Great Bounces But to What?

MARKET SUMMARY

- Another gain Friday but after good moves resistance starts to factor in.
- Great bounces but to what? Pretty ugly large cap index patterns.
- Excellent patterns still exist in the leading groups with new stocks break higher. The rebounding large caps, you would think, need to set up better patterns.
- Stocks are rallying even as wage growth stymies and huge percentages of US citizens make very little.

With Friday's gains on top of the past week and one-half recovery, SP500 managed to close a week higher for the first time in quite awhile. Friday, and indeed earlier in the week outside of Thursday, the large cap indices led the move, though all indices logged gains.

SP500 13.76, 0.71%
NASDAQ 30.93, 0.69%
DJ30 127.51, 0.76%
SP400 0.37%
RUTX 0.21%
SOX 1.06%

Volume: Faded on both exchanges. NYSE -10%, NASDAQ -12%

A/D: Weak given the moves. 1.6:1 NYSE, 1.2:1 NASDAQ.

Nice, solid advances, not on the same scale as shown last week or earlier this week, but solid.


THE MARKET

CHARTS

Thing is, not a lot of headway was made. Indeed, given the indices are up 1.5 to 2 weeks rut-depending upon which one you look at, you could expect stocks in general to start slowing the move some.

RUTX: Case in point, Friday RUTX was up but could not make any serious moves, butting into the 50 day EMA. Thursday RUTX traded through the 50 day but then faded to close. Friday a doji at that level on low volume. 7 of 9 days to the upside, at the 50 day EMA, at the August lows. Early to lead, now maybe needs a break with only two days off during the two weeks.

SP400: Similar action as SP400 posted its 7th gain in 8 sessions. It is not only at the 50 day EMA but the 200 day SMA as well. Thursday it moved through the latter but faded to close below it. Friday it moved up to the 200 day, but as with RUTX it is at the August low resistance as well. Strong recovery but the question is how much gas is in the tank? A pause or is it done?

SOX: At the 50 day EMA as well, having filled the MCHP warning gap lower. Great recovery but a lot of the big names on SOX are in bear flag patterns, e.g. INTC. If they go down, SOX goes down. Bigger picture, look at the double top spanning July and September, the hard decline and gap, the sharp rebound. Not a great pattern, not one you would buy into right at this moment.

SP500: SP500 rallied through the 50 day EMA and up to the 50 day SMA. In seven days it recovered all it lost in the five days to the downside. Isn't that the way it always is? The downside is so fast. Anyway, SP500 has recovered, but to what? The pattern wasn't great BEFORE it tanked. It has the July peak at 1990ish (closed at 1964) then the September peak. Not saying it has to fail. If it is going higher, however, it is going to have to take a breather at some point, regroup, and take on the highs.

DJ30: Up just over the 50 day EMA Friday as the Dow lags a bit. It is closing in on resistance at 16,900 to 17,150. Dutifully following SP500, but not much more.

Nice moves higher, extending the gains with bids holding. But, again, just where are they now?

You have to look at the indices' relative position after more than a week of upside. The leading indices that started the move (small and midcaps) have slowed and are actually pausing, trying to consolidate. The large caps likely show some of that next week as they continue to catch up to the move the smaller caps started.

This is all very normal action just looking at the sharp upside move the past two weeks. Even so it means the upside likely has to test. We thought we would get 2 to 3 sessions of testing last week but instead the market took a day off and then continued higher Thursday and Friday. So, with a bit more gain in the books the indices likely test.

Okay, so we get the test. Then stocks have to hold and continue the move. In so doing they would have to overcome some pretty ugly patterns that formed just prior to the dive lower on Ebola, MCHP, Europe, earnings worries, etc. Again, they can do it, we just have to realize that the indices bounced sharply to resistance so likely 1) need a test/rest before going much higher, and 2) have to overcome the pre-existing ugly patterns.

