NASDAQ Fills Early May Gap

MARKET SUMMARY

- Stocks try to start higher then fade to a lower low, recover some lost ground.
- NASDAQ fills early May gap, helps trigger afternoon recovery.
- Took some downside gain on the dip, tested the waters with an upside play on the rebound.
- Some leaders ignore the selling, holding out some upside promise for the market.
- Looks as if an oversold bounce tried to set up on Friday, and we will see if it can keep moving and provide some upside trade opportunities this week.

It was a bounce, not much of a bounce, but a bounce. Moreover, it took the circuitous route to get the result. The problem started early on with futures to the upside. After the kind of rout the market had Thursday, nothing typically good comes from an early market bounce, at least if what you consider good is a sustained upside move. Thus when we saw futures were up on basically no new news, well we were less than enthusiastic about the session's prospects.

As it turned out, however, we were able to take some gain on the SSD and QLD as per our plan when the indices dipped again after the higher open, and actually took a new upside position on SSO. Kind of testing the waters on that one when we saw the action we wanted, or at least close to it.

What action? NASDAQ filled the early May gap and started to recover. SP500 and DJ30 didn't quite hit the 78% Fibonacci retracement, but they came close and they too started to rebound. As noted, however, it wasn't a straight drop and recovery.

No, stocks started the session attempting a bounce. And as you would expected after such a butt kicking as on Thursday, the sellers were feeling their oats and charged the early upside. They managed to drive all of the indices negative by midmorning.

At the session lows, however, NASDAQ had filled that early May gap and when the sellers got there they relented. Stocks bottomed over lunch, rallied and tested in mid-afternoon, forming an intraday inverted head and shoulders. They rallied into the afternoon, fading just a bit in the last hour. A mixed close but not terrible. Indeed, but for ORCL and its second straight earnings miss, NASDAQ may have made it to positive as well.

SP500 4.24, 0.27%
NASDAQ -7.38, -0.22%
DJ30 41.08, 0.28%
SP400 -0.27%
RUTX 0.33%
SOX 0.25%

So, it took longer than we wanted and it was not the route we preferred, but stocks did eventually test lower, held, and started a rebound.

Volume was huge on this expiration so it is hard to attribute the recovery with a lot of strength.

Breadth moderated: From -12:1 NYSE on Thursday to basically flat. Reversal session so that is understandable.

Summary: You have to view it as an oversold move in our book but that is what we were expecting anyway, right? The question is whether it can be played. We tested the water a bit on Friday, not wanting to get drawn in too much on expiration after a butt-kicking on worries of a FOMC tightening cycle, and a weekend to boot. If there are good stocks in position to move this coming week and if the indices continue in a bounce, we can look at putting some more money to work to play a bounce but it would just be playing trades. Nothing in the action Friday suggests the market bottomed the selling and is ready to run higher in a renewed rally in the trend.


THE NEWS

Are you kidding? There was virtually nothing to discuss Friday in terms of economic data. Now there was lots of debating what the FOMC actually said, the merits of whether it is correct in seriously talking taper, is the economy really better given headlines but also given the lack of acceptance of those headlines as being indicative of the real economy, the continuing deterioration of the jobs picture, and the worry whether housing can hold up with spiking interest rates.

Those are just a few issues. You can throw in some non-domestic worries such as Japan, China's liquidity crisis where it injected $8B overnight in response to what was rumored a bank default, Brazil's now millions in the streets, a frosty G8, Syria.

Despite the recovery, the world is in serious crisis. There are the problems that never go away, e.g. Greece, Spain, Portugal, Italy and Europe in general given the few that can help but the overwhelming number that need help.


Nice Carnival mask dude.

There are new/not so new problems such as China's slowdown. Recall China was supposed to have bottomed a few months back and was on the road to recovery. Funny thing happened along the way as liquidity dried up when the PBOC stopped its stimulus moves. Things are just lovely with bank overnight rates spiking to 25% the past week. You know that is a sign of economic health as are the tens of thousands that waited in the streets to buy physical gold. Yes the Chinese are very confident their communist government has everything under control and is there to help them.

And that brings you back to the US that is considered, as was and indeed still is China, to be in recovery. If the Chinese markets seize up when the PBOC withdraws liquidity, is the US going to be really different?

I have said it before many times, but it bears repeating: is the run in the US stock market from 666.79 to 1,687.17 on SP500, a 2.5x move, warranted by the economic recovery the US has shown? Two quarters, two measly quarters of 4% or better growth in 4 years and you get a market that is up 150% from the low? Moreover, putting in new highs. Hardly.


The US economy is painted in a favorable light, but it's strength is about as real as this fellow's.

