Stocks Alive and Kicking After 3-Day Bounce

SUMMARY:

- Three day bounce ahead of a three day weekend shows stocks are still alive and kicking though still solidly in the trading range.
- Dollar hits an interim top and rolls, dovetailing with the reasons for the bond rise.
- Spending and Income lackluster but Michigan sentiment jumps.
- Pending home sales tank but that is hardly news.
- G8 Economic Summit leaders issue their solemn vows. Grand words. Meaningless words.
- Indices look as if a pullback in the range is ahead, but light volume next week can be a stock's friend

MARKET SUMMARY

Indices put in a 1-2-3 rebound bounce, aided by renewed dollar weakness. Lots of weakness.

Stocks managed to put in a third day of a rebound to cap the week following a very weak start. They fell back into their trading range on Monday, giving up the ABCD pattern and the attempt to continue the breakout from the inverted head and shoulders that formed from the February high into mid-April. Something of a 1-2-3 rebound similar to a 1-2-3 pullback. Stocks will often rally nicely and then stage a 1-2-3 pullback. That third day marks the end, and then it bounces back to the upside. Now we have a fall back into the range after three failures to take out those prior highs and extend the rally. That can mean a bear flag that leads to more selling.

I will be watching that as next week unfolds, but the action was not that bad overall. Buyers showed back up immediately after the indices fell back into the trading range, and that is a good thing. There was some buying on the dips. It did not win out the day. Nothing changed the character of the market after falling back into the range, but it shows that maybe the indices can avoid a stronger selloff that takes it through the bottom of the range. In other words, perhaps they can consolidate, base out, and make a new break to the upside.

Futures were higher in the morning, and they peaked right at 8:30 eastern time as Personal Income and Spending for April came out. That somewhat eroded the gains, but stocks rebounded again. They were doing quite nicely until some more economic data came out that was mixed. The market would not be denied, however. It continued higher after that first hour, and it managed to rally nicely positive. Even though it eroded much of the day, SP500 still managed to bounce in the last hour and put together a decent gain. Again, it was the third upside in a row after that fall back into the trading range. NASDAQ, +0.5%; SP500, +0.4%; Dow, +0.3%; SP600, +0.6%; SOX, +1.1%; NASDAQ 100, +0.44%. Some of the large cap techs continued to struggle while the smaller caps tended to work better.

It was not a fantastic move to the upside, but it was a good third day in a row to end and week ahead of a long weekend. There was not any real inclination to sell the market off with worries of what may happen over the weekend. That is another indication of a positive bid under the market still holding it up. Of course it was not enough to break it out recently, but it is not letting it tank either. Note that both NASDAQ and the SP500 moved back positive above the 50 day EMA, though there is still significant resistance from prior tops and some lows in the near future it will have to deal with. That always happens when a stock or index falls back into a range or gives up a breakout move.


OTHER MARKETS

Dollar: 1.4285 versus 1.4137 Euro. The dollar rolled over hard. It peaked early in the week, but it looked like just a normal 1-2-3 pullback. I noted on Thursday that it did not get much of a gain as it renewed its breakout before rolling over. Where have we seen that before? That would be the indices as they broke out, tested, and then started back up. 1-2-3 days to the upside and looking good, but they could not make it stick. They rolled over, and are now back in the trading range.

That is very similar action to the dollar. It renewed the breakout, two days to the upside, and then a 1-2-3 pullback. It looked good, but then the bottom hit. What happened? There were more stories that China will support European countries by buying their bonds and buying the Euro versus the dollar. China said it wants to diversify, and the dollar took a licking on Friday. Indeed, the dollar was much stronger earlier in the week. We have a problem with the dollar, and it looks like it has had a near term rollover. This dovetails perfectly will with what I have been saying about bonds.

For a refresher on bonds, they have continued to the upside. As noted on Thursday, they formed a nice rounded bottom with an inverted head and shoulders. It looks like they are ready to make the move. They have broken out, tested, and now they are back over the 200 day EMA. The bonds are rising because the economy is not that strong. That is one of the main reasons bonds move higher. That is one of the main reasons that the dollar would lower as well. The administration refuses to support the dollar, but the economy is also not doing very well.

If the economy performs poorly, fewer people want the dollar. It becomes worth less because the future of the economy itself and the value of America is lower. There is no doubt with a $14T debt that is likely to balloon up to $24-25T, that the US is worth less. It is not the same country it used to be. That is a hard concept to accept, but we simply do not have the same horsepower that we had economically because we do not have the right policies in place. We have Great Depression and 1970's policies that prolong economic angst.

This dovetails with what I was discussing about the dollar. The dollar turned back at an important level the double bottom in October and November of 2010. This has been a bottom in other moves as well, thus it has significance. Also, at the higher level, it has significance because it has acted as support and resistance before. The dollar's next important test is back from Q4 of 2009 as well as Q4 in 2007, near 74. The dollar is heading back down for a key test. It is ultimately a key test of the early 2008 lows that it bounced ahead of on this run that stemmed the sharp selloff from early in 2011.

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


Bonds: 3.07% versus 3.06% 10 year US Treasury. The 10 year was virtually flat on the day. After a selloff, the bond has made a very strong recovery last week. As the economic data deteriorated, the bonds prices strengthened. That is a normal relationship. There was a long-term bullish pattern for bonds. With the US economic data continuing to worsen, it looks like there will be even more weakening.

Several pundits on the financial stations the past two days have been saying this is just a soft patch. Indeed, the G8 was saying it is a soft patch. I do not think that is the case. "Transitory" is the new word of the day when it comes to the economy and the Fed with "transitory" inflation, and "transitory" slowdowns. Bernanke was totally wrong in saying that the subprime mortgage crisis would be contained. Why believe he is right in suggesting that inflation and any economic slowdown is transitory? Everything we see is pointing in the other direction. Frankly, the bond market rarely lies.

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Gold: $1,535.70, +11.90. Gold also rarely lies. After that short pullback that I talked about on Thursday, gold was off to the races again. We bought into it right on this move that broke it sharply off of the double bottom at the 50 day EMA. Gold is rallying on inflation worries and fear with respect to the US economy. The US was once the strongest economy with the greatest future ahead of it. Gold has reason to rally for several reasons.

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Oil: $100.59, +0.36. Very modest gains. GS on Tuesday said that it was time to buy oil and it was ready to rally. A lot of oil stocks were ready to rally, but I am not sure oil is going to follow suit. It bounced for a couple of days, but it has hit resistance. Maybe it makes a little 1-2-3 pullback here and continues to the upside. Maybe. It looks very weak to me at this point, not in a position to move higher. Oil is a strange beast, however, and it could make the move. If Europe and the US economies are not strong, it is hard for oil to sustain. Although, we have China, India, and Brazil sucking up a lot of barrels every day.

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


THE ECONOMY

Personal Spending and Income blas , Michigan Sentiment very solid.

Pending home sales continue to stink but it too is blas .

G8 Leaders 'vow' to persevere.


TO VIEW THE ECONOMY VIDEO CLICK THE FOLLOWING LINK:

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


TECHNICAL SUMMARY

INTERNALS.

The internals were relatively lackluster as one would expect on the Friday before Memorial Day.

Volume. Volume fell 14% on the NASDAQ to 1.65B shares. It fell 20% on the NYSE to 688M shares.

Breadth. Breadth was relatively weak and modest. 1.75:1 on NASDAQ and a solid 3:1 on the NYSE.

Put/Call Ratio. After spiking up to over 1 for a couple of sessions, the put/call ratio fell quickly back down as the market recovered. I anticipated it might bounce back over 1 next week as the market pulls back from the 1-2-3 rebound to the upside.


CHARTS

SP500. SP500 did move above the 50 day EMA, which is the next key point to deal with. It closed well off of its high as it tapped the early-May low, the early-April peak, the early-March peak, and still well below that February high that marked the end of the nice rally out of 2010. Three days to the upside, closed off the high. We may get a pullback down toward the bottom of the trading range. If so, we take it for what it is. We are still in this trading range at this point. We can play it to the downside with some SPY puts. We can buy some of the upside/downside plays on the indices and that type of thing. We will see how it pans out. We still have a lot of leadership, so we do not want to get too negative on the market just because it bounced up for three days and did not move to a new breakout.

NASDAQ. NASDAQ showed similar action. Third day to the upside, almost gapping above the 50 day EMA on Friday. Note that it has pretty much filled the gap from Monday. This is a point of import. There are several gaps in this area, and there is also that early-April peak and the early-March peak. All very important levels because they all stop the index on a prior move. Look how it tapped the gap on the high, and there is another gap. There are the highs from early April and the highs from early March. A lot of resistance at this level. Looks like it could trend lower as well. Again, that is not necessarily bad action. It is in a trading range. If it can consolidate again, that would not hurt. In fact, it could ultimately lead to a new breakout.

SP600. SP600 was up 0.6%. It, too, broke higher after clearing its 50 day EMA on Thursday, but it is struggling at a big swath of resistance as well. Looks a bit better, but it still has work to do. It is in a better position to hold. It bounced off the middle of its trading range. It could chop around and even come back and still be in good position to ultimately resume the move to the upside.

SOX. SOX rose 1.1%, the best of the session. The pattern still is not the best. It gapped higher above the 10 day EMA, and it has also filled this gap lower from early in the week. It is a very solid move after it gapped higher in mid-April and then gapped lower. It made an island reversal it, but came right back. No follow-through to the downside. That is important. The selling dried up there. While it may not be able to move significantly higher yet, it could definitely continue to hold in this range and consolidate for a new break to the upside. Even though it is not a pretty-looking pattern, there are some positive aspects.


LEADERSHIP

Semiconductors. Semiconductors are performing quite well. ALTR looks like it might be ready to make a move to the upside. It was a chip leader early on, and it has made a nice pullback to the 50 day EMA. Now it showed a little hammer doji or tombstone on Friday. Maybe it will come back a little before taking off. That could prove to be interesting. We picked some NVDA on Friday. Nice move to the upside, cleared the 50 day EMA.

