (8:30): 2.5% actual versus 2.3% expected, 1.3% prior
GDP Deflator, Q3 (8:30): 2.5% actual versus 2.5% expected, 2.5% prior
Pending Home Sales, September (10:00): -4.6% actual versus -0.9% expected, -1.2% prior

October 28 - Friday
Personal Income, September (8:30): 0.1% actual versus 0.3% expected, -0.1% prior
Personal Spending, September (8:30): 0.6% actual versus 0.6% expected, 0.2% prior
PCE Prices - Core, September (8:30): 0.0% actual versus 0.1% expected, 0.1% prior
Employment Cost Inde, Q3 (8:30): 0.3% actual versus 0.6% expected, 0.7% prior
Michigan Sentiment -, October (9:55): 60.9 actual versus 58.0 expected, 57.5 prior

October 31 - Monday
Chicago PMI, October (9:45): 58.9 expected, 60.4 prior

November 1 - Tuesday
ISM Index, October (10:00): 52.1 expected, 51.6 prior
Construction Spending, September (10:00): 0.3% expected, 1.4% prior
Auto Sales, November (15:00): 4.07M prior
Truck Sales, November (15:00): 5.97M prior

November 2 - Wednesday
MBA Mortgage Index, 10/29 (7:00): 4.9% prior
Challenger Job Cuts, October (7:30): -211.5% prior
ADP Employment Change, October (8:15): 100K expected, 91K prior
Crude Inventories, 10/29 (10:30): 4.735M prior
FOMC Rate Decision, November (24:30): 0.25% expected, 0.25% prior

November 3 - Thursday
Initial Claims, 10/29 (8:30): 402K expected, 402K prior
Continuing Claims, 10/22 (8:30): 3675K expected, 3645K prior
Productivity-Preliminary, Q3 (8:30): 2.8% expected, -0.7% prior
Unit Labor Costs -Preliminary, Q3 (8:30): -1.1% expected, 3.3% prior
Factory Orders, September (10:00): -0.2% expected, -0.2% prior
ISM Services, October (10:00): 53.7 expected, 53.0 prior

November 4 - Friday
Nonfarm Payrolls, October (8:30): 88K expected, 103K prior
Nonfarm Private Payrolls, October (8:30): 114K expected, 137K prior
Unemployment Rate, October (8:30): 9.1% expected, 9.1% prior
Hourly Earnings, October (8:30): 0.2% expected, 0.2% prior
Average Workweek, October (8:30): 34.3 expected, 34.3 prior

By: Jon Johnson, Editor
Copyright 2011 | All Rights Reserved

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

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Sunday, October 23, 2011

Market Defies the Negatives

SUMMARY:

- After fighting off the negatives all week and holding the top of the range, SP500, DJ30 join NASDAQ with a breakout move.
- EU 'intensified negotiations' help fan a Friday rally.
- Earnings overall solid Friday, adding to the upside push.
- Dollar hits post-WWII low versus yen.
- Market defies the negatives and moves into the next range of resistance.
- Rally to a new high? Don't expect it, but will take what the market is giving out.


Indices defy the negativity as SP500, DJ30 follow NASDAQ's breakout.

Where there's a will there's a way, I suppose. The market took about every possible hit you could throw at it. There were problems with the European deal, economic issues here at home, and maybe some earnings that were not quite as good as some felt they should be (e.g., AAPL). Nonetheless, all week it held up in the top of its range AT the top of its range, so to speak. Remember the indices were trading in a range from August into October. The past week moved up to the top of that range and then consolidated laterally. The question was whether they were going to break higher or fall back down in the range. NASDAQ was the first to move to the upside. It broke higher last Friday and then sold back to test. This Friday it gapped higher again, moving back out of its range. This time it was not alone. It was joined by SP500, breaking out of its range. It was also joined by the Dow 30. Even the DJ20 broke higher out of its range. Very solid moves as a group of indices all moved up together.

I have to say, I had my misgivings as to whether this move could occur. After the action on Wednesday and Thursday, I started to change my tune a bit, particularly on Thursday as the indices reached lower, held the bottom of this recent lateral consolidation and rallied back. That is the first time the buyers have stepped in to rally stocks off of an intraday move. That showed a bit more bullish action as the consolidation went into its first week. Apparently that was enough to send it to the upside. Certainly my views and the views of the others here are not going to stop the market's move. The question now is, one, can they sustain the break? Number two, will it move just into this range of resistance below the April peak, or will it try to make the breakout?

Once again, I have to take negative side. I do not see how it can possibly do that given outlook for the economy. Then again, the market does not care what I think. It factors in the fact and the beliefs of millions of traders and investors. That is how it makes its moves. Even though we may have misgivings, we recognize the move and we were ready to play the move. Indeed, we have been playing the move even though we did not necessarily like it. It was one of those situations where your gut may say one thing, but you have to keep your eyes open and do what the market tells you to do.

We have a break higher in the indices. They could turn right back down next week if the European meeting this week is not as good as investors think it should be. There could also be some bad earnings next week that flip things back down. The key move now will not about the race higher. It will be the test of this break by SP500, the Dow, and the Dow 20. Will they hold a la the NASDAQ and then begin the move back upside? The interesting thing is NASDAQ already made the break. It has already tested the break and it is heading up. Now these other indices are joining it. Maybe the testing is done. That is one of the reasons we were moving into upside positions on Friday even though we had a gap to the upside. There are very solid plays that we have been looking at. Those that have formed that rounded bottom over the August-October time frame. As they were making breaks higher (as they have been doing in a staggered form all week), we moved into new upside positions.

Was there really a reason for this move on Friday? There was no economic news released. There was a lot of other news. As I mentioned, there was the EU news. There were supposedly "intensified negotiations" reported on in the morning. They were ahead of this weekend meeting, so that got everyone excited. They are talking this time, and Merkel or other Germans are not saying this deal will not fly. Now they were having "intensified negotiations," whatever that means, and the market took that as a positive that some kind of deal would be reached. Indeed, they were throwing out a figure of 1.3T Euros as a bailout amount. Of course that was less than the 2T heard earlier in the week, but that is better than a sharp stick in the eye or a thumbs down from Merkel as seen earlier.

There were some good earnings out. GE's earnings were rather in line and boring. HON reported a nice beat and upside guidance. It took off to the upside, breaking out of that little rounded type of bottom that I have talked about. VZ beat. It was not a great beat, but it was solid. We are seeing that with other stocks this week. INTC, GOOG, and others have posted some great earnings and are moving higher.

So we had reasons, but does it really matter what the reason was for the market to make the breakout? A breakout is a breakout, right? It does not matter what our feelings are or why we believe it happens. There is always the game of "pin the tail on the reason" why the market moved whenever there is a significant break upside or downside. It really does not matter why we think it happened. Everyone can hypothesize, but the market does not the react as much to the day-to-day news. It does short term, do not get me wrong. It will bounce one way or the other based upon a news story, but the overall trend occurs over time.

The indices broke lower to start October. They rallied back to the top of the range, and then they moved laterally along the top of the range until the breakout on Friday. While Friday may have been influenced by some of the news that got things going, the move was set up long before Friday ever came around. Whether it was Europe, earnings, both, or just the phase of the moon does not really matter in the long run. The question is what the technical action is on the breakout and then what happens afterward. As I said, who knows if this breakout can continue, but we do know that we had the break after it rallied up to the top of the range, and then the SP500 and NYSE indices followed the NASDAQ's lead to the upside.

