Market Wrap, Wednesday, 04/08/2009 Thin Trading Easily Moves the Markets Up and Down and Up by Robert Ogilvie Click here to email Robert

HAVING TROUBLE PRINTING?

The futures were down heavily in the overnight markets only to be bid up on the news that Pulte Homes (PHM) will be acquiring Centex (CTX) for $10.50 per share or a premium of about 38% over Tuesday’s closing price. Other help for the bulls came in the form of news that the Treasury Department is planning to extend its bailout funds to insurers. I recall writing on this same topic about a month ago. Lincoln National (LNC) and Hartford (HIG) rallied on the news. I have noticed a lot of the same rumors being repeated over and over. Every day the government releases some data that pushes the market one way or another. For instance, the bounce off the lows was partially spurred by the announcement from a congressman (Barney Frank) that the uptick rule would soon be returned. Another announcement came within a day or so that the mark to market accounting methodology was under review. The markets rallied, and the rest is recent history. Other news came from the Federal Reserve in the form of their minutes from the March 18th meeting. The meeting indicated that committee members did not consider an uptick in February housing starts to be the beginning of a new trend. The minutes served as a reminder to investors that economic conditions remain weak and that downside risks predominate the near term, stirring midday selling pressure. The sharp decline following 2:00 PM EST on the intraday chart below was the initial reaction. The rally into the close off the morning session lows showed that traders are anticipating some positive reports out in the morning. Other news from the Federal Reserve came as they announced that its second TALF auction received $1.7 billion in requests, which is down from March’s $4.7 billion. Finally, ending on some good sentiment, Bed Bath & Beyond (BBBY) reported earnings that beat the $0.43 per share expectations by $0.12 per share. BBBY closed up $6.19 or up 24%.

The internals were mostly positive from both the NYSE and NASDAQ Composite. There were 2.5 to 1 advancing issues to declining ones on both exchanges. On the NYSE, 2,696 stocks advanced versus 989 that declined. And on the COMP 1,966 stocks advanced versus 761 decliners. The negative internals came from only 4 and 6 new 52 Week Highs on the NYSE and COMP, respectively. There were 48 and 21 new 52 New Week Lows on the NYSE and COMP, respectively. Volume was very low at 1.3 billion shares on the NYSE. The whole week has been light trading ahead of the Good Friday holiday. There is somewhat of a trend that I am noticing that occurs ahead of Easter, Christmas and New Years where volatility shrinks regardless of the direction of the market. Volatility may be shrinking in anticipation of the uptick rule coming back, but it may just be a coincidence. Normally, I sell short on low volatility and buy on high volatility. To be more specific, I prefer to sell positive delta premium when volatility is peaking and buy negative delta premium when volatility is low. Therefore, according to historical trends, except around Christian holiday’s, shorting the market is usually a higher probability trade when volatility is low like it is right now. Refer to the chart below to see the close of the $VIX held its recent low (as identified by the blue horizontal line) but is now below its 200 day moving average. A failure to hold above these levels may indicate further weakness in volatility and possibly returned strength in the markets.

The chart just below is just a reference of the reports scheduled for tomorrow morning. As mentioned on Monday, the Initial Claims poses the most risk to the markets since most traders are closely watching the labor market. The Import and Export prices along with the Trade Budget should provide some guidance on the trend of capital inflows versus the U.S.’s tendency to spend more than it makes.

Except for Chevron (CVX), Christopher & Banks (CBK) and Pep Boys (PEP), I haven’t followed the rest of the stocks reporting tomorrow. Earnings will continue to be the hot story next week as a lot more widely followed companies report their quarterly earnings. While Alcoa reported negative results, the market was able to shake it off and rally anyway. But this week is a little strange in that the volume is so low and it is being pushed around more than normal.