CCMP has a nifty pattern. We will have to see how it shakes out. It could come back a little and start back to the upside. It would make it a little more interesting. BRKS is back town to a support level. Maybe it can make a break to the upside. We will be watching it. And, of course, there is KLIC. It is trying to make a bounce back to the upside after a very nice pullback to test the breakout and rally in early-May.

Technology. AAPL had a rally up as well. It looked like it would fall over on Thursday and made a better move on Friday, but it still was only able to make it to the 10 day EMA. At least this time it managed to hold the move. Maybe AAPL will be out of its trading range sooner rather than later. I am not waiting around for it, but it would be great to see it happen.

FFIV had a strong move to end the week. It had a little shakeout early in the week, and then powerful moves on Thursday and Friday. Looks like it is trying to clear a very important resistance level right now. We have some of it. If it clears this and comes back to test it, we will add some more.

CRM had an excellent couple of weeks. Looks like it might try to peak out. We want to watch for a test back to a key support level and see if we can get some kind of trading buy out of that. ADTN was not bad. Good recovery. It was in trouble, and now it looks to be ironing things out. It has a nice rounded bottom. It is making some higher lows, and we will see if it can continue to the upside.

Metals. Metals had a good week. They started to come back as all commodities performed better. FCX moved up nicely, gapping higher and rallying above the 50 day EMA on Friday. AKS gapped and rallied through the 50 day EMA as well. There is some strength in commodities, and it was aided by that really weak dollar on Friday.

Industrial Equipment. Industrials are not necessarily feeling the love. CAT was up on Friday, but it gapped higher and showed a doji. Kind of a tombstone at the 10 day EMA. It does not look that healthy right now. DE gapped higher and showed a doji at the 10 day EMA, also at some prior resistance. These are questionable. They could do it, but we will have to see. Industrial equipment is a bit iffy right now.

Retail. Retail has obviously been a leader of late. COH is strong. It added some more on top of that huge Thursday move. In the case of the turnabouts, CHS sold off with a gap two weeks ago and we closed out the rest of our positions. We had some June or May options. We got nice gain on them, but then it had a reversal and a change of heart. It has rallied right back up. Fairly impressive.

BBBY gapped higher back in early April. Now it rallied further and it stepped back to the gap point. And the 50 day EMA, it rallied right up to there. It is coincident with the gap and is holding fast at that level. That is pretty cool. If we can get a strong break off of there, that is a buy. Not bad. LTD has a nice rebound under way. It did not do squat on Friday. It came back a little bit, but that is okay because it might give a better entry point.

Retail overall has me a little concerned because we have seen some big implosions. RL really tanked on Wednesday on earnings, but it came right back. Old Ralph was not going to be caught just sitting around on his huge spread in Ridgway, Colorado. Nice rebound from that stock. We are seeing some recoveries in retail from stocks that looked dead like COH and RL. Others are not doing as well or have not recovered yet. ARO rebounded last week, but there is low volume after a massive gap lower. Retail is having issues, but it is surprisingly resilient given the crappy economic data as well as the falling wages we saw in the GDP report on Thursday. Not to mention gasoline prices that are too high.


THE MARKET

VIX. After a spike higher early in the week on the selling, it has come right back down to the same level it hit in December-February. Recently we have had selloffs when it has come down to this level. Thus we have a nice doji that tapped that horizontal support level on Friday, and it bounced. After that 1-2-3 upside and a little bear flag, we could get a downside move on the indices next week.

VIX: 15.98; -0.11
VXN: 16.87; -0.39
VXO: 15.76; -0.23

Put/Call Ratio (CBOE): 0.7; -0.22


Bulls versus Bears:

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

Bulls: 43.0% versus 45.6%. Bulls were already concerned, and the selling early in the week sent them running. 51.1% just three weeks back. Held at 54% for a few weeks before this slip. 60+ indicates some trouble for a bull run. Hit 55.1% in January and 58.8% on the December high on this leg. It is matching those readings in a string of high readings but below the 5 year high at 62.0. Fading back from the level considered bearish, i.e. where so many are in the market and believe it is going up that the ammunition to send it higher runs low. This is where you start to be careful and watch for breakdowns, but there is also a lot of liquidity being pushed into the market and that can continue the move despite excess bullishness. The crossover level at 29% bulls is long gone, but it did its job. The high on the last leg was 56.0% after starting at 35.6% on the low in February, the lowest it has been since July 2009 . . . until this last leg. 35% is the threshold level suggesting bullishness. Again, to be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 19.4% versus 19.6%. Not in sync with the Bulls; should be rising. Surpassing 18.5% registered a month back. Down from 23.1% to start April, but making their way back. Fell like a stone on that decline, moving below the April 2010 low. 28.3% in September 2010. The 37.7% peak at the height of the crossover is well in the rearview mirror but bears remain well below the 35% level, above which is considered bullish for the market overall. Hit 18.7% on the low in April. Hit a high of 27.8% level on the prior leg in February. For reference, cracking above the 35% threshold considered bullish. Hit a high on the prior run at 47.2%. For more reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.


NASDAQ

Stats: +13.94 points (+0.5%) to close at 2796.86
Volume: 1.655B (-14.12%)

Up Volume: 1.17B (-340M)
Down Volume: 448.85M (+59.88M)

A/D and Hi/Lo: Advancers led 1.75 to 1
Previous Session: Advancers led 2.53 to 1

New Highs: 89 (+17)
New Lows: 35 (-20)

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: +5.41 points (+0.41%) to close at 1331.1
NYSE Volume: 688.25M (-20.06%)

Up Volume: 522.99M (-104.16M)
Down Volume: 156.86M (-61.23M)

A/D and Hi/Lo: Advancers led 2.91 to 1
Previous Session: Advancers led 2.52 to 1

New Highs: 126 (+34)
New Lows: 18 (-20)

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

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


DJ30

Stats: +38.82 points (+0.31%) to close at 12441.58
Volume DJ30: 126M shares Friday versus 149M shares Thursday.

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


TUESDAY

The monthly unemployment report should be out because it is the first Friday of the new month. With the holiday, however, we will have to see. The government has not said when it will release that data. It may be pushed to the next week, but there will be other important data out the Case/Shiller and the Challenger job cuts report. We will see the ADP report out as well. Then we will have another important piece of manufacturing data, the Chicago PMI. It is expected to fall considerably, and that would be in line with what we have seen in the other reports that have come out recently.

What about the market itself? I talked about the 1-2-3 rebound from the selling back into the trading range. It gave up the breakout, gave up the attempt at the continuation of the breakout after the test, and then the failure of the ABCD pattern that bounced and rolled over. Now it is back up over the 50 day EMA, but the indices are at serious resistance nonetheless. Frankly, to me it looks a lot like this is just a little 1-2-3 bounce to the upside.

Volume will remain light next week because it is Memorial Day week. It is a four-day week, and that means people will be out on their holidays. Light volume can be a friend of the trend. Overall, even though the indices fell back into the trading range, it means the upside bias is still there even though they have taken it kind of hard near term. Where we would be expecting a pullback, there may be a continuation of the rally back toward the February peak at least on SP500.

We did not buy a lot of Friday. We bought significant positions when the market fell back and the leaders showed they were holding support. We bought into some of those leaders, and we bought into several positions because there were several good stocks making moves. Friday we picked up a few. We let some go that maybe we should have gotten into, but it is just that Friday situation. I felt like there may be a better chance to pick up some of those early next week if things should fall. Remember, we are looking at the VIX. It is not the primary indicator, however; I do not want to imply that the VIX is leading my analysis around by the nose. It is showing the same kind of action that it did on the last selloff, and that is something to consider next week.

I think we might get some better entry on these stocks that we did not pick up at the end of the week. That is fine. Again, you have to be aware that light volume can allow the existing bias to extend beyond what you would normally think it could do. That might mean that the indices continue higher in their range. If they do, that is great and we will let our positions run. We will take some more gain off of the table. With the bounces that we got off of the lows starting on Tuesday and Wednesday, maybe we can already bank some gain on those. We have had some good moves on those stocks in a short period of time. That might let us bank some money, and I would be more than happy to do that and then see if we get that pullback.

What has happened on Wednesday, Thursday, and Friday? A rebound. Has it changed the character of the market that fell back down into the trading range? No. Beyond that, has this drop into the trading range automatically changed the entire bias of the move? No, it has not. There is no breakout now. There is a question as to whether the market will base out and try to post a new breakout, or base out and fail, or just forget about basing out and fall through the bottom of the trading range.

The fact that it rebounded Wednesday through Friday is a good indication that the buyers are still there and are not giving up. They will try to base out the indices and maybe make a new break. The fact that there are many good, high-quality leaders that held close support and bounced Wednesday, Thursday, and Friday is a very good indication that the upside bias remains. It is all very positive even though the indices tumbled back into their range this week.

That means we will continue to look for opportunity. On this bounce to the upside, we will be ready with some downside plays on the SPY, other indices, and other stocks that bounce to the upside. Some of our downside plays made strong moves at the end of the week, but they started to top out where you would expect them to. They showed a little toppy action even though they were up on Friday. With the VIX showing that action, it is worth waiting to see if there is a fade next week. Light volume is the wild card, but technically it looks like the markets want to go back and trade in the range some more.

We may not get buys right away. It may be a bit in the future that we get some more good buys and better entries, but we can be patient. We have great stocks in great positions that are working for us. We can let them do so. At the same time, we can look to play shorter term, maybe on a test back from this 1-2-3 bounce from the tumble back into the trading range.

Have an excellent three-day weekend. I hate to lecture, but do not forget that this holiday is about those who have died in defense of this country and in preserving those truths that we hold dear; that we have certain inalienable rights that are given from the Creator. The government cannot give those, and it cannot take them away. They are ours, and our Constitution memorializes that along with the other contemporaneous documents such as the Declaration of Independence. Remember the millions who have sacrificed for those rights. Given the trials facing our country right now, it is especially important that we reflect upon what the future holds and what we need to do in order to hold onto those rights.

Have an outstanding holiday!


