Sunday, February 12, 2012

Indices Struggle with Prior High

A modest pullback as the indices struggle with the prior highs.

A Greek bondholder deal is not a Greek austerity deal. Investors were concerned because there were riots in the streets, and the head of one of the three political parties said he would not vote for the current austerity package because it was designed to humiliate the Greeks. They did not want to be under the boot of the Germans. That sums up the feeling on the continent about those haves and the have-nots. Those who have already gone through their austerity and have relative prosperity versus those who just wanted to do their own thing.

I am reminded of the cartoon about the grasshopper and the ant. The ant worked so hard during the days of summer to put away food while the grasshopper sat back, strummed his guitar, and sang a song about how working could wait. Come winter, the ant had a nice, warm home full of food, and the grasshopper was starving to debt. You know the story. I do not think the Greeks would appreciate that analogy, but it is somewhat similar to how things are going. They have to bite the bullet and, as I said the other night, we will have to do the same at some point. They do not want to do it, and that is understandable. As I mentioned last night, we did end up seeing pictures with the haze of not only tear gas but of burning autos dimming the natural beauty of Greece. It is a shame for such a beautiful place.

That news roughed up the futures, and they were starting to the downside. They tried to recover a bit into the open and could not make much of a move. They were heading in the right direction until things started. They did recover, and then it was back and forth the entire day, never gaining any kind of traction. It looked like things were turning up at the opening bell, but the Michigan Sentiment numbers brought the market right back down. They were not horrible, but they did miss expectations. It did not do much from there, although it did manage something of a late rally that cut the losses. But that is all it did.

SP500, -0.69%; NASDAQ, -0.8%; Dow, -0.69%; SP600, -1.42%; SOX, -2%; NASDAQ 100, -0.65%.

AAPL was not able to keep the NASDAQ 100 going, although AAPL was up pretty decently early in the session before things lost their mojo. Then it fell into that backsliding mode.


When there is worry about Europe and Greece, we start having improvement.

Dollar. 1.3171 versus 1.3290 euro. The dollar managed to bounce, but it was down on the week. Money continued to flow back to Europe from the U.S. on the sign that things were a bit better. That is, of course, taking Friday out of the equation. There is just something about people rioting in the streets, tear gas, and fires that quell the feeling that everything is just fine.

Bonds. 1.96% versus 2.04% 10 year U.S. Treasury. Bonds rebounded with a bounce back up toward the 50 day EMA. Back in the range but at the bottom of the range nonetheless. Money is being moved back out for the same reason it is moving out of the dollar. They are better on the day, but overall they are still trending down as money flows back to Europe.

Gold. 1,725.30, -15.90. Gold was up and down, but it still finished lower. It did rebound after hours and improve itself. It still looks like it will try to make a bounce. It held the 20 day EMA on the low, and it bounced nicely off that level.

Oil. 98.68, -1.23. Even though we imported incredible amounts of oil at an all-time high in 2011, it was down on the day. It also tested lower, but it rebounded and bounced up higher in its range this week.

Oil is still range bound, as are bonds, the dollar, and gold. They are all trading in a range, and they are all trading as you would expect as the news comes out day to day. But none of them are breaking out or breaking down. That tells us that things are not necessarily decided in Europe. Our stock market has rallied in anticipation of maybe a resolution, but then bonds have sold back, raising yields. But there have been no major breakthroughs that would suggest anything serious has changed. We head into another week with the markets banging up against those old highs yet again. And bonds, the dollar, gold, and oil are all roughly moving around in their ranges as well. It is as if they are all waiting for the definitive moment to take place or something new to come out.

With the markets where they are now, on Friday we saw that they can be rattled a bit. No doubt the market is a bit overbought and subject to upset when the news does not go its way. Greece did the market no favors, one that has its indices trying to break through the prior highs. There were some nominal breaks over the past week, but nothing that was able to extend and rally to the upside. The selling was pretty innocuous. It was not heavy across the board. Volume was lower. It was not anything that will scare investors too much ...yet. That is the way it always starts, however. It is something little. It reminds me of the Kurt Russell movie 'Big Trouble in Little China.' They were questioning Egg Shen and he says, "It was just a little thing. But that is how it always happens." We had just a little move on Friday, but that does not mean there will not be more selling. Sometimes the selling comes in quietly like a thief in the night. Other times it is like shock and awe when it starts. We have had a good run to the upside. Buyers still want to buy in, and we may just have a nice backslide. That remains to be seen, and this coming week will answer more of those questions.