What is the import of that? Well, you don't go piling into every stock on the upside after a 2 week run. That is why our buys scaled back though we still bought positions on good stocks making solid breaks.

Indeed, we STILL see a lot of leadership quality stocks in position to make upside breaks and have more on the weekend report. Many leaders keep stepping up and we note that some of the early leaders that surged but spent the past 1.5 weeks testing as the rest of the market rallied, are set up to break higher or started on Friday (e.g. TGTX, XLRN)

Of course we also banked gain on plays as well, e.g. AMZN, VIPS Friday, AGIO, BABY, etc. earlier in the week. Interesting that AMZN and VIPS are heading in opposite directions, but that doesn't make the profits any less appealing, and it shows you also that you can make money looking both ways, STILL, in this market.

Friday we did pick up some TGTX as it broke higher from a very nice 3 week consolidation. YY is a play we bird-dogged Thursday night and sure enough it surged higher Friday. Plenty of room for these plays to run, and they appear to be making their own wake, i.e. moving without a lot of concern for the market's moves.

The market still has to deal with a lot of extraneous issues, e.g. Ebola, school shootings, Putin, ISIS, China, yet the market continues to move higher. Remember, this is the 'no respect' Dangerfield rally and we hear many still want to short it. That works for us.

We are looking at more upside plays for next week because very good stocks continue to set up very good patterns as money is put to work in some areas after being pulled from others. If the money stays in the market, it behooves us to find where it is going, and thus far we are indeed doing just that.

We could see more money being pulled from other areas this week after the strong rebound moves off the lows. Stocks sold hard, rebounded hard, and now face the reality of resistance and pre-existing ugly patterns as noted earlier.

That is why we also have several new downside plays in addition to the other ones we are watching, waiting to see if they break lower. If so, we could make some rapid downside money once again.


THE ECONOMY

September hourly wages show a continued disturbing trend.

The BLS released its September hourly wages data and it shows more trouble for the US worker.

$10.32/hour versus 10.34/hour, -0.2% (1982-1984 constant dollars).

This may not seem to be much, but since 3/2014 only 1 month has shown wage gains. The other 5 were wage losses. The US worker, despite burgeoning gains in corporate profits, continues to suffer wage declines.

I have posited the question before: how can the US be in recovery if wages continue to decline?


Social Security Administration releases its tally of US citizen earnings.

The SSA reports that 2013 saw 50% of US workers earning less than $28K per year. 50%! 39% earned less than $20K. 63% less than $40K. 72% less than 50K.

We are told by several think tanks, and the US government, that it takes $50K per year to for a family of four to maintain a middle class life. 72%, however, make less than that threshold level.

Meaning: The middle class is effectively gone as the vast majority of Americans make less than is required to maintain what is considered a middle class lifestyle.

And on top of this, Hillary Clinton today says "Don't let anybody tell you it's corporations and businesses [that] create jobs. The money has to go to the federal government because the federal government will spend that money better than the private sector will spend it."

It does not get any clearer than that. The democratic frontrunner believes government is best at allocating the resources of the American business person, the American entrepreneur? Seriously? Only in a country where the populace is wholly ignorant as to why this nation is a separate country, why this nation of the people, for the people, and by the people was created, can allow this kind of tripe to be uttered without running her out of town on a rail. We get what we deserve.



MARKET STATS

NASDAQ
Stats: +30.92 points (+0.69%) to close at 4483.72
Volume: 1.698B (-10.22%)

Up Volume: 1.13B (-500M)
Down Volume: 585.75M (+291.33M)

A/D and Hi/Lo: Advancers led 1.29 to 1
Previous Session: Advancers led 2.67 to 1

New Highs: 54 (0)
New Lows: 53 (+5)

S&P
Stats: +13.76 points (+0.71%) to close at 1964.58
NYSE Volume: 717.7M (-12.35%)

Up Volume: 1.94B (-950M)
Down Volume: 1.1B (+253.93M)

A/D and Hi/Lo: Advancers led 1.62 to 1
Previous Session: Advancers led 3.39 to 1

New Highs: 81 (-20)
New Lows: 26 (-6)

DJ30
Stats: +127.51 points (+0.76%) to close at 16805.41


SENTIMENT INDICATORS

VIX: 16.11; -0.42
VXN: 17.93; -0.85
VXO: 15.75; -0.17

Put/Call Ratio (CBOE): 0.9; +0.08. Third session below 1.0 in the past two weeks.