Financial assets are inflated by excess liquidity. The economic growth is still very tepid. The 'animal spirits' are low in where it counts, e.g. investment in capital goods and R&D, and thus few jobs will be created. Those that are created are part-time in order to adjust to the healthcare law as companies cut costs wherever they can. The economic growth the US has shown is what you get when you flood the economy with trillions of dollars.

Remove the reason for the current stumble along economic activity and the inflation of financial asset prices and is there reason for the prices to advance? To even hold at the current levels?

I say the answer is 'no,' and thus if the Fed is serious and sticks to its taper, there will necessarily be an unwinding of some portion of the move higher in equities to match the economic expectations. That, or the Fed will be forced BACK INTO THE GAME of buying securities in order to float the economy and financial assets.

It is a very treacherous game with the economy not nearly as good as we are led to believe or hope for. As such, the financial markets are at risk as the economy cannot produce enough activity to justify the inflated asset prices as businesses and individuals are handcuffed by regulations that limit what they can do and increase their costs. Indeed we hear that the President is going to sidestep Congress and issue through the EPA new regulations on emissions and that will constrain our new energy boom and threaten out energy independence. We also hear he is going to unilaterally block the Keystone pipeline.

Those actions will not help the economy catch up to the gains in financial instruments, those gains enjoyed by the inflation of asset prices by the Fed. Remember, that is what Bernanke said he wanted to do, but one can hardly argue the 'wealth effect' has ignited the economy.



MARKETS:

OTHER MARKETS

Dollar bouncing: 1.3122 versus 1.3220. Dollar put in its third upside day off of the three week selloff. It is now back at the April lows facing some resistance but moving up well. With the Fed potentially back off from money printing the dollar is showing more strength.

Bonds: 2.53% versus 2.43% 10 year. Dive, dive, dive. Well, if Mr. Bernanke was 'somewhat puzzled' on Wednesday by bond yields rising the past 7 weeks, he must be damned perplexed right now. The TLT broke below the March 2012 and October 2011 lows and is now at the August 2010 peak. If you look at a two year chart you can see a big head and shoulders top and TLT just broke through the neckline.

Oil fades a second day: 93.69, -1.45. After rallying to a 2013 high midweek, oil is off its feed. Seems it is worried that the Fed pulling back will impact US economic growth, and of course there is the bank liquidity crunch in China so maybe China won't be buying up supplies all over the world for awhile.

Gold bounces ever so modestly: 1292.20, +6.30. After plummeting close to $100 Thursday, gold 'surged' a few bucks upside. Okay, it broke lower from the descending wedge pattern and now a modest bounce. No recovery.


TECHNICAL SUMMARY

INTERNALS

NASDAQ
Stats: -7.39 points (-0.22%) to close at 3357.25
Volume: 2.718B (+35.43%)

Up Volume: 1.39B (+1.172B)
Down Volume: 1.49B (-310M)

A/D and Hi/Lo: Advancers led 1.49 to 1
Previous Session: Decliners led 5.85 to 1

New Highs: 63 (+18)
New Lows: 74 (0)

S&P
Stats: +4.24 points (+0.27%) to close at 1592.43
NYSE Volume: 1.418B (+45.73%)

A/D and Hi/Lo: Decliners led 1.01 to 1
Previous Session: Decliners led 12.05 to 1

New Highs: 68 (+5)
New Lows: 486 (-158)

DJ30
Stats: +41.08 points (+0.28%) to close at 14799.4

Volume: Ballooned on expiration so doesn't really help in analysis, i.e. no accumulation on a modest large cap NYSE bounce.

Breadth: Flat on NYSE, +1.5:1 NASDAQ. All in all not bad given the up and down moves and NASDAQ's negative finish. Most of that was attributable to ORCL with its second straight horrid earnings report.


THE CHARTS:

DJ30 and SP500. SP500 and DJ30 reached toward the 78% retracement discussed Thursday, came close enough, then rebounded, showing a modest gain and a doji on the candlestick chart. Could be the D point in an ABCD pattern formed off the April to May run. It has the characteristics, now we see the two can generate an upside push. Picked up some SSO calls on the action. Looking at a bounce at this juncture, not a resumption of the rally. Will take it if it comes, but not expecting it.

NASDAQ. Under pressure all session thanks to ORCL and thus closed lower. But NASDAQ did fill the early May upside gap and then it rebounded. That puts it in position to bounce to fill the Thursday gap, perhaps. Being in position, however, does not equal making the move, and we still don't like the look of the pattern. Thus a bounce upside is likely just that, but then again, that is the way we are viewing the entire market on any upside move.

RUTX. Gapped upside then broke lower and tested the March consolidation highs noted Thursday. Used that as support, opting not to head significantly lower to the early May gap, instead rebounding to a modest gain and a nice doji with tail. That puts RUTX in a similar position as SP500.