Can it continue? Again I ask that question. I will answer it with another question: Who knows? I do know that things are extremely negative and kind of extremely positive at the same time. That may seem strange. Investor sentiment is way down. The bears have been on top of the bulls for several weeks. The bears are at 41%, sharply lower this week from the last couple of weeks, but they are still above the bulls that are at 35.8%. Those are the investment advisors. We have a cross over that has been ongoing now for close to a month, and it is very bullish. The sentiment is quite negative. At the same time, a lot of people are saying the market has to go up. They are overly exuberant about what will happen with the EU.

I heard some things today that made me think that times may be a-changin', so to speak. Early on I heard comments that I had not heard since the late 1970's. On some of the news shows, some analysts said that the best way for the U.S. to move forward is for it to manage its decline similar to the UK. A lot of this was said back in the late 70's as well. Things like, "The days of the U.S. are over" or "It has seen its best days." It was a nice experiment while it lasted, but how long could this thing called a Republic last, really? Of course then we proceeded to get Ronald Reagan in, and he reignited our entrepreneurial spirit and national pride. Then we had one of the most incredible 20-year booms the world has ever seen, creating over 200M jobs along the way. An amazing period in our history.

This extreme pessimism is a cause for optimism. I heard other things about this rally on the session. "It was a short squeeze. There was no real buying. There was no conviction." It was just expiration, a short squeeze that put the pinch on those that were trading the market short. No doubt rallies start with squeezes, but, again, this rally is a bit beyond that point for the moment. We have had this break to the top, and now a breakout. There will be shorts there because a lot of people are looking right at this 1225-1230 level. When SP500 broke over it, they were caught with their shorts down, so to speak, and they got squeezed where you do not want to get squeezed. That is how these things work. So it was partly that, but it is always partly short squeeze.

Lack of conviction. No one believes in it, and then you have a lot of stocks that have formed up that rounded bottom as I have talked about (HON, for instance). Over the past three months they have moved in this rounded bottom where there is a double bottom, an inverted head and shoulders, a cup pattern whatever it happens to be. Now they are breaking higher. This is the next wave of stocks to lead the market higher, and we are starting to see that happen. Indeed we were buying into that next wave of stocks again on Friday despite the moves already to this point.

When you see companies such as VSEA or LNKD are moving higher, you have to take note of that and participate in the move to the upside. You may not believe in the move. Your gut may tell you not to get involved, but your gut and the market do not go together. As I tell people in the seminars, you have to forget about what you have learned all your life about how you should react to buys and sells. I am not just talking about the stock market; it is about everything in life. You have to forget about all that. You have to start understanding stock movements and why they move. More importantly, just understanding that they are moving and to take advantage of it when they do.

That is the kind of market we are in today. Then when you see stocks set up in these bases, it is telling us there is accumulation ongoing. We may not believe it, but you cannot deny it. They are breaking higher, and you cannot deny that either. You can either be like some of the guys you see on TV and curse the night, or you can light a few candles, call your broker, or get online and make some trades to participate in the move.

On Friday the stocks were moving. They started higher. Futures were up and stocks went higher when the bell rang. There was a mid-day slump, but they never came close to negative. Then they rallied back in the afternoon to finish close to session highs.

SP500, +1.9%; NASDAQ, +1.5%; Dow, +2.3%; SP600, +2.3%; SOX, +2.25%.

Very solid moves. We have seen this back-and-forth movement all week. It is one of the things we were somewhat lamenting, but this time there was a difference. It was not just banging back and forth, day-to-day in a tennis match inside the trading range. This move broke it through the top of the range.


OTHER MARKETS

As you would probably suspect, the other markets were heading in different directions.

Dollar: 1.3863 versus 1.3772 euro. The dollar lost ground. The dollar is now at a post-World War II low versus the Japanese yen. Wow. It was down against the euro for four straight days. That is the first time it has done that since July of 2011. Certain not a banner day for the dollar or a banner week, for that matter. But it was not beaten to a pulp either. It is still holding at its support after a nice break to the upside. The dollar holders are not ready to give up and say that Europe has its problems solved. That is what this chart is telling you. There is some doubt, but they have not given up and said it is a fait accompli.

http://investmenthouse.com/ihmedia/dxy0.jpeg


Bonds: 2.21% versus 2.18% 10 year U.S. Treasury. Bonds had fallen back down to the 50 day EMA but, as with the dollar, they have not given up their trend. There is some doubt that Europe will do what it needs to do or at least what our Treasury Secretary and others are telling them they need to do. If they do not, the bonds can bounce right back up on fear. We will have to see how it plays out. This is an important test, but a test in an uptrend nonetheless.

http://investmenthouse.com/ihmedia/tlt.jpeg


Gold: 1,636.20, +23.30. Gold bounced back. This was the week that it broke down from that upwardly-pointing wedge. It came close to 1600, falling down to 1605 on the low. Now it is bouncing. We have gold to the downside. I do not think we have overstayed our welcome on the downside move. Maybe we did, but I still think it will find a lot of resistance at 1650. I still think it will come back lower, closer to 1550 before it moves significantly back to the upside. What will that have set up, mind you? The old ABCD pattern. If it goes down to 1550 or right around the 200 day EMA and bounces from there, that will be a great buy on gold.

http://investmenthouse.com/ihmedia/xgld.jpeg


Oil: 87.46, +1.39. Oil bounced upside once more. It closed off of its high. It is trying to bump back up at the top of the range at 90. It is just above mid-range, and it is trying to hold. It has been very volatile this week, but the theme is still holding this move higher off of the late-September low. Looks like it wants to try to bump 90. That will be a very important test. If Europe comes up with something, it will definitely give that a run. If Europe does not, we will see it fall back down in relatively short order.

http://investmenthouse.com/ihmedia/xoil.jpeg



TECHNICAL SUMMARY

INTERNALS

Internals were solid, but you have to juxtapose that with the fact that it was expiration Friday and that will skew the numbers.

Breadth. Breadth was solid on NASDAQ at 3.5:1. It was a very solid at 5.4:1 on the NYSE.

Volume. Volume actually fell on the NASDAQ by 2.5% to 1.97B. No expiration effect there. It was up 18.5% on the NYSE however, topping 1B shares. Maybe a little expiration bump there, but it was nothing really impressive as far as the trade. It did push volume up to average on the NYSE.


CHARTS

SP500. SP500 broke above resistance. It cleared the recent highs as well as the late-August peaks. It is at 1238. That takes it beyond 1227 that was that November peak. Finally, after several month of waiting, it is now looking toward the March low at 1250 and the June low at 1260 or so. You have another 12 to 22 points before it hits those levels. The large caps are in position to challenge them now. Again, the question is do they rally higher or test first? NASDAQ has already tested and succeeded, so it may just be a case where these indices continue higher following NASDAQ as it has already done the heavy lifting for them. What is the next run? We look for a test to March or June at 1250-1260. That is when things get tough. That will be a serious resistance range. It has to break through that to get to the next serious resistance range that would perhaps allow it to challenge the April and May peaks up near 1370 or so. It is making the headway. It is surprising; you may not believe it is happening, but it is. We will see if it can hold the move and continue on.