Bulls and Bears:

Bulls continue to fall rather sharply: 35.3% versus 37.8% versus 45.5%

Bears finally broke the ice and are rising rapidly, for them: 18.2% versus 17.3% versus 14.1%

Theory: When everyone is bullish and has put all their capital to work, where does the ammunition to drive the market come from? There is always new money to start a new year. After that is used will more money be coming? That is the question.




Bulls: 35.3%
37.8% versus 45.5% versus 47.5% versus 48.0% versus 52.5% versus 57.6% versus 56.1% versus 52.5% versus 49.5% versus 46.4% versus 50.5% versus 55.6% versus 56.5% versus 56.6% versus 60.6% versus 57.6% versus 60.2% versus 61.4% versus 62.6% versus 62.2% versus 58.3% versus 57.2% versus 55.1 versus 55.7 versus 54.7

Background: Last undercut 35%, the threshold for bullishness, in early June 2012.

Bears: 18.2%
17.3% versus 14.1% versus 15.1% versus 15.3% versus 15.2% versus 14.1% versus 13.3% versus 15.1% versus 16.2% versus 16.2% versus 17.1% versus 16.2% versus 17.2% versus 15.1% versus 15.2% versus 16.1% versus 16.3% versus 17.2% versus 17.4% versus 17.3% versus 18.3% versus 19.4% versus 20.6% versus 19.7% versus 21.7% versus 20.6 versus 18.6%

Background: Over 35% for bears is the threshold to be really be a good upside indicator. The best indication is when bears cross up through bulls as the two merge. Right now bulls are coming back down from the 60 level that has consistently marked market tops over the past two years. The rapid decline in progress is pushing the bulls/bears lines toward one another. Still far from a cross with bulls falling faster than bears are rising, but bears are warming up to the notion of market weakness.


OTHER MARKETS

Bonds: 2.26% versus 2.28% versus 2.22% versus 2.18% versus 2.20% versus 2.16% versus 2.14 versus 2.20% versus 2.28% versus 2.31% versus 2.34% versus 2.42% versus 2.44% versus 2.44% versus 2.41% versus 2.49% versus 2.48% versus 2.53% versus 2.51% versus 2.56% versus 2.53% versus 2.56% versus 2.58% versus 2.63% versus 2.62% versus 2.59% versus 2.59% versus 2.61% versus 2.55% versus 2.54% versus 2.50% versus 2.47% versus 2.45% versus 2.45% 10 year.


Oil: 81.03, -1.02. Trying to post up the past two weeks and build a bottom to bounce from.

Gold: 1231.80, +2.60 After a nice rally to the 50 day EMA gold failed to end the week, holding the 20 day EMA.

$/JPY: 108.13 versus 108.17 versus 107.20 versus 106.88 versus 106.38 versus 106.875 versus 106.33 versus 105.92 versus 107.05 versus 107.29 versus 107.66 versus 108.12 versus 107.95 versus 108.96

Took a bit of a breather after the Tuesday to Thursday surge.

Euro/$: 1.2670 versus 1.2650 versus 1.2645 versus 1.2723 versus 1.2810 versus 1.2760 versus 1.2809 versus 1.2838 versus 1.2658 versus 1.2683 versus 1.2628 versus 1.2748 versus 1.2680 versus 1.2627



SUPPORT AND RESISTANCE

NASDAQ: Closed at 4483.72

Resistance:
4486 is the July 2014 high
4610 is the September 2014 post-bear market high.

