Monday, December 21, 2009

Market Looks for Santa Claus Rally

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

Lots of movement but all markets continue their trends.

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

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

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

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

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

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

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


TECHNICAL

INTERNALS

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

CHARTS

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

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

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

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

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

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

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

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

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

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

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

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

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

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


THE MARKET

MARKET SENTIMENT

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

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

Bulls versus Bears:

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

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

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


NASDAQ

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

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

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

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

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

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

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


SP500/NYSE

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

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

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

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

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

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


DJ30

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

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


MONDAY

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

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

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


Support and Resistance

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

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


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

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


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

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


Economic Calendar

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

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

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

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

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

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

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Sunday, December 13, 2009

Maybe No Rally to Year End

SUMMARY:
- Rotation and stocks rising with a rising dollar: two new themes.
- Retail sales post second month of gains.
- Import prices are rising.
- Jobs are growing . . . in the federal government (along with salaries).
- Commodities dipping, small and mid-caps under accumulation.
- Maybe no rally to year end, but small caps look to be setting up for a good January effect.

Market actually starting to act like a market anticipating economic growth.

This week epitomized the changes taking place in the market, even though they may have just solidified this week. It behooves us as investors to take note of what is happening in the stock market and the markets surrounding it. One of the main changes I discussed on Thursday was rotation. There has been a move out of commodities. Gold had a rough week ($1,115.10, -10.00) after hitting $1,226 just over a week ago. There is a current rotation out of gold, but we have a play on the GLD because it could be trying to bottom and could make a knifepoint turn.

Oil was down sharply ($69.66, -0.88). It may be in a position to bounce as it is reaching important EMAs, but the rotation has been out of these and into medical, business services, and semiconductors. A lot of these are in small cap areas, and the small caps have been consolidating with perhaps some accumulation ready to break them higher for the January effect.

There is a second change in the market that started showing itself on Friday: the dollar is rising. It was just consolidating on Thursday along the 50 day EMA, and now it has broken sharply higher. At the same time, the stock market rose slightly and the small caps gained a bit of ground. The Dow industrials gained ground, and SP500 gained as well. There were no breakouts of the range, but the dollar was up, stocks were up, and bonds were down. The 10 year treasury was strong (3.55%). It surged back up and broke through a key level at 3.5%. Whether it will hold the move remains to be seen, but stocks and the dollar are higher, and the bonds are lower. They are acting as they "should" act if the economy is trying to improve.

The market was mixed overall at the close with NASDAQ down and the NYSE up. Stocks mostly moved higher, however, and moved higher in the small cap area. That is important because they are a growth area, and if the economy were improving, one would expect to see it move higher. SP600 rose 0.95%. Those are key points with respect to the market. There is rotation and it is acting as if there will be economic improvement. You would expect to see improvement in small caps and other growth areas such as semiconductors. Semiconductors had an excellent move over the past two weeks. There is a growth trade and now more of a positive economic trade.

Looking at the SP futures in the morning, there was a huge pop on the retail sales data (1.3% for October, 0.6% expected). October was revised a bit lower (1.1% from 1.4%), but November was quite solid. If you take out autos, it was not much worse (1.2% versus 0.4%). October was revised a bit lower again to flat from 0.2%. There is some downside revision, but not bad overall. Two months of positive retail sales growth had people excited. The futures jumped up, but they did not stay there. They came back and closed the gap. By the time the market got underway, they closed, bounced, and then were back down. It took an afternoon recovery to get SP500 back up to speed.

We tend to import more of what makes our economy go (such as petroleum), so import prices are important. They were supposedly tame at 0.4%, and that matched the prior month. That leads some to say there is no inflation there is not massive inflation, but there is inflation underway. Some financial stations were arguing that if you take out petroleum, then things are better because petroleum is falling in price. They will be better, and they are falling just in time to give consumers a Christmas present that may hold over into the New Year. Oil prices are falling, but they look to be reaching a support level now. It bounced to $80, and now it has gone down to $70. That is the range oil tends to trade in, so it could bounce back up. If you look at the ex-petroleum numbers for import prices, they are up 1.4% on the month and up 3.6% year-over-year. That is inflation. We are not as much of an export nation as we would like to think (although the Obama administration wants to make us an export nation). Imports are still important because we import more when US consumers do well. The problem is that prices are rising, and there is that pesky oil. However, even if you strip out oil, prices are still rising above what the Fed would consider its speed limit. There is inflation out there, and it is not helped by the dollar. If the dollar rallies, it will be better in December, just as oil falling will be better for us in December. That will help things out, but thus far it has not changed the trend, and the import prices were somewhat looked past.

NSM beat the street on the top and bottom, and UTX substantially raised its guidance and shot higher. There is good news with the forecast for 2010, and it benefited the market. Initial job claims come out on Thursday and then they reverberate through Friday. As you know, they were higher on Thursday (474K versus 455K expected), but it was still below 500K. Continuing claims fell (5.1M versus 5.46M the week prior). Everyone thinks things are great, but there are problems with jobs when you look beyond the headline numbers. There is a category posted called emergency continuing claims, and they rose 430K for the week. They are six times where they were this time last year. Continuing claims are not getting any better; people are just falling off the rolls of standard claims and going elsewhere. Every time Congress extends unemployment benefits, they have to go back to the small businesses and ask them for more money. It is a double whammy: Not only do they not have money to hire people, but they also have to pay for the people they have already laid off. They would probably love to hire them back, but if there is no work, that is not going to happen.

Congress does not have an issue because there are plenty of jobs there. USA Today reported that the fastest growing segment of jobs in the country is in the federal government. They are adding 10K jobs per month during a recession. The average public sector job earner makes $40,331 per year, while the average federal government employee makes $71,206. It is a rapidly growing area, and they are paying top dollar. The Department of Transportation had one employee making more than $170K before the stimulus package was passed; after the stimulus package was passed, there are 1,690 transportation department employees making more than $170K. The FAA chief got a $100K + raise thanks to the stimulus package. That money is not being used to create jobs; it is being used to pad the pockets of federal workers. When the FAA chief got 100K + raise, how many other federal government employees got such raises? 1,700. In the middle of a recession when millions of people are losing their jobs, federal employees are not only getting more jobs, but they are getting massive pay raises. This should be bothering people. It certainly bothers me as a taxpayer.

There is a proposal with the healthcare bill to cut the Medicare age requirement down to 55. How can they cut $500B + from Medicare, then lower it to the age of 55 and add approximately 30M people onto the Medicare rolls? It does not seem like the plan is to make it work at all. The new Senate bill has been measured by a non-partisan group, and they found it will cost a lot more and is going to put more people out of coverage than in it. With that kind of logic going on in Washington, it is hard to believe the economy will turn around. The economy tries to do what it wants without Washington it can help or hurt, and Washington has not helped. The economy will try to make a recovery out of it anyway, although it is going to be a slow, pathetic recovery by past standards. It will try to pull it together for 2010 and at least get it going through the summer. After that, there may be a double dip, but that is in the future, and lord knows our Senators and Congressmen cannot look that far into the future.

Gold was down, the dollar was up, and bonds were down. Things are at least looking right in the world of the stock market.


TECHNICAL

INTERNALS

The internals were not much to crow about for the session. The small caps tend to represent what the advance/decline line is going to be. NASDAQ 1.4:1 advancers, NYSE 1.9:1 advancers. Those are the small caps helping kick in with their nearly 1% gain on the session. Looking at SP500 and the representation of the NYSE volume, you see it was a week of declining volume. It was the same story with NASDAQ. There was an upside day on Thursday, but it was still in a very low range of below-average volume. Again, they are range trading, and that is the kind of volume to expect in a range trade. It is not necessarily a bad thing.

CHARTS

The SP500 had an up and down week. It was down at the beginning, held the bottom of the range, bounced back up, and was trading in the top half of the range to end the week. No relative change. There have been five weeks now of trading laterally. Some of the SP500 stocks are being sold, and some other stocks in the NYSE are being accumulated.