Support and Resistance

NASDAQ: Closed at 2796.86

Resistance:
2796 is the February gap down point
2816 is the early April peak
2825 is the 2007 closing peak.
2841 is the February 2011 peak
2862 is the 2007 peak
2888 is the recent May peak
2956 from November 2000
3026 from October 2000 low
3042 is the May 2000 low

Support:
The 50 day EMA at 2789
2762 is the February low
2759 is the May low
2729 is the 127% Fibonacci extension of the August 2010 run
2723 to 2705 is the range of support at the bottom of the January to May trading range
2706 to 2705 is the April 2011 low and the February 2011 and consolidation low (bottom of the trading range)
2686 is the recent January 2011 closing low
2676 is the January 2010 low
2645-2650ish from December 2010 consolidation
The 200 day SMA at 2604
2603 is the March 2011 low
2580 is the November 2010 closing high
2569 is the November gap up point through the April 2010 peak


S&P 500: Closed at 1331.10
Resistance:
1332 is the early March peak
1340 is the early April 2011 peak
1344 is the February 2011 peak
1364 is the March 2007 low
1370 is the August 2007 low
1371 is the recent May 2011 peak

Support:
The 50 day EMA at 1328
1325-27 is the March 2008 closing low and the May 2006 peak.
1318.51 is the May low
1313 from the August 2008 interim peak
1295 to 1294 is the April 2011 low and the February 2011 consolidation low (bottom of the trading range)
1275 is the January 2010 low, early January 2011 peak
1255 is the late December 2010 consolidation range
1249 is the March 2011 low
The 200 day SMA at 1243
1235 is the mid-December 2010 consolidation low
1227 is the November 2010 peak
1220 is the April 2010 peak


Dow: Closed at 12,441.58
Resistance:
12876 is the May high
13,058 from the May 2008 peak on that bounce in the selling

Support:
The 50 day EMA at 12,422
12,391 is the February 2011 peak
12,283 is the March 2011 peak is bending
12,110 from the March 2007 closing low
12,094 is the April 2011 low
11,893 from March 2008 closing low
11,867 from the August 2009 high and peak on that bounce in the selling.
11,734 from 11-98 peak
The 200 day SMA at 11,600
11,555 is the March low
11,452 is the November 2010 peak


Economic Calendar

May 27 - Friday
Personal Income, April (08:30): 0.4% actual versus 0.4% expected, 0.5% prior (revised from 0.4%)
Personal Spending, April (08:30): 0.4% actual versus 0.5% expected, 0.6% prior (revised from 0.5%)
PCE Prices - Core, April (08:30): 0.2% actual versus 0.2% expected, 0.1% prior
Michigan Sentiment - Final, May (09:55): 74.3 actual versus 72.4 expected, 69.8 April Final
Pending Home Sales, March (10:00): -11.6% actual versus -1.4% expected, 3.6% prior (revised from 5.1%)

May 31 - Tuesday
Case-Shiller 20-city, March (09:00): -3.4% expected, -3.33% prior
Chicago PMI, May (09:45): 62.5 expected, 67.6 prior
Consumer Confidence, May (10:00): 66.3 expected, 65.4 prior

June 01 - Wednesday
MBA Mortgage Index, 05/27 (07:00): +1.1% prior
Challenger Job Cuts, May (07:30): -5.0% prior

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

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

Technorati tags: stock trading stock market investing Jon Johnson InvestmentHouse.com

More Startling Economic Numbers

SUMMARY:

- Down end to a down week, but still in position to continue the rally. Just has to do it.
- Gold jumps off its 50 day EMA as the dollar bounces off its test.
- Retail starting to crack.
- More startling economic numbers.
- Trend remains in place, but after another week it is up to the buyers to prove they can maintain and extend it.


MARKET SUMMARY

Volatile expiration pushes indices to the 'show me' point.

It was not necessarily a great day for the stock market, but it was a rather typical expiration Friday. Stocks sold off, rebounded to flat, and then sold off in the last hour and a half to close to the downside. There were some steep losses. NASDAQ, -0.7%; SP500, -0.8%; Dow, -0.75%; SP600, -0.8%; SOX, -0.3%. NASDAQ 100, -0.8%. Overall a very spread-out, even decline as all market sectors took part in the general beating about the head and shoulders. It was by no means a bloodletting. It was something of a stubbed toe, but it was typical of an expiration Friday.

I want to note a couple of interesting features of the day. The initial selloff at the open was somewhat forecast by the futures. They were down but were trying to trend higher, and stocks did try to move up momentarily before they fell off down to the mid-morning low. There is the tumble, and then an inverted head and shoulders and a nice break to the upside. As a bookend to that, there was a head and shoulders form over lunch and into the early afternoon. It brought the indices right back down near the session lows by the close. Just a little intraday chart interpretation, and it very much reflects what you would see on a daily or weekly chart. In expiration, you have volatility and it sets up clearly-defined bullish and bearish patterns intraday that help the transfers from downside to upside and then back down again.

There was very little to get the market excited on the day. There were a few earnings out, mostly retail sales. GPS and ARO both had trouble. GPS had a problem with its outlook, and it seems that sellers love to sell GPS. It gapped down sharply from near 23 to 19. Very steep decline for this stock. ARO did not fare much better. It had already gapped lower, and there was a continuation gap and something of a breakaway as well. Huge gap to the downside. It was struggling because it had the same problem with its outlook. ANN actually surprised to the upside and posted some strong guidance. Nonetheless, it was down as well.

I noted on Friday, and as the week progressed, that some retailers are starting to struggle. More than that, some are actually cracking and starting to break. That somewhat makes sense when looking at the economic data over past several months. It has been steadily declining, and we saw that this past week as well. Housing starts and building permits were disappointing. Industrial production and capacity utilization both came in less than expected, showing declines after peaking. It looks like they are starting to turn back over.

Initial claims improved, but they are still over 400K for a sixth week. Again, this is no reversal. I will talk about some of the statistics shortly. These are not good numbers. Existing home sales were down when they were expected to rise. The Philly Fed was pathetic at 3.9 versus 18 expected and 18.5 in April. The leading economic indicators put in a downside month after eight months to the upside. That does not mean the trend has turned anymore than a 409K weekly jobless claims means that the six-week rise is over. It just shows that there is some mitigation in the numbers, and a weaker leading economic indicators number actually dovetails with the other weakening data we have seen through the economy.

As retail earnings start to fall, it corresponds to the issues with respect to the economy. Again, I will go into some of the numbers in more detail later. They are quite frightening with respect to how many people are unemployed and where we are with other recessions and depressions in the past. The RTH, the retail ETF, is having problems of its own. Nice, strong rally up through May, but now it is stumbling. We could have an ABCD pattern, so I am not jumping off the cliff with respect to retail. It is showing some cracks, though it is after a good run.

We will have to see how that shakes out, but I do see some big moves down. There are some almost unwarranted gaps to the downside. Again, I am referencing GPS and ARO. Those moves are not warranted for the numbers, and that is often a sign that a sector is running out of gas. People are getting out while the getting is good. We need to watch this for the other retail leaders to see if it becomes more of an epidemic or if it is just an isolated outbreak.


OTHER MARKETS

Dollar: 1.4115 versus 1.4312 Euro. We had the pullback from this sharp trend break that began in early May. The dollar spent the entire week testing, tapped the 20 day EMA on the Friday low (the low for this pullback), and reversed to post a strong upside gain. This is a classic test. The initial break, a little flag pattern, and now rallying back to the upside. The dollar is gaining strength, no doubt, to the chagrin of the Obama administration and to Chairman Bernanke. They are playing with our dollars and our wealth, in a gambit to benefit the federal government. It wants to help pay for its profligate spending while it decimates our wealth and savings. It is a game that has been played before. It is been played here and in other countries, and it does not have a good outcome for us.

The dollar is rebounding regardless of what the Fed Chairman and the President are trying to accomplish. One reason that it did bounce today versus the Euro was that Fitch downgraded the Greek economy and Greek debt once more. They basically said it is junk. Tell us something we did not know. Every time that happens, the dollar performs better versus the Euro. That was the lion's share of the gains for the greenback on Friday. Even with that reason for the day, overall in the past three weeks, we have a strong break to the upside.

The dollar has been tested now, and it looks like it has held because the dollar is starting to break back to the upside. I am all for that. We need to get things back on track with a strong economy and a strong dollar. We need to get away from this idea that we will be an exporting nation of large multinational companies. They will export their cash cow-products that make them money, but we will not have any real innovation ongoing. That would be devastating to our standard of living in the future.

We have to develop the new products. We cannot rely on GE, IP, and CAT to make big technology breakthroughs. It does not happen that way. Thomas Edison was the founder of GE, but it was a small company when he was making his inventions. Then it rode those to super-multinational status. We need the entrepreneurs and innovators to create the new technologies that require the new jobs and that raise our standard of living. Then we can export that technology elsewhere.

There is nothing wrong with it, but we cannot rely on exporting bulldozers as a way to maintain our lead on the rest of the world. Any country can make a bulldozer. I do not mean any offense to CAT, but if someone wants to make a bulldozer, they can do it. We have to make new technologies that create the new jobs that require that new class of worker. That makes us wealth. That is what has always made us so strong, and it is the small businesses that do it.

I am glad to see the dollar rally. The problem is, when the dollar rallies, what happens to the stock market? The relationship it has now is abnormal because most of the money is in the big-name companies. It sees the goal of the administration and the Fed, so it is moving into those stocks that will benefit from their actions. When the dollar is rising, it is contrary to the earnings of those companies. Thus the stock market falls because the stock market is playing the same game that the administration and the Fed are playing. Eventually that will change. Hopefully the dollar will just do it on its own. That would be great, but I do not see any reason for it to rally with these terrible economic numbers. Maybe we are just looking at an oversold bounce and nothing more. That would be sad, but at least it gives us a bit of buying power near term.

Looking back at the overall chart and the peak back in June of 2010, you can see it was due a relief bounce. It is also right back at the important resistance from the November 2010 low. Notice that it banged into it and fell back. It looks like it will try it again. It has the trend and it has formed an inverted head and shoulders that looks like it wants to make the break to the upside through this classic double bottom of October-November 2010.