Maybe it is a bit down the road, but a test would not hurt at all. As you know, we were taking positions seriously. If they showed signs of trouble, we were getting out of them. We want to keep the gain we have. One of the problems with the market is it has a lot of potential inflation because of all of the money printing. You want to make as much money as you can to keep ahead of inflation. You want to buy some commodities and buy some gold, and that is what we have been doing. You kind of take care of things from both ends. As Ronald Reagan said, one of the most patriotic things you can do is be a person for free enterprise, start your own business, make as much money as you can, and then give as little of it as you can to the government. When you are in an inflationary environment, that is all the more important. You have to hang onto all those extra bucks because they will be worth less. Not worthless, but worth less.


The internals were not that impressive.

Volume. NASDAQ -18%, 1.75B; NYSE -1.7%, 697M. Volume was down, and it was already quite low even before that drop. Volume overall has fallen considerably, so overall volume will not shock you if it is lower or higher.

Breadth. NASDAQ -2.9:1; NYSE -3.1. Decliners led thanks to the small caps suffering. Pretty obviously slanted toward the downside, but nothing grotesquely out of the norm or compared to what we have seen over the past year.


There was no big action. Friday was rather innocuous. It is a small start that may lead to something, but it was not showing it on Friday.

SP500. SP500 is back below the February peak, but it is holding the 10 day EMA. It is still in the steady rise. Looking at this, you might say this is no issue. If you ignore all of the tops, you may think that is no big deal at all. But that is not the case. We know they are there, but thus far the market has not broken. You just have to be concerned in the event that things get worse. What looks to be nothing can (as easily as not) develop into something, particularly when you are at prior highs.

DJ30. The Dow shows this. It broke through, but it just could not make it stick. The fell to the 10 day EMA as well, and now it is trading around in a range. It is still trying to hold, but it could easily come back and test the 50 day EMA that is marked roughly with the late-October peak. We have a place that is perfectly logical for the market to pull back and then turn back to the upside. That is much more logical than continuing on as it is without a pullback. Then again, the market does not always act according to our logic.

NASDAQ. The NASDAQ is very similar. It is holding its breakout, sitting with a doji on the 10 day EMA. A little island reversal. On Wednesday to Thursday there is a gap, and on Thursday to Friday a gap to the downside. Maybe that will lead to more selling, but it is nothing heavy duty. The bigger ones were back a week ago with that gap to the upside. If it gaps down from there, we have a pullback to the 50 day EMA. It is also roughly coincident with the late-October peak.

SP600. The small caps are a bit more interesting. The SP600 does not show a lot. Up and down, sliding just below the 10 day EMA. But if you look at the ETF that is traded, it gapped in something of an island reversal that one of the subscribers pointed out today. It gapped upside last week, it gapped downside on Friday. Could be a selloff. But how deep? You just look for a pullback down to that October high. At this point there is nothing to suggest otherwise.

SOX. The SOX was beaten up a bit. The chips took it on the chin. They have been one of the leaders, and they were roughed up somewhat. The question is whether they are going to lead to the downside. Some patterns got suddenly quite rocky. Not terrible, but not as comfortable as they were. It was like going over a big pothole in the road. The question is whether it smoothes back out or if we have more potholes that degrade and take it down to these October and early-November highs.

The markets are bumping up against those highs. There were some nominal breaks that everyone was excited about, but they are not able to push through. There is no follow-through, and that is something I always talk about. That is the key to anything whether it is a breakout of a stock or a selloff off a stock that breaks below support but then comes back and does not sell off. No follow through. The buyers cannot push the indices up through that resistance and make it stick or put mileage between it and those key points. If there is no follow-through, then the other side (whether you are upside or downside) tends to come back in. They push back and have some backsliding. That leaves us the possibly that we could have a bit of trouble, but that is what we have been looking for.


Semiconductors. The chips are struggling a bit. Nothing major, but a bit of a struggle. ALTR is coming back toward the 200 day EMA. TXN is gapping downside, having a hard time getting through that early-January high. MRVL is one we have been watching and playing. It has been struggling. There is a little bit of hitch in the get-along, but that is okay. We are just being careful. We can get better setups out of these with a pullback. Why ride through something that is not looking that great in hopes that it gets better? Instead we can just let it come back and give us a test that sets it up a lot better. That is the theme I have been hounding you about for the past week. If you have a little trouble, do not mess around; just take it off the table and then maybe we will come back and later get a better buy on it.

