Market Wrap, Wednesday, 04/15/2009 Buying into the Close Ahead of the Earnings News by Robert Ogilvie Click here to email Robert

HAVING TROUBLE PRINTING?

As mentioned in previous missives, the market moves will mostly be from the Earnings reports this and next week. Last night Intel Corp. (INTC) announced their earnings and immediately caused the S&P and NAZ futures to drop. It wasn’t because the earnings were at all bad, in fact first quarter earnings were $0.11 per share, which beat the consensus estimate of $0.03 per share. The after hours and early indication for today’s pre-market was most likely because the report indicated that the second quarter would show no improvement from the first quarter. In addition, INTC stated that a bottom in the personal computer market has been reached and that they believe the worst is now behind them from an inventory correction and demand perspective. By the open of today’s regular session, the NAZ futures were down 15 points. This caused the cash indices to gap down at the open. The S&P quickly filled in the gap down and then ran back to test its new support before running to hit a recent low before advancing steadily higher (see chart below). The horizontal lines indicate where the late day bounce into the close left some gaps to the downside. I have noticed that when the futures are down significantly in the overnight session, they seem to recover to break even or better by the next morning’s economic reports. It will be interesting to see what the futures do over night ahead of the reports tomorrow.

Today’s reports included the CPI or Consumer prices for March and the April Empire State Manufacturing Index. The CPI showed that prices contracted 0.1% versus the expected 0.1% increase and down from the 0.4% increase. Core consumer prices increased 0.2% month over month versus the expected 0.1% increase. The Empire State Manufacturing Index came in at minus 14.7, which is an improvement from the prior reading of minus 38.2 and better than the minus 35 expectation. As for the rest of the week, we are expecting building and housing permits, Initial Claims, and the Philly Fed for April tomorrow. Michigan Sentiment is the lonely report for Friday. April options expire on Friday for all equity and most Index and Futures options. The SPX and NDX options expire on Thursday and settle on Friday’s open settlement price. There is usually a lot of added volatility on options expiration week as hedgers and traders roll out their positions to other expiration months.

The earnings releases are increasing and including more widely followed companies. For instance, Google reports their earnings tomorrow after the close. GOOG has been a long time EPS Implied Volatility position for me because there is a lot of premium built into the options that almost always seem to expire the following day. GOOG’s April options have an implied volatility of 122% versus May’s 56%. The stock closed the day today at $359.50. The April 320 Puts are about $1.10 while the April 440 Calls are trading at $1.15. Both options are about $40 away from the current price, which is greater than 10% from today’s close. The main issue with entering this trade is that the initial margin is $3,900 per contract for a max gain of $225 per contract. JP Morgan (JPM) also reports earnings tomorrow. The financials provided a lot of the strength today perhaps pricing in some good results from the investment bank and government go to for emergency company takeovers. Goldman Sachs rebounded somewhat from yesterday’s $15 point decline that resulted from their premature earnings release. The healthcare sector has a few companies reporting tomorrow. They include Baxter International, Amylin Pharmacueticals, Intuitive Surgical and Biogen Idec.

Starting with the weaker of the two, the Nasdaq 100 fell $5.80 to 1316.51 on the negative sentiment from Intel and InfoSys. Out of the 100 stocks, 53 of them declined which possessed three quarters of the volume. While it closed down, it managed to close just shy of its intr-day high of 1317.93. The low was about 21 points lower at 1295.1. The NASDAQ Composite had 1,728 advancing issues versus 1,019 declining issues on 2.06 billion shares which was less that the 50 day average of 2.2 billion shares. The Comp had 7 new highs and 14 new 52 Week lows.

The above chart shows the 50, 89 and 200 day moving averages (blue, purple and grey, respectively) as well as the 14 bar ADX and the 14 bar Money Flow Index. I have drawn two horizontal lines to depict the current price resistance and support. The resistance is at 1345 from the recent high last Friday and then at 1415 from the 200 DMA. The support is found at 1255 from the gap up on April 1st. The next level is shared by the 50 and 89 day moving averages at about 1207. The ADX had signaled that an uptrend was being established until today when the ADX indicator ticked back down. Confirmation of a trend is indicated by two steps, first the ADX has to begin advancing and second the ADX needs to move up past the 20 threshold. The Money Flow Index isn’t helping us provide any directional guidance. Usually, overbought indications occur when the index breaks above 80 while oversold indications occur when the indicator declines below 20.

The chart above is included tonight to show that today the NDX filled in the recent gap up from last Friday’s strong open. The trend is still up, but with the NDX closing at the 8 day exponential moving average (EMA), some downside pressure for whatever reason could bring the index to the 21 day EMA. Normally, we like to peel off some of our position (that means to scale out a portion of the overall position) when either the security becomes overbought and/or when the security closes below the 8 day EMA. We can add back to the full position on the next test of the 21 day EMA. If the security closes below the index, we close out the entire position until the security can confirm it isn’t entering into a new trading bias scenario. If you peel off in thirds, you should have one third of the original allocation. I realize there is a lot more to consider when describing a strategy. The point I am trying to make is that a simple strategy can be implemented and traded as one’s business without getting too complicated. I think anyone can learn a strategy. The question is what the best strategy fit is for the individual. It is a good thing that there seems to be an infinite combination of techniques for the vast number of market participants. Both RSI and Slow Stochastics are indicating that the upside momentum is diminishing. If RSI breaks below the recent lows, we should see a strong sell off that may actually fill in that April gap I mentioned earlier. Because I am a gap trading believer, I have to believe that it will eventually occur, I just don’t know when or why.

The S&P 500 had the opposite type of day than the NDX. It closed up 10.56 to 852.06 on some late day strength led mostly by the financials. The financials finished the day with a 5.6% gain led mostly by JPM (up 1.86 to $32.56) ahead of their earnings tomorrow. As for the Big Board (NYSE), there were 2,158 advancing issues and 828 declining issues on less than average volume of 1.4 billion shares. The NYSE (NYA) gained 83.47 points with 2 new highs and 3 new 52 Week Lows. Therefore, the internals were good if you are bullish.

The above chart depicts the daily SPX chart with the Bollinger bands and the oscillators. I have also drawn some trend lines on the chart to show where the SPX has broken downtrend lines and found resistance at uptrend lines. The SPX has been riding down the previous downtrend line drawn from the January highs to the early April high with lower lows over the last two days. But the target is actually to the upside as indicated by the January to February trend line cross the uptrend line at approximately the upper Bollinger band. The RSI is indicates upward momentum because the lows are higher each time the SPX dips. However, the Slow Stochastics is almost indicating weakness as the Stochastics line (purple) bears down on its 3 bar moving average (green line). Another point for the support and upside move, as small as it might be, is the bounce higher from just below the 8 day EMA. An aggressive and active trader may add back into their position at the 8 day EMA rather than waiting until the 21 day EMA. A close below the 8 day EMA will be our first alert that some market weakness is coming.

The SPX had a nice bounce from being down about seven points. However, the ADX has slipped back into the red which doesn’t allow the indicator provide an uptrend signal. There is support firming at the 89 day moving average (pink line) which is found at 826 and then lower at the 50 day moving average at 790. As I have written before, the upside resistance at 875 from February is acting like a magnet for the SPX. Sell offs in the markets are met with a lot of support while rallies seem to run. The fast of the three slower moving averages are beginning to flatten out their decent while the 200 day moving average is still heading south as if it needs to catch up with the market. At least the market is being kind enough to wait. It does appear as though the momentum is slowing and a retest of these well regarded long term moving averages.