NASDAQ is an interesting play because it gapped higher on the session up toward the top of the range and then reversed. It closed off its lows and closed basically flat. It is still trading in the top half of the range, but it is trying to make that higher low and is not able to get the breakout of the ascending triangle it has formed. It has been banging around in a narrowing range, and the breakout will occur over the next week or two. It is going to be interesting because it will be a catalyst coming for the rest of the market. It is a growth area --- semiconductors and small caps have been performing better. If there is growth coming, it should break out to the upside. The market is going to tell what the economy will do, and we are seeing some of this in the small caps. I think they are under accumulation because when looking at leadership, there are many small caps in good shape. I think they are under accumulation and, if you look at the SOX, you see it had a super two weeks. It leveled out this week and is consolidating, but it is holding over the peaks that it broke through, looking very strong.

NASDAQ has its ascending triangle, the SOX is breaking to a new high, and there are the small caps consolidating laterally and trying to set up a move. We will see many good small caps positions when we look at leadership. There are the mid-caps, similar to NASDAQ, setting up an ascending triangle. The SP400 is setting up an ascending triangle and trying to make a higher low right now. Those are growth areas, and they are improving. If the economy is going to pick up, these indices are going to break out ahead of that.

LEADERSHIP

The USO is lower and oil fell. During the week, some of the energy stocks that had rebounded after falling were showing signs of heading back over. HAL rebounded up to the resistance point at 28 and is struggling. It is showing a doji at resistance on a light-volume rebound after heavy-volume selling. It will roll back over. You can see the same thing in general in the OIH. It sold off early in the week, rebound Wednesday and Thursday, and a hangman doji at resistance on Friday it looks like it will head lower as well. BTU is showing some wear and tear, but it has not broken down completely. It did recover at the end of the week, but it was a low-volume recovery and it could head back lower. As it made a high in November, MACD was unable to make a high, rolling over at a lower level. That shows a weakness, and there was a selloff. We will see how this bounces. It has tried to come up to the 78% Fibonacci, and if it comes back up there again and stalls, it is definitely a downside play.

They say economic recoveries have a copper roof to them. FCX is somewhat of the bellwether of copper, and it is rolling over. Similar to other stocks, there was a high with MACD, there was a new high, and MACD failed to make a new high. There was a crash lower on volume, an attempt to hold near the 50 day EMA and some support, but the downside volume was stronger. It looks like it is ready to roll over and make a serious drop, possibly down to the 65 range. We will be looking at that as a short play for the weekend. It is the same story if you look at PCU. There is a double top --- I would have loved for this to hold down at the 78% Fibonacci, but it did not. It does not matter because the weakening MACD gapped lower on volume, there was a weak test, and it is ready to roll over as well.

Steel is still looking solid, and even AA had a good day because it upped its guidance. You would think that commodities would be moving higher given a better economic outlook for the US, but some are and some are not. Some have had great runs and are victims of their own success and of the strengthening dollar. Bear in mind that they do not necessarily cut against the idea that the economy will be improving in 2010.

GS bounced up Wednesday and Thursday, and it looks like it will try to roll back over. Some of the banks that were down Thursday tried to rebound. WFC gapped lower and recovered a bit of ground, and BAC recovered some ground as well. The financials are trying to bounce back. LM had two very difficult days on Wednesday and Thursday, but it recovered a bit of ground on Friday. Somewhat of a snap back in the financials, but they still are not great-looking patterns.

DOX has had a great run and is coming back and testing. It looks like that could be a play. It traded below the breakout point on the low Thursday and snapped back. Buyers picked it back up and it held up on Friday. It could give a buy. FALC has a trend reversal ongoing, and it is trying to set up and make a break. INFA is trying to make a breakout of an ascending triangle. SNIC had a nice breakout, and now it is testing and holding over very orderly pullback. A lot of these are in the business software area, and they cater to small businesses and increasing productivity. LFT is performing well, had a nice break higher, and has a nice flag in progress. I am looking for ABCD patterns this week and for flag pullbacks on the small caps. I am also looking for rollovers from some of the big caps and the sectors in energy and metals that rallied back a bit after breaking lower but are not able to consummate the recovery through resistance. That is going to give us some excellent opportunity.

FLOW had a break higher and a nice pullback a great flag. We have seen a lot of this catalog and retail stuff (such as VVTV) doing well. XING has a nice base, a break higher, and it is testing. It is volatile but just an example of what is going on. There is rotation. Money is coming into these and you can see the volume moving up.

There is ongoing accumulation as the overall market moves laterally. Big volume is coming in, and there are nice, long, low-lying consolidations where you see they have been buying all along. Then there is big volume moving in as they make the break. There is a lot of money flowing into small caps, and that is what happens in rotation. That is why the growth areas are moving higher.


THE MARKET

MARKET SENTIMENT

VIX: 21.59; -0.73
VXN: 22.38; -0.75
VXO: 20.53; -0.44

Put/Call Ratio (CBOE): 0.9; -0.01


Bulls versus Bears:

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

Bulls: 50.6% Up from 44.4%. Moving to a high on this last run, matching the levels from September and October. Hitting highs again just as SP500 bumps prior peaks yet again. Believers may have waned but the liquidity did not. Still well over the 35% level that is the threshold for what is considered a bullish climate. It does not mean things are necessarily bearish; that takes a reading in the 60% range. Hit a high of 47.7% mid-June on the run from the March lows. Again, to be seriously bearish it needs to get up to the 60% to 65% level. Dramatic rise from 21.3% in November 2008, the bottom on this leg. This last leg down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator.

Bears: 17.6%. Bears are leaving the building the past three weeks, falling sharply from 26.7%. This is the lowest level of the entire rally and is at a bearish level. Just in time for the SP500 testing the prior peak. Peaked near 28% on this round, falling short of the 35.6% hit in July 2009. For reference, cracking above the 35% threshold considered bullish. Hit a high on this run at 47.2%. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.


NASDAQ

Stats: -0.55 points (-0.03%) to close at 2190.31
Volume: 1.698B (-10.44%)

Up Volume: 901.543M (-134.906M)
Down Volume: 841.681M (-41.915M)

A/D and Hi/Lo: Advancers led 1.43 to 1
Previous Session: Decliners led 1.57 to 1

New Highs: 59 (-36)
New Lows: 24 (+2)

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: +4.06 points (+0.37%) to close at 1106.41
NYSE Volume: 1.003B (-4.7%)

Up Volume: 677.677M (+24.696M)
Down Volume: 319.151M (-63.611M)

A/D and Hi/Lo: Advancers led 1.89 to 1
Previous Session: Advancers led 1.55 to 1

New Highs: 290 (+53)
New Lows: 42 (+9)

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

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


DJ30

Stats: +65.67 points (+0.63%) to close at 10471.5
Volume DJ30: 189M shares Friday versus 195M shares Thursday.

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


MONDAY

It is another week closer to Christmas without a sign of real movement in the indices. Whether you are talking about the SP500 or SP600, they have been moving laterally for five weeks. There are two forces at work, particularly in the big cap areas: the managers wanting the market to go upward to the end of the year, and those that want to keep the status quo and are being defensive and selling into rallies. They are canceling each other out right now, and we are moving laterally in the range. Then there is the rotation into other areas. Commodities are heading lower and many industrials are struggling. Areas that led the market higher are struggling as the dollar strengthens, but they had a healthy run. Money is rotating and moving into many of the smaller areas. The small caps and mid caps are harbingers of economic growth, so we are setting up for the January effect and a run higher by the small caps. In January, mutual fund managers traditionally buy the smaller caps where they have more chance of big gains through the year. You can get better percentage gains on stocks that are smaller in price. Smaller cap can move versus a lot of the big names that have run higher and move slowly when they do make moves because their growth is not as big as the small caps. Their percentages cannot be the same, so we can see bigger multiples built into the small caps. They can make big runs, and then they are sold off after they make those runs and fund managers look elsewhere for the rest of the year. They try to get their growth stocks bought in December and January, then let them run higher and then sell them off by the summertime. That is the way it typically works, and then they look for consumer stocks at that point. This is the rotation that fund managers go through.