Technology. It was a great week for AAPL. It was up 0.25 on Friday. It was showing a doji, but that was after a really nice run. We took some excellent gain off the table on the move. GOOG has had a good move to the upside. There are some interesting features. It has filled part of gap, and now it is up at a resistance point. If we draw another resistance line, it is bumping up against this range of resistance. We could see a downside move that would aid the market in testing. Is that not putting a positive spin on it?

Miscellaneous. Even though there are some trouble areas and potential problems, most every other area looks great from what we can tell. How do you tell? You look at the charts. I want to go through a group of stocks that we have that look good. TEX is performing very well. ARAY was off on the day, but it has had a great run. It was not showing that it is wearing out. TREX did not have a spectacular move, but it was down with a doji to the 10 day EMA. Plenty of positives with stocks still showing good action, good moves, and holding the market to the upside. That does not mean that these will continue to do so. Things start off quietly sometimes and then get worse. That is why we do not want to let positions get out of hand and start to hurt us.




Michigan Sentiment lower but in keeping with the recovering trend.

A wider trade gap is a good thing.



VIX. Volatility did bounce. It rose significantly on the day. It was up +11.5%, but it tapped the 50 day EMA and backed off. That means the market is having a rough patch and reacting as you would think when it sold. It is still very low, but volatility can remain low for long periods of time. This will be the key move where it bumped that 50 day EMA because there are other peaks along the way from back in the summer and in late 2010. That will be a level up around 22 that tries to keep it in check.

VIX: 20.79; +2.16
VXN: 20.94; +2.04
VXO: 18.76; +1.86

Put/Call Ratio (CBOE): 1.1; +0.23

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: 52.1% versus 48.9%. After a dip from 50.0% bulls are picking up steam. At the highest level since April and May of 2011, the peak of the post-bear market high. Now the indices are back at that level and so are the bulls. All the more reason to watch this action at the prior highs. 35% is the threshold measuring bullish versus bearish action. Six weeks the bulls were below bears. A powerful sentiment signal but now dissipating. Highs from April and December (60% readings spanning December through early May 2011). The 5 year high is 62.0. The crossover level at 29% bulls from July 2010 is long gone. 35% is the threshold level suggesting bullishness. To be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 28.7% versus 29.8%. Still around the 30% level but starting to back off, matching the same level as three weeks back. A bit less fearful as the indices probe the prior highs. Not at a bearish level but they are growing more confident even as the market hits the prior highs and is not blasting on through. 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: -23.35 points (-0.8%) to close at 2903.88
Volume: 1.759B (-17.57%)

Up Volume: 405.95M (-654.05M)
Down Volume: 1.37B (+418.54M)

A/D and Hi/Lo: Decliners led 2.87 to 1
Previous Session: Decliners led 1.23 to 1

New Highs: 43 (-67)
New Lows: 14 (+4)


Stats: -9.31 points (-0.69%) to close at 1342.64
NYSE Volume: 697M (-1.69%)

Up Volume: 819.86M (-1.45B)
Down Volume: 3B (+1.25B)

A/D and Hi/Lo: Decliners led 3.08 to 1
Previous Session: Advancers led 1.01 to 1

New Highs: 88 (-106)
New Lows: 11 (+4)


Stats: -89.23 points (-0.69%) to close at 12801.23
Volume DJ30: 123M shares Friday versus 157M shares Thursday.


We are going into next week a bit cautiously, but we are looking for a test. Maybe it will hold and continue higher, but we are looking for a test that we can make plays off of. Plenty of data comes out next week. Tuesday we have Retail Sales back out. We have Business Inventories, and it will be important to see if they are rising. Empire Manufacturing is on Wednesday. On Thursday we have the Initial Claims, Philly Fed, Housing Starts, Building Permits, and the PPI. Friday we have the Leading Economic Indicators. Plenty to move the market, not to mention Greece and what will happen there over the weekend.

Considering all of that, we have to figure out what we want to do for the coming week. Frankly, I would love one more push to the upside and to take more gain off of the table. But you cannot count on that. The Friday action was not bad, but it may not get better. If we get a push downside, we need to be ready to continue what we are doing. Take gain off of the table, close positions, and do not let them hurt us. We have made a lot of great money, and we do not want to lose any of it. You will lose a little bit because, as you ride up, obviously you have positions that are not padded with a nice gain on them. You have to be quick. If you see they are in trouble, you take them off. If it gaps lower, then so be it. That is the way it goes.

