Market Wrap, Monday, 04/06/2009 Late day strength in markets does't translate to internals by Robert Ogilvie Click here to email Robert

HAVING TROUBLE PRINTING?

Much of today’s session was marked in the red stemming from some various stories that culminated into a reason for buyers to take a break and sellers to take some profits. Even though the markets closed down they came up quite a bit from their mid afternoon lows. The NASDAQ 100 (NDX) rocketed up 27 points from its lows to close down only 3.06 at 1313.10. The S&P500 (SPX) regained 13 of its minus 20 points to close down 7.02 lower at 835.48. Part of the negative sentiment came from a report that the Wall Street Journal broke regarding Sun Microsystems’ (JAVA) merger talks with IBM could be coming undone. Shares of SUNW fell $1.93 to 6.56 per share on the report. The beginning of the day decline was due mostly from the financial and commodity sectors. Crude Oil declined to an intraday low of $49.81 before rallying into the close. Crude declined $1.46 to $51.05 per barrel. Much of the financials weakness is regarding ongoing pessimism about the fundamentals of the banking system and major banks. Richard Bove, a highly regarded securities analyst, chose Bank of America (BAC) to separate from its peers by giving the company's stock a Buy rating. Even though the BAC shares had the positive statement from Bove's rating, the stock declined $0.14 to close at $7.48. However, BAC held up better than other diversified financial services companies (-4.2%) and diversified banks (-6.7%). In overseas markets, the Nikkei closed up 1.2% or 108.10 points to 8.857.93 and the Hang Seng closed up 3.1% to 14,998.04. After being slightly up ahead of the U.S. Stock Exchanges open, the major European indices closed down most likely due to the U.S. market’s negative sentiment while they were still open. By the close, roughly 11:30 AM EST, the German DAX closed down 35.18 points to 4,349.81, the French CAC 40 closed 0.98% to 2,929.75 and the British FTSE closed down 36.13 points (0.90%) to 3,993.54.

Today’s market internals indicate that there were more than 2 to 1 decliners on the NYSE. However, this was done on less than stellar volume which came in at 1.3 billion shares, less than the 50 day average volume of 1.6 billion. The NYSE fell 1.29% to 5.249.48. There were no new 52 Week Highs and only 3 new 52 Week Lows. The NASDAQ Composite had about 2.5 to 1 declining stocks on 2.04 billion shares. The 50 day average volume for the COMP is 2.24 billion. There were 14 new 52 Week Highs and 6 new 52 Week Lows. With the rally back to only close down 15 points rather than the nearly 42 point loss at its low, the decline wasn’t marked as a distribution day because the volume was lower than Friday and lower than the 50 day average. The same is true on the NYSE.

With a holiday shortened week due to good Friday and most of the important economic headlines behind us from last Thursday and Friday, there aren’t a lot of major reports coming out this week. All of the reports are coming out on Wednesday and Thursday. Therefore, I don’t expect much to happen tomorrow. But Wednesday’s Wholesale Inventories may provide some added momentum if it hits or beats the expected 0.6% decline. The market has been celebrating meeting or beating reduced expectations lately. On Thursday, this week’s Friday, Import and Export prices help to provide transparency into the ability to pass on our stuff relative to how much we are paying for stuff to come into the country. The most watched item seems to be anything to do with employment. These are tough times for many. The numbers are often miscalculated or misunderstood because it doesn’t calculate people that don’t qualify for unemployment or those that don’t register for it.

Earnings season is upon us once again. Most of the major stocks report their quarterly earnings in the following three weeks. Tomorrow marks the first of the major industrials to report with Alcoa (AA) reporting after the close. There isn’t much great to expect here as the stock has had a difficult time in the last year. Two home improvement and consumer discretionary stocks report tomorrow. Pier 1 Imports (PIR) reports in the pre-market while Bed Bath and Beyond (BBBY) reports after the close. Most likely, anything that PIR states in their report will affect the price of BBBY during the day. Therefore, if the stock declines on the news, perhaps much of the weakness may be priced in. However, I don’t know what PIR will report and if the stock will decline or rally. Last quarter, many of the companies fully disclosed everything that could provide forward risk and therefore may report better than expected results. Of course this is just my own observation. Mosaic, one of our Option Writer positions, reports tomorrow. The time is not supplied. However, its peer, Monsanto (MON), reported in the morning last week. We have the April 35 puts and the April 60 calls sold already. I decided to keep the position leaned slightly positive and not change or add any additional risk.

Regarding the RIMM position from last Wednesday’s Market Wrap, as always the best way to trade EPS Implied Volatility is to wait until the close so as not to take on additional delta risk throughout the day ahead of the actual report. The trade I tried to send out on the Option Writer entailed selling the 60 Calls and the 40 Puts for a total credit of $1.45 on 2 contracts. This gave the stock $11 to the upside and $9 to the downside. Once in a while, the underlying moves outside of the normal gap range, which happens to be 10% above or below the close. Unfortunately, RIMM gapped up to open at $60.51 before closing at $59.29. The good news is that the trade alert didn’t get sent out in time. Otherwise, one would have lost about $360 on two contracts. I wanted to review this trade in order to go over the one that didn’t work. All too often, traders only like to discuss what works. There have been many times in my trading life that the trade didn’t work out. What is important is figuring out what, who and how the trade went wrong and then learn from it. We don’t seem to learn from successes. We tend to learn from the losses and the mistakes. Hopefully I can tell you about my own education and help you learn more efficiently (less costly).

