When the stars begin to fall

Traders,

Shake down the stars, pull down the clouds,

Turn off the moon, do it soon

Frank Sinatra, Shake Down the Stars

Our current position:

MARKET VULNERABLE

In this week’s edition you will find:

  • Where We Are
  • What Was Important About Last Week
  • What We Are Watching For This Week
  • A Word On Discipline

The following sections can now be found on our home site:

Where We Are:

Taking a look at the overall markets:

The broader markets ended the week little changed.

Despite earnings season at high tide, price action gives us little to digest.

Our measures of market strength continue to advise us to stay away from new breakouts. Given the dearth of new breakouts, this is not hard to abide by.

We have a certified follow through day in the books.

Follow through days are a mark of strong buying that occur at the beginning of the fourth after a potential market bottom. Research tells us that by four days short covering is a less likely motive for buying as selling pressure dries up.

Follow through days are strong indicators, but of course not full-proof.

Our follow through day from Wednesday appears vulnerable, as Thursday gave us another round of heavy selling.

We’re still looking for a bounce to shed light on what areas of strength might emerge that would lead to buying opportunities in the event of a return to a healthy market. This can be a very slow process.

Relative strength winners for the week were in Broker Dealers, Banks, and Technology.

While Growth Stocks as a group are weak, their dominant trend remains up. Energy and Materials have been whacked, though have not crosses the bearish line to be deemed “has beens.”

Growth Stocks are usually that last to fall in a bad market. When we see these stars fall, it will give us strong conviction that the bull is terminal.

The S&P, from a chartists perspective, looks like it has a good shot at forming the third low in an upward trending trend line.

We are not pure technicians, though entertain ourselves with the analysis.

Price and volume are at the core of what we look for to measure strong and weak environments.

We will wait as long as it takes for the edge to return before committing to the long side of this market.

If the market continues to nose dive, we expect to see short setups present themselves, though our methods for shorting are very limited, and could take weeks to emerge.

Technically speaking:

The Dow Industrial Average ($INDU), -0.70%, is below all its major moving averages in a bearish head and shoulders pattern.

The S&P 500 ($SPX), -0.59%, is below all its major moving averages, and attempting to make the third bounce of a trend line.

Nasdaq ($COMPQ), +0.84%, is under its 50-day average and above its 200-day average, the index is trading in a triangle, and has shown relative strength against the other major indexes in that it managed a gain for the week.

Russell 2000 ($RUT), -0.07%, is below all its major moving averages with no clarity of price action pattern.

Volume indications remain bearish, however, we have a follow through day in the books, which appears vulnerable.

New Highs – New Lows is trend down, just off the weakest levels of the year.

Advance Decline Line is off its lows and showing no divergence to indicate a bias.

Investors Intelligence indicates more bulls than bears at a ratio of 1.54. This contrarian’s indicator continues to flash red.

Key chart action for the week:

Charts courtesy of Stockcharts.com

The 20+-year Note Holdr (TLT) is below all its major moving averages and is trying to reverse a two-month trend down.

The U.S. Dollar Index ($USD) is trading above all its major moving averages and is poised to breakout of a cup and handle into overhead resistance from two years ago.

The Gold Miners Index ($XAU) declined to its 50-day moving average as pressure from the U.S. Dollar created a weak environment for Gold.

The Dow Jones AIG Commodity Index ($DJAIG) declined to its 50-day moving average, with the trend still up.

Consumer Staples ($CMR) is below all its major moving averages, as it remains in a year long consolidation pattern. Consumer Cyclicals ($CYC) fell further on the week and now has its moving averages arranged trend down with the 20 below the 50 which is below the 200.

Technology ($DJUSTC) is showing relative strength after posting a small gain on the week. The index is between its 50 and 200 day averages.

The Semiconductor Index ($SOX) dipped below its 200-day moving average for the week and left a tail bullish tail there.

Banks ($BKX) are attempting a bounce, and are facing resistance under its major moving averages.

Broker Dealers ($XBD) remain trend up as they hold above the 50-day moving average.

Retail ($RLX) remains a weak spot in the broader markets as the index consolidates below its major moving averages.

Internet ($IIX) is consolidating above its major moving averages in a display of relative strength.

