Sunday, May 23, 2010

A Return of Buyers?

- Thursday selloff continues early Friday but then reverses into a pre-weekend rebound.
- Sharply down week, February low, weekend, expiration lead to a rebound, at least for the day.
- Volume strong on the Friday upside, matching Thursday selling volume. A return of buyers? Expiration makes that position dubious.
- NASDAQ at a long term support level.
- Deflation trade entered the market last week, held through expiration.
- Poised for yet another attempt at a relief bounce. Third time the charm?

More selling but then, yet again, another recovery.

We saw it Monday and then again on Wednesday. The market sold off sharply, continuing the prior session's dive lower, then rebounded to a gain or damn near, setting up a potential oversold relief bounce. Of course on Tuesday and again on Thursday that intraday rebound was thoroughly trashed as the selling continued to the downside.

Indeed on Thursday at the close institutions were actively selling, meaning they were selling after an already ugly downside selloff. That is typically a bad sign as they are unloading shares even after a downside rout. Friday futures were down sharply again pre-market, some more follow through on the Thursday selling, aided by the US senate passing a non-reform financial 'reform' bill that many say puts US financial institutions at a clear disadvantage to non-US institutions.

Leading up toward the open, however, both German houses passed the proposed EU bailout package and that helped bounce futures. Not positive, but it did bounce them. The market gapped lower on the open as expected. Immediately, however, stocks reversed and rallied positive by lunch.

Why? As I noted Thursday, another move lower ahead of the weekend would prime the market for a bounce. The market sold off sharply to end the prior week and tanked this week through the Thursday close despite two rebound attempts on the way there. As stocks opened Friday the SP500 quickly fell to the February low, undercutting the February closing low, a key support point. A stock or index that sells hard and then undercuts an important support level often triggers a rebound. In addition it was expiration Friday and that often adds additional volatility spice. Throw in it was the weekend and stocks were pounded all week and you have the right ingredients for a rebound.

It was certainly enough to reverse the market almost immediately after the initial gap and selloff. Stocks turned and rallied, and by lunchtime sported gains in excess of 1%. It was not, however, a powerful surge back upside. Indeed after that surge the stocks started to test, something that is normal after a big recovery. They continued to test all afternoon, however, and by the last hour had pretty much frittered away all the gains. It took a late bounce to return the gains to decency status.

It may not have been powerful, but it was a recovery to 1+% gains. Stocks undercut or held important support and bounced . . . once again. The question heading into next week is whether this rebound, the third of the week, is the one that results in more than just a one-day recovery.


The deflation trade that entered the market on the Tuesday CPI report remained through the weekend. After all, with the EU still a big question mark given the action in the bond markets and LIBOR (rose to 0.50 Friday from 0.48, the highest level since July 2009), there was nothing to change the emerging view that deflation is now a larger worry than inflation. This despite the trillions of excess dollars, euros, pounds, etc. floating around the world.

Dollar. The dollar sold back starting Wednesday and while a lot of people are questioning whether the dollar has peaked, the action suggests that is not the case. It continued its pullback Friday (1.2564 versus 1.2494 Thursday) after trading below 1.22 Wednesday before the reversal to the downside that day, but it is holding near the 10 day EMA. As noted Tuesday through Thursday, the dollar is close to bumping its late 2008 and early 2009 peaks and feeling some resistance. It also put in a spectacular run from early May and is near term overextended. That combination logically leads to a pullback to test the move. That is what the chart shows right now, and if it continues this trend the dollar is just testing and likely resumes its move.

Bonds. An almost incredible run higher the past week as money rushed out of world bond and stock markets and continued pouring into the US bond market. Bonds approached the May 6 high on Friday before reversing field and closing basically flat (3.23% 10 year versus 3.21% Thursday). Incredible surge and as we know, incredible surges in anything lead to tests or corrections. Similar to the dollar, bond yields are approaching a prior high at the October 2009 peak and as such they are going to be tested. Thus, do not be surprised next week to see bonds sell back some, pushing up yields a bit. If it is just a normal pullback don't be fooled by the television talking heads. Until the world attains a comfort level with the European issues or the US economy suddenly weakens, money will find its way into US treasuries. We best hope the US economy is not pulled down by Europe; the Fed has no ammunition left to fight given rates are at 0% already and it still has $1.25T in assets it bought during the crisis. More government spending? Right; let's get to Greece's position in 2 years instead of 5 to 10.

Oil. Oil gapped higher after trying to bounce Thursday, but it had no stomach to hold the move, reversing to close lower but still hold above 70/bbl after falling below $68/bbl on the intraday low last week. It is still at the bottom of its 7 month range. Trying to hold there for certain, and you would expect it to hold and bounce there. Oil is as oversold as gold, bonds, and dollars are overbought. All are due a retracement.