SOX. Good action. Gapped upside but didn't stick, fading to test further, undercutting the 50 day EMA on the low then rebounding. Held the May and early June lows on the test, and that means SOX is still in its range, looking pretty darn solid.


LEADERSHIP:

Big Names: AMZN remains in its breakout with a tests lower and recovery. GOOG tested and reversed, holding the 20 day EMA near support. AAPL still stinks; bad week. IBM continues to dive.

Technology: STX sold again. FFIV is at the April low with higher MACD. CTSH is at a key support. ORCL dove lower, but didn't drag all software with it. CA testing the 50 day EMA. SNDK sold again but it bounced off a 50 day EMA test. RAX looks interesting to try a bounce.

Chips: Mixed. KLAC quickly turned to struggling below the 50 day EMA. TXN ditto. Others are solid: DIOD, ANAD, NVDA.

Financial: JPM is at the 50 day EMA and its own ABCD. BAC and C even as interest rates surge. Why? Perhaps no more free Fed money to help pad the balance sheets? WFC looks solid.

Internet: Still solid, e.g. WWWW, AWAY, GOOG.

Telecom: Not bad. BBRY at the bottom of its triangle, JDSU tests the 50 day EMA.

Retail: Very mixed: HD, DECK, YUM weak. Others fine: JWN, LTD.


SENTIMENT INDICATORS

VIX: 18.9; -1.59
VXN: 19.44; -0.62
VXO: 18.91; -2.42

Put/Call Ratio (CBOE): 1.17; -0.22

Bulls and Bears:

Well, market sentiment is as volatile as stocks. As SP500 and DJ30 held the 50 day EMA with a double bottom and bounced, sentiment improved as bulls expanded and bears contracted. All, of course, just in time for the market to roll over. Expect to see fading sentiment this coming week with the dive.


Bulls: 46.8% versus 43.8% versus 45.8% versus 52.1% versus 54.2% versus 52.1% versus 47.9% versus 44.3% versus 47.4% versus 50.5%.

Background: Undercut 35%, the threshold for bullishness, in early June. As noted, hit 34% in early June. It did its job and the market is on the rally. Hard drop to 34 from 39.3% as economic reality and a choppy stock market hit. Off the 55+ level hit in late February. That was the highest level since April and May of 2011, the peak of the post-bear market high. 35% is the threshold level suggesting bullishness. To be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 21.9% versus 22.9% versus 20.8% versus 19.8% versus 19.8% versus 19.8% versus 18.8% versus 19.6% versus 20.6% versus 20.6% versus 19.4% versus 19.6% versus 18.6% versus 18.8% versus 21.1% versus 21.1% versus 22.1% versus 21.1% versus 21.1% versus 22.3% versus 22.3% versus 23.4% versus 24.5% versus 24.5% versus 23.4% versus 25.5% versus 27.7% versus 27.7% versus 28.7% versus 27.7%.

Summary: Over 35% is the threshold to be really be a good upside indicator. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.


MONDAY

A full economic calendar is ahead with many data points the Fed and the market can chew on and decide, or argue, as to whether the Fed will stay on its taper track.

As noted above, nothing in the Friday action indicates the break lower has run its course. ABCD patterns on SP500 and DJ30 are promising. NASDAQ filled its early May gap and bounced, but its pattern is frightening. On the other hand, SOX looks very good, holding its range.

Add to that many stocks that managed to hold support even as many more seemed to fold up last week. Leadership is the key for nay market, and if enough hold and can then pull others along with them the rally can continue. Many stocks broke hard to the downside but if leaders hold the line and keep the market moving, those stocks that broke hard have time to recover into new patterns.

That is the analysis you need to always apply to the market. Then you can add some of your own color to it that is consistent with the leadership. What this tells us is that yes, the rally can resume. We are not approaching any bounce, however, as if it WILL be the resumption of the rally. If the move higher continues to start next week we want to play it as a bounce/trade at first. Realistic expectations about a break higher, and if it turns out to be more great. If it is, there will be leaders making the move, taking the point. You play those, and if they want to do more with the move, you let them.

So, we play a bounce and if it turns into something more we let positions run. If it fails, as I think it will (but that is just a personal opinion) and the indices hit resistance and roll with leadership doing the same, then you use the bounce to exit weaker upside positions or trades to the upside and play some more downside.

It is still an open question as to the market's next real trend a la FOMC decision. The money is still coming into the market gratis the Fed, but the market looks ahead and as of last week it was looking at a Fed pulling back the QE and an economy that isn't up to snuff. This week will tell more about whether the market is looking through rose colored binoculars as it looks ahead. In any event, play it for the move it gives.