Things are playing by the standard rulebook right now. That shows NASDAQ setting up with an ascending triangle that could make the breakout because it is a growth area. The mid-caps are setting up an ascending triangle because it is a growth area. The SOX already broke into a new high out of a ragged, ugly pattern because it is a growth area, and now we are waiting for the small caps to do the same and confirm what is going on. It may take until early January when they start moving, but they are definitely under accumulation, and we have definitely been putting them on the report and will continue to do so. We will also continue to take advantage of the stocks that have rallied but have run out of buyers (e.g., in commodities and some of the metals).

We are taking what the market gives. Right now, it is going to give upside on small cap and growth plays, and it will give downside on the plays that have run hard and are rolling over near term. It is going to give us plays like on PCU or FCX that have made their runs and are ready to make a fall. That is how we take what the market gives and make some more Christmas money ahead. Have an excellent weekend, and we will try to do the same.


Support and Resistance

NASDAQ: Closed at 2190.31
Resistance:
2191 is the October 2009 peak
2205 is the November 2009 peak
2210 (from September 2008) to 2212 (the July 2009 closing low)
2275 - 2278 from the February 2008 and April 2008 lows

Support:
2177 is a low from March 2008
2169 is the March 2008 closing low (double bottom)
2168 is the September 2009, intraday peak
2167 from the July 2008 intraday low
2155 is the March 2008 intraday low
2143 is the October 2009 range low
The 50 day EMA at 2139
2099 is the mid-September 2008 closing low
2070 is the September 2008 intraday low
2060 is the August peak
2048 is the early October 2009 closing low
2016 is the early August peak
1984 from late September
1962 is the bottom of the August 2009 range.
1947 is the October gap down point
1897 is the October post gap intraday high.
The 200 day SM A at 1884
1880 is the June peak
1862 is the July peak


S&P 500: Closed at 1106.41
Resistance:
1106 is the September 2008 low
1114 is the November 2009 peak
The March/July up trendline at 1128
1133 from a September 2008 intraday low
1185 from late September 2008
1200 from the July 2008 low

Support:
1101 is the October high
The 18 day EMA at 1098
1085 is the 2007 down trendline
1080 is the September 2009 peak
The 50 day EMA at 1081
1078 is the October range low
1070 is the late September 2009 peak
1044 is the October 2008 intraday high
The August peak at 1040
The early October 2009 closing low at 1025
The early August intraday peak at 1018
The November 2008 peak at 1006 closing 1007.53 intraday
992 is the August 2009 consolidation low
The 200 day SMA at 959
956 is the June intraday peak


Dow: Closed at 10,471.50
Resistance:
10,496 is the November 2009 high
10,609 from the Mid-September 2008 interim low
10,963 is the July 2008 low

Support:
10,365 is the late September 2008 low
The 50 day EMA at 10,122
10,120 is the October 2009 peak
9918 is the September 2008 peak
9855 is the early September peak in its lateral range
9835 is the late September 2009 peak
9654 is the November 2008 high
9625 is the October 2008 closing high
9620 is the August 2009 peak
9430 is the early October low
9387 is the mid-October peak
9116 is the August low
9088 is the January 2009 peak
8985 is the closing low in the mid-2003 consolidation
The 200 day SMA at 8946
8934 is the December closing high
8878 is the June peak
8829 is the late November 2008 peak


Economic Calendar

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

December 15 - Tuesday
Core PPI, November (08:30): 0.2% expected, -0.6% prior
PPI, November (08:30): 0.8% expected, 0.3% prior
Empire Manufacturing, December (08:30): 24.00 expected, 23.51 prior
Net Long-term TIC Fl, October (09:00): $42.3B expected, $40.7B prior
Capacity Utilization, November (09:15): 71.1% expected, 70.7% prior
Industrial Production, November (09:15): 0.5% expected, 0.1% prior

December 16 - Wednesday
Building Permits, November (08:30): 570K expected, 552K prior
Housing Starts, November (08:30): 578K expected, 529K prior
CPI, November (08:30): 0.4% expected, 0.2% prior
Core CPI, November (08:30): 0.1% expected, 0.3% prior
Crude Inventories, 12/11 (10:30): -3.82M prior
FOMC Rate Decision, December 16 (14:15): 0.25% expected, 0.25% prior

December 17 - Thursday
Initial Claims, 12/12 (08:30): 465K expected, 474K prior
Continuing Claims, 12/5 (08:30): 5170K expected, 5157K prior
Leading Indicators, November (10:00): 0.7% expected, 0.3% prior
Philadelphia Fed, December (10:00): 16.0 expected, 16.7 prior

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

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

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Monday, December 07, 2009

Dollar Explodes Higher

SUMMARY:
- Jobs report surprises with some positives but is not out of the woods yet.
- Dollar explodes higher and the related trades take a hit.
- Stocks and bonds acting as they should with a better economic outlook: growth is growing, bonds are selling.
- Leadership may be starting to rotate away from dollar trades to growth trades.
- Despite the rally on good news, the indices remain in their ranges: watching the small and mid-caps for the true direction.

Jobs report shows some tantalizing progress.

All the action was related to the jobs report on Friday. It was much better than expected (-11K non-farm payrolls versus -125K expected). There was a sharply reduced number for October
(-111K versus original -190K) and September, with a net of 159K fewer lost jobs than originally anticipated. The unemployment rate fell to 10.0% from 10.2% on top of that. It was expected to clone that for the month, so there was a significant gain. Those positives gapped futures higher; indeed, it gapped it over the midday action on Thursday. The SP futures topped out over the Thursday peak and then fell off. There were fewer losses, the revisions were positive, and the most important factor (for us) was the average workweek. It went up to 30.2 hours from 30.0. This is not just a one tenth bump as usual, so that shows significant action. Temporary employees were up. There have not been any temporaries hired of late, and those are where the full-time employees usually come from. It is good to see temps being picked up.

It was not all candy and roses, however. The work force fell by 100K. Those people have given up. It now stands at 861K, and that is significant. They say 65% of the workforce is disgruntled that is something to consider. When people start seeing the good job numbers, they will come back out in the labor force and the unemployment rate will likely rise even more. The administration was hinting at that today because that is the way it works. People hear that things are better and they go looking for jobs, but there are no real jobs yet. They will have rejoined the pool and not found a job, so the unemployment rate will tick higher. For people putting a lot of stock in 10% versus 10.2%: Remember there was a drop from 9.5% to 9.4% in September, and Robert Gibbs said this was a sign that the economy had pulled back from the brink and everything would be okay. It then immediately ran up to 10% and 10.2%, so you cannot put too much stock in one month. It could be a rogue month. The good news is the 10.2% may have been overly negative. There will be a move back up to 10.1-10.3 (or even higher) as the months unfold because more people will be looking for work given the "good news" shown on Friday.

Emergency benefits were up 265K even though the job market is supposedly getting better. They have been extended repeatedly. Someone can effectively have been on unemployment for two years now, and it is the small businesses paying that. The government keeps coming back to extort more money from them for people who are no longer working. It is a tough racket when you are a small business and your business is down. You cannot afford to have the employees anymore, yet you still have to pay for them.

Another thing to consider is the non-farm jobs versus the unemployment rate. Coming out of recessions, the unemployment rate is more important. The big companies do not create jobs. They have been net job losers for 20 years. The startups create the jobs, and that is what makes the job summit such a joke in the eyes of many: the large companies were there, and they do not do much of the hiring or innovation. They are getting handouts from the government stimulus package (GE and the like) but are not creating any jobs. The unions were there, and they are not going to create any jobs in and of themselves. 11K non-farm jobs lost does not mean a lot; you have to look at is what the unemployment rate is. It did come down, and that is positive, but it will not stay down yet. The jobs report was not the perfect news I would like to see, but I am not going to deny that it was good news.