NASDAQ. NASDAQ has already made the break. It did so two Friday's back, and it spent this past week testing. There was that Thursday move where it tapped the 50 day EMA and reversed. First-time buyers had showed up intraday, and then it gapped to the upside. It was not a breakout for NASDAQ. It did not clear the prior highs, but it was an important move because it managed to move back up over resistance and has but in what looks to be a successful test of that breakout move. Now it will challenge very significant ranges, as noted before. That takes it all the way back to 2007 levels, these shoulders from that head and shoulders that lead off into the massive decline in 2008. It will be a very tough range for it. It is a breakout, it is a move, but now it has to figure out where it will go from here. It is pretty tight up to these levels at 2700, 2710. That gets it up another 60 or 70 points. That is not a bad move, but it gets it very serious in here with some heavy duty resistance. It may have the help of the SP500 and the Dow to send it higher, however.


DJ30. DJ30 also broke over its recent highs and it broke through the March lows. It is aiming at the June double bottom. That little double bottom is not far away. Serious resistance at 1200 psychological and actual price resistance at that level. It has problems as well. It is just trying to retake all of these prior peaks, but it is a "one step at a time" program. It has to shoot down that resistance. You have to hand it to the indices, they did it on Friday.


SP600. SP600 had a 2.3% gain. Back up to last weeks' highs. Still in their range and still below the August peak. They are following but they are not inspiring a lot of belief that the economy will be super anytime soon.


SOX. The SOX was up 2.25%, well off its high on the day. Still well off last week's high, and well off the September highs. It is just not leading here. I guess we will take following for now, as long as we can get some of the indices to move higher. We have to watch the SOX. It was one of the first to notch the lead lower earlier in the year. If it does not follow here, that is very significant. We would look for the moves by the other indices up into the next range to be truncated ultimately by the SOX acting as an anchor chain and dragging them back down. If the semiconductors do not perform well, the economy will probably not do that well. Any breakout by SP500 and NASDAQ that moves up into this upper range will be impeded by the SOX falling back down. We have to watch for that as the weeks unfold. For now we have a break higher. That is obviously a positive move, and we will play it. The question is how much play we will get out of it.


LEADERSHIP

Financial. JPM was trying to make the break through the 50 day EMA, but it could not. MS is playing above its 50 day EMA, but it could not put a lot of mileage on anything. WFC had a decent move, up over 2%. It is trying to stretch its move. These are not ones to write home about, but they are trying to make hay to the upside. A rounded bottom, a break higher, and struggling a bit. But it is putting the moves on again and trying to make its mark to the upside.

Retail. ANF has an interesting pattern. Nice flag. It has its double bottom/rounded bottom ready to move higher. BEE is breaking higher out of its own rounded bottom. Very interesting. I will call that retail because it is a hotel/motel type. A little stretch, but give me a break. COH is trying to make a break higher. It is not surging, but we did see surges from stocks this week. TSCO is breaking higher. On Friday we saw CMG smash to the upside along with MCD. I am eating crow burgers today for getting out of my MCD the day before earnings. Good call.

Transportation. The transports broke out. CSX broke higher from its lateral consolidation. JBHT formed a nice pennant after it reversed its trend and broke nicely higher. We have rails breaking higher, we have freight breaking higher. Very nice to see the transports following and breaking out with the Dow. That is some kind of Dow theory signal, although it is not a new high. It is just a break higher, but it is a positive synergistic move to the upside.

Energy. Energy remains somewhat of an enigma. It has improved off its lows, but it is not breaking out as other areas are. CHK has rallied up to resistance. Kind of struggling. HAL rallied but it faded this week. It looks like it wants to break to the downside. VLO is trying to make the break over resistance. We will see if it does. The point is that energy has recovered some, but it is not breaking higher. That is an interesting feature as well. It has something to do with economies. Energy follows economies or leads economies, and it is not making a strong move to the upside here. We need to watch this as time goes on.

Technology. AAPL was the big story. It missed its earnings and it is testing its 50 day EMA. GOOG hit its earnings and gapped upside. It is moving laterally. We will see if it can move higher. It was not a breakaway gap, so we will see what it can do. There are others setting up and trying to move well. NTGR has a nice rounded bottom, forming a handle. You have to like that. JNPR is trying to set up and turn the corner as well. RAX had a nice break to the upside, and now it is testing that move. FFIV is the same thing. A nice handle test. These are the cloud companies. They were the big leaders back in 2009. They sold off. They have had a deep correction, and now they are trying to step up and become some of those stocks that take the lead or assist in taking the lead now that some of the horsemen who pulled the markets higher have to take a break.



THE MARKET

SENTIMENT INDICATORS

VIX: 31.32; -3.46
VXN: 31.42; -3.36
VXO: 30.14; -3.42

Put/Call Ratio (CBOE): 0.86; -0.52


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 does not have the cash to drive it higher.

Bulls: 35.8% versus 34.4%. Rising for the first time in several weeks but still over 35%. 35% is the threshold measuring bullish versus bearish action. Sixth week the bulls are below bears and the gap is widening. A powerful sentiment signal. Solid move lower from 49.5% in late July. Highs from April and December (60% readings spanning December through early May 2011). The 5 year high is 62.0. The crossover level at 29% bulls from July 2010 is long gone. 35% is the threshold level suggesting bullishness. To be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 45.0% versus 46.3%. Fading off the high but still well over 35%, the level considered bullish for the market. Sixth week of bears over bulls and six weeks over the 35% threshold considered a bullish indicator and have made that important crossover of bulls. For more 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: +38.84 points (+1.49%) to close at 2637.46
Volume: 1.975B (-2.47%)

Up Volume: 1.73B (+778.28M)
Down Volume: 416.54M (-663.46M)

A/D and Hi/Lo: Advancers led 3.48 to 1
Previous Session: Decliners led 1.09 to 1

New Highs: 40 (+40)
New Lows: 26 (+26)

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: +22.86 points (+1.88%) to close at 1238.25
NYSE Volume: 1.075B (+18.52%)

Up Volume: 3.69B (+840M)
Down Volume: 764.71M (-665.29M)

A/D and Hi/Lo: Advancers led 5.41 to 1
Previous Session: Advancers led 1.3 to 1

New Highs: 78 (+50)
New Lows: 16 (-19)

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

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


DJ30

Stats: +267.01 points (+2.31%) to close at 11808.79
Volume DJ30: 264M shares versus 166M shares Thursday.

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


MONDAY

With those leaders trying to step up, the market has a good shot at continuing this run. That is why we are buying into the move, pure and simple. There is a lot more data next week, and there are a lot of earnings. One third of the SP500 reports earnings in the coming week. It will be a huge week for earnings and for data. Case/Shiller, Consumer Confidence, Durable Goods Orders, New Home Sales, Initial Claims. The advance GDP for the third-quarter will be important. 2.2% we will see. Personal Income and Spending and Michigan Sentiment end the week. A lot of news and a lot of earnings.