Gold. Gold was down again, after all deflation worries remain, but losses were curtailed with a recovery off the lows as the chart shows, though that recovery was after hours (1176.70, -11.90 on the close). Gold suffered a fairly precipitous drop: the shift from inflation worries to deflation fears occurred rapidly and we took the rest of our gain in the GLD off the table last week after a very nice run higher and prior gain we banked. Friday finds it tapping the 50 day EMA and bouncing. Similar to the indices, it is set up to bounce. Will it? The deflation fears are likely overblown as the view of Europe's weakness is likely overblown. Thus we anticipate a recovery from gold perhaps starting as early as this week.



Volume. Volume was mixed, down a fraction in NASDAQ, up a fraction on NYSE, but both holding very strong levels. You would expect strong volume in a volatile time on expiration Friday and that is what you got. Of course Thursday volume was as strong and impressive as Friday. Indeed, Thursday trade was even more impressive as it was part of a dive lower with institutions selling into the close. Thus that downside trade in our view has more meaning than the upside expiration related trade on Friday. Thus volume still suggests downside weakness.

Breadth. At -2.9:1 NYSE and -1.8:1 NASDAQ, breadth was paltry, not nearly showing the kind of strength as the downside. That is suggestive of a relief bounce Friday versus any kind of serious reversal. Not surprising given the circumstances, but even relief bounces can run nicely on weak breadth and volume.


SP500. SP500 gapped lower and sold to just undercut the February selloff low, all in the first few minutes. That brought out the short covering and sparked the move back up. That often happens: the breach of an important support level after a sharp selloff brings about a reversal. Friday that was the case, but it almost gave up the move before a last half hour bounce. The rebound took SP500 back up to the 78% Fibonacci retracement level, but that doesn't mean a whole lot now as the index has given back 100% of the February to April rally. Now we look to see if the third reversal off the lows for the week, this time at a key prior low, can provide the index a continued upside bound back toward the January consolidation lows.

NASDAQ. NASDAQ gapped lower as well and then it too reversed, taking back the May 6 low as well as closing just over the 200 day SMA. As with SP500, the third intraday reversal of the week. Now can it fill the Thursday gap lower and get back over the January high? In good position to do just that, and indeed NASDAQ is at an important long-term support level defined by various points including the December 2004 peak, July to October 2005 consolidation, January, March and July 2008 lows, and October 2009 peak. It indeed looks as if NASDAQ is at a point it can post a credible bounce, particularly given it has put in a double bottom at this support point.

SP600. SP600 held its January peak, gapping below it Friday morning and then staging a solid recovery to gain 1.29%. This puts in a double bottom for SP500 at the January peak. As with NASDAQ, this is a longer term important level: July 2006 low and the January, March and July 2008 lows. Good point to make a stand, and the double bottom formed in May helps.

SOX. SOX improved its position relative to the other indices last week, holding the 200 day SMA for the second time in the month, putting in a 2.5% gain on the session. SP600 is holding a support line running through the September and October 2009 peaks, the January to March 2008 consolidation, the July 2008 low, the September and October 2001 lows, and the September 1997 peak. Impressive company.


The past month finds leadership besieged with even the rally stalwarts such as retail undergoing significant corrections. Not all retail has sold just as other pockets of stocks or individual stocks have held their longer term trends in other sectors. Overall, however, the leadership ranks are quite thinned.

Nonetheless, with the indices hitting key long term support as just discussed, there are key leadership areas, either current or former, that are ready to move higher.

Retail. After that significant connection, is setting up some interesting potential buys. We have stocks such as OSTK, TJX, ARO and others in interesting patterns.

Financial. Some are saying GS bottomed. I don't see any evidence of that in the chart. On the other hand, JPM shot off a long term support point on Friday, prompting us to take our last JPM downside gain off the table. It is also prompting us to look at an upside play there as well.

Semiconductors. With the chips holding important support there are some decent looking chips. LSCC and NVLS are examples.



VIX: 40.1; -5.69. Gapped higher Friday to 48.20, the highest since the late September selloff. In the range that typically leads to turns in the market.
VXN: 42.81; -3.82
VXO: 37.65; -5.98

Put/Call Ratio (CBOE): 1.32; -0.21. Another session over 1.0 and well over 1.0. The put/call ratio is getting to the point of extremes along with other indicators.

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: 43.8% versus 47.2%. Continuing the drop though not quite as precipitous as the prior week that saw a fall from 56.0%. Looks as if that was the high on this move, falling short of the 60% to 65% considered bearish, but not that short. As with horseshoes, it was close enough. This move started at a low of 35.6% in February, the lowest it has been since July 2009. Over the 35% threshold level below suggesting bullishness. After peaking at 53 on this move the bulls lost some nerve, falling to a new low post- July 2009. Once again bulls peaked out near the 50% level. Bulls have bumped at 50ish since late August 2009, falling to 45ish and then rebounding. 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.

