Tuesday, May 31, 2011

Stocks Alive and Kicking After 3-Day Bounce


- 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


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.


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.


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.


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.


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.



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.


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



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.


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.


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.


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.


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


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


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


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

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

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
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

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
12876 is the May high
13,058 from the May 2008 peak on that bounce in the selling

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

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