It does not look like it will do that, but we are not going to sit around and wait for things to get down to the 50 day EMA without doing anything. We can buy back in at that point. I have a concern that this might be more than just a pullback. So many are positive that this is a great market to buy and that all we need is a little test and everything will be fine. But tests usually get to the point of discomfort. They want to scare you out as you see your profits evaporating. If you are back in the market down from October of 2011 and it comes right down here, then you will not feel much discomfort. But not everyone gets in right at the bottom, and you buy along the way. We do not want to get uncomfortable with positions. That is why we were taking them off of the table without much hesitation on Friday. We have been ruthless on them all week long, taking gains as well as taking trailing stop losses.

Just keep cool. There are still a lot of good patterns out there. We will look at some to the upside and some to the downside. There are some great patterns both ways, and we will get opportunity out of those. We have some that are still down at the bottom and ready to move up. If the market wants to go higher, if it gets some good news over the week, we could do that. We could get another week or two of run to the upside.

The market will go further than you think it should. Even now I think it should pull back. This is something that I have been thinking about all along. Remember, if it got to this target, I did not think it would go higher. But it could. That is just my thought; it is not the market's final word. I can kind of hear it walking up behind me and saying it might fall here. I am just listening and I am ready. I have a little adrenaline going (or maybe that is just coffee).

The point is we have to be ready. We need to know what we have, which is a good chunk of positions that are still in good shape. We have already banked a bunch of gain on them. If we get in any trouble, we want to take those off, too, and just wait for good opportunity. There are some of them that we can let ride. They are in great shape and we will not sell them out, like some old positions in AAPL. We might sell some calls on that, but we are not going to dump those shares because we have a little pullback in the market.

Again, my thesis is that this is just a pullback in the market and not a major decline. I may be proved wrong. If we get a pullback to the 50 day EMA or the late-October peak and it holds and we see a bunch of patterns setting up, we will be ready to buy again. We may be ready to buy on the way down if some early leaders find their purchase before the rest of the market and start move up. That is fine. We will just take them on a stock-by-stock basis. Overall I feel there could be a pullback, but we cannot be sure until the market lets us know. We have just been positioning ourselves to be ready for it, and we will continue to do so.

I will see you on Monday. We have a big week ahead, and we will preserve some money and make some money.

Have a great weekend!

Support and Resistance

NASDAQ: Closed at 2903.88

3026 from 10/2000 low
3042 from 5/2000 low

2888 is the May 2011 peak and post-bear market high
The 10 day EMA at 2881
2879 is the July 2011 peak
2862 is the 2007 peak
2841 is the February 2011 peak
2825 is the 2007 closing peak.
2816 is the early April 2011 peak.
2754 is the October 2011 high
The 50 day EMA at 2743
2706 to 2705 is the April 2011 low and the February 2011 and consolidation low (bottom of the trading range) 2723 to 2705 is the range of support at the bottom of the January to May trading range
2686 is the January 2011 closing low
2676 is the January 2010 low and the December 2011 peak
The 200 day SMA at 2663
2645-2650ish from December 2010 consolidation
2643 is the September 2011 high
2612 is the late August 2011 peak
2603 is the March 2011 intraday low (post-Japan low)
2599 is the June 2011 low and NASDAQ
2593 is the November intraday high
2580 is the November 2010 closing high
2572 is the November 2-11 gap down point
2555 is the mid-August 2011 peak
2546 is the early September 2011 gap down point
2535 is the November island reversal gap point
2532 is the early August gap down point
2469 is the November 2010 low
2441 is the November 2011 low
2331 from October 2010 low and the August 2011 intraday low
2305 from the August 2010 peak (summertime base)
2139 is the May and June 2010 low

S&P 500: Closed at 1342.64
1357 is the July 2011 peak
1364 is the March 2007 low
1370 is the August 2007 low
1371 is the recent May 2011 peak