Bears: 24.7% versus 24.7%. Holding steady after the strong surge higher from 18.7%. Hit a high of 27.8% level on this leg in February. Over 35% is considered bullish for the market; definitely at the lower end of the scale. Peaked near 28% in November, falling short of the 35.6% hit in July 2009. For reference, cracking above the 35% threshold considered bullish. Hit a high on this run at 47.2%. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.


Stats: +25.03 points (+1.14%) to close at 2229.04
Volume: 3.314B (-1.21%)

Up Volume: 2.477B (+2.4B)
Down Volume: 843.92M (-2.424B)

A/D and Hi/Lo: Advancers led 1.83 to 1
Previous Session: Decliners led 10.6 to 1

New Highs: 10 (-3)
New Lows: 133 (-28)





Stats: +16.1 points (+1.5%) to close at 1087.69
NYSE Volume: 2.147B (+1.09%)

Up Volume: 2.065B (+2.039B)
Down Volume: 222.787M (-1.874B)

A/D and Hi/Lo: Advancers led 2.91 to 1
Previous Session: Decliners led 10.51 to 1

New Highs: 77 (+10)
New Lows: 160 (-1)




Stats: +125.38 points (+1.25%) to close at 10193.39
Volume DJ30: 438M shares Friday versus 360M shares Thursday.



For the third time last week the indices sold off then reversed intraday for either a gain or a significant intraday turnaround to the upside. The prior two attempts failed and failed rather horribly.

This time, however, it will be different, right? We will see. Mondays and Tuesdays after sharp selloffs and then rebounds to end the week can be brutal. Mondays after expiration Friday often go the opposite way. Moreover, this Friday was up not down, and the pattern of late has been down on Friday then up on Monday.

Suffice it to say that the correction is not over; with the indices diving lower Thursday and then again Friday, forging new lows in the selloff it is hard to say it is over. Not over, perhaps, but as discussed with the charts, particularly NASDAQ, SP600 and SOX, there is reason to look for a significant rebound from these support levels, suggesting that maybe the third time is indeed the charm.

Add to that some subsidence in the EU worries given that the EU news is no longer news, and you have the ingredients for a bounce. Markets are not unidirectional indefinitely. There may still be significant downside in this selling. Some suggest that we are in a secular bear market meaning that after this bounce off the March 2009 low and rally into April that another ugly leg down in the bear market is ahead. Given the massive debt remains, the Fed cannot unload its $1.25T in junk assets it bought in the crisis, and must keep printing money to support the economy, they could be right.

So do we don the sackcloth and ashes for Monday? No, we look for the upside. The market will bounce at some point and given the failed attempts after Monday and Wednesday, when it goes it is going to be a shot to the upside. Thus we picked up some BIDU Friday, a stock that can deliver rocket shots upside. There are other stocks that are massively oversold and at support. We will look to play them to the upside as the selling pressure abates and stocks recover in a relief move.

It may not last and the selling may resume: few recoveries are just one drop down and a rebound to new highs. Yes, yes, there is a small double bottom in place, but that is likely not THE bottom to this correction. If it is and we play the upside with strong stocks, we will profit very handsomely. If it is not and we play the relief bounce with strong stocks, we will profit very nicely and then transition to more downside if the move rolls over, making money with puts just as we did on this last leg lower.

Support and Resistance

NASDAQ: Closed at 2229.04

2245 from July 2008 through 2260 from late 2005.
2275 - 2278 from the February 2008 and April 2008 lows
2273 to 2282 marks bottom of January 2010 lateral peak
2292 is a low from January 2008
The 10 day EMA at 2312
2319 from the September 2008 peak
2320 to 2326.28 is the January 2010 high
2324-2370 is a range of resistance from early 2008
2382-2395 from 2008
The 50 day EMA at 2376
2412-2415 represents a series of peaks and lows in 2007, 2008
2434 is the May 2010 high
2453 is the August 2008 peak
2535 is the April 2010 peak
2546 from July 2007, February 2007, November 2007: a level touched many times as a high and low.
2725-2730 from the July 2007 and May 2009 peaks

The 200 day SMA at 2222
2210 (from September 2008) to 2212 (the July 2009 closing low)
2205 is the November 2009 peak
2185 to 2195 represent support points for years: December 2004 peak, July to October 2005 consolidation, January, March and July 2008 lows, and October 2009 peak.
2177 is a low from March 2008
2169 is the March 2008 closing low (double bottom)
2168 is the September 2009, intraday peak
2167 from the July 2008 intraday low
2155 is the March 2008 intraday low
2100 is the February 2010 low