The jobs report set the stage, and stocks opened much higher. The DXY0 had a massive surge all the way back to the EMA that held it in check in early November. This is a big move. It cleared some resistance, and it is approaching some other serious price resistance, but it was a big move. If the US economy will recover (as the data seemed to suggest), then the dollar will strengthen. That is the reason for the move. The Fed will raise rates and it makes the currency worth more as the economy recovers. There was short covering in the dollar, of course, and an unwinding of the dollar carry trades that contributed to the move in the dollar. You have to get out of those if it looks like the economy (and thus the dollar) will be stronger. If you do not move out, you can be in a word of hurt. You have to unwind those trades, and that gets the snowball rolling faster down the hill.

Gold dove lower ($1,162.50, -55.70). It was down $60, and pushing $70 at one point. We took nice gain over 200% on our GLD options, but gold took quite a hickey. That will happen with worry about money printing the Fed being incessantly lax. When there is an indication that something else may be afoot, the knee-jerk reaction was to sell off hard. The dollar closed well off yesterday's close (1.4846 Euros, versus 1.5069 Thursday). Oil did not sell off tremendously ($75.74, -0.72), but many energy stocks were hit hard. They have been under pressure the last few days, which is why we took several off the table and looked at downside plays in energy. We entered a bonus play on Friday with DUG.

Oil and gold were both under pressure. Bonds sold hard. The TIPS gapped lower indeed, the 10 year closed at 3.47%, up 10 basis points from 3.37 the day before. Bonds have been selling and yields have been rallying. Over the last week, it seems like the bond market, after looking for trouble, anticipated a better jobs report. Rates have been swinging violently over the last week: It was at 3.19% just over a week ago.

The SP500 and the Dow both surged to new highs but were unable to hold them. The small caps and NASDAQ surged and held most of their gains. The semiconductors had an explosive move -- like bonds, it looked like they anticipated this news. They rallied and closed at a new high for 2009. There was a lot of strength in growth areas, and that is what we like to see. Stronger growth stocks are an indication of a stronger economy, and that is why I have been watching SP600 so closely over the last few weeks to see if it could rally.

The sum total was positive action. It is the right kind of action. The dollar is up, and the stock market is up; they are anticipating a stronger economy in the future. The growth areas were moving while those that have been tied to the dollar and exports (and a second-rate US economy) were down. The NYSE large caps, the SP500, and the Dow were unable to hold their moves and showed much less relative strength than the other indices. Where SOX gained 2%, the SP500 gained 0.5%. The Dow gained 2%. NASDAQ posted a solid 1% gain and was at 1.5% at one point. Things are moving in the right direction, but the big question is whether it can last.


TECHNICAL

INTERNALS

The advance/decline line was not bad on NASDAQ at 2.8:1, but it was not huge. It was not the 3:1 or 4:1 one could expect on great news about jobs. NYSE was 2.1, which was also not great considering that decliners led nearly 2:1 on Thursday.

The volume was key. It rose 14% on NASDAQ and 22% on the NYSE, pushing both of them above average. That is not bad. We want to see the growth indices like NASDAQ rise on strong, above-average volume. The NYSE rallied to a new high but gave it back. As a matter of fact, it gave back 14 points off the high more than two times what it gained on the session and it kept it in this range. The high volume indicates that a lot of the stocks tied to the dollar were selling back. Commodities and energy were taking it on the chin, and industrials were not performing well either. They have been feeding off the weak dollar in the export market. They were knocked around a little, and that will keep happening if things continue this way.

The small caps posted a 2.3% gain. They have not moved over the November peak, but they are challenging it, and this will be a very important move. They are trying to make a higher low, and if they can make a higher high, they may keep the whole upside trend moving even after a lower low. As the small caps and mid-caps moved higher, the strong NYSE volume shows that the action was mixed. There was buying in the growth areas, while there may have been some higher volume selling in dollar-related areas. That shows that the action was mixed but still positive given the news on the day.

There is obviously short covering going on, some dollar selling, and some selling to the dollar-related stocks. That had to happen because they have had such a good rally. When things appear to change, they are quick to bail. There were positive developments related to growth areas.

CHARTS

SP500 moved to a new rally high, but could not hold it and traded in the same range. There was great news out there, but it could not hold onto the move. That is a negative for SP500 because many of the financial stocks were up on the news, but not substantially. The Dow did the same thing: It rallied to a new high and turned back unable to hold that new high on tremendous volume. There are still issues with the large cap stocks tied to the dollar. NASDAQ did not finish at its high and did not finish were it gapped open. It did hold a very solid gain and is trying to push out of this range, but it could not quite do it. It moved to a new high but could not close there. It is in the same position it was before, even though it is showing more strength. Until it clears that range, it is still in the same boat. The small caps held almost all of their gains, but they are still below the November peak. This is a good move. It has held its gain, but still has to make the break, and that is what we want to see. How it moves from here will be the key. It was not able to clear that high on a very good news day, and this is a concern.

The SOX moved to a new closing high, but just by a hair after a strong week of gains as if it was anticipating the news as well. It gapped to a doji, and that may show it needs a pullback, but the semiconductors have been on fire and they came out of nowhere to do it. This is an important growth area, so it is another example that feeds into the idea that things are improving and looking better down the road. Then again, the small caps and mid-caps still need to break out. Growth definitely led the market and led the gains on Friday, while the dollar-related stocks suffered that is how it should be. When looking at the overall picture, there was no real change in any of these indices (other than SP500) even with what many were saying was excellent news. This is a problem. Maybe they were too far down in their range to make the break on Friday. We will find out next week.

LEADERSHIP

The chips were in the lead and have been doing very well. NVLS gapped higher and continued its run. RMBS continued its run with a gap higher. They are running and getting a lot of money on a lot of volume. It was trading in that range, made a higher low, and made a big breakout. We are lamenting that one because we were trying to get in and play it.

Tech was not doing badly at all. GLW has been running higher. AAPL was off again, but it looks like it has made a test of support and may be ready to run. Net stocks were doing fine. AKAM was having a good day. NTGR had a nice day; it was not runaway, but it moved up out of a good pullback. Many good stocks were making moves, but others (such as energy) were struggling. We are playing HAL to the downside. OII is heading lower. BTU hit its 50 day EMA and it has bounced off it many times before. It has some serious downside volume. The metals were also in trouble. AKS is a good indication, and it has had two tough days. It is not totally broken down, but it is struggling. If the idea holds that the economy is recovering and the dollar continues to gain, there could be more of this.

Agriculture has been leading up, and it is still okay after the breakouts. MOS sold back hard, and that is how it was across the agricultural sector, just as it was with energy and metals. There is a bifurcation here as in the major indices. Growth areas were moving higher, and areas tied to the rest of the world and the weaker dollar moved lower. There is still a plethora of leadership out there, but it is rotating. Rotation is not only good for the tires on your car, but it is good for the stock market. New money has to move into other areas when stocks become overextended as many of these have. It is healthy for the stock market when they pull back as others move higher. This change in leadership is not bad at all.


THE MARKET

MARKET SENTIMENT

VIX: 21.25; -1.21
VXN: 23.1; -0.9
VXO: 20.53; -1.13

Put/Call Ratio (CBOE): 0.85; +0.17


Bulls versus Bears:

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

Bulls: 50.6% Up from 44.4%. Moving to a high on this last run, matching the levels from September and October. Hitting highs again just as SP500 bumps prior peaks yet again. Believers may have waned but the liquidity did not. Still well over the 35% level that is the threshold for what is considered a bullish climate. It does not mean things are necessarily bearish; that takes a reading in the 60% range. Hit a high of 47.7% mid-June on the run from the March lows. Again, to be seriously bearish it needs to get up to the 60% to 65% level. Dramatic rise from 21.3% in November 2008, the bottom on this leg. This last leg down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator.