Most of the time, it is the charts that tell the story behind the words we read on from our news prompters. The common thing to do following a sudden price move is to check the news to see why the security or commodity made the move. Rather than react and trade the volatility, we look for delayed news to tell us why as we look for that confirmation before stepping into a position. By the time we get our confirmation from the news, the move has most likely exhausted itself. Mind you I am referring to small time intervals within the trading day. The answer is to follow few companies and know them well. That way when the stock declines, you know its historical tendencies of how it reacts to various news surrounding the sector and individual company.

,/p>

The S&P 500, as mentioned earlier, had a nice rebound from its lows that had the index down nearly 20 points. After posting an intra-day low of 822.79, the SPX rallied to close down only 7 points to 835.48. The decline was on greater declining stocks, but there was lower volume. So the bulls can still run in the streets until the new uptrend line is broken. There is a price gap that is calling out to the market to fill at 813. The upside target remains intact. To review, the upside drawn horizontal blue line is at the 875 double top resistances from late January and early February. There are two uptrend lines drawn. The first one to discuss is that of the one drawn from the March 10th low all the way to the March 27th low. The trajectory of this trend was almost stellar and all rockets eventually fall to earth. On March 31st, the SPX gapped down below this uptrend line and ended the flight. But the SPX managed to post a 22% advance from the March lows and mark a new technical bull market. The second uptrend line is drawn from the March lows to the April 1st low. So far, the SPX has remained above this line. A decline to it in the next day or so would coincide with a retracement to fill in the gap mentioned above. The uptrend as indicated by the 8 and 21 day Exponential Moving Averages (dEMA) is still intact. In fact, the curious thing here is how the SPX declined to the 8 dEMA (purple) and bounced off it today. The first buy signal was when the SPX declined to the 21 dEMA (green line) on March 30th and then closed slightly higher but still down on the day. That is where the lower blue line is drawn from. One trading the exponential strategy would have stayed long and may have been prompted to sell a portion of their shares on Friday when the RSI and Slow Stochastics indicated overbought. The RSI generally indicates the security is overbought when the indicator breaches above 70 and oversold when it declines below 30. The Slow Stochastics follows similar patterns but is overbought above 80 and oversold below 20. A trader may have then been in the position to add back the closed long position on the test of the 8 dEMA on today’s decline.

The chart above differs in that the moving averages are simple calculations rather than exponential. I use the 50, 89 and 200 day moving averages to depict major trends and the levels at which popular belief suggests that institutions trade. Experience has shown that the resistance and support found at the 50 and 200 period moving average has some significance. However, these parameters are not the only answer. That is why it is prudent to utilize other tools at our disposal. For instance, I prefer to use Fibonacci levels on top of moving averages and trend lines where some of my colleagues use Elliot Waves to hypothesize price levels and targets.

Our Fibonacci extension correlates to the 875 resistance levels. In addition, there is support at the (31.2%) 770 level should the SPX begin to retrace. But I would be surprised to see the SPX drop much below the 50 day moving average of 790 as it is now beginning to curve upward ever so slightly. The 200 day is quickly declining and soon may be relevant. The Money Flow Index is providing some gloom to the bullish picture of the other charts. It is declining after hitting 80, traditionally the overbought level, in late March. Finally, our ADX indicator has yet to signal anything of importance. We await its increase from below the 20 level. An increasing ADX that is also above 20 generally indicates a trend.

The NASDAQ 100 (NDX) has been on fire lately. With stocks like Apple (AAPL) and Research in Motion (RIMM) rallying, the NDX finds a lot of strength while the SPX shows some weakness. The NDX, however, appears to be reaching for new highs and consequently finding it harder to climb. There is a gap at 1251 that is calling out to be filled in. I can’t tell you what the news will be to pull the market into this hole, but, in my opinion, the NDX should sell off. If you wait for the news to tell you why it will, it will most likely be too late. If you know the reason, then please share it. Obviously, on reason is that the upper Bollinger band is curling over which indicates decreasing volatility and a potential consolidation following the rapid advance. Also an indication are the oscillators both becoming overbought. However, the uptrend, as indicated by the 8 and 21 dEMAs, is still strong. The first sign that this run is ending may either be a re-emergence of the RSI and Slow Stochastics out of the overbought territory. Or the NDX closing below the 8 dEMA may indicate a retest of the 21 dEMA and which would fill in the gap.

All the daily overbought picture aside, the NDX sold off intraday and consolidated until finding some legs to break back above the 15 minute 50 bar moving average. The ADX also found some reason to get on the uptrend and began to advance. The NDX eventually filled in the open gap down and closed only 3 points lower. Even with the negative news from Sun Microsystems, the technology stocks pulled the market along today.

Gold fell nearly over $27 to a low of 866.6 before closing down $23 today to settle at $870.60 per ounce. The low correlates to the previous breakout that occurred in January. As mentioned in previous wraps, the 200 day moving average, which is now at $863, is still the target level to place a partial long position. We only want to drip into a position in case the bottom falls out and gold continues to decline to its January 15th low near $800 per ounce. Basically, we don’t want to get overexposed and buy into an aggressive decline. If we are wrong, we only want to be a little wrong. A break or close below the 200 day moving average would be a good reason to close out the position.

As previously mentioned, some of the decline today can be attributed to the energy sector’s response to Crude Oil’s nearly 4% decline. Oil fell to about $50 per barrel in the regular pit trading session, but then advanced up to $51.26 at the time of writing this article. It appears that the buying that came into the market at the end of the day also went into oil. The chart below shows the intraday action on a 15 minute chart. Right at 2:00 PM EST oil ran up. Today’s decline follows a failed attempt to break back above the late March highs near $55 per barrel. But a consolidation in crude may be necessary following the advance from $33.55 (a 61% increase) just two months ago. So we will wait to see if oil finds some support or if it falls through the April 1st low of $47.50. Have a nice couple of days.