Healthcare ($HCX) continues its dive as it trades below all its major moving averages.

Biotech ($BTK) is attempting to find a low after pulling back from all time highs made five weeks ago. The sector is showing relative strength.

REIT’s ($DJR) is putting up a fight at its 200-day moving average.

Homebuilders ($DJUSHB) is below all its major moving averages and poised to trend higher in what would start looking like a bearish right shoulder.

Transportation ($TRAN) is consolidating with its major moving averages as it trades in a triangle.

Airlines ($XAL) continue to bounce, and are facing resistance under a long term trend line.

Defense ($DFX) continues to consolidate in multi-month base.

Energy ($IXE) fell for the third week in a row, and is attempting to make a stand at its 200-day moving average.

Utilities ($UTY) fell for the third week in a row, and is flirting with its 200-day moving average.

The top 10 industry groups from the 6 month RS screen are:

What Was Important About Last Week

STOCKS:

  • International Business Machines (IBM) said its third-quarter earnings fell 2.5% with lower revenue from its personal-computer business.
  • Citigroup (C) announced its earnings increased 35% in the third quarter, boosted by the sale of its Travelers Life & Annuity and other international insurance businesses.
  • Charles Schwab (SCH) said its quarterly earnings rose above $200 million for the first time since the dot-com boom.
  • Google (GOOG) announced quarterly earnings up 7 fold as it beat expectations.
  • eBay (EBAY) disappointed in its quarterly earnings and guided lower.
  • Yahoo! (YHOO) posted better than expected earnings.

ECONOMY:

  • PPI came in at 1.9% vs. expectations of 1.2%.
  • Housing starts came in at 2,108K vs. expectations of 1,975K.
  • Leading indicators came in at -0.7% vs. expectations of -0.5%.

Key earnings releases:

  • MONDAY: j2 Global Communications (JCOM), Merck & Co., Inc. (MRK), Schering-Plough (SGP), Texas Instruments (TXN).
  • TUESDAY: Ameritrade Holding Corp. (AMTD), BellSouth Corporation (BLS), CHICAGO MERCANTILE HLDGS INC (CME), DuPont (DD), Halliburton Company (HAL), Murphy Oil Corporation (MUR), Pixelworks (PXLW), United States Steel Corp. (X).
  • WEDNESDAY: Baidu (BIDU), Biogen Idec Inc. (BIIB), ConocoPhillips (COP), Garmin Ltd. (GRMN), Jones Apparel Group Inc. (JNY), L-3 Communications Holdings (LLL), Moody’s Corporation (MCO), Newmont Mining Corporation (NEM), Pulte Homes Inc. (PHM), The Boeing Company (BA), The Nasdaq Stock Market, Inc. (NDAQ), WellPoint, Inc. (WLP).
  • THURSDAY: Apache Corporation (APA), Barrick Gold (ABX), Black & Decker Corporation (BDK), Burlington Resources, Inc. (BR), ExxonMobil Corporation (XOM), Honda Motor Co. Ltd. (HMC), ImClone Systems Incorporated (IMCL), Kendle (KNDL), Marathon Oil Corporation (MRO), Microsoft (MSFT), Olympic Steel (ZEUS), Penn National Gaming (PENN), Phelps Dodge (PD), Raytheon (RTN), Southwestern Energy (SWN), The Dow Chemical Company (DOW), Vitesse Semiconductor (VTSS), Waste Management (WMI), XM Satellite Radio (XMSR).
  • FRIDAY: Archer Daniels Midland Company (ADM), Baker Hughes Incorporated (BHI), Chevron (CVX).

On the economic front we have potential market movers with:

  • MONDAY: none
  • TUESDAY: Consumer Confidence, Existing Home Sales
  • WEDNESDAY: Crude Inventories
  • THURSDAY: Durable Orders, Initial Claims, Help-Wanted Index, New Home Sales
  • FRIDAY: Chain Deflator-Adv., Employment Cost Index, GDP-Adv., Mich Sentiment-Rev.

The Following Sections Are Now On Our Home Site:

This Week’s Word On Discipline:

“ Do not fear mistakes — there are none.” –Miles Davis

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