1344 is the February 2011 peak
1340 is the early April 2011 peak
1332 is the early March 2011 peak
1325-27 is the March 2008 closing low and the May 2006 peak.
The 20 day EMA at 1323
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)
1293 is the October 2011 peak
The 50 day EMA at 1290
1275 is the January 2010 low, early January 2011 peak
1267 is the December 2011 peak
1258 is June 2011 intraday low
The 200 day SMA at 1258
1255 is the late December 2010 consolidation range
1249 is the March 2011 low (post-Japan)
1235 is the mid-December 2010 consolidation low
1231 is the late August 2011 peak
1227 is the November 2010 peak
1220 is the April 2010 peak
1209 is the mid-August 2011 high
1196 is the November 2010 consolidation peak
1178-1180 is the October 2010/November 2010 consolidation low
1158 is the November 2011 low
1131 - 1127 from August 2010 base peak.
1119 is the early August closing low
1109 is the mid-September 2010 gap up point
1101 is the August 2011 low
1075 is the October 2011 intraday low
1099 from the mid-July interim peak

Dow: Closed at 12,801.23
12,876 is the May high
13,058 from the May 2008 peak on that bounce in the selling

12,754 is the July intraday peak
The 20 day EMA at 12,700
The 50 day EMA at 12,426
12,391 is the February 2011 peak
12,284 is the October 2011 peak
12,258 is the December 2011 peak
12,110 from the March 2007 closing low
12,094 is the April 2011 low
The 200 day SMA at 11,991
The June low at 11,897 (closing)
11,893 from March 2008 closing low
11,867 from the August 2009 high and peak on that bounce in the selling.
11,734 from 11-98 peak
11,717 is the late August 2011 peak
The August low at 11,702
11,555 is the March low
11,452 is the November 2010 peak
11,178 from November 2010
10,978 is the bottom of the November 2010 consolidation
10,750 from September 2010
10,720 is the August closing low
10,705-710 from January 2010 peak
10,694-700 from August 2010 peak
9938 is the August 2010 low

Economic Calendar

February 7 - Tuesday
Consumer Credit, December (15:00): $19.3B actual versus $8.5B expected, $20.4B prior

February 8 - Wednesday
MBA Mortgage Index, 02/04 (7:00): +7.5% actual versus -2.9% prior
Crude Inventories, 02/04 (10:30): 0.304M actual versus 4.175M prior

February 9 - Thursday
Initial Claims, 02/04 (8:30): 370K expected, 367K prior
Continuing Claims, 01/28 (8:30): 3475K expected, 3437K prior
Wholesale Inventories, December (10:00): 0.4% expected, 0.1% prior

February 10 - Friday
Trade Balance, December (8:30): -$48.8B actual versus -$48.2B expected, -$47.1B prior (revised from -$47.8B)
Michigan Sentiment, February Preliminary (9:55): 72.5 actual versus 74.0 expected, 75.0 prior
Treasury Budget, January (2:00): -$27.4B actual versus -$40.0B expected, -$49.8B prior

February 14 - Tuesday
Retail Sales, January (8:30): 0.8% expected, 0.1% prior
Retail Sales ex-auto, January (8:30): 0.5% expected, -0.2% prior
Export Prices ex-ag., January (8:30): -0.2% prior
Import Prices ex-oil, January (8:30): 0.1% prior
Business Inventories, December (10:00): 0.5% expected, 0.3% prior

February 15 - Wednesday
MBA Mortgage Index, 02/11 (7:00): 7.5% prior
Empire Manufacturing, February (8:30): 14.0 expected, 13.5 prior
Net Long-Term TIC Flow, December (9:00): $59.8B prior
Industrial Production, January (9:15): 0.6% expected, 0.4% prior
Capacity Utilization, January (9:15): 78.6% expected, 78.1% prior
NAHB Housing Market , February (10:00): 26 expected, 25 prior
Crude Inventories, 02/11 (10:30): 0.304M prior
FOMC Minutes, 1/25 (14:00)

February 16 - Thursday
Initial Claims, 02/11 (8:30): 365K expected, 358K prior
Continuing Claims, 02/04 (8:30): 3505K expected, 3515K prior
Housing Starts, January (8:30): 670K expected, 657K prior
Building Permits, January (8:30): 675K expected, 679K prior
PPI, January (8:30): 0.3% expected, -0.1% prior
Core PPI, January (8:30): 0.1% expected, 0.3% prior
Philadelphia Fed, February (10:00): 10.0 expected, 7.3 prior

February 17 - Friday
CPI, January (8:30): 0.3% expected, 0.0% prior
Core CPI, January (8:30): 0.2% expected, 0.1% prior
Leading Indicators, January (10:00): 0.5% expected, 0.4% prior

By: Jon Johnson, Editor
Copyright 2012 | All Rights Reserved

Jon Johnson is the Editor of The Daily at

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