Of course we also have our friends over in Europe who will be trying to solve their financial problems. A lot of things can push and pull the market different directions, but we are going to continue to look at these stocks that have had these rounded bottoms and can provide leadership to the upside. Because we have had a break higher in the indices themselves. Again, I do not think they will break to new highs on this, but we can challenge the prior range, rattle around in there and make some money. We sure made money rattling around in this range. Play the move up, see how it tests, and then we can play it for as far as it will run. Then if it sets up into a back-and-forth trading range once more and it is a decent range looking at it. It is just the same size as the one it just broke out from. That gives us plenty of opportunity to make great money. We are going to look to do that using these plays. I am looking at the SP500, but it is the same type of pattern of the other plays that we have been looking at. We will use them until we cannot use them anymore.

Maybe the market runs out of juice because the economy just cannot hang. Okay. It will get there eventually. Until then we will not wring our hands about how terrible the future will be. We can talk about it; it is a lot of fun to make fun of our fearless leaders and talk about how they are screwing up and how we would do things so much better if we were there. That is all part of the process. But it comes down to what the market is doing and how we can make money out of it. Even if we feel like things might be going to hell in a hand basket, if we can make money in the near term buy playing the upside, we will make money in the near term by playing the upside. We may have to flip it back to the downside and make a lot of money as things sell off quickly again, but that is what you do. We are traders and investors in this market. You take what the market gives, and that means you have to be ready to move. And we will be.

For now, I like these little rounded bottoms. We will see how far they can take us. Enjoy your weekend. We are getting carried away by the mosquitoes down here, but I take solace in the fact that winter will be here eventually and two or three of them might die when the weather gets down to 35 or so.

Have a great weekend!


Support and Resistance

NASDAQ: Closed at 2637.46

Resistance:
2643 is the September 2011 high
2645-2650ish from December 2010 consolidation
2676 is the January 2010 low
2686 is the January 2011 closing low
The 200 day SMA at 2692
2706 to 2705 is the April 2011 low and the February 2011 and consolidation low (bottom of the trading range) 2723 to 2705 is the range of support at the bottom of the January to May trading range
2759 is the May low
2762 is the February low
2796 is the February gap down point
2816 is the early April peak.
2825 is the 2007 closing peak.
2841 is the February 2011 peak
2862 is the 2007 peak
2879 is the July 2011 peak
2888 is the May 2011 peak

Support:
2612 is the late August 2011 peak
2603 is the March 2011 intraday low (post-Japan low)
2599 is the June 2011 low
2593 is the November intraday high
2580 is the November 2010 closing high
2569 is the November gap up point through the April 2010 peak
The 50 day EMA at 2563
2555 is the mid-August 2011 peak
2546 is the early September 2011 gap down point
2540 is the early November 2010 lower gap point
2532 is the early August gap down point
2512 is last week's gap down point
2469 is the November 2010 low
2331 from October 2010 low and the August 2011 intraday low
2305 from the August 2010 peak (summertime base)
2139 is the May and June 2010 low
2123 is the August 2010 gap down point
2100 from the August 2010 lows


S&P 500: Closed at 1238.25
Resistance:
1249 is the March 2011 low (post-Japan)
1255 is the late December 2010 consolidation range
1275 is the January 2010 low, early January 2011 peak
The 200 day SMA at 1275
1295 to 1294 is the April 2011 low and the February 2011 consolidation low (bottom of the trading range)
1313 from the August 2008 interim peak
1318.51 is the May low
1325-27 is the March 2008 closing low and the May 2006 peak.
1332 is the early March peak
1340 is the early April 2011 peak
1344 is the February 2011 peak is being challenged again
1357 is the July 2011 peak
1364 is the March 2007 low
1370 is the August 2007 low
1371 is the recent May 2011 peak

Support:
1235 is the mid-December 2010 consolidation low
1231 is the late August 2011 peak
1227 is the November 2010 peak
1220 is the April 2010 peak
1209 is the mid-August 2011 high
1196 is the November 2010 consolidation peak
The 50 day EMA at 1196
1178-1180 is the October 2010/November 2010 consolidation low
1131 - 1127 from August 2010 base peak.
1119 is the early August closing low
1109 is the mid-September 2010 gap up point
1101 is the August 2011 low
1075 is the October 2011 intraday low
1099 from the mid-July interim peak
1090 is the early September 2010 gap up point
1040 from the August 2010 lows and May/June 2010 lows
1011 is the summer 2010 low


Dow: Closed at 11,808.79
Resistance:
11,867 from the August 2009 high and peak on that bounce in the selling.
11,893 from March 2008 closing low
The June low at 11,897 (closing)
The 200 day SMA at 11,966
12,094 is the April 2011 low
12,110 from the March 2007 closing low
12,283 is the March 2011 peak
12,391 is the February 2011 peak
12,876 is the May high
12,754 is the July intraday peak
13,058 from the May 2008 peak on that bounce in the selling

Support:
11,734 from 11-98 peak
11,717 is the late August 2011 peak
The August low at 11,700
11,555 is the March low
11,452 is the November 2010 peak
The 50 day EMA at 11,392
11,178 from November 2010
10,978 is the bottom of the November 2010 consolidation
10,750 from September 2010
10,720 is the August closing low
10,705-710 from January 2010 peak
10,694-700 from August 2010 peak
9938 is the August 2010 low


Economic Calendar

October 17 - Monday
Empire Manufacturing, October (8:30): -8.48 actual versus -4.0 expected, -8.82 prior
Industrial Production, September (9:15): 0.2% actual versus 0.2% expected, 0.0% prior (revised from 0.2%)
Capacity Utilization, September (9:15): 77.4% actual versus 77.5% expected, 77.3% prior (revised from 77.4%)

October 18 - Tuesday
PPI, September (8:30): 0.8% actual versus 0.2% expected, 0.0% prior
Core PPI, September (8:30): 0.2% actual versus 0.1% expected, 0.1% prior
Net Long-Term TIC Fl, August (9:00): $57.9B actual versus $9.1B prior (revised from $9.5B)
NAHB Housing Market Survey, October (10:00): 18 actual versus 15 expected, 14 prior

October 19 - Wednesday
MBA Mortgage Index, 10/15 (7:00): -14.9% actual versus +1.3% prior
CPI, September (8:30): 0.3% actual versus 0.3% expected, 0.4% prior
Core CPI, September (8:30): 0.1% actual versus 0.2% expected, 0.2% prior
Housing Starts, September (8:30): 658K actual versus 595k expected, 572K prior (revised from 571K)
Building Permits, September (8:30): 594K actual versus 610k expected, 625K prior (revised from 620K)
Crude Inventories, 10/15 (10:30): -4.729M actual versus 1.344M prior

October 20 - Thursday
Initial Claims, 10/15 (8:30): 403K actual versus 403k expected, 409K prior (revised from 404K)
Continuing Claims, 10/08 (8:30): 3719K actual versus 3690k expected, 3694K prior (revised from 3670K)
Existing Home Sales, September (10:00): 4.91M actual versus 4.92M expected, 5.06M prior (revised from 5.03M)
Philadelphia Fed, October (10:00): 8.7 actual versus -8.8 expected, -17.5 prior
Leading Indicators, September (10:00): 0.2% actual versus 0.3% expected, 0.3% prior