I am going begin tonight’s index coverage as I always do, with the S&P 500 (SPX). However, the difference is that instead of looking at daily chart; let’s first see where the SPX is on a Weekly time interval. The first thing to notice is that the 8 week Exponential Moving Average (EMA) is still below the 21 week EMA. Therefore, if we are trading on a longer term perspective, then the tendency is to only trade short (bearish) set ups. A test of the 21 week EMA like the one last week would have been a great selling opportunity. Once the price declines to the 8 week EMA, we can peel off some of the short position. Re-emergence trade setups work on a weekly chart as well. Look at the oversold indications from the RSI and Slow Stochastics just five weeks ago. As for risk management on the short trade, a close above the 21 week EMA would serve as the initial reason to close out the trade until further confirmation. The reason to point out the longer term time horizon is to point out that the longer term can help determine the overall tendencies (bias) of the market’s direction for shorter term setups. A long trade setup may work better if both the short term chart and a longer term chart both suggest positive bias.

With the weekly chart indicating it is near resistance and remains in a bearish trading bias, the chart of the daily SPX just below poses a different story in that it is on a positive uptrend as indicated by the 8 day EMA trending above the 21 day EMA. As with the $VIX, the Bollinger bands are indicating volatility compressing. Usually, the security springs in one direction following a squeeze in the volatility. The trick is determining which way it will go. The RSI has ticked up on today’s close up. But the higher high in the SPX was done with a lower high on the RSI. The Stochastics is declining toward oversold territory which almost translates into a predestined occurrence. There is still a gap at 813 that needs to be filled in whether it does it this week or some time next week. Then there is the 802 support level from the 21 day EMA that appears to be in range of getting tested. The cash settled S&P 500 doesn’t show the bounce off the 21 day EMA like the S&P Futures do. The futures actually sold off to a low of 802.25 last night. We may get a move higher tomorrow morning as those that might sell into strength are already on their vacation.

The NASDAQ 100 (NDX) is the next index to discuss. The weekly chart shown below indicates that the market is still trying to climb back up toward better market levels. However, the NDX closed above the double tops as indicated by the horizontal blue line. The next major resistance level from the weekly chart is near 1390. The 50 week average (1513) then serves as the next barrier for the NDX to reach for.

There is still a huge gap at 1250 on the NDX chart that is calling out to be filled in. Yesterday’s low and the early indication of the futures had this accomplished if they would have held. For me, I don’t like taking long positions with a huge hole in demand at lower levels. It then comes down to being patient and anticipating the move into the gap before re analyzing the playing field. It may seem like an easy trade to place a conditional buy trade order at the gap high. But the picture of the trend may change by the time the NDX accomplishes this task. It should be noted that one can still trade shorter term setups with the overall daily uptrend. But keep in mind that once the uptrending NDX’s picture changes, you must also change your directional bias. Swimming upstream is more difficult than with the tide. The RSI and the Slow Stochastics disagree in sentiment. The RSI still shows an upside tendency while the Stochastics suggests a selloff or continued weakness in the next few days.

The gold chart below shows that the commodities price successfully tested the 200 day moving average and bounced up. However, gold declined 11 points from its intraday high of 892 to close at 871. As the chart illustrates, gold futures attempted to stay above the 89 day moving average but failed to so. Now it appears as though the 200 day moving average will come into play again. A failure to hold this level might end up having the commodity trend down another $60 per ounce to the $800 level. However, a break and close above the 89 day moving average may confirm a move higher in the near term.

Finally, we look at Crude Oil and see that the commodity price declined in early trade down to a low of $47.37 a barrel. Once the inventories came out, oil rallied up to a $51.30 high before closing the day at $50.10. Crude oil prices pared their losses after the weekly inventory reports reflected a build of 1.65 million barrels versus an expected build of roughly 1.5 million barrels. While oil was able to close above its 21 day EMA, the 8 day EMA is very close to crossing below it. Oil is looking weak since its recent high Monday failed to break above the late March highs. Today’s low could hold the recent lows from 4/1/09. Therefore, the sentiment is for continued weakness if oil can’t close above the 8 day EMA tomorrow. Have a nice long weekend.