S&P 500: Closed at 1087.69
1101 is the October 2009 high
The 200 day SMA at 1103
1106 is the September 2008 low
1114 is the November 2009 peak
1119 is the early December intraday high
The 10 day EMA at 1122
Bottom of the January 2010 consolidation 1131 to 1136
1133 from a September 2008 intraday low
1151 is the January 2010 peak
The 50 day EMA at 1154
1156 is the Sept 2008 low
1170 is the prior March 2010 high
1174 is the May 2010 high
1181 is the April selloff low
1185 from late September 2008
1200 from the July 2008 low
1214 is the first April peak, 1220 is the second high.
1240 is the key July 2008 interim low.
1293 from a March 2008 low
1298 is the November 2008 rebound high that made a lower high. Also part of the Q1 2008 double bottom.

1084 to 1080 (September 2009 peak)
1078 is the October range low
1070 is the late September 2009 peak
1044 is the October 2008 intraday high AND the February 2010 low
1020 is the bottom of the late summer 2009 consolidation
946 from June 2009

Dow: Closed at 10,193.39
The 200 day SMA at 10,262
10,285 is the late December consolidation peak
10,365 is the late September 2008 low
The 10 day EMA at 10,488
10,496 is the November 2009 high
10,609 from the Mid-September 2008 interim low
10,730 is the January 2010 peak
The 50 day EMA at 10,732
10,920 is the recent May high
10,963 is the July 2008 low
11,100 from the 7-08 low
11,205 is the April closing high
11,734 from 11-98 peak

10,120 is the October 2009 peak
9829 is the September 2008 closing high
9918 is the September 2008 peak
9855 is the early September peak in its lateral range
9835 is the late September 2009 peak AND the February 2010 low

Economic Calendar

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

May 17 - Monday
Empire Manufacturing, May (08:30): 19.11 actual versus 30.0 expected, 31.86 prior
Net Long-Term TIC Fl, March (09:00): $140.5B actual versus $40.0B expected, $47.1B prior

May 18 - Tuesday
Housing Starts, April (08:30): 672K actual versus 655K expected, 635K prior (revised from 626K)
Building Permits, April (08:30): 606K actual versus 680K expected, 685K prior (revised from 680K)
PPI, April (08:30): -0.1% actual versus 0.1% expected, 0.7% prior
Core PPI, April (08:30): 0.2% actual versus 0.1% expected, 0.1% prior

May 19 - Wednesday
Core CPI, April (08:30): 0.0% actual versus 0.1% expected, 0.0% prior
CPI, April (08:30): -0.1% actual versus 0.1% expected, 0.1% prior
Crude Inventories, 05/15 (10:30): 0.162M actual versus 1.95M prior
FOMC Minutes: (2:00)

May 20 - Thursday
Continuing Claims, 05/08 (08:30): 4625K actual versus 4600K expected, 4665K prior (revised from 4625K)
Initial Claims, 05/15 (08:30): 471K actual versus 439K expected, 446K prior (revised from 444K)
Leading Indicators, April (10:00): -0.1% actual versus 0.2% expected, 1.3% prior (revised from 1.4%)
Philadelphia Fed, May (10:00): 21.4 actual versus 20.7 expected, 20.2 prior

May 24 - Monday
Existing Home Sales, April (10:00): 5.65M expected, 5.4M prior

May 25 - Tuesday
Case-Shiller 20-city, March (09:00): 2.8% expected, 0.6% prior
Consumer Confidence, May (10:00): 58.3 expected, 57.9 prior
FHFA Housing Price I, March (10:00): -0.2% prior

May 26 - Wednesday
Durable Orders, April (08:30): 1.4% expected, -0.3% prior
Durable Orders ex Trans, April (08:30): 0.5% expected, 3.5% prior
New Home Sales, April (10:00): 425 expected, 411 prior
Crude Inventories, 05/22 (10:30): 0.162M prior

May 27 - Thursday
GDP - Second Estimate, Q1 (08:30): 3.3% expected, 3.2% prior
GDP Deflator - Second iteration, Q1 (08:30): 0.9% expected, 0.9% prior
Initial Claims, 05/22 (08:30): 455K expected,
Continuing Claims, 05/22 (08:30): 4600K expected,

May 28 - Friday
Personal Income, April (08:30): 0.4% expected, 0.3% prior
Personal Spending, April (08:30): 0.3% expected, 0.6% prior
PCE Prices - Core, April (08:30): 0.1% expected, 0.1% prior
Chicago PMI, May (09:45): 60.0 expected, 63.8 prior
U. Michigan Consumer Sentiment, May (09:55): 73.7 expected, 73.3 prior

By: Jon Johnson, Editor
Copyright 2010 | All Rights Reserved

Jon Johnson is the Editor of The Daily at

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