We have a short-term indication that the dollar will continue to move higher. I view that as a total positive because it brings the price of oil down. That will help with the price of gasoline if refineries do not flood and we do not have to continue making 16 different blends across the country that are bottlenecking the refineries. But that is another story altogether. Of course, as always, I was digressing.

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Bonds: 3.15% versus 3.17% 10 year US Treasury. A nice rebound in bonds after they sold off midweek. There was a huge move up on Tuesday and a reversal, but they have held at the 20 day EMA and look to be bouncing back to the upside. We had this big trading range from back in 2009 and 2010. A very important support level hit back in June of 2009, again in January of 2010, February, and again in late March and early April of 2010. That led to a big surge in bonds, but they sold off. They also formed an inverted head and shoulders. A nice rounded bottom, and they are rallying off of that bottom. We have to keep asking what the heck bonds are rallying for. It could be many things.

Number one, our economy is not that good and is heading down. Bonds perform better when the economy is in trouble and stocks start to tail off. That makes sense. There other issues as well. The President is trying to throw Israel under the bus, and maybe the ramifications of that were something the bond market was worried about. Israel is left with no choice than to take care of things on its own if the US does not have its back. Israel will have to do what it feels is necessary against Iran. After that, our President will use that against Israel, beating them over the head with the horrible things they did. That is not a good outcome either.

We have taken away Israel's choices, and that is not a good thing to do. It puzzles me why it is being done, but it does not matter because it HAS been done. Maybe we will see some backtracking. Who knows? In any event, bonds remain skittish. That is why they are moving higher even when, based on our economy, they should be moving lower.

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Gold: $1,510.20, +17.80. Gold was one of the big stories of the day. It has been holding at its 50 day EMA after this big pullback, and on Friday it started to make an upside move. Looking at the Fibonacci chart, it was not necessarily a great, high-momentum pullback. It fell all the way to the 61% retracement, but it made a bounce and a higher low near the 50% retracement. As noted, it was holding right above the 50 day EMA. Look how it snapped off the bounces each time it tapped it. Then we have the nice break to the upside on Friday, and that was enough for me to issue a bonus alert for the IAU. It is another way to play gold, the COMEX gold ETF. It is priced a bit less, and it also has a little more favorable transaction costs.

In any event, a nice break to the upside on strong volume by gold, and it looks as if gold will continue higher. You would think it is because of the inflation issues, but then you have bonds moving higher. There are a lot of undercurrents in the economy and the world right now.

Is silver going to start back up? It might. It needs more work. The SLV, the silver ETF, simply does not have the same kind of nice pattern that gold does. It had more of a blow off top. It really went up higher. The last three or four months, it really outpaced gold to the upside. Thus it has outpaced it to the downside. It was a bit overdone and frothy. It is paying the price now. Nonetheless, a nice move by gold as it starts its way back up off its 50 day EMA.

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


Oil: $100.12, +1.68. Oil started to come back on the session. It will not give in at the February consolidation and the March low. It sold off and it has tapped down. There are four sessions where it has reached lower and reversed each time it hit this certain level. There are buyers that keep popping it back up. It rallied on Friday at a critical point. It is bumping into the 10 day EMA that is falling down on top of it, and it has been pushing it back. It is not strong resistance. If it holds it shows that oil is weak. Oil looks like it has buyers underneath it. I think it might try to pop up higher. The 50 day EMA is logical. It is just a bit below the March peak. Two highs at that level, and then the April low is there as well. That will be some fairly significant resistance for oil as it continues to the upside near term.

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


TECHNICAL SUMMARY

INTERNALS.

Put/Call Ratio. The Put/call ratio jumped over 1 on a relatively minor downside session. It closed at 1.04 after bumping up at 1.0 for quite some time. Anything above the 1.0 level typically marks excess bearishness because buyers and stock players are typically more bullish than bearish. It is a relatively rare occasion when there are more put buyers than there are call buyers. Looking at the indices, SP500 was down but hardly out. There is a lot of pessimism with respect to where the market is going near term. The pattern does not suggest anything nearly as nefarious as the put/call ratio jumping over 1.0.

That said, I have to put a caveat in here. It was expiration Friday, so there was probably more activity with respect to those puts. Maybe there was rolling out of positions. Maybe some puts were sold and the sellers needed to roll those out to the next expiration. That will bump the ratio higher. We need to watch this over the next week and see what happens.

It was not a one-day phenomenon. At noted, the put/call ratio only had to rise 0.07 to get to 1.04. That means it was at 0.98 right before that. It was bumping up against that level. There is pessimism even has the market has moved higher. What do we know about the put/call ratio? It is a contrary indicator. As it moves higher as people get more bearish and buy more puts the contrary is that things are not as bad as the crowd thinks they are. At least not as bad as the option traders think they are. They are a pretty fast crowd, those option-buy guys. They tend to have a lot of fast money and go in and out. They can get overexcited. That is the benefit of the put/call ratio.

Just one move over 1.0 is not in itself indicative of any kind of turn. What I am looking at is that the level has been elevated even as the stock market has moved higher and has set up a decent ABCD pattern. That would suggest there could be too much pessimism out there based on what the market is showing, and we might get another bounce to the upside.

Volume. Volume was up slightly to 1.8B on NASDAQ, but that is still a very low level. It was expiration, so you would expect a bit more trade. It was up 15% on NYSE, and it jumped up late. A lot of late trades bumped the volume up to 1B shares on the NYSE. That should push it over average on the day.

Breadth. Breadth was -2:1 decliners over advancers on the NASDAQ and -1.9:1 decliners over advancers on the NYSE. It was not a great day for stocks, but it was not a bloodletting either.


CHARTS

SP500. SP500 volume jumped up to just above average. The index fell back from the Tuesday reversal, the Wednesday rally, and the equivocal Thursday right at the February peak. It faded back from there and does not look that great. But it did not give the move up. It is still holding above the 50 day EMA, and it could still make the break higher. This is not an overly-negative pattern by any stretch, and it is still positive with higher highs and higher lows overall. The trend remains in place.

That said, the ball is in the buyers' court to make something happen. You had the breakout, the test, and then it tried to resume the move and could not hold it. Then it formed the ABCD, had the reversal where it should have, and rallied up. It looks like it wanted to break higher, but it has not been able to hold it yet. A test like this is normal. We will see if it holds above the 50 day EMA and can rebound and deliver that move up to the April peak. That is the initial target we have for the continuation run off of this ABCD pattern.

NASDAQ. NASDAQ showed similar action. It, too, closed above the 50 day EMA after coming back off of that Thursday doji. It has its own ABCD pattern. It has made its rally as well. It did not quite make it to the February peak before it faded back, but this is not a bad pullback. You had the break higher, it came back to test the 50 day EMA, and then this gap up point from mid April. If it holds here and can make the turn back up, that would be fine for a run up to that April peak. Again, that is our initial target on this rebound move attempt.

SP600. SP600 did not have a great day. It was off -0.77%, but it is trying to hold the 50 day EMA as well. It has a little narrowing pattern. We will see if it can make a break upside off of this pattern. It was very solid. It was making higher highs and higher lows. Then it made a lower high and a lower low. It is getting muddled. That would be the ABCD, so it is okay. It has to hold here. The ball is also in the buyers' court here to see if they can send the index back to the upside.

SP400. It is always fun to look at the mid-caps, and they are an important sector. Not a bad pattern, tapped at the 50 day EMA on the low and rebounded, cutting the losses on the session. It made a lower low as did the SP600, but it is still in that same general pattern. Still in position to make a move higher. Once again, it is in the buyers' court as to whether it makes the move or not.

SOX. SOX was down 0.3%. It is trying to hold some support. There is definite support at this 430 range. You can see some bottoms and gaps. There is a little island reversal where it gapped below it. There is an inverted head and shoulders and a gap above it. Then back in January of 2011, it held a low at that point as well. There is history here. It is trying to hold, and it would be a good point for it. If it does not, it indicates that the semiconductors will not participate. What would that mean? Semiconductors are very commoditized; they go into just about everything we buy now. If retailers are starting to struggle and if the economy is struggling as it looks to be, there may be fewer goods purchased. Then there would be less need for semiconductors, and then an oversupply. In oversupply the price declines, and then the stock prices decline as well.


LEADERSHIP

Technology. AAPL did not have a great turn of events as it rallied back from the selloff earlier in the week. It was unable to continue higher, reversing on rising volume. Not a good indication, but techs overall remain in good shape. BLKB has a nice pullback underway. What a reversal. It was a big one down to the 50 day EMA that reversed. It looks as if it had a shakeout and is ready to move back to the upside.

Same thing with TTWO. It is in multimedia graphic software. A nice pullback here. Looks like it is setting up a new move to the upside. CRM gapped sharply to the upside. It is performing quite well. You see the trend; software continues to perform well. FFIV had a pullback to end the week, but it still looks quite solid.

The PC-related aspects of technology are struggling. Earnings from HP and DELL showed that there was cannibalization of PC sales in favor of the touch pads and smart phones. Business software is doing fine, filling a demand as businesses try to find ways to save money.

Retail. Retail was a mixed bag. HIBB gapped to the upside on strong volume. It had good results. AMZN is struggling. It bounced on the week, trying to find its legs and continue. Looks like it might do it, but it has to prove it. LTD had a tough day. It is one that is starting to crack, but it is not a massive problem for that stock yet. ANF is moving up fine. YUM is moving straight on to the upside. EAT is still looking strong. Retail is broken into segments. Some of the more discretionary areas are taking the hits first.

Energy. Energy had a decent day. OII started to the upside. It announced a split and is trying to make a break higher. RRC is breaking upside on good volume in a nice triangle. Very solid action. Some of the natural gas producers are doing better. CHK bounced nicely off the bottom of its range, showing good volume. CVX does not look good. It has a double top, it has a lower MACD, and it is bumping up against the 50 day EMA. It looks like it might sell some to the downside. BTU is trying to hold the 200 day EMA and some other support levels. Trying to make a bounce at that level. There could be some bounces in energy coming up.