Bears: 17.6%. Bears are leaving the building the past three weeks, falling sharply from 26.7%. This is the lowest level of the entire rally and is at a bearish level. Just in time for the SP500 testing the prior peak. Peaked near 28% on this round, falling short of the 35.6% hit in July 2009. For reference, cracking above the 35% threshold considered bullish. Hit a high on this run at 47.2%. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.


NASDAQ

Stats: +21.21 points (+0.98%) to close at 2194.35
Volume: 2.247B (+14.34%)

Up Volume: 1.722B (+1.011B)
Down Volume: 547.684M (-711.032M)

A/D and Hi/Lo: Advancers led 2.81 to 1
Previous Session: Decliners led 2.1 to 1

New Highs: 142 (+38)
New Lows: 34 (+4)

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

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

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


SP500/NYSE

Stats: +6.06 points (+0.55%) to close at 1105.98
NYSE Volume: 1.383B (+22.04%)

Up Volume: 974.742M (+652.839M)
Down Volume: 382.883M (-415.125M)

A/D and Hi/Lo: Advancers led 2.01 to 1
Previous Session: Decliners led 1.78 to 1

New Highs: 387 (+39)
New Lows: 68 (+7)

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

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


DJ30

Stats: +22.75 points (+0.22%) to close at 10388.9
Volume DJ30: 460M shares Friday versus 243M shares Thursday. Some unwinding of the dollar related trades led to some massive volume.

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


MONDAY

If SP600 can break over the November peak, then maybe the rally to the end of the year is coming early. We can get a nice run, kick started by the jobs report, after the indices have traded for a month in a lateral range. However, the action shows that there was no relative change in the position of any of the indices other than the SOX. They could not make the breakout even with the good news. You have to take the jobs claims with a grain of salt. There was good news, but it has not been able to break the market free and rally into the end of the year. It is very possible it could do it next week; I am only saying it was not able to do it on Friday despite all the good news.

That does not mean there are not good stocks out there. We picked up several on Friday that were in good position and making moves higher. I am definitely going to keep looking for those. The chips have rallied. They are a bit overextended and we may still find buys there, but there may be pullbacks over the next week as they come back and test. That will give us good entry points. There are small techs looking good and some business services looking good. These are all areas that you want to see do well if the economy is going to improve because they will tend to lead the way up. Remember, in late 2008 and early 2009, small business stocks started to move higher. They tend to lead out if things are going to recover. That was a false lead, but it happens. We got the stimulus package passed and optimism was higher, so those stocks built in some gains in anticipation of economic recovery. That has obviously taken longer than many hoped, and some have fallen to the wayside. We should see growth stocks and small and mid-cap stocks start to perform again (as they seem to be doing now) if there is going to be economic recovery.

What to look for over the next week: stocks that are moving up those smaller ones doing well and ready to make the breaks higher as we watch how SP600 plays off the prior November peak. I sound like a broken record, but it touched that level and pulled back on Friday. This is going to be important. It needs to make a higher high, and then take on the two levels at 325 and up to the October peak. If it makes a breakout, things look good for a January effect rally with the small caps leading the way. That could be positive for the economy, but we will see. It looked good earlier in the year as well. The small caps were trying to lead higher, it looked positive, but then things waffled. They still went higher but lost their leadership move in August. It was overtaken by SP500 and the Dow the dollar-related stocks. That will have to change to avoid the double dip recession. If the unemployment rate can be brought down to where it is no longer a leading indicator of trouble, but falls in line with some of the economic data, then that is a huge positive. The small and mid-caps should rally in that case. We will be right in there with them because they will be on the reports. As they make the move, we will move into them.

Have a great weekend. I will see you Monday, and we will see how the SP600 fairs with respect to that November peak.


Support and Resistance

NASDAQ: Closed at 2194.35
Resistance:
2205 is the November 2009 peak
2210 (from September 2008) to 2212 (the July 2009 closing low)
2275 - 2278 from the February 2008 and April 2008 lows

Support:
2191 is the October 2009 peak
2177 is a low from March 2008
2169 is the March 2008 closing low (double bottom)
2168 is the September 2009, intraday peak
2167 from the July 2008 intraday low
The 18 day EMA at 2163
2155 is the March 2008 intraday low
2143 is the October 2009 range low
The 50 day EMA at 2128
2099 is the mid-September 2008 closing low
2070 is the September 2008 intraday low
2060 is the August peak
2048 is the early October 2009 closing low
2016 is the early August peak
1984 from late September
1962 is the bottom of the August 2009 range.
1947 is the October gap down point
1897 is the October post gap intraday high.
1880 is the June peak
The 200 day SM A at 1865
1862 is the July peak


S&P 500: Closed at 1105.98
Resistance:
1106 is the September 2008 low
1114 is the November 2009 peak
The March/July up trendline at 1121
1133 from a September 2008 intraday low
1185 from late September 2008
1200 from the July 2008 low

Support:
1101 is the October high
The 18 day EMA at 1097
1090 is the 2007 down trendline
1080 is the September 2009 peak
1078 is the October range low
The 50 day EMA at 1077
1070 is the late September 2009 peak
1044 is the October 2008 intraday high
The August peak at 1040
The early October 2009 closing low at 1025
The early August intraday peak at 1018
The November 2008 peak at 1006 closing 1007.53 intraday
992 is the August 2009 consolidation low
956 is the June intraday peak
The 200 day SMA at 950


Dow: Closed at 10,388.90
Resistance:
10,496 is the November 2009 high
10,609 from the Mid-September 2008 interim low
10,963 is the July 2008 low

Support:
10,365 is the late September 2008 low
The 18 day EMA at 10,324
10,120 is the October 2009 peak
The 50 day EMA at 10,065
9918 is the September 2008 peak
9855 is the early September peak in its lateral range
9835 is the late September 2009 peak
9654 is the November 2008 high
9625 is the October 2008 closing high
9620 is the August 2009 peak
9430 is the early October low
9387 is the mid-October peak
9116 is the August low
9088 is the January 2009 peak
8985 is the closing low in the mid-2003 consolidation
8934 is the December closing high
8878 is the June peak
The 200 day SMA at 8866
8829 is the late November 2008 peak


Economic Calendar

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

December 04 - Friday
Nonfarm Payrolls, November (08:30): -11K actual versus -125K expected, -111K prior (revised from -190K)
Unemployment Rate, November (08:30): 10.0% actual versus 10.2% expected, 10.2% prior
Average Workweek, November (08:30): 33.2 actual versus 33.1 expected, 33.0 prior
Hourly Earnings, November (08:30): 0.1% actual versus 0.2% expected, 0.3% prior
Factory Orders, October (10:00): 0.6% actual versus 0.0% expected, 1.6% prior (revised from 0.9%)

December 07 - Monday
Consumer Credit, October (14:00): -$9.3B expected, -$14.8B prior

December 09 - Wednesday
Wholesale Inventories, October (10:00): -0.5% expected, -0.9% prior
Crude Inventories, 12/04 (10:30): 2.09M prior

December 10 - Thursday
Initial Claims, 12/05 (08:30): 465K expected, 457K prior
Continuing Claims, 12/04 (08:30): 5435K expected, 5465K prior
Trade Balance, October (08:30): -$37.0B expected, -$36.5B prior
Treasury Budget, November (14:00): -$134.1B expected, -$176.4B prior

December 11 - Friday
Export Prices ex-ag., November (08:30): 0.3% prior
Import Prices ex-oil, November (08:30): 0.4% prior
Retail Sales, November (08:30): 0.7% expected, 1.4% prior
Retail Sales ex-auto, November (08:30): 0.4% expected, 0.2% prior
Michigan Sentiment-Preliminary, December (09:55): 68.5 expected, 67.4 prior
Business Inventories, October (10:00): -0.3% expected, -0.4% prior

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

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

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Sunday, November 22, 2009

SP500 Bumps Resistance

SUMMARY:
- Quiet expiration Friday, quiet expiration week as SP500 bumps resistance.
- Dollar's gain pushes stocks modestly lower on the week.
- SP500 works at resistance while NASDAQ, SP600 struggle to hold on.
- Dell earnings not a worry for the consumer, but what about businesses many are relying on to lead us out of recession?
- If more stimulus is to come, at least make it stimulus that works.
- Whether a correction or more weakness on a stronger dollar, liquidity keeps an underlying bid in the market.

