Market Wrap, Monday, 04/20/2009 Keeping it Simple by Robert Ogilvie Click here to email Robert

HAVING TROUBLE PRINTING?

Today’s sell off was partly spurred on by Bank of America’s report that its first quarter credit loss provisions totaled $13.4 billion, up almost $5 billion from the fourth quarter. Even though Bank of America actually generated a pretax, pre-provision income of $19 billion that exceeded expectations, the stock fell $2.58 to $8.02 per share. Today’s decline follows six consecutive up weeks in the broader markets. The financial sector finished the session 11.9% lower on wide spread weakness.

Crude oil futures also faced selling pressure as a strong dollar continued to lower demand forecasts for energy commodities due to the recession and the near 19-year high inventory levels. The May Crude oil futures contracts finished 8.8% lower at $48.90 per barrel. Precious metals were one of the few sectors that glimmered in today’s session. For instance, June gold futures rallied throughout the session to close up 2.3$ or at $887.50 per ounce.

In other corporate news, Sun Microsystems (JAVA) gained $2.46 to close at $9.15 after Oracle (ORCL) announced it will acquire the company for $9.50 per share. The premium ORCL is paying is more than 40% above JAVA's closing price last week. The announcement comes after talks between IBM and Sun Microsystems faltered. IBM stated it has no intention to return to discussions with Sun Microsystems, according to reports.

The NYSE internals showed a widespread sell off in the markets in that there were only 220 advancing stocks versus 2,747 declining stocks. That translates to 93% decliners. The NYSE fell 260.24 points today or 4.75% to 5,220.12 on volume of 1.76 billion, which was less than Friday’s but still above the 50 day average of 1.64 billion. There wasn’t a lot to learn from the New 52 Week Highs/Lows today. The ARMs index, also referred to the $TRIN, closed at 2.20. Usually, closes above 2.0 are followed by an initial bounce higher. This is commonly believed since the level of selling pressure to reach 2.0 or greater is so great that the markets tend to follow the weakness with a short term relief rally, even though it may only last a few hours. The NASDAQ Composite fell 64.86 points or 3.88% on 3.2 billion shares in today’s regular session. The volume spiked well above the 50 day average of 2.28 billion and above the highs not seen since November. The decliners were a little more subdued on the COMP than the NYSE. There were 454 advancing issues versus 2,320 decliners. On the NASDAQ 100, there were only 3 advancing stocks, which included JAVA, AMLN and Network Appliances (NTAP).

Following the last few weeks, this week is a slow economic report week in comparison. Most of the data is due out on Thursday and Friday. On Thursday, Initial unemployment claims for April 18th are expected at 630 thousand versus the previous week’s 610 thousand. Then, at 10:00 AM the same morning, expect the existing home sales data. The market expects the March report to show an annualized 4.65 million versus 4.72 million the month before. On Friday, Durable orders are expected to decline 1.5% from the prior report’s 5.1% increase. Durable Orders ex-Auto are expected to decline 1.2% from the prior report’s 3.9% advance. Finally, new home sales close out the week with an expected 340 thousand versus 337 thousand last reported. Crude inventories may provide some added volatility to crude oil contracts. The April contract expired today which seems to cause a lot of price fluctuation as hedgers and speculators roll out their contracts. Recently, the new front month has lost a lot of its basis on the expiration versus the farther out expirations.

Suffice it to say, tomorrow is going to be a crazy pre-market. As mentioned above, not because there are important economic reports due but for the number of large market influential companies reporting their quarterly earnings. To start with, Dow Components Caterpillar (CAT), DuPont (DD), Merck (MRK), Coca-Cola (KO) and United Technologies (UTX) are all scheduled to report earnings. One could blame today’s sell off partly on the pricing in of disappointing earnings. One could also blame today on the fact that the market had risen over 200 points from its March 6th low. Other influential stocks from the health care sector include: United Healthcare (UNH), Forest Laboratories (FCX), Gilead Sciences (GILD) and Schering-Plough (SGP). Technology will be well represented with Advanced Micro (AMD), Cree Inc. (CREE), Broadcom (BRCM) and Sandisk (SNDK) reporting as well. Most of the companies that I listed are well represented and deserve some attention. However, there are many stocks that I didn’t list because they were either foreign or didn’t ring a bell as a company I ever followed. And I have traded a lot of names in the past.

Covering the indices are the most enjoyable part of writing for me. I know it isn’t all about what I like, but it is important to enjoy what ever you do. Furthermore, it is also very important to determine your trading style. How does one do this? First of all, don’t be reactive to what the market is doing. Try to research the trends of the business of investing as well as the trends within the market or sector you prefer to trade. I have mentioned that it is helpful to trade an instrument that you can relate to or find interesting enough to devote the majority of your time to. It is also important to understand what it is you are trading. Be it an ETF, a stock, a futures contract or an option strategy. In addition to exuding confidence to your spouse or peers, it is important to understand why you trade. For instance, is it to benefit from shorter term frequency patterns, trend and momentum setups or excessive option volatility premium? The answer doesn’t have to be one of these but there should be at least one reason you trade rather than hand over your hard earned cash to some “professional.” Most people choose to trade for themselves in attempt to outperform the market and their adviser they used to have. I will admit, there are probably some of you that have better returns than me and the rest of the writers. But we all want to be as good as possible and therefore need to constantly educate one self. Obviously, reading the various OptionInvestor newsletters is a great start. My advice is to find a strategy that fits you and you only. We all have a friend or college that is doing something different that might even be outperforming us. But is their strategy a good fit for you? The question to ask yourself is whether or not your strategy or theirs provides too much risk for the potential return. Another important question is whether or not your strategy provides enough added return to your portfolio for the added amount of time spent away from the most important things in life: your family, friends, religion, hobbies, etc. Trading is fun. Trading is addictive. The best thing to do as a trader is to keep it simple silly (KISS).