Industrial. CAT is not looking good. It rebounded to the 50 day EMA and looks to be rolling over. DE announced good earnings on the week, but it is continuing to sell off. Not very strong in that sector.

Financial. Financials are not helping at all. JPM turned back down after rallying early in the week. WFC is showing the same action, bouncing down from the 200 day EMA. Not looking that strong. It will make it much harder for the SP500 to make another break to the upside if it has those financials unwilling to participate or selling back instead.


THE ECONOMY

Unemployment, Money Supply, and Inflation numbers that are quite worrisome.

TO VIEW THE ECONOMY VIDEO CLICK THE FOLLOWING LINK:

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


THE MARKET

VIX. VIX is hugging the same level it did back in December, January, and February. That suggests perhaps the market could sell, but, as we have seen, it has not materialized into anything. We are not seeing the volatility moving higher as the market moves higher. That would indicate something much more troublesome ahead. It is matching the market right now, so I am not getting too wrapped up in that and what volatility is showing.

VIX: 17.43; +1.91
VXN: 18.16; +1.1
VXO: 16.41; +1.12

Put/Call Ratio (CBOE): 1.04; +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 does not have the cash to drive it higher.

Bulls: 45.6% versus 51.1%. Nice decline in bulls even as the indices continue to move near rally highs. This is exactly what you want to see: growing pessimism in the face of an uptrend and ABCD pattern. It is not definitive, but after high readings, this is good to see. Held at 54% for a few weeks before this slip. 60+ indicates some trouble for a bull run. Hit 55.1% in January and 58.8% on the December high on this leg. It is matching those readings in a string of high readings but below the 5 year high at 62.0. Fading back from the level considered bearish, i.e. where so many are in the market and believe it is going up that the ammunition to send it higher runs low. This is where you start to be careful and watch for breakdowns, but there is also a lot of liquidity being pushed into the market and that can continue the move despite excess bullishness. The crossover level at 29% bulls is long gone, but it did its job. The high on the last leg was 56.0% after starting at 35.6% on the low in February, the lowest it has been since July 2009 . . . until this last leg. 35% is the threshold level suggesting bullishness. Again, to be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 19.6% versus 18.5%. Bears are rising, another indication of pessimism and also a better indication for the rally. Surpassing 18.5% registered a month back. Down from 23.1% to start April, but making their way back. Fell like a stone on that decline, moving below the April 2010 low. 28.3% in September 2010. The 37.7% peak at the height of the crossover is well in the rearview mirror but bears remain well below the 35% level, above which is considered bullish for the market overall. Hit 18.7% on the low in April. Hit a high of 27.8% level on the prior leg in February. For reference, cracking above the 35% threshold considered bullish. Hit a high on the prior run at 47.2%. For more reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.


NASDAQ

Stats: -19.99 points (-0.71%) to close at 2803.32
Volume: 1.806B (+0.84%)

Up Volume: 539.01M (-520.99M)
Down Volume: 1.24B (+528.96M)

A/D and Hi/Lo: Decliners led 1.99 to 1
Previous Session: Advancers led 1.01 to 1

New Highs: 59 (-24)
New Lows: 61 (+18)

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: -10.33 points (-0.77%) to close at 1333.27
NYSE Volume: 1B (+14.8%)

Up Volume: 258.63M (-203.49M)
Down Volume: 736.12M (+355.08M)

A/D and Hi/Lo: Decliners led 1.89 to 1
Previous Session: Advancers led 1.42 to 1

New Highs: 114 (-76)
New Lows: 43 (+13)

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

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


DJ30

Stats: -93.28 points (-0.74%) to close at 12512.04
Volume DJ30: 175.0M shares Friday versus 158.5M shares Thursday.

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


MONDAY

There is quite a bit of economic data next week. The important New Home Sales are on Tuesday, followed by Durable Orders on Wednesday. On Thursday we have the Initial Claims again and the second reading of the Q1 GDP. It is expected to rise to 2%, and maybe it will. There was some beneficial export data, but export data does not tell us much as far as I am concerned. It is not a real indication of economic strength or economic growth, unlike imports.

On Friday there is Personal Income and Spending, Michigan Sentiment, and Pending Home Sales. All important. It will be a week of important data, but it is also a week of technical action. With all of the undercurrents, that is what is driving the market. We have the dollar, gold, and foreign relations. We have what bonds are doing and, of course, stocks and economic data.

The action has been somewhat erratic, but that is what happens with an ABCD pattern. That gets people upset. They seeing that action the lower highs, lower lows and they say it will sell off. It could. It is no guarantee that it will make a break higher, but the possibilities are typically that it does rally back up into that prior resistance level. That is our initial target. When there is a good base after a solid rally, a new breakout, and then an ABCD consolidation, that would suggest that it will continue to the upside. That is why we have been focusing on the upside plays. Although we did make some money on the downside this past week with SSYS and the QID to name a couple.

There is also leadership. There is some good leadership, and there is some that is breaking down. We are seeing that in retail and in some technology stocks like AAPL. But AAPL has been struggling for quite some time now in its trading range. It has been bouncing back and forth, and this is just more of an up-and-down inside of its trading range. Some leaders are struggle, and that is normal. The key is whether the majority of leaders start to break down and the indices simply cannot hold the ABCD patterns and start to break lower as well. That is a different story altogether.

The action is erratic and there is a lot of pessimism with that put/call ratio bouncing higher. Still, that does not mean that the market is going to tank and roll over. There are a lot of factors that naturally get people on edge after a rally. The question is when the market will break. Eventually it will have to because the economy is not that strong. We are printing way too much money and we are ignoring inflation. In history, that has ultimately meant that we have serious problems in the stock market.

Again, the question is when it will happen. Nobody knows. This Saturday is supposed to be the end of the world. There are people making predictions with absolute certainty that the rapture will happen on Saturday, and we will have the end of the world with a massive earthquake. I do not know. The Bible I read just says that nobody knows when the master will come, and you should not spend your time worrying about it. It is best just to be prepared in the event he does come. How do you prepare? Do what the good book says and go about living your life as you should. Part of that is taking care of your family and making money for them. You also take care of other people with the other money that you make as well. That said, I will get off the soap box.

I will be looking at more upside plays because the trend is still in place. We will also look to the downside just in case. You always have to have a "just in case." Like "Shoeless" Joe Jackson said in Field of Dreams, "You have to watch for in your ear" even when you are looking at the most probable event. I will be looking at some downside plays just in case. The market is still trending higher. If it continues higher, we will make money to the upside. If it decides to give it up, we will button up our positions and make money to the downside. As long as it is moving, we will be making money.

Have a great weekend!



Support and Resistance

NASDAQ: Closed at 2823.31

Resistance:
2825 is the 2007 closing peak.
2841 is the February 2011 peak
2862 is the 2007 peak
2888 is the recent May peak
2956 from November 2000
3026 from October 2000 low
3042 is the May 2000 low

Support:
2816 is the early April peak
2802 is the early March intraday peak
2796 is the February gap down point
The 50 day EMA at 2793
2762 is the February low
2729 is the 127% Fibonacci extension of the August 2010 run
2706 to 2705 is the April 2011 low and the February 2011 and consolidation low
2686 is the recent January 2011 closing low
2676 is the January 2010 low
2645-2650ish from December 2010 consolidation
2603 is the March 2011 low
The 200 day SMA at 2588
2580 is the November 2010 closing high
2569 is the November gap up point through the April 2010 peak


S&P 500: Closed at 1343.60
Resistance:
1344 is the February 2011 peak
1364 is the March 2007 low
1370 is the August 2007 low
1371 is the recent May 2011 peak

Support:
1340 is the early April 2011 peak
1332 is the early March peak
The 50 day EMA at 1329
1325-27 is the March 2008 closing low and the May 2006 peak.
1313 from the August 2008 interim peak
1295 to 1294 is the April 2011 low and the February 2011 consolidation low
1275 is the January 2010 low, early January 2011 peak
1255 is the late December 2010 consolidation range
1249 is the March 2011 low
The 200 day SMA at 1237
1235 is the mid-December 2010 consolidation low
1227 is the November 2010 peak
1220 is the April 2010 peak


Dow: Closed at 12,605.32
Resistance:
13,058 from the May 2008 peak on that bounce in the selling

Support:
The 50 day EMA at 12,425
12,391 is the February 2011 peak
12,283 is the March 2011 peak is bending
12,110 from the March 2007 closing low
12,094 is the April 2011 low
11,893 from March 2008 closing low
11,867 from the August 2009 high and peak on that bounce in the selling.
11,734 from 11-98 peak
11,555 is the March low
The 200 day SMA at 11,545
11,452 is the November 2010 peak


Economic Calendar

May 16 - Monday
Empire Manufacturing, May (08:30): 11.9 actual versus 18 expected, 21.7 prior
Net Long-Term TIC Fl, March (09:00): $24.0B actual versus $27.2B prior (revised from $26.9B)
NAHB Housing Market Survey, May (10:00): 16 actual versus 16 expected, 16 prior

May 17 - Tuesday
Housing Starts, April (08:30): 523K actual versus 563K expected, 585K prior (revised from 549K)
Building Permits, April (08:30): 551K actual versus 590K expected, 574K prior (revised from 594K)
Industrial Production, April (09:15): 0.0% actual versus 0.5% expected, 0.7% prior (revised from 0.8%)
Capacity Utilization, April (09:15): 76.9% actual versus 77.7% expected, 77.0% prior (revised from 77.4%)

May 18 - Wednesday
MBA Mortgage Index, 05/13 (07:00): +7.8% actual versus +8.2% prior
Crude Inventories, 05/14 (10:30): 3.703M actual versus 3.703M prior
FOMC Minutes, May (14:00)