October 25 - Tuesday
Case-Shiller 20-city, August (9:00): -3.5% expected, -4.11% prior
Consumer Confidence, October (10:00): 46.0 expected, 45.4 prior
FHFA Housing Price Index, August (10:00): 0.8% prior

October 26 - Wednesday
MBA Mortgage Index, 10/22 (7:00): -14.9% prior
Durable Orders, September (8:30): -1.0% expected, -0.1% prior
Durable Orders -ex Transportation, September (8:30): 0.4% expected, 0.0% prior (revised from -0.1%)
New Home Sales, September (10:00): 300K expected, 295K prior
Crude Inventories, 10/22 (10:30): -4.729M prior

October 27 - Thursday
Initial Claims, 10/22 (8:30): 403K expected, 403K prior
Continuing Claims, 10/15 (8:30): 3700K expected, 3719K prior
GDP-Adv., Q3 (8:30): 2.2% expected, 1.3% prior
GDP Deflator, Q3 (8:30): 2.5% expected, 2.5% prior
Pending Home Sales, August (10:00): -1.0% expected, -1.2% prior

October 28 - Friday
Personal Income, September (8:30): 0.3% expected, -0.1% prior
Personal Spending, September (8:30): 0.6% expected, 0.2% prior
PCE Prices - Core, September (8:30): 0.1% expected, 0.1% prior
Employment Cost Index, Q3 (8:30): 0.6% expected, 0.7% prior
Michigan Sentiment - Final, October (9:55): 57.5 expected, 57.5 prior

By: Jon Johnson, Editor
Copyright 2011 | All Rights Reserved

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

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Monday, October 17, 2011

No Quit in the Rally

SUMMARY:

- No quit in the rally as more fuel fuels more gains.
- SP500 that much closer to the top of its range as NASDAQ makes the break.
- September retail sales top expectations but remember, sales are based on prices and inflation is a factor in prices.
- Business inventories tick higher but they are not building as some say.
- Michigan Sentiment hits a 30 year low as income expectations hit all-time lows.
- Europe, China CPI's are hot.
- The real leading indicators: Manufacturing led us out of the recession, gave the early indication of a new economic slowdown, and after it bounced and other indicators followed, it is now leading lower again.
- Stocks are driving higher into earnings. Now with the indices up two weeks and at the top of the range will earnings drive stocks higher from here?

Another solid price advance pushes SP500 to the top of its range.

Stocks pushed ahead once again. After some shaky intraday patterns on Wednesday and Thursday, stocks found more fuel to the upside. That was pretty much gratis of GOOG's earnings. GOOG reported blowout earnings once again, putting to rest any idea that its results might be somewhat shaky. It gapped sharply to the upside, and that really ignited NASDAQ, taking it higher with a big gap. AAPL followed GOOG, and they go somewhat hand-in-hand. AAPL gapped and ran to a new closing high. Very impressive moves. It kept the rally alive in the market even after more than a week of solid upside gains.

Indeed, NASDAQ broke out of its range with the move, holding its early gap higher and adding to it as the session went on. SP500 posted a nice gain, closing out at session highs. It closed at roughly 1225, and that puts it just below that November peak were it never really was able to break free. We are still looking for SP500 to someday make it up to the March and June lows. It has not been able to do it yet. It is still in a trading range, though it did put in a new closing high in that range on Friday.

Stocks were ready to move from the get-go on Friday. There was some good news out with retail sales, and there were other issues that helped drive stocks higher. But again, it is really earnings and a better feeling about Europe. They are all merging right now and driving stocks to the upside. Investors are breathing a collective sigh of relief about Europe and go back to investing in stocks. We will see how far that goes; I have been talking about the economy lately, and I have some more things to talk about tonight.

Looking at the SPY, futures gapped to the upside. They rallied nicely into the open, tested midday, and were still holding nice gains. They put on a nice show in the afternoon, rallying back to session highs. Impressive moves once again.

NASDAQ, +1.8%; SP500, +1.75%; Dow +1.45%; SP600, +1.8%; SOX, +1.1%.

Bringing up the tail end were the semiconductors. They have had a good run to this point, so I will not hold it against them. Very nice action to round out a solid week that saw the indices bounce up to the top of the range in some cases (as noted with NASDAQ) breaking through the top of the range.



OTHER MARKETS

Stocks are moving higher. Investors feel better about Europe and maybe U.S. prospects because some of the economic data has been better for the past few weeks. As stocks moved higher, the dollar continued lower along with the other markets. They kind of reversed the course they have been taking as stocks sold.


Dollar: 1.3876 versus 1.3787 euro. The dollar continued to sell. It has not been down this road in quite some time. It broke just below the 50 day EMA, but that still keeps it below the low from mid-September. It has tested its trend. This is the most significant test back for the dollar since it did renew its run higher. Remember it sold off into May, rallied, and then tried to make a break but formed a somewhat upward-tilting wedge and broke down. Nice consolidation and a tremendous run on the fear about Europe. Now it is taking that out.

It is coming down to a key test, and that is this trio of tops. Indeed, there is another top and bottom along the way, just above the 200 day EMA around 7650 on the DXYO. It will be an important test for the dollar. It is at an important support level. We will have to watch this as next week progresses. As the U.S. economy has improved, ironically the dollar has dropped. A lot of that is money leaving the dollar and going to Europe after it fled to the dollar on fears that Europe would implode.

http://investmenthouse.com/ihmedia/dxy0.jpeg


Bonds: 2.24% versus 2.17% 10 year U.S. Treasury. Bonds showed a similar chart pattern. A nice, strong breakout and rally through mid-September in the past two weeks. As the market recovered on the European situation, supposedly improving, the bond market sold. It was a decline again on Friday, but it is still holding its uptrend more or less. It is not holding the sharpest uptrend, but it is holding above the 50 day EMA. After this kind of run where the TLT has rallied from roughly 95 up to 125, a little pullback to the 50 day EMA is normal. We will see if it holds if there is worry once again interjected about the U.S. economy.

With earnings from GOOG looking good and this uptick in U.S. economic data, bonds have pulled back, but they have not broken their trend.

http://investmenthouse.com/ihmedia/tlt.jpeg


Gold: 1,683.20, +14.80. Gold bounced modestly. It continues in its upward-pointing wedge. I still think gold will break to the downside. The caveat is if Europe announces some crazy plan to run things up higher. In other words, if it does some Quantitative Easing or something along those lines, gold could jump up. Inflation is already crazy in Europe. The CPI for Europe in September grew at 3%. Huge moves. In China it was up 6%. They already have an inflation problem over there. If they throw gasoline on the fire with some Quantitative Easing, they will have incredible inflation. Massive stagflation. Today Jim Rogers said that the 1970's stagflation would be a piker (those are my words) versus what we will see with stagflation this time around if we keep up the crazy nonsense we are doing. So we have that wonderful nugget to digest down the road. Right now the market is not paying any mind to it, but we have to worry about that later.

http://investmenthouse.com/ihmedia/xgld.jpeg


Oil: 86.98, +2.75. Oil continued to rally. It broke back through the 50 day EMA. It is just above the middle of its range from 80-90. As the dollar declines, you will see oil rally. Oil is denominated in dollars. If the dollar gets weaker, it takes more dollars to pay OPEC off for its oil. That is part of our importing inflation. That is why having a weak-dollar policy is such a bad idea when we have so little oil on our own. That is why the Obama administration's energy policy is insane. It is trying to get us off of oil by doing something I do not know what. Paying off solar companies with contributors, apparently? It is laudable to get us off of oil, but we will not make that jump overnight. We have companies trying to do these things, but they cannot compete with China right now. Maybe we should try to get to a point where we can, but we have to get things that actually work.