Support:
The 50 day EMA at 4424
4372 is the March 2014 high
The August low at 4321
4316 is the lower gap point from October 2014
The 200 day SMA at 4308
4289 is the July 2000 recovery high
4277 is the March lower gap point
4246.55 is the January 2014 peak
4185, the May lower gap point
4131 is the March 2014 low
4104 is the lower gap point from 12/20/13
4070 is the series of highs from late November/early December
3991 is the prior November 2013 high and the post-bear market high.
3968 is the February 2014 low
3946 is the April 2014 intraday low


S&P 500: Closed at 1964.58

Resistance:
1987 is the lower trendline from 11/2012
1991 is the July 2014 high
2011 is the all-time high
2044 is the December 2012 up trendline

Support:
The 50 day EMA at 1949
1905 is the August 2014 low
The 200 day SMA at 1909
1902 from early May was the intraday all-time high.
1897 is the prior all-time high hit in April 2014
1883.57 is the early March high.
The December and January highs at 1848
The April 2014 low at 1814
1808 is the November and December 2013 twin peaks
1775.22 is the October prior all-time high
1768 is the December 3013 low
1738 is the February 2014 low
1730 is the September 2013 peak
1710 is the August 2013 peak.
1698 to 1700 are the July and August interim highs


Dow: Closed at 16,805.41

Resistance:
16,946 is the June 2014 peak
16,970 is the June 2014 former all-time high
17,068 is the early July 2014 peak
17,152 is the mid-July post bear market high
17,351 is the September 2014 all-time high.

Support:
The 50 day EMA at 16,776
16,736 is the penultimate all-time high from May 2014
16,632 is the April 2014 all-time high
The 200 day SMA at 16,589
16,589 is the December 2013 all-time high
16,506 is the March 2014 peak
16,341 is the May low
16,334 is the August 2014 low
16,257 is the January 2014 low
16,179 is the November 2013 peak.
15,739 is the December 2013 low
15,696 is the September 2013 peak
15,659 is the August 2013 peak


ECONOMIC CALENDAR

October 24 - Friday
New Home Sales, September (10:00): 467K actual versus 475K expected, 466K prior (revised from 504K)

October 27 - Monday
Pending Home Sales, September (10:00): 0.5% expected, -1.0% prior

October 28 - Tuesday
Durable Orders, September (8:30): 0.7% expected, -18.4% prior (revised from -18.2%)
Durable Goods -ex tr, September (8:30): 0.5% expected, 0.4% prior (revised from 0.7%)
Case-Shiller 20-city, August (9:00): 5.5% expected, 6.7% prior
Consumer Confidence, October (10:00): 87.2 expected, 86.0 prior

October 29 - Wednesday
MBA Mortgage Index, 10/25 (7:00)
Crude Inventories, 10/25 (10:30): 7.111M prior
FOMC Rate Decision, October (14:00): 0.25% expected, 0.25% prior

October 30 - Thursday
Initial Claims, 10/25 (8:30): 284K expected, 283K prior
Continuing Claims, 10/18 (8:30): 2375K expected, 2351K prior
GDP-Adv., Q3 (8:30): 3.0% expected, 4.6% prior
Chain Deflator-Adv., Q3 (8:30): 1.5% expected, 2.1% prior
Natural Gas Inventor, 10/25 (10:30): 94 bcf prior

October 31 - Friday
Personal Income, September (8:30): 0.3% expected, 0.3% prior
Personal Spending, September (8:30): 0.1% expected, 0.5% prior
PCE Prices - Core, September (8:30): 0.1% expected, 0.1% prior
Employment Cost Inde, Q3 (8:30): 0.5% expected, 0.7% prior
Chicago PMI, October (9:45): 60.0 expected, 60.5 prior
Michigan Sentiment -, October (9:55): 86.4 expected, 86.4 prior

By: Jon Johnson, Editor
Copyright 2014 | All Rights Reserved

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

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