May 19 - Thursday
Initial Claims, 05/14 (08:30): 409K actual versus 420K expected, 438K prior (revised from 434K)
Continuing Claims, 05/07 (08:30): 3711K actual versus 3713K expected, 3792K prior (revised from 3756K)
Existing Home Sales, April (10:00): 5.05M actual versus 5.23M expected, 5.09M prior
Philadelphia Fed, May (10:00): 3.9 actual versus 18.0 expected, 18.5 prior
Leading Indicators, April (10:00): -0.3% actual versus 0.0% expected, 0.7% prior (revised from 0.4%)

May 24 - Tuesday
New Home Sales, April (10:00): 300K expected, 300K prior

May 25 - Wednesday
MBA Mortgage Index, 05/20 (07:00): +7.8% prior
Durable Orders, April (08:30): -2.0% expected, 4.1% prior (revised from 2.9%)
Durable Orders -ex Transportation, April (08:30): 0.6% expected, 2.3% prior (revised from 1.8%)
FHFA Housing Price Index, March (10:00): -1.6% prior
Crude Inventories, 05/21 (10:30): -15K prior

May 26 - Thursday
GDP - Second Iteration, Q1 (08:30): 2.0% expected, 1.8% prior
GDP Deflator - Second Iteration, Q1 (08:30): 1.9% expected, 1.9% prior
Initial Claims, 05/21 (08:30): 400K expected, 409K prior
Continuing Claims, 05/14 (08:30): 3700K expected, 3711K prior

May 27 - Friday
Personal Income, April (08:30): 0.4% expected, 0.5% prior
Personal Spending, April (08:30): 0.5% expected, 0.6% prior
PCE Prices - Core, April (08:30): 0.2% expected, 0.1% prior
Michigan Sentiment - Final, May (09:55): 72.4 expected, 72.4 prior
Pending Home Sales, March (10:00): -1.8% expected, 5.1% prior

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

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

Technorati tags: stock trading stock market investing Jon Johnson InvestmentHouse.com

Don't Be Against the Trend

SUMMARY:

- Different day, a different theme . . . yet again.
- Buyer and Seller conflict continues to the end of the week. What does it tell us?
- CPI shows the core is rising but still tame. Sure wish I could eat and drive in the core.
- The irony of rising Michigan Sentiment
- European style growth versus US style growth.
- Don't bet a lot against the trend, but don't bet everything on it.

MARKET SUMMARY

The sellers put it right back in the buyers' face.

It was a different day and a different theme in the market yet again. On Friday the stronger dollar/weaker commodities/weaker stocks theme reemerged. On Thursday it was the weaker dollar/stronger stocks/stronger commodities theme. It has been flip-flopping back and forth all week. After a good start, things took a turn for the worse in terms of stocks and commodities but not necessarily for the dollar.

The session started out looking weak, but it tried to bounce back after the open with the SP500 just about positive. Then things took a turn for the worse through lunch as the indices sold off to session lows. All of the indices were well below 1% on the day. There was an afternoon "rally," but it was not much of one. It was a steady relief move up off the lows, and even it tailed off in the last couple of hours. That left the indices down sharply. NASDAQ, -1.2%; SP500, -0.8%; Dow, -0.8%; SP600, -1.3%; SOX, -1.4%; NASDAQ 100, -1.2%.

Looking at the daily chart, it was back and forth since the start of the week. The old theme from two Thursdays back has reappeared on an every-other-day basis. That theme is a stronger dollar and weaker commodities that saw gold, oil, and silver dive. That kept the market stagnant for the week, unable to close above the February high on both SP500 and the NASDAQ.

The old buyer-versus-seller conflict continued through the end of the week, and it did not resolve the rubber match week. This was the week where we wanted to say we had a nice up run, we had the pullback to test that move, the breakout above the February peak, and then we were going to have the rally back up to the upside that should have continued the rally. It was all good through Tuesday. Nice move on Tuesday, although Monday and Tuesday did show low volume on the upside. That was a concern, but they still broke above the February high again and looked solid. Then the old theme reasserted itself. The dollar rallied and commodities and stocks sold on Wednesday. On Thursday the dollar started stronger, but it turned weaker and stocks rallied. Then Friday we had the problem again with the dollar moving back up and everything else moving back down.

Typically when the dollar would move higher, stocks would move higher. A strong dollar reflects strong economic growth; that reflects good earnings by companies, and that would support stronger stock prices. These are not normal times, however. There has been too much tinkering by the Federal Reserve and the Treasury Department. After all, we have run up $14T+ debt. There are a lot of skewed relationships. They are skewed to the point of inversion as seen in the dollar and stock relationship. One thing we do know is that these abnormal, inverse relationships will ultimately revert back to normal. The problem is that getting there often causes a lot of stress, angst, and a lot of pain.

The Federal Reserve views the inflation pressures as transitory. Those are Bernanke's words. In the bigger picture they likely are transitory. After all, in the 1930's, Germany's hyperinflation was transitory. It did not last forever, but Germany's economy had to collapse before that hyperinflation became transitory. That is what I mean by a lot of angst and pain when transitory imbalances revert back to the norm.

We are trying to resolve a debt and credit crisis by creating more debt and credit. You may think that is crazy and it cannot work. Maybe the government is taking the view of curing an alcoholic by giving him all the alcohol he can drink. He either gets sick and stops or he will die. Maybe the government wants the economy to die so it can reset and start back over. I am just speculating. I am not a conspiracy theorist in most instances, but it is hard to understand what the government is doing.

What is likely happening is a race against time. They are hoping against hope that the economy will catch hold and really start to run. I am not just talking about the big multinationals (the only ones making real money right now), but small business as well, the real guts of our economy. They hope it will catch and run and create real wealth again before we reach the point of hyperinflation. It is a dangerous gambit against time.

What makes it even more frightening is no country in history has ever been successful doing this. Of course we are smarter and know what we are doing this time, so we will be able to pull it off. That is what we are told and are supposed to believe. Maybe it is too far gone to do anything about it. We are told we should not worry about raising the debt limit. We are told it would be irresponsible to do that. We are told that a lot of the cuts that are being offered are simply too small and will not make a difference. But if we do not show the world that we are at least trying to do the right thing, then we will never get there. Well, we will get there, but it will be more like Germany in the 1930's than the scenario of just working our way out of it that the federal government is trying to spin.

Maybe we should not raise the debt ceiling. Maybe we should say will not raise it but will cut spending. We will pay all of our creditors, as we always do, but we will just not spend. We will start making the hard choices that only get kicked down the road further when you raise the debt ceiling. But I digress.

I want to talk about what this back-and-forth action meant on the week. What does it tell us? For one, all of the indices are holding their bigger uptrend. Indeed, SP500, NASDAQ, the SP600, and the Dow 30 industrials are all holding a nice uptrend. They do not look to be in danger. The Dow looks perfectly healthy. Odds are there is nothing wrong with them. We have a lot of liquidity out there. The Fed is still saying it will continue to put more liquidity in the system or continue it in a different name. As long as the money is there, it tends to drive the stock market. Indeed, that is what has driven it up to this point.

A big positive is that the market is still holding the uptrend. We also have some high-quality leaders that are performing just fine, although there was some erosion on Friday. AAPL broke below its 50 day EMA with a rather sharp move. CAT had a nice doji at its 50 day EMA, but it showed an engulfing pattern to the downside on Friday. When market leaders are starting to roll over and show these engulfing patterns at a key support level, you have to take a bit of pause. Overall, the quality stocks are moving quite well, however.

What is the other side of the coin? We have to look back at what happened over the past few weeks to put it in perspective. We had the rally, an inverted head and shoulders, a breakout over the February high, a test, and then a resumption of the breakout move. That is where everything stopped. It simply could not continue on with the breakout. There has been no follow-through to this point. Instead you have back-and-forth action like a tennis match. The buyers come out and hit stocks higher one day, and then the sellers slap them right back down.

We have no follow-through and the inability to continue the breakout. We have sellers that have become equally powerful as the buyers. There has been no headway over the past two weeks since the peak. The sellers are matching blow-for-blow with the buyers where the buyers have been in charge before. Now that does not seem to be as clear.

We also have quite volatile action. The VIX is not surging higher. It is still holding down in the bottom of the range. What I am talking about is the day-to-day volatility where there are not big moves up and down in the range, but there are big moves day-to-day inside the large range. It is unsettled. There is not one side in charge, and it is occurring on some higher-volume. The selling was on higher volume, the rebound was on low volume. Over the past three sessions it has been decent volume as the buyers and sellers traded blows. We have volatility. After a long run, volatility typically spells selling. Or, if you have had a downtrend, it typically tells you a turn is coming.

In December through February we had a long, straight run with barely a hiccup along the way. There was volatility in late February and early March, and then the volatility resulted in a selloff. Now we have a strong run again that broke out of the pattern, a pullback to test, and now volatility. The point I am getting at is that volatility suggests change is coming, just as storms usually accompany the change in seasons. There are steady, cool temperatures in the winter. When things start to warm up, the air moves and cold air masses start hitting warm-air masses. The next thing you know, you have volatile storms. When the summer gets here, things settle down into another routine summer pattern. When the fall comes around, northers come blowing down and jumble everything up. Then the action gets a little wild again. Volatility signals that there could be change. Thus far the trends are holding, but we see volatility. As in February and March, that can lead to some selling.

We have both sides of the coin. There was no answer this week to the rubber match, but the fact that there was no answer to the question makes you to take notice. The buyers were caught by the sellers and could not shake them. That tells us a few things. Do not load up on any one upside position. Do not get overly aggressive with any one particular play. Keep good stops in place and start looking at the downside plays as something of a hedge. We have some we are in right now. The SPYders, the QID, and a couple of other downside plays on individual stocks. Volatility is a sign, and you need to pay attention to it.

Volatility will either have to subside in a consolidation or be convincingly defeated by the current trend. That would mean a strong break to the upside on good volume that holds with follow-through. That would put to rest any of the worries that the sellers have been throwing at the market over the past two weeks.