We are having a real problem, but we need a stopgap measure. We have to go to natural gas or develop more of our own reserves so we can make that transition. The problem is, while we are doing that, if you weaken the dollar for the export economy that he wants that benefits the big companies and hurts America and small businesses, you are going to cheapen the dollar and make everything more expensive. That just makes our energy more expensive. That makes our inflation more expensive. It is a pernicious cycle they have started. They truly do not understand economics. They do not understand how, if you squeeze one part of the balloon another part pops out. You have to understand the entire balloon, so to speak, and how applying pressure at certain points impacts it. They are just going around taking potshots at different areas, and the result is a horrendous sausage-making process. It will not turn out to be good sausage.

Oil is bouncing up as the dollar is selling. It is going higher. People are also thinking that the world economies are better than they thought, so they are pushing oil higher as well. Again, the key will be when it gets up to 90 in the top of that range. There is no reason for oil to go through that, but I will talk more about the economic activity later. As you will see, while things look better near term, I think longer term, we will have a real problem overall. Europe has that 3% CPI rate. We could have trouble here as well if we are not very, very careful. I can tell you right now, we are not being careful.

http://investmenthouse.com/ihmedia/xoil.jpeg



TECHNICAL SUMMARY

INTERNALS

All of the internals and market technicals got to extreme levels. They wanted to rally to the upside, and that is exactly they have done. Now the indices find themselves at the top of the range. Friday was not a stellar day.

Breadth. Advancers were solid at 3:1 on the NASDAQ and 4.3:1 on the NYSE. Pretty much matched the session as they should, but volume was low.

Volume. Volume was down 1.65B on NASDAQ. Down a fraction. Down 9% to a meager 758M on the NYSE.



CHARTS

SP500. SP500 moved up to the November peak. Got close to it. Closed near session highs, did not back off. Very nice. We will see what it can do next week. It has run along way, from below the bottom of the range to the top of the range in eight sessions. Next week we will see if it can make the break higher and actually make it up to the March and June levels starting around 1260 and running up to 1270. That would still be a nice run. It is at the top of the range. Still in the range for now. We will see if the large caps can make the move.


NASDAQ. NASDAQ broke out. It is above its September peak as well as the March and June lows. It is ready to bump up into this modest range of resistance that is near the 200 day EMA. On Wednesday it gapped to a doji right at resistance, but it paid it no mind. It showed excellent strength. It was aided by AAPL and GOOG's earnings on Friday, and it performed well. Volume has been very low as it moved up to this top, but MACD has broken to a higher high as the index moved to a higher high. It is doing what it should do, and we will have to see where it decides to pause. It is the time of year for techs. They are performing well, but we have some big names coming in next week including AAPL.

AAPL has run very well towards its earnings. It had a new closing high. It is also near the September intraday highs. It has put in a good run. If it runs through Tuesday, you can bet we will take some more option gain on the two plays we still have options on. We have some November and December options on them, and we will bank some gain ahead of those earnings. You can always leave some and let them go crazy to the upside like GOOG. Maybe you get it. But when you look at this run into earnings, the probabilities are that you may get some backtracking. With AAPL, you may get a big burst to the upside. If we do, we will take some more gain at that point. We are being driven by some big moves in some big names on NASDAQ. When we get used to the earnings, that might change the story. Not for now, though.


SP600. The small caps were up 1.8%. A nice move. Still below the August peak. Lagging and, of course, that tell us that the economy is not as great as people think it is. If the economy in the U.S. was going to take off, the small caps would be taking off. We are seeing a drive by the same old big names and multinational exporters that lead the market over the past three years. That is because of the lower dollar policy and the export-economy policy of the administration. Small caps are not the favored few because they create wealth, they create independence, and they give people the ability to tell the government, "We do not need you." The government does not like that; it wants us all to be beholden to it.

Small caps are lagging. Not good for the market and not good for the economy. Ultimately I think that is the reason we are going to go back into a recession whether it is an official textbook recession or not.


SOX. SOX rose 1.1%, and it, too, is approaching its prior high in the range. The last time it went up here, it gapped to that evening star and sold off. It showed a hammer doji or hangman doji on Friday just below that prior level. Worth watching. NASDAQ has laughed at those candlestick indications for the past week, but it cannot laugh at them forever. It has hit SOX on several occasions and has resulted in selloffs. Will this be the next one? It is below resistance. It is right at the top of the range. It is showing that hammer or hangman doji. We will see what happens here.

In sum, the indices had a great two weeks. They are up near the top of the range. NASDAQ was breaking out of the range. Will NASDAQ be able to pull the rest of the market higher with it? Or is the SP500 going to roll over at the top of its range? It did not look that way on Friday, but you also have the small caps. Are they tagging along, or will they act as a weight on the rest of the market? They are not the largest, most capitalized names, so they do not move markets overall. They do give a very good indication of our economic future, however.



LEADERSHIP

Technology. AAPL is at a new closing high. GOOG jumped massively on its earnings, gapping to the upside very sharply. They dragged a lot of names with them. That is just the way it goes AAPL and GOOG did great, no doubt about it.

NVDA had a great two weeks, but it has gapped to a hangman doji right at the old high. MACD is not making a higher high. It sold off on this kind of symbol last time. We will see what happens. This is something to consider. It is an important stock. BRCM is a semiconductor that is moving higher. It was upgraded, and it just missed taking out that prior high. Back in July it gapped to the upside on earnings and then rolled over and sold off hideously. Maybe it does not do that this time. It is up at this level and MACD is rising. Maybe it will eclipse the prior level. We will see. This is one to watch as well. It will not necessarily slow down. There is nothing saying it is in trouble maybe as much as NVDA. We just need to be watching how all of these stocks handle the prior highs because they are all getting up there right now. We want to see how they react.

Financial. JPM announced its earnings. They were not great. Did not sell off very hard. GS is still trending lower. WFC has been a decent performer. It has a little rounded bottom and is breaking higher. There are some financials that are helping support the move to the upside. Not raging and breaking out, but supporting the move to the upside.

Overall. A lot of what you see right now is the pattern of a little rounded bottom. That is about the only thing you can put any money in right now that is not overbought. Are they going to rally to the upside and keep the move going, or are they just late comers who were lagging all along and are not going to be able to hang with the market? If these big boys turn around and sell off, are they just going to collapse back down in their range? We will see what happens there. The market is divided into these two areas. There are those that have really surged and then those that are wannabe surgers. We will see if they can make the break higher.



THE ECONOMY

Retail sales surprise to the upside but is it real growth or inflation issues?


Business Inventories tick higher prompting some to say an inventory build means a good holiday season. Get off the crack.


Michigan Sentiment hits all kinds of records.