Expiration is a sleeper.

It was a quiet expiration Friday for a relatively quiet expiration week. There were a few fireworks, however. SP500 and the NASDAQ broke above resistance on Monday, but by the end of the week (on Thursday in particular), they broke back below that level and gave it up. The break higher was not that strong and neither was the break back down. The indices are sparring a bit and feeling out the key resistance. That resistance is the 2007 downtrend line and the 2004 lateral consolidation on SP500, with the NASDAQ bumping up against the 2008 lows. You would expect that the indices would need to feel their way along and try to get over that level (SP500 in particular), especially when you consider how far they have run off the March lows. When a market slams or bumps into key resistance levels, it takes time either to get through them or to turn back down; markets rarely turn on a day or two. An extraordinary event can cause that, but usually it is more like the seasonal changes in weather. There is steady movement in the heart of the season, and then things get more volatile on the fringes of the season. The indices may be at a seasonal change given the bump up against key resistance.

The leading factor driving the market is the dollar. If the dollar is weaker, the stock market is up, and vice versa. The dollar ended the week stronger (1.4861 Euros versus 1.4920 Thursday).
It was at 1.4839 Euros earlier in the day, so it did lose strength as the day went on. The indices came back late in the session and finished down, but with modest losses. The losses were well below 1%, and much less than the levels on Thursday when there was sharper selling. The dollar is driving and there is an overlaying theme of liquidity. The word's central banks still have a lot of money circulating, and this past week they said that would not change. On Friday, Mr. Trichet of the ECB said that when the central banks pulled back the easy money, it would have to be done gradually. That was not an earth-shattering statement, but the fact that he even mentioned pulling back the stimulus rattled the market and led to some strengthening in the dollar. The dollar finished stronger and the market finished weaker, but there was not much change at the end of the session.

NASDAQ and SP500 are bumping up against the resistance and working their way along, waiting for the next bout of liquidity to push them higher. Alternately, if the dollar rebound continues to the upside, they may pull back some more and correct, and then move higher with the next liquidity bout. This is not going to be a serious pullback (if there is one at all). The liquidity is still putting a bid under the market. It will keep driving it up until the liquidity is pulled or until something so horrendous happens that it overwhelms the fact that money has been made cheap and available.

The other markets were impacted by the dollar being stronger for yet another day, trying to make the oversold bounce off the double bottom. Oil was down as a result ($76.72, -0.74). It was over $80 during the week, so it did fall back. Gold finished positively ($1,150.60, + 8.7 0), and it is not paying attention to the dollar right now. Gold is concerned with inflation, and there is hoarding with worry about what may happen in 2010. Many people are starting to see this as a liquidity-related financial rally. When the liquidity is over, I wonder where it will be left. Someone on the Fed said they might have to leave rates low until 2012. The dollar will be worth nothing at that point, but we will see what happens. We are feeling our way along in managing economic crisis, just as the market is feeling its way along at resistance.

TECHNICAL

INTRADAY

The market showed the same action it did on Thursday, just not as severe. There was a gap lower, an early selloff, the lateral move, and then a rebound back to the close. It was a very sleepy day on the market overall.

INTERNALS

The internals were very modest and flat (NASDAQ -1.2:1, NYSE -1.4:1). There are still laggards in the SP600, and when they lag the breadth lags in NYSE overall. The volume was mixed, but it remained well below average. The volume rose on SP500 and gained about 4%. It was at 1.1B - up, but still quite low.

Volume was lower on NASDAQ, and that is more interesting. When it gapped lower off the island reversal on Thursday, it was up near average. The prior Thursday when it struggled and was down, it was above-average. NASDAQ is showing distribution, but only a little bit. If you look back over the week, there was the breakout in NASDAQ and it was on no shakes on good volume. Then there was the breakdown. It was higher, and that may mean something, but it was no big move and there was no follow through on Friday.

It was the same situation on SP500. It broke out, but the volume was no great shakes and not approaching average at all. It was a bit higher when it broke back down on Thursday, but it was still nothing. There was below-average "blah" which is not showing much. That is interesting in itself because SP500 is hitting a new rally high, but is not going to break through the downtrend or the 2004 resistance level with that low volume. On the other hand, it is not batting it back down like a fly either. It is hanging in there.

CHARTS

There was a modest pullback on Friday, and it tapped the 18 day EMA on the low. That keeps SP500 below its 2007 downtrend line, below the March uptrend line, and below the 2004 trading range. It was no major break down, only sag back. It broke higher on low volume; it tried the water a bit and did not like it. It broke back down on low volume and it is sitting there. It will either make a pullback and trade down into this range following NASDAQ and SP600, or it will hold and make a breakout if the liquidity decides to come back in.

The dollar will play a factor. If the dollar continues to rally, then the dollar-sensitive stocks that make up the SP500 will have to come back and take some gain off the table while the dollar does its thing. It could stand for a consolidation - all the stocks in energy, steel, and industrials could use the breather to set up some better buy positions. I will not complain about that if it happens.

The SP500 has not tipped its hand at all, but we do know it has the liquidity underneath it that has helped keep a bid in that market. NASDAQ was a little more interesting with the gap higher on slightly higher volume, and then it tested the water as well. It then gapped lower on higher volume on Thursday - that was the island reversal, but there was no follow through on Friday (that does not mean there will not be one). Near term, this is a bearish signal, but it is not a bearish breakdown. We are just taking about a trade down to 2100 or to the bottom of the range. That is what I anticipate will happen if the liquidity does not take over and surge things back up. That would mean the dollar would stay stronger, which would help NASDAQ make the test. That certainly would not upset us. We have calls out on AAPL that we could ride down and then buy back when they go down and NASDAQ tests this level and holds. Then we can prepare for upside positions. I have no issues with what is going on so far; nothing has changed and nothing is too scary at this point.

The SP600 is the one that is a little bit scarier because it made the lower low, came back up, made a higher low, and then broke higher. It looked positive and got up to the resistance range, and then it fell back somewhat sharply on Thursday. It held the line on Friday and is going to try to hold up at the late-August peak. I am worried about the small caps. There is a head and shoulders that can be trouble. You can look at buying into the IWM. The problem with these patterns is that they set up but rarely consummate. We all saw that happen in June and July, and it got some people's feet slammed in the door. If the small caps break down, that is not a good portent for the economy moving into 2010 - but that is another story. We are worried about what will happen right now, toward the end of the year.

The SOX is similarly ugly. It has a double top. It broke down, made new lows, and rallied back, but then it gapped down. It gapped up, then gapped down, and made an island reversal. That could bring it back down to this 300 range (even to 290), and that is not that far. There is too much liquidity for a major correction, selloff, or rollover. There will be corrections, but they will be viewed as a buying opportunity as long as the central banks have the money out there. The central banks will not take the bid out of the market right now when talking about withdrawing liquidity in 2012.

The dollar-sensitive indices (SP500, Dow) are holding up the best because the dollar has been slammed. They have been performing well and leading the market. Now that the dollar is picking up steam, they are fading back, but it is not a massive selloff. The DXY0 has moved up off its low and it is trying to break up toward the 50 day EMA, but it has slammed the door shut on it in early November. That is the big test coming up next week. The dollar-sensitive indices have been leading. They are pulling back a bit now, but so are the other indices that have been lagging. It always works out that way: Leaders pull back some, laggards pull back more. That is why NASDAQ and SP600 are struggling more.