Again, this week did not answer the questions. It deferred to next week, so we will have to see what happens in the coming week. You know the saying, "Sell in May and go away." The volatility has a lot of heads talking about what could be a selloff ahead. Why? A strong rally, a good base and breakout, but it is unable to follow through thus far. It is important to note that the breakout did not go anywhere. This was a nice, long rally. We have a base, but it has not done anything with it. That tells a story in itself. You do not want to bet heavily against the trend, but you do not want to bet everything on the trend right now given the action.


OTHER MARKETS

Dollar: 1.4108 Euro versus 1.4299. Here is one reason you do not bet everything on this trend given the inverse relationship between the dollar and stocks. The dollar rallied sharply again. It had a strong week even though it had its hesitation from time to time and the doji on Thursday. The dollar has broken the 50 day EMA on the close, something it has not done since early January of 2011.

The dollar is in a strong move. Is it because the economy is going to be so strong, or is it because other economies are going to be so weak? For example, today it was announced that Germany had a 1.5% GDP growth rate. France had a 1% rate. This was heralded as "great" by many commentators in Europe and some European commentators here in the US. That is why I fear becoming like Europe. We had a 1.8% GDP reading in Q1. That is terrible by our standards, but it would be great by European standards.

Do we want to move to European styles of growth? Of course not. That would be terrible for us. We cannot create enough jobs in the US to cover everyone coming out of college or vocational schools if we are not making 2.5-3% growth rates and that is just keeping even. We need more than that. Think long and hard before you consider whether we should adopt policies that are prevalent in Europe although we are already adopting them with national healthcare and other actions that limit workers going out and actual working. They limit companies from starting businesses where they want to start businesses. They limit professions to certain places where they can work based upon how the government has set up the game.

I digress again, but this is very important. This tells the story of our economy and the future for us and our children. 1.5% growth is not great in any book. Sorry Germany. Again, compare that to the kind of growth we had coming out of the 1981-82 recession. We had multiple quarters of 7%+ growth in GDP. What did we have last quarter when we are supposedly recovered? 1.8%. It does not take a great economist with a bunch of letters after his name to figure out that this really is not a great recovery.

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


Bonds: 3.17% versus 3.23% 10 year US Treasury. Bonds continued to rally. They took a little pullback on the week, but they look like they are ready to make a break higher and continue their series of higher highs and higher lows. Bonds are rallying; something is not right. If the economy is supposedly stronger, it should not be supporting higher bond prices. It should be supporting higher bond yields, which would mean lower prices. There is still something out there scaring the bond market.

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


Gold: $1,493.10, -13.70. Gold had an off session. It is trying to consolidate above the 50 day EMA, and it may do it. It is still in a very strong uptrend, and it is working inside. It can even set up an ABCD pattern if it undercuts the 50 day EMA. We will have to see. It does not look like it is trying to sell off just yet, but it has been beaten down.

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


Oil: $99.65, +0.68. Oil was up modestly. Not a big day for the black gold, but it has tried to put in a double bottom over the past week and a half. This was a major selloff and it broke major support. It sold off sharply on Wednesday, and it is struggling right now. Hopefully gasoline prices will fall. They have fallen modestly but not nearly enough due to worries about the floods hitting the lower Mississippi and what it will do to some key refineries in the area.

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


TECHNICAL SUMMARY

INTERNALS.

On the day, the internals were not too impressive or exciting.

Volume. Volume dropped 13.5% on NASDAQ to 1.93B, so it was not high-volume distribution. Volume fell almost 6% to 896M. Again, no high-volume distribution and that is better. That goes with the theme that the market is still in its uptrend, and it is holding it despite all the hits it has taken over the past two weeks as the sellers try to assert themselves.

Breadth. Breadth was somewhat negative. Pretty much everything was down. -3:1 on NASDAQ, and -2.4:1 on the NYSE. There was highly-negative breadth, and a lot of stocks did not fare too well on the session.


CHARTS

SP500. Looking at the chart, you can see the day-to-day, up-and down action on the SP500, but it is still holding the near trend. Of course, the overall longer-term trend remains well in place. You can take comfort that the trend is in place, but you also have to watch for potential trend turns. Turns in the market are what really hurt investors. They get everything going in the market and they have some great success moving in with the existing trend. When it changes, however, it can change hard. That is what crushes a lot of traders because they get out at the wrong time.

We just tighten up and take some gain as we have been doing. Then you watch and do not get too stretched thin when the market starts to show some volatility at a key high as it is showing now. I want to stress that it is a key high that makes this so important.

NASDAQ. NASDAQ is the same picture. Back-and-forth, day-to-day volatility at these key resistance levels. The sellers are showing as much strength as the buyers. They have stymied the move right now, and we have to see if they will be able to turn the tide. Volatility suggests they are trying to turn the tide, but it does not necessarily mean they will. In the past when we have seen these moves, it has led to at least a bit further of a pullback after the up-and-down, back-and-forth volatility.

SP600. SP600 looked beautiful yesterday. It wiped away those moves today, but it still looks just fine. This is a very solid uptrend. Higher highs and higher lows. It may turn if the rest of the market breaks, but it is hard to get really negative about the small caps. There is a bit of a divergence on MACD, however. There is the higher price high in late April/early May, but MACD made a lower price high. We are losing some momentum. This is not definitive in itself, but it is something to watch out for. There was a lower high on the MACD, and now we have had a lower high on this last bounce. That could set up a head and shoulders, but it still has to defeat the rising trendline; there is some power there. This is a classic case of why you like the trend but you have to watch out when you start seeing this kind of action.

SOX. SOX was down 1.4% on the session. It is still moving laterally above the 50 day EMA. It looked like it was making a seminal move on Thursday. It did not work out, but it is still in the range. It has been very quiet, moving laterally, and that can result in something good. We need to see some leadership by the SOX to help pull the market out of this funk.


LEADERSHIP

The leadership picture may have you thinking the market is ready to correct back some more.

Industrial equipment. Last night I talked about CAT being on the 50 day EMA with a nice doji. As a matter of fact, I said it has been there and pulled off nice bounces. It showed an engulfing pattern on Friday. That is where it rolled over, swallowing up the prior day on volume. Remember, it has the MACD that was lower. It is a risk there is a chance of it actually falling further to the downside. DE is struggling. It has had a tough week, accelerating to the downside with rising volume. A High-volume selloff on Wednesday and a high-volume selloff on Friday. These are two important stocks that are heading lower.

Financial. Financials look like crud. JPM broke below the lows in its range on rising, above-average volume. Same story: Sharp volume and downside on Wednesday, and then sharp volume and downside on Friday. WFC is not as dramatic, but it is sagging below its recent range.

Metals. Metals have problems as well. FCX tried to bounce but rolled over on the session. Not on engulfing pattern, but a downside piercing pattern. AKS broke sharply lower, below the 200 day EMA on rising volume. Commodities do not look good.

Technology. AAPL broke sharply below its 50 day EMA and recent consolidation. GOOG turned down after a double top at resistance at the gap point. It could be heading lower as well. Compare that with some of the software companies. ORCL is doing fine in its uptrend. It is suffering a bit of the same kind of action, but it has not broken through its 20 day EMA at all. CERN is moving laterally in a nice pennant pattern. Software is not being bothered. There are still leaders out there.

Retail. AMZN was down on Friday, but it is still very strong. BWLD is moving laterally this week, but in a nice, strong uptrend.JWN is moving up as well. TJX is doing fine.

There are stocks doing fine, even within the technology sector and within retail which continues to do well. As a matter of fact, we took some gain on DDS as it exploded higher on a good report. They are out there making moves. We just have to take advantage of them when we can. At the same time, you do not want to overload on any position.


THE MARKET

VIX. It was not spiking up on the day-to-day volatility in the indices. That is often what you see in a turn, and it is a part of the equation that many do not talk about. That back-and-forth action, day to day after a solid trend has been in place is just as indicative of a turn as is a sagging volatility index if there has been a strong run in the stock market.

We see a break higher and a higher low. We see a lot of intraday, day-to-day volatility in the VIX as well. It could be setting up for a selloff. This is not one that has been rallying necessarily with the stock market. This has been the inverse. These moves up were a move down in the SP500. It is not doing the really scary stuff where it rises as the stock market rises. That is good, but what we are seeing is a higher low. We could be getting a break higher in volatility that is coincident with a stock market pullback.

VIX: 17.07; +1.04
VXN: 18.4; +1.41
VXO: 17.02; +1.23

Put/Call Ratio (CBOE): 0.94; +0.1

Bulls versus Bears:

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

Bulls: 51.1% versus 52.8% prior. The selloff after the breakout mitigated the bullish spirit for a second week but it is still fairly spry. Held at 54% for a few weeks before this slip. Remains close enough to that 60+ level that indicates some trouble for a bull run. Hit 55.1% in January and 58.8% on the December high on this leg. It is matching those readings in a string of high readings but below the 5 year high at 62.0. Fading back from the level considered bearish, i.e. where so many are in the market and believe it is going up that the ammunition to send it higher runs low. This is where you start to be careful and watch for breakdowns, but there is also a lot of liquidity being pushed into the market and that can continue the move despite excess bullishness. The crossover level at 29% bulls is long gone, but it did its job. The high on the last leg was 56.0% after starting at 35.6% on the low in February, the lowest it has been since July 2009 . . . until this last leg. 35% is the threshold level suggesting bullishness. Again, to be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 18.5% versus 16.5%. Right back up to 18.5% registered three weeks back. Down from 23.1% to start April, but making their way back. Fell like a stone on that decline, moving below the April 2010 low. 28.3% in September 2010. The 37.7% peak at the height of the crossover is well in the rearview mirror but bears remain well below the 35% level, above which is considered bullish for the market overall. Hit 18.7% on the low in April. Hit a high of 27.8% level on the prior leg in February. For reference, cracking above the 35% threshold considered bullish. Hit a high on the prior run at 47.2%. For more reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.