TO VIEW THE ECONOMY VIDEO CLICK THE FOLLOWING LINK:

Flash: http://investmenthouse1.com/ihmedia/f/eco/eco.html



THE MARKET

SENTIMENT INDICATORS

VIX. The VIX has fallen off of the proverbial table as the market has rallied. That is exactly what you would expect. Indeed, it has broken below an important support level. That bodes well for the market overall. It has made a good move, no doubt.


VIX: 28.24; -2.46
VXN: 28.69; -1.61
VXO: 27.15; -2.01

Put/Call Ratio (CBOE): 0.99; -0.06


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 does not have the cash to drive it higher.

Bulls: 34.4% versus 34.4%. Holding steady after dropping form 37.6%. Still below the important 35% level suggesting a bullish climate for stocks. Fifth week the bulls are below bears and the gap is widening. A powerful sentiment signal. Solid move lower from 49.5% in late July. Highs from April and December (60% readings spanning December through early May 2011). The 5 year high is 62.0. The crossover level at 29% bulls from July 2010 is long gone. 35% is the threshold level suggesting bullishness. To be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 46.3% versus 45.2%. Increasing the negative views, well above the 40.9% reading just three weeks back. Still well above the bulls and the 35% level considered bullish for the market. Fifth week of bears over bulls and six weeks over the 35% threshold considered a bullish indicator and have made that important crossover of bulls. For more 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: +47.61 points (+1.82%) to close at 2667.85
Volume: 1.645B (-0.66%)

Up Volume: 1.28B (+160M)
Down Volume: 391.67M (-156.15M)

A/D and Hi/Lo: Advancers led 3 to 1
Previous Session: Decliners led 1.04 to 1

New Highs: 31 (+19)
New Lows: 24 (-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: +20.92 points (+1.74%) to close at 1224.58
NYSE Volume: 758M (-9%)

Up Volume: 3.15B (+1.77B)
Down Volume: 532.65M (-1.987B)

A/D and Hi/Lo: Advancers led 4.34 to 1
Previous Session: Decliners led 1.55 to 1

New Highs: 46 (+15)
New Lows: 20 (0)

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

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


DJ30

Stats: +166.36 points (+1.45%) to close at 11644.49
Volume DJ30: 133M shares Friday versus 144M Thursday.

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


MONDAY

A huge, busy week next week. We have a lot on the economic data slate. That will be very important. Monday we have New York Empire Manufacturing. We will see if they can actually pull back out of the negative numbers. Not expected to do so. Industrial Production and Capacity Utilization is still expected to rise. We will see. If they go along with the recent bounce in data, they should do that. The core PPI on Tuesday is important. Wednesday brings the CPI, and that is also very important. Housing Starts are somewhat important. The CPI will be critical for us. It is expected to actually slow its rise. We will see. I do not trust the government with that one. Jim Rogers thinks they are lying, and I think he is correct. But I will not point fingers. That would not be the civil thing to do in this country that is acting so civilly of late.

Thursday Initial Jobless Claims are out once more. Existing Home Sales are much more important than Housing Starts. The Philly Fed is important. Will it pull another negative as anticipated? Will it be better or worse? It is anticipated to improve or to not be so negative. Some people say I should not be so negative, but it is in my nature. Leading Indicators are out on Thursday. Who gives a flip? Does not mean anything. The only man-made indicator worth anything is ECRI. ECRI already said we are going into recession. I have to go along with them. It does not say when, but it will not be too long.

Lots of news in manufacturing. That will be very important. It was the first to turn up, and it was the first to turn down when things started to sag early in 2011. Here's the rub. The thing that everyone is forgetting is that manufacturing has turned down again ahead of all other economic indicators. It has led the recovery. It led the decline this year. It started to recover and then started to turn down. The rest of the economic data is just now turning back. It has likely just turned up in time to start rolling back down with the regional manufacturing data. Consider that when you hear all the other things they are saying. You can make a good case and convince yourself that things are getting better, but everything bounces in a downtrend. But I do not want to be too negative, so I will move on.

What will really be driving things next week? The market will be important and, yes, Europe will be important while they try to get a plan together. Remember, all this good will and good cheer is because Europe has finally said "I guess we ought to do something." Then the markets rally and everyone feels better. Do not count on Europe doing the right thing. It has not done that in quite some time. What is the right thing? That is a good question. Is it what the U.S. wants? I do not think so. It should be what Iceland wants. I wrote a blog about this. Iceland was the poster child for all of the selloff in 2008 because it is just financial that is basically its economy. It took a bunch of these bad loans and bad mortgages, and it was crushed. No one would bail it out. It had to come up with its own scheme, and that was that the bond holders had to pay for it. In other words, those who had the contracts had to deal with it. If they could not stand, they went down. Banks went down and financial institutions collapsed. Now Iceland is in better position than any of the countries that tried to bail things out. By 2012, it will not have a yearly deficit in its economy. It has flushed out the system and is doing quite well.

We will have earnings next week, and that will be driving a lot of the action. AAPL's earnings come out Tuesday after the close. They will probably be blockbuster. The stock may rally ahead of that. The question is do you want to take some before or after? You can play the gamble and maybe go after. If it rallies up through Tuesday afternoon, we will probably take some more options off the table. Look at the pattern. Look how far it is. That is the market in general. They have rallied up to the next resistance level except for NASDAQ. It has broken through the intermediate resistance. The question is can they continue from here? There is nothing to slow them down. They are going quite well. If they get more good earnings, they should continue higher near term.

Remember how earnings work. Look back in June, July, and August; when you get the initial results, you get good moves. Then you can have a slump after that. It does not matter what kind of market you are in. Look at April. Pretty good. It sold off but came back. After awhile, the market gets the gist of what they will be, and it is harder to impress the market with the results unless they are blockbuster. After everyone gets used to what is coming, a huge number will benefit an individual stock, but the market overall has pretty much priced it all in.

The market had rallied ahead of earnings, as I suggested it would. It has continued into the early earnings. I did not think it would keep going as it has, but it has some big earnings that helped it out. The key is whether it turns down here or if it keeps going. We will be split. We will probably put 50/50 upside to downside on the plays for next week. This is an important point. We have some SPY, we have QID. We got some of that tossed back in our face. Fortunately we played the QQQ all the way to the upside. That helps. We will reload on those to the downside if it shows us that. I am not convinced that this thing will move higher. The economy does not suggest it will. Something will come up that will suddenly wake people. I think it will hit them with a sledgehammer about the economy and that will bring things down.

That is just what I think, however. Ultimately, you have to go with what the market tells you. It has rallied nicely. Some people believe the market is saying that things are rosy. NASDAQ has broken out. It is looking pretty good, but it is supposed to do that this time of year. SP500 has not broken out of its range yet. DJ30 has not broken out of its range yet. SP600 has not broken out of its range yet; indeed, it is lagging considerably. Mid-cap SP400 has not broken out of its range. The SOX is up at the top of its range, and it is showing a hangman doji on the candlestick chart. We have NASDAQ making the break. Good for it. It has GOOG and AAPL driving the show. AAPL is the strongest stock in the entire country. It is driving the action on NASDAQ.