The dollar may bounce up to 76.50, perhaps to 77. That is good resistance. If it does that, we will get the pullback that we want and can then cash out of our downside plays and buy some more upside. You can add to what you have if you road some of these out and they held up during the downturn. Then you can buy some new positions to catch them as they move up.

LEADERSHIP

Leadership is still extended and showing some trouble, but there are some that have already pulled back and are try trying to regroup. It does not look pretty, but it is interesting. There was the trend higher, and it has broken lower. This is not an ABCD pattern because it is not a strong move, but there is an interesting feature of a gap, a consolidation, a gap, and then another consolidation. It looks like AKS may try to break higher. If it does, it is a nice trade up to 22-23. That is not 100% gain on a stocks position, but when the market is working through these issues with resistance, that is not too bad. STLD has a nice pattern as well; something of a double bottom with handle has formed. I can live with that. If it pulls back to the rising 10 day EMA and pops higher, we could make nice scratch on that as well.

Retail had some tough earnings this week that were not exactly pleasing, but the stocks held up well. PLCE has a nice ascending triangle. It traded in a wild range on the day it reported earnings, but it held its pattern. When a stock can do that in the face of less-than-great news, it shows it has sold out and is ready to break higher. ANN does not have a great pattern. I was looking at it as a downside play, but then it started to move laterally and hold its position, so I lost interest in that. It showed today that earnings were not as great as hoped. It was light on revenues and said its Q4 sales could be less than Q3, yet the selloff and the gap down to oblivion did not happen. As with PLCE, ANN may be sold out at this point, and that may be the case with other retailers as well. Why would BBY be moving up when California may ban flat screens? It must not be that bad (and that liquidity sure helps).

In energy, APA is holding the 50 day EMA and has come back to test it. It is down but not out. Others are having bigger pullbacks, such as HAL. It needs some work, but a pullback would not hurt it at all. RIG was selling off, and broke through its trendline on volume. That was not good, but if the market pulls back, maybe it will set a base, a double bottom, or an ABCD pattern. We have to remember that we cannot turn completely negative on the market just because it is in a correction. We have to look for the opportunities setting up and not forgot that these patterns formed during a lot of this market chop that gets everyone running scared.

DE looks great. It had a gap up, a nice test, and there could be a new entry point there. There are also some question marks. CAT is hanging in there, but we will see how many lives it has left on this move. TEX is trying to set up, but we will see. It is holding some support. The industrials have been the leaders and are now struggling as the dollar moves up a bit, but they are not giving up completely.

AAPL gapped higher and made somewhat of a double top. MACD sold off hard on Thursday on higher volume, and it could easily come down to the 190 level. You can still sell calls on this if it bounces up to the 10 day EMA on Monday and stalls. Buy them back when it hits 190 and holds.

Leadership could use more of a pullback, but some are already getting there. Steel is looking interesting again, and others will look interesting with more of a pullback. There are different waves of leadership, so different groups will move up. I have been looking for healthcare to make a move, and some stocks are, but they do not look great as a group. You have to pick and choose right now. When the dollar finishes making its rally, then the dollar-sensitive stocks should be coming back. We can then load up the boat in that direction once again.'

THE ECONOMY

DELL results a worry for a business led recovery?

There was no economic report out on Friday, but there were interesting economic developments. DELL announced its earnings on Thursday night, and they were terrible. That was a major drag on the NASDAQ because Dell has so many outstanding shares. It is heavily weighted, and it gapped lower and dragged NASDAQ down with it. It closed down 0.5%, down just over 10 points.

A lot of pundits said that HPQ is the consumer-related PC company, so we cannot worry about DELL having poor earnings. That is fine if we are only looking to the consumer to pull us out of this. HPQ's earnings were not that bad. As you recall from the 2000-2001 recession, the businesses play a huge role in whether or not the economy prospers. Consumers continued to buy houses and that sort of thing all through that recession, but businesses collapsed and their inventories killed them. The economy suffered greatly, and we are still feeling the repercussions for that because we gave away our technological advantage over that period. That is another story, but an important one because it ties into our problems today. We gave away a lead there and are paying the price today when we struggle even more with massive debt.

DELL is not doing well consumer-wise, and it was not doing well in business because most of its business IS with businesses, and its earnings were very weak. That does not bode well for the pundits who say that the business side is going to carry us out of the recession - you have to have consumers with you. I will agree that the business aspect is very important in getting any country out of a recession. They have to invest and create more jobs, and that helps pull it out. Unfortunately, we are not investing in the kind of businesses that pull us out of recessions. In the past, we have had nice booms that turn the economy around and produce the kind of growth that pays our deficits down and gets them to manageable levels (or, dare I say, even surpluses). Those are the kind of booms where small businesses create new technologies and create millions of jobs as they grow. MSFT, DELL, CSCO all started to dorm rooms, garages, and motel rooms, but went on to become huge companies that created millions of jobs. Once they get to a certain size however, they are no longer growing. AAPL is not creating the same kind of jobs it did in the past, and neither is MSFT or DELL. They are not growing the way they were, and they cannot. It is incumbent upon the next round of small businesses that start in garages and dorm rooms to become the next growth companies that produce the job machine.

We have a real problem. DELL's numbers give a look into what is happening with small business: They are not buying anything. We have seen in other pieces of economic data that there are no new orders coming out even though production is up. Regional manufacturing is improving, but there are no new orders are coming. It is all going to curtail unless something triggers some buying among the nuts and bolts of the US economy - that is small business. Something has to spark the entrepreneurial spirit to get the new businesses started so we can create new technologies and thus the new jobs that drive our economy and our standard of living higher.


New stimulus talk, but same old results? Tax credits for jobs or for businesses?

There is talk about there being another round of stimulus. The Democrats in charge say that is not going to be necessary because of all the jobs that have been "saved," but those jobs are bogus (and they cost $303K per job). Those jobs are not going to produce what we need in the US to make us a strong economic power once more. They are creating teacher, police, and firefighter jobs - they are all in the public sector. I have nothing against any of those jobs, but they do not produce new technologies and they are not going to bring us to the level where we need to be. The problem is jobs, so there is talk that we need to pass incentives to get small businesses to hire people. That always sounds great and it is something we have tried for many in years. If the economy is going well and you want to bring on some people, it is great to give an incentive, but right now, the economy is slack. It is not expanding, the numbers are not as strong as in other recoveries, and the data is showing that there is not a lot of momentum building to the upside.

Small businesses are struggling, and if there is a tax credit for hiring, it is usually a one-time credit. It offsets the cost of training a new hire, and that is expensive. When you hire someone, you have to train them in many things. They may have a certain level of experience, and they may not, but you have to tailor it to your job and it costs a lot of money to do that. It is nice to have that cost offset by a credit. Then next month, you have the salary - and the month after that, and the month after that. A one-time credit is not going to help. You have to have enough business to keep that person employed to pay their salary and to make a profit on your own. With the new healthcare bill, you will have to be able to either pay extra for the healthcare or pay a tax or penalty. On the other hand, there are one-off tax credit incentives that work. They are the "use it or lose it" type, where if you buy equipment for your business or engage in R&D, you get a credit that comes right off the bottom of your taxes. If you owe $5K in taxes, and you get a $5K credit, you owe no taxes. Then you take the $5K that you would have paid in taxes and you spend it on whatever you need to help grow your business. That is an order coming in. If enough businesses do that, that creates a snowball effect. It creates more demand and you are investing in your business and trying to grow. You are unleashing the entrepreneurial spirit, and that is what always takes us out of these recessions. It is a one-time credit, but you use it because if you do not, it becomes money sent to the government while you get nothing. It is a no-brainer. It worked and set off a boom in the 1960's. It set off a boom in the 1980's. It also set off booms in Russia and other Eastern Bloc countries. Ireland was the same. It is proven to work, but we are unfortunately not going that route.