NASDAQ

Stats: -34.57 points (-1.21%) to close at 2828.47
Volume: 1.93B (-13.58%)

Up Volume: 244.03M (-1.026B)
Down Volume: 1.66B (+713.61M)

A/D and Hi/Lo: Decliners led 3.13 to 1
Previous Session: Advancers led 1.89 to 1

New Highs: 93 (-21)
New Lows: 53 (-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: -10.88 points (-0.81%) to close at 1337.77
NYSE Volume: 896.76M (-5.59%)

Up Volume: 165.15M (-372.88M)
Down Volume: 721.72M (+319.5M)

A/D and Hi/Lo: Decliners led 2.42 to 1
Previous Session: Advancers led 1.65 to 1

New Highs: 199 (+1)
New Lows: 44 (-20)

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

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


DJ30

Stats: -100.17 points (-0.79%) to close at 12595.75
Volume DJ30: 170M shares Friday versus 216M shares Thursday. Hardly any heavy selling as DJ30 looks great.

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


MONDAY

There will be a lot of news out next week. Several of the regional manufacturing reports will hit, starting with the New York PMI on Monday. Then there are other important numbers such as housing starts and capacity utilization. FOMC minutes come out on Wednesday. Thursday we have initial claims, existing home sales, and the Philly Fed.

All important, but we have to look back at what the market is doing and everything I have talked about to this point. We are at a point where the trend is still in place. You do not want to say the trend will break simply because it is struggling. It has done this before and has not broken at all. Back in November and December of 2010, it struggled and broke higher in nice, strong runs.

We have a few more issues on the table right now. We are seeing some leadership crack and break lower. We are also seeing a solid base break out, but it has been unable to deliver any serious follow-through to the upside thus far. As I said before, it is a time where change is trying to occur. When change is trying to take shape, it does not behoove us to rush out and continue with necessarily the same approach that we have been using when the market was solidly moving higher or looked to be solidly moving higher again with a breakout.

Do not necessarily bet against the long-term trend at least we do not want to bet a lot against it yet. We do not want to bet everything on the trend continuing either. We know that markets change and trends change. We are seeing the signs that there could be change in the air with the day-to-day volatility. If we see good upside plays, we will still give them a good look. We will still pick up some positions in them, but we will also give more and more looks to the downside because leadership is turning over.

As noted, we have been taking downside positions as they present themselves. They show up, and you take some of them when things start to look a little uncertain because they can turn out to be good winners for you. We may come up with some more, and I have already pointed out some that could be downside plays for next week. The market has not answered the question as to what it will do yet. Will it resume the uptrend or maybe pull back again a bit deeper? It is occurring just on the heels of a break out of a base that did not get a lot of gain on that initial breakout move.

There will be a lot of news next week, but I do not think that will be the driver. It could be a catalyst that breaks the buyers out of their funk. They may think things look good and buy. But with the dollar still rallying, breaking through the 50 day EMA for the first time since January, you have to take that into consideration. Again, you do not want to bet a lot against the current trend, but you do not want to put everything on the line for the current trend either.

We are in mid-May. The market may already be starting to factor in the end of Quantitative Easing II. The Fed said it would maintain its balance sheet as it did before the end of Quantitative Easing, but that is not exactly the same as saying it will continue indefinitely, no matter what. It does suggest a tightening of the policy. Maybe the market is starting to read that in, and that could be driving the dollar higher. Of course, that should also drive interest rates higher and bonds lower, but it is not doing that yet.

There are a lot of factors in the mix. A lot of irons in the fire. I am trying to use as many metaphors as possible, but you get the point. There are so many variables right now. There are those who look at one of two of them and draw broad conclusions, but that is foolhardy. They may be right, but they may be very wrong. It is hard for anybody or any machine to analyze all the variables right now and come up with any particular, rational course.

We will do what a smart person and a good trader does. We see some change, so we will take some off the table. We have been doing that, both on the upside and with trading stops. We are lightening the load right now. We are starting to branch out with some downside plays, too, for a little hedging. We will just be smart. We do not always have to be fully invested, and we are not right now. It is just a natural occurrence. As the market has rallied, we take gain off the table. As it tops and some stocks struggle, we take gain off the table because we pull the stops up. We are a bit light, but that is good. We are more agile and we can move. We will not get caught in anything too deep.

We will be ready. We will have a bit of downside and a bit of upside, but knowing full well that the "Big M" The Market will have the final say in what we do. The trend is holding. The trend has been our very good friend on this move. At some point it will change. Maybe the end of QE II is factoring in and some the buyers are not being as aggressive and the sellers are being more aggressive. Will that necessarily be the end of the rally? No. The Fed has been clear that it is going to keep providing liquidity, and I guarantee that as soon as we have any trouble, the Fed will pump more liquidity into the system.

The Fed's game plan all along has been to inflate the value of financial assets. That makes consumers and citizens in general feel wealthier and want to go out and spend more money and, hopefully, jumpstart the economy. It has not happened so far. At least not on a broad scale outside of the multinationals that got a lot of the stimulus money and sell a lot overseas. The Fed cannot afford to let it collapse. This is Bernanke's big case study of the Great Depression era and how he would have solved things versus what the central bank did at that time.

He cannot afford not to extend more Quantitative Easing if things get in trouble. At the same time, he has to deal with reality. While maybe he cannot afford to let things get out of control without more Quantitative Easing, he may not be able to help it. We are $14T in debt and our dollar until the last week has been in dire straits. His hand might have been forced on it, and it may still be forced. We always have to worry about those unforeseen events that hit while the government is in the process of major tinkering with the economy.

Remember, the Fed is tinkering, the Treasury is tinkering (I say "tinkering," but they are in it deep), and the administration is tinkering with its manipulation of labor markets and where companies can open new plants, etc. There is a lot of nudging and manipulation going on behind the scenes. Everyone has their own agenda.

Where this could end is somewhat worrisome. We just have to take care of ourselves. We will watch what the market is doing and will be cautious. We will take advantage of opportunity, upside and downside. Be smart and keep stops appropriate. When the market shows us which way it will break, then we will move in. I will posit that it will break pretty big when it does break, whether to the upside or downside. I will admit that I am just not smart enough to say which way it will go. Why? This has never happened before. We have never had this kind of debt or this kind of intervention.

There great unknowns here, but we do know that one day, when it does revert, it will revert big. It may not be right now, or for a month, or it may not be for years. I am not smart enough to know that, but I am smart enough to look at the market and see some leadership breaking down. I can see intraday volatility and the bonds rising when they should be falling. That tells me that something is up.

We will just play it a little closer to the vest, be smart about it, and keep a lot of that money we have made. I will see you on Monday. There will be a lot of news and a lot more excitement. We will see what the market shows us.

Have a great weekend!


Support and Resistance

NASDAQ: Closed at 2828.47

Resistance:
2841 is the February 2011 peak
2862 is the 2007 peak
2888 is the recent May peak
2956 from November 2000
3026 from October 2000 low
3042 is the May 2000 low

Support:
The 20 day EMA at 2828
2825 is the 2007 closing peak.
2816 is the early April peak
2802 is the early March intraday peak
2796 is the February gap down point
The 50 day EMA at 2792
2762 is the February low
2729 is the 127% Fibonacci extension of the August 2010 run
2706 to 2705 is the April 2011 low and the February 2011 and consolidation low
2686 is the recent January 2011 closing low
2676 is the January 2010 low
2645-2650ish from December 2010 consolidation
2603 is the March 2011 low
2580 is the November 2010 closing high
The 200 day SMA at 2578
2569 is the November gap up point through the April 2010 peak


S&P 500: Closed at 1337.77
Resistance:
1340 is the early April 2011 peak
1344 is the February 2011 peak
1364 is the March 2007 low
1370 is the August 2007 low
1371 is the recent May 2011 peak

Support:
1332 is the early March peak
1325-27 is the March 2008 closing low and the May 2006 peak.
The 50 day EMA at 1327
1313 from the August 2008 interim peak
1295 to 1294 is the April 2011 low and the February 2011 consolidation low
1275 is the January 2010 low, early January 2011 peak
1255 is the late December 2010 consolidation range
1249 is the March 2011 low
1235 is the mid-December 2010 consolidation low
The 200 day SMA at 1233
1227 is the November 2010 peak
1220 is the April 2010 peak


Dow: Closed at 12,595.75
Resistance:
13,058 from the May 2008 peak on that bounce in the selling

Support:
The 20 day EMA at 12,597 trying to hold on
The 50 day EMA at 12,403
12,391 is the February 2011 peak
12,283 is the March 2011 peak is bending
12,110 from the March 2007 closing low
12,094 is the April 2011 low
11,893 from March 2008 closing low
11,867 from the August 2009 high and peak on that bounce in the selling.
11,734 from 11-98 peak
11,555 is the March low
The 200 day SMA at 11,506
11,452 is the November 2010 peak


Economic Calendar

May 13 - Friday
CPI, April (08:30): 0.4% actual versus 0.4% expected, 0.5% prior
Core CPI, April (08:30): 0.2% actual versus 0.1% expected, 0.1% prior
Michigan Sentiment, May Preliminary (09:55): 72.4 actual versus 69.5 expected, 69.8 prior

May 16 - Monday
Empire Manufacturing, May (08:30): 18 expected, 21.7 prior
Net Long-Term TIC Fl, March (09:00): $26.9B prior
NAHB Housing Market, May (10:00): 16 expected, 16 prior

May 17 - Tuesday
Housing Starts, April (08:30): 565K expected, 549K prior
Building Permits, April (08:30): 590K expected, 594K prior
Industrial Production, April (09:15): 0.5% expected, 0.8% prior
Capacity Utilization, April (09:15): 77.7% expected, 77.4% prior

May 18 - Wednesday
MBA Mortgage Index, 05/13 (07:00): +8.2% prior
Crude Inventories, 05/14 (10:30): 3.781M prior
FOMC Minutes, May (14:00)

May 19 - Thursday
Initial Claims, 05/14 (08:30): 420K expected, 434K prior
Continuing Claims, 05/07 (08:30): 3713K expected, 3756K prior
Existing Home Sales, April (10:00): 5.22M expected, 5.10M prior
Philadelphia Fed, May (10:00): 17.5 expected, 18.5 prior
Leading Indicators, April (10:00): 0.0% expected, 0.4% prior

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

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

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