The S&P 500 (SPX) fell more than 37 points to close the day at 832.39 after topping 875 last Friday. If you pay attention to my missives, you would know that I had been pointing to the 875 area as the resistance for over two weeks. For review, the 875 area has been the resistance from both January and February and now from April unless the SPX can break out to the upside. The direction of the market is dependent upon the reaction to the earnings due in the nest week or two. It is still very possible to see the SPX decline to 790 or even lower if the reality of the true financial sector earnings. I have drawn three horizontal lines on the chart above. One is at the resistance (875) and the others are at the small gap found at 813.62 and then the low from March 30th at 780. I have also drawn an oval around today’s close to draw attention to the proximity of the 21 day exponential moving average (EMA). We still want to take a long trade at a test of this moving average. Stop losses are best at a close below the21 day EMA or if too great of a loss, the first confirmed breach of the 21 day EMA. The Slow Stochastic and RSI are both indicating weakness in the momentum. In fact, they suggest to me that there is further weakness ahead. The reason is found in that the RSI is lower today than it was on the March 30th low. Slow Stochastics is a little lower than last week’s dip. Even though the VIX spiked up over 5 points, the Bollinger bands are squeezing together which indicates that volatility is subsiding. Once the bands expand, the tendency is for one to expect a volatile move in either direction.

The above chart is a daily chart of the SPX as well. It shows the longer term moving averages that many institutions and professional money managers use to determine trends and support from. They are the 50, 89 and 200 day moving averages. The grey line at 980 is the 200 day moving average. The pink line, which is currently hidden by the 23.6% Fibonacci retracement level, is the 89 day moving average. Then there is the blue line, which is the commonly referred to 50 day moving average. The 50 day moving average is at 791 while the 89 day moving average is at 825 which was approximately where the SPX closed at today. The SPX did close at the 23.6% Fibonacci retracement level. A bounce from here is usually prevalent in an uptrending market. Where a failure to hold this or the more commonly followed 38% retracement level suggests that there is further weakness. The 38% retracement level is at 795 which is pretty close to the 50 day moving average. It wouldn’t surprise me to see the SPX fall to these levels in the short term and then, assuming no new negative sentiment or news, bounce up to the 200 day moving average which should be at about 950 by then. Finally, the 50% retracement is around the 980 level which coincides with the March 30th low. I usually watch the markets closely this time of year to determine whether or not the go away in May tendencies are accurate. The ADX in the daily chart above is not showing any signs of trend indication. The whole advance from the March lows was done on a declining ADX.

The NDX deserves some attention tonight in order to identify the resistance levels and support levels. The 200 day moving average is at 1408. Because of today’s lower open, there is a gap that is now required to be filled at 1339. The 50 and 89 day moving averages continue to track close to one another and stand near 1213. The 50% retracement level is consequently just below these two moving averages. Perhaps there is some relevance to this level. Only time will tell. For the short term, the NDX is still in a nice uptrend but there is some possibility for the NDX to drop to its 23% retracement at 1286. As with the SPX, the ADX has yet to determine or confirm that a trend exists. We will have to see if the ADX begins to advance above 20 and then see the direction of the market.

The horizontal blue line above the close show the recent resistance found at 1362. As mentioned above, there is new found demand to fill in above the market at Friday’s close. The support at the lower horizontal line at 1251 still exists from the April 1st close. Since the NDX has yet to close in on the 21 day EMA, there is still no reason to add to an existing long position. This is in reference to our KISS momentum strategy that I constantly reference. We should cover on a close below the 8 day EMA like we saw today. We also close out a part of the position when the security becomes overbought as it did on Friday’s close. That means we would have had only two thirds of a long going into today and one third at the close. Since the open was below the 8 day EMA, one might be prudent to close out that portion and add it back if the security closes back above the 8 day EMA. That usually indicates that the security was perceived weak initially and for some reason thing improved. Rather than get hung up on closing out at a lower price and having to buy back, just drop the attitude and get back on the horse. The market doesn’t care if you missed a trade or had to buy back at a higher price. In fact, it prefers that you get upset and all emotional about the trade. Then you aren’t trading with reason you are trading with emotion. There are three ways to lose money in the market, hope, fear and greed. What do all of these have in common? Yes, they are all emotions. Trade like a robot by being systematic in your trading business. That way if your system is flawed, you only need to adjust your system and not your attitude. I know some of you might think this is harsh, but it is important. It is your money and I want you to be successful. Back to the NDX chart above, the Stochastics and RSI are indicating further weakness is coming and the 21 day EMA should come into play soon. That is about 30 points lower. The RSI’s decline is sharper than the flatter Slow Stochastics and suggests a sharp decline from downside weakness. The Slow Stochastics is almost below its three bar moving average (green line). A cross below this line confirms the weakness in the underlying security. I will be writing again on Wednesday and will therefore be able to see what happens. Charts provide keys to the future from the lessons learned from the hindsight observances of each securities price and pattern tendencies.