Even NASDAQ has not broken to a new high. It has huge resistance overhead. I am still thinking we will have a pullback. Again, what I think does not matter a hill of beans to the market, but we will be ready for it. Just like we have been ready to play the upside and let upside positions keep running. If we get more good upside, we will let them run as long as they want to run. Then we will get the heck out of dodge if it rolls over and start to sell. As always, we will let the good stocks test, but those that we just played for a quick hit and got the gain, we will be out of there. Then we will look to the downside. We will take whatever the market gives.

It is an important week ahead. A lot of data and earnings. We have rallied two weeks up to the top of the range. We saw some good initial earnings. Often the pattern is that once we get the good earnings in, we have trouble. Then again, it is the end of the year. People are feeling a bit better. They are in denial of a lot of the data out there. They are saying no recession. They say we will have a great holiday season in the retail area. That is fine. You can be in denial a long time and things continue to run higher.

The market tends to overshoot near term but not long term. We can be in denial and things can continue much further than a rational person would think they could go. How many times have we seen that on this rally? It has made us a lot of money, so we just play it and let it run. If it rolls, it rolls. If it does not, we keep letting it run. We just take whatever the market gives. We play what it tells us to play, but we have a selection of plays to make. If we get good risk/reward, we take the shot. If it does not work, we get out.

Have a good weekend. Enjoy the beautiful weather (at least that's what we have down here). I will see you on Monday for a big week of data.


Support and Resistance

NASDAQ: Closed at 2667.85

Resistance:
2676 is the January 2010 low
2686 is the January 2011 closing low
The 200 day SMA at 2694
2706 to 2705 is the April 2011 low and the February 2011 and consolidation low (bottom of the trading range) 2723 to 2705 is the range of support at the bottom of the January to May trading range
2759 is the May low
2762 is the February low
2796 is the February gap down point
2816 is the early April peak.
2825 is the 2007 closing peak.
2841 is the February 2011 peak
2862 is the 2007 peak
2879 is the July 2011 peak
2888 is the May 2011 peak

Support:
2645-2650ish from December 2010 consolidation
2643 is the September 2011 high
2612 is the late August 2011 peak
2603 is the March 2011 intraday low (post-Japan low)
2599 is the June 2011 low
2593 is the November intraday high
2580 is the November 2010 closing high
2569 is the November gap up point through the April 2010 peak
2555 is the mid-August 2011 peak
The 50 day EMA at 2550
2546 is the early September 2011 gap down point
2540 is the early November 2010 lower gap point
2532 is the early August gap down point
2512 is last week's gap down point
2469 is the November 2010 low
2331 from October 2010 low and the August 2011 intraday low
2305 from the August 2010 peak (summertime base)
2139 is the May and June 2010 low
2123 is the August 2010 gap down point
2100 from the August 2010 lows


S&P 500: Closed at 1224.58
Resistance:
1227 is the November 2010 peak
1231 is the late August 2011 peak
1234 is the August 2011 low
1235 is the mid-December 2010 consolidation low
1249 is the March 2011 low (post-Japan)
1255 is the late December 2010 consolidation range
1275 is the January 2010 low, early January 2011 peak
The 200 day SMA at 1276
1295 to 1294 is the April 2011 low and the February 2011 consolidation low (bottom of the trading range)
1313 from the August 2008 interim peak
1318.51 is the May low
1325-27 is the March 2008 closing low and the May 2006 peak.
1332 is the early March peak
1340 is the early April 2011 peak
1344 is the February 2011 peak is being challenged again
1357 is the July 2011 peak
1364 is the March 2007 low
1370 is the August 2007 low
1371 is the recent May 2011 peak

Support:
1220 is the April 2010 peak
1209 is the mid-August 2011 high
1196 is the November 2010 consolidation peak
The 50 day EMA at 1191
1178-1180 is the October 2010/November 2010 consolidation low
1131 - 1127 from August 2010 base peak.
1119 is the early August closing low
1109 is the mid-September 2010 gap up point
1101 is the August 2011 low
1075 is the October 2011 intraday low
1099 from the mid-July interim peak
1090 is the early September 2010 gap up point
1040 from the August 2010 lows and May/June 2010 lows
1011 is the summer 2010 low


Dow: Closed at 11,644.49
Resistance:
The August low at 11,700
11,717 is the late August 2011 peak
11,734 from 11-98 peak
11,867 from the August 2009 high and peak on that bounce in the selling.
11,893 from March 2008 closing low
The June low at 11,897 (closing)
The 200 day SMA at 11,968
12,094 is the April 2011 low
12,110 from the March 2007 closing low
12,283 is the March 2011 peak
12,391 is the February 2011 peak
12,876 is the May high
12,754 is the July intraday peak
13,058 from the May 2008 peak on that bounce in the selling

Support:
11,555 is the March low
11,452 is the November 2010 peak
The 50 day EMA at 11,352
11,178 from November 2010
10,978 is the bottom of the November 2010 consolidation
10,750 from September 2010
10,720 is the August closing low
10,705-710 from January 2010 peak
10,694-700 from August 2010 peak
9938 is the August 2010 low


Economic Calendar

October 14 - Friday
Retail Sales, September (8:30): 1.1% actual versus 0.6% expected, 0.3% prior (revised from 0.0%)
Retail Sales ex-auto, September (8:30): 0.6% actual versus 0.3% expected, 0.5% prior (revised from 0.1%)
Export Prices ex-ag., September (8:30): 0.3% actual versus 0.3% prior
Import Prices ex-oil, September (8:30): 0.2% actual versus 0.2% prior
Michigan Sentiment, October (9:55): 57.5 actual versus 60.0 expected, 59.4 prior
Business Inventories, August (10:00): 0.5% actual versus 0.4% expected, 0.5% prior (revised from 0.4%)
Treasury Budget, September (14:00): -$64.6B actual versus -$67.0B expected, -$34.6B prior

October 17 - Monday
New York Empire Manufacturing, October (8:30): -4.0 expected, -8.82 prior
Industrial Production, September (9:15): 0.2% expected, 0.2% prior
Capacity Utilization, September (9:15): 77.5% expected, 77.4% prior

October 18 - Tuesday
PPI, September (8:30): 0.2% expected, 0.0% prior
Core PPI, September (8:30): 0.1% expected, 0.1% prior
Net Long-Term TIC Fl, August (9:00): $9.5B prior
NAHB Housing Market Survey, October (10:00): 14 expected, 14 prior

October 19 - Wednesday
MBA Mortgage Index, 10/15 (7:00): +1.3% prior
CPI, September (8:30): 0.3% expected, 0.4% prior
Core CPI, September (8:30): 0.2% expected, 0.2% prior
Housing Starts, September (8:30): 595k expected, 571K prior
Building Permits, September (8:30): 610k expected, 620K prior
Crude Inventories, 10/15 (10:30): 1.344M prior

October 20 - Thursday
Initial Claims, 10/15 (8:30): 404k expected, 404K prior
Continuing Claims, 10/08 (8:30): 3690k expected, 3670K prior
Existing Home Sales, September (10:00): 4.94M expected, 5.03M prior
Philadelphia Fed, October (10:00): -9.6 expected, -17.5 prior
Leading Indicators, September (10:00): 0.3% expected, 0.3% prior

By: Jon Johnson, Editor
Copyright 2011 | All Rights Reserved

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

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