Support and resistance

NASDAQ: Closed at 3357.25

Resistance:
3371 is the early May 2013 upper gap point
3378 is the June 2013 intraday reversal low.
The 50 day EMA at 3390
3449 is the November 2012 up trendline
3521 is the August 2000 low.
3532 is the early May high and 2013 high
3540 is the upper channel line for the November 2012 to present uptrend

Support:
3321 from April 2000
The 2011 up trendline at 3253
3227 is the April 2000 intraday low
3197 is the September 2012 post-bear market high
The 200 day SMA at 3175
3171 is the October intraday high
3134 is the March 2012 post-bear market peak
3130 from some January 2013 lows
3104-3112 from August and mid-October peaks.
3101 is the August 2012 high
3090 is the mid-March interim high
3076 is the late April 2012 high and the 1/2013 low after gapping higher
3062 is the December 2012 prior peak
3042 from 5/2000 low and several other price points
3024 is the gap point from early May
3000 is the February 2012 post-bear market high
2999 is the bottom of the August 2012 consolidation
2988 is the July 2012 high
2977 to 2980 is the bottom of the late October 2012 consolidation, July 2012 peak
2962 is the April 2012 low
2950 is the mid-April closing low



S&P 500: Closed at 1592.43

Resistance:
1598 is the June 2013 intraday reversal low and the April 2013 high and former all-time high
The 50 day EMA at 1615
The November up trendline at 1652
1687 is the May high and post-bear market high
1724 is the upper trendline in the channel

Support:
1576 from October 2007, the prior all-time high
1569.48 is the 78% Fibonacci retracement of the April to May 2013 run
1556 from July 2007
1541 is the April 2013 closing low in that pullback inside the uptrend
1539 from June 2007
1531 is the recent high
The 200 day SMA at 1506
1499 from January 2008
1475 is the September 2012 high
1471 is the October 2012 intraday high
1466 is the September 2012 closing peak and rally closing high
1440 from November 2007 closing lows
1434 from early November 2012
1433 from August 2007 closing lows
1427 is the August 2012 peak
1425 from May 2008 closing highs and the October 2012 low
1408 is the late October 2012 range closing low
1406 is the early May 2012 peak
1402.22 - 1400 is the closing low of the August 2012 lateral consolidation


Dow: Closed at 14,799.40

Resistance:
14,844 is the June intraday low
14,888 is the April peak and prior all-time high
The 50 day EMA at 14,979
The November up trendline at 15,360
15,542 is the May 2013 high
15,925 is the upper channel line for the trend off the November low.

Support:
14,198 from the October 2007 high
14,149 is the February 2013 high
14,022 from 7-07 peak
14,010 from the early February 2013 consolidation
The 200 day SMA at 13,962
13,784 is the late February 2013 closing low
13,692 from 6-2007 peak
13,668 from 12-2007 peak
13662 is the October 2012 intraday high
13,653 is the September 2012 high
13,557 to 13,662
13,413 from the late September 2012 low
13,300 to 13,331 is the August 2012 post-bear market high
13,297 is the April 2012, prior post bear market high
13,058 from the May 2008 peak on that bounce in the selling
13,056 is the February 2012 high
12,716 is the April 2012 closing low
12,524 is a range of support from early 2012 and summertime 2012


Economic Calendar

June 25 - Tuesday
Durable Orders, May (8:30): 3.0% expected, 3.5% prior (revised from 3.3%)
Durable Goods -ex transports, May (8:30): -0.5% expected, 1.5% prior (revised from 1.3%)
Case-Shiller 20-city, April (9:00): 10.5% expected, 10.9% prior
FHFA Housing Price I, April (9:00): 1.3% prior
Consumer Confidence, June (10:00): 74.9 expected, 76.2 prior
New Home Sales, May (10:00): 460K expected, 454K prior

June 26 - Wednesday
MBA Mortgage Index, 06/22 (7:00): -3.3% prior
GDP - Third Estimate, Q1 (8:30): 2.4% expected, 2.4% prior
GDP Deflator - Third Est., Q1 (8:30): 1.1% expected, 1.1% prior
Crude Inventories, 06/22 (10:30): 0.313M prior

June 27 - Thursday
Initial Claims, 06/22 (8:30): 345K expected, 354K prior
Continuing Claims, 06/15 (8:30): 2958K expected, 2951K prior
Personal Income, May (8:30): 0.2% expected, 0.0% prior
Personal Spending, May (8:30): 0.4% expected, 0.2% prior
PCE Prices - Core, May (8:30): 0.1% expected, 0.0% prior
Pending Home Sales, May (10:00): 1.5% expected, 0.3% prior
Natural Gas Inventories, 06/22 (10:30): 91 bcf prior

June 28 - Friday
Chicago PMI, June (9:45): 55.5 expected, 58.7 prior
Michigan Sentiment - Final, June (9:55): 82.6 expected, 82.7 prior

By: Jon Johnson, Editor
Copyright 2013 | All Rights Reserved

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

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