When you invest in one-offs that people will take advantage of, then they invest in their business and you will generate new technology and businesses that create new jobs. If you just say "hire someone," and throw some money in that direction, that is not creating anything. Many people in Washington have never run a business. They have never had to figure out what works and what does not, how to make a payroll, and how to keep a business running. That is a big disconnect, and it is why you have ideas like a credit to hire. Unless that person comes on board and generates revenue in excess of their salary, they are not going to be worth it. That is especially the case with the healthcare bill that is going to be passed this weekend. There are all those expenses saddled on the small businesses, and then there is cap and trade in early 2010 that will add more expenses - and they do not even know what they are yet. Small business is not going to invest in anything or spend any money when the economy is this bad and they see more taxes and costs eating away at their business down the road. They are going to hoard their money versus spending it. The government the fighting very serious headwinds of its own creation in trying to get the economy back on its feet.

We have some problems and the solutions we hear are not up to the task, but we will muddle through it. It will be painful, but we may have liquidity in the market until 2012. That could keep things rolling despite the fact that we would lose the middle class and the small business base in the US.


THE MARKET

MARKET SENTIMENT

VIX: 22.19; -0.44
VXN: 22.49; -0.81
VXO: 21.12; -1.29

Put/Call Ratio (CBOE): 0.92; -0.08


Bulls versus Bears:

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

Bulls: 44.4%. Finally cracking some from the recent spike (48.3% last week, 49.5% prior). Of course this is just in time for SP500 to break key resistance. Believers may have waned but the liquidity did not. Still well over the 35% level that is the threshold for what is considered a bullish climate. It does not mean things are necessarily bearish; that takes a reading in the 60% range. Hit a high of 47.7% mid-June on the run from the March lows. Again, to be seriously bearish it needs to get up to the 60% to 65% level. Dramatic rise from 21.3% in November 2008, the bottom on this leg. This last leg down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator.

Bears: 26.7%. Bounced up on the selling in conjunction with the decline in bulls. Up from 24.7% and 22.5% before that. Rebounding from the big drop 31.1% and 35.6%. For reference, cracking above the 35% threshold considered bullish. Hit a high on this run at 47.2%. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.


NASDAQ

Stats: -10.78 points (-0.5%) to close at 2146.04
Volume: 1.98B (-7.29%)

Up Volume: 621.67M (+331.592M)
Down Volume: 1.355B (-549.203M)

A/D and Hi/Lo: Decliners led 1.17 to 1
Previous Session: Decliners led 3.78 to 1

New Highs: 47 (+14)
New Lows: 31 (+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: -3.52 points (-0.32%) to close at 1091.38
NYSE Volume: 1.128B (+4.1%)

Up Volume: 405.464M (+285.65M)
Down Volume: 685.156M (-269.385M)

A/D and Hi/Lo: Decliners led 1.42 to 1
Previous Session: Decliners led 4.05 to 1

New Highs: 83 (+7)
New Lows: 37 (-4)

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

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


DJ30

Stats: -14.28 points (-0.14%) to close at 10318.16
Volume DJ30: 230M shares Friday versus 196M shares Thursday.

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


MONDAY

SP500 is bumping up against key resistance, and the big question is whether (and how much) it will consolidate. Will it move laterally for a few days with the liquidity shoving it higher, or will the dollar go higher while SPP500 kicks back a bit and corrects more? There are plays setting up both ways, and we have seen some already pulling back. The steel stocks have pulled back ahead of others, and energy is pulling back. After a bit more consolidation, it may be ready to move upside again. There are also downside plays that continue to set up. We have to ride the fence while the market goes through this. We do not want to get too involved in any case because the market is in the process of working through serious resistance. With the liquidity out there, the presumption is that it will ultimately break higher off this. When you start assuming that, the problem is that there could be a deeper correction than anticipated.

NASDAQ had the island reversal. It did not do anything on Friday, but that does not mean it is not going to do anything with it on Monday. We took positions with respect to that pattern on Friday, and we have been taking others here and there and setting ourselves up for the moves. We will have to play the dollar factor and the liquidity factor against one another and mind our positions. As long as the upside is holding support, we can let them ride out because they are relying on liquidity coming back in. On the other hand, if there is a correction near term, many of the other stocks that have rallied up are going to come back. It does not mean they will break down and crash, it just means they will come back and test the moves they made. We can take advantage of that and make some money to the downside; indeed, we have some downside positions accordingly.


Support and Resistance

NASDAQ: Closed at 2146.04
Resistance:
2155 is the March 2008 intraday low
2167 from the July 2008 intraday low
2168 is the September 2009, intraday peak
2169 is the March 2008 closing low (double bottom)
2177 is a low from March 2008
2191 is the October 2009 peak
2210 (from September 2008) to 2212 (the July 2009 closing low)
2275 - 2278 from the February 2008 and April 2008 lows

Support:
The 18 day EMA at 2147
2143 is the October 2009 range low
The 50 day EMA at 2110
2099 is the mid-September 2008 closing low
2070 is the September 2008 intraday low
2060 is the August peak
2048 is the early October 2009 closing low
2016 is the early August peak
1984 from late September
1962 is the bottom of the August 2009 range.
1947 is the October gap down point
1897 is the October post gap intraday high.
1880 is the June peak
1862 is the July peak
The 200 day SM A at 1835


S&P 500: Closed at 1091.38
Resistance:
1100 is the 2007 down trendline
1101 is the October high
The March/July up trendline at 1104
1106 is the September 2008 low
1133 from a September 2008 intraday low
1185 from late September 2008
1200 from the July 2008 low

Support:
The 18 day EMA at 1086
1080 is the September 2009 peak
1078 is the October range low
1070 is the late September 2009 peak
The 50 day EMA at 1065
1044 is the October 2008 intraday high
The August peak at 1040
The early October 2009 closing low at 1025
The early August intraday peak at 1018
The November 2008 peak at 1006 closing 1007.53 intraday
992 is the August 2009 consolidation low
956 is the June intraday peak
944 is the January 2009 high
The 200 day SMA at 937
935 is the January closing high


Dow: Closed at 10,318.16
Resistance:
10,365 is the late September 2008 low
10,609 from the Mid-September 2008 interim low
10,963 is the July 2008 low

Support:
The 18 day EMA at 10,183
10,120 is the October 2009 peak
9918 is the September 2008 peak
The 50 day EMA at 9916
9855 is the early September peak in its lateral range
9835 is the late September 2009 peak
9654 is the November 2008 high
9625 is the October 2008 closing high
9620 is the August 2009 peak
9430 is the early October low
9387 is the mid-October peak
9116 is the August low
9088 is the January 2009 peak
8985 is the closing low in the mid-2003 consolidation
8934 is the December closing high
8878 is the June peak
8829 is the late November 2008 peak
The 200 day SMA at 8747


Economic Calendar

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

December 01 - Tuesday
Construction Spending, October (10:00): 0.8% prior
ISM Index, November (10:00): 55.7 prior
Pending Home Sales, October (10:00): 19.8% prior
Auto Sales, November (14:00)
Truck Sales, November (14:00)

December 02 - Wednesday
Challenger Job Cuts, November (07:30)
ADP Employment Report, November (08:15): -203K prior
Crude Inventories, 11/27 (10:30)
Fed Beige Book, (2:00)

December 03 - Thursday
Initial Claims, 11/28 (08:30)
Continuing Claims, 11/21 (08:30)
Productivity-Rev., Q3 (08:30): 9.5% prior
Employment Cost Index, Q4 (08:30)
ISM Services, November (10:00): 50.6 prior

December 04 - Friday
Nonfarm Payrolls, November (08:30): -190K prior
Unemployment Rate, November (08:30): 10.2% prior
Average Workweek, November (08:30): 33.0 prior
Hourly Earnings, November (08:30): 0.3% prior
Factory Orders, October (10:00): 0.9% prior

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

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

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