Market Wrap, Monday, 04/27/2009 Health Care Scare by Robert Ogilvie Click here to email Robert

HAVING TROUBLE PRINTING?

Today’s decline was spread across the major averages on what could only be assumed as initial reaction to more unknowns that could spur from the swine flu pandemic. While the media was focused on the effects the potential implications the flu could have on pharmaceutical stocks, the rest of the economic sectors found reasons to sell off and take some profits. The pre-market open for S&P futures was indicating down more than 14 points fair value on the fear of the unknowns. Investors found the on sale stock prices to be interesting enough to raise the indices into the green for about tow hours. At high noon, the indices began to steadily decline to below the early session lows. I was speaking with a colleague on how strange the shape of today’s trading appeared (see below). Steady slope up and then down with very little intra bar volatility; at least until the end of the day. But lately, the last half an hour seems to be when the daily print is established.

The The S&P 500 declined 8.72 or 1.01% which was slightly higher than its intraday low of 854.65. The NASDAQ 100 (NDX) rallied back to only close down 3.34 after being down 15 plus points. On the NYSE more than two-thirds of the stocks declined. The actual number of advancing issues was only 857 versus the 2,060 declining issues. Volume on the NYSE was subdued with only 1.4 billion shares versus the 50 day average of 1.66 billion shares. The NASDAQ Composite had 945 advancing stocks versus 1,822 declining stocks on 2.2 billion shares. Average volume on the NAZ Comp is about 2.27 billion. Today can’t be labeled as a distribution day due to the lackluster volume on a down day.

No, not calendar spreads. Although I do find various spreads to be a lot of fun to discuss, but with tomorrow being Super Tuesday we should probably focus a little on the big names scheduled to report earnings tomorrow. The following stocks are on my radar tomorrow: Pfizer (PFE), Panera Bread (PNRA), FPL Group (FPL), optionsXpress (OXPS), E*Trade (ETFC), Dreamworks (DWA), Bristol-Myers Squibb (BMY), and Fresh Del Monte (FDP). I like to watch the online brokers to see what they are doing and the trends of traders compared to my firm. Dreamworks is an indicator for the entertainment/discretionary sector as is Panera Bread. PFE and BMY help provide clarity to trends in the healthcare sectors. As always, there are a lot of companies reporting in the next few days. Therefore, I picked the stocks that I believed had the most coverage. I apologize if I didn’t list your stock symbol and it reports tomorrow. There just isn’t enough room for the hundreds of names.

Next on the discussion list is the busy economic calendar. One of the benefits of writing the wraps is that I am forced to pay attention to the economic and earnings reports as well as the rest of the news that might have affected the market’s direction for that day and possibly days to come. Otherwise, I would just trade my index options and futures or the occasional high probability EPS Implied Volatility play. When I suggest that you Keep It Simple, I practice what I preach. For instance, I prefer to trade four to five strategies and be patient until all the indicators are in alignment. Had I not written this week, I might have missed that the Federal Reserve is meeting tomorrow and Wednesday and scheduled to release their decision on rates on Wednesday. Tomorrow morning the Consumer Confidence is expected to come in at 29.9 versus last March’s 26. In addition to the Fed Decision, first quarter GDP- Adv. is expected to post a 4.9% decline versus the prior report’s 6.3% decline. The first quarter Chain Deflator is expected to increase to 1.7% from 0.5%. Since I am scheduled to write on Wednesday, I will review the rest of the week in that post.

The first chart we will review is the S&P 500 (SPX) daily charts that depicts the three long term simple moving averages. The longer term averages help provide dynamic support and resistance as well as an indication of the underlying symbol’s trend. I have drawn a line from the February highs to last week’s highs in addition to an uptrend line stemming from March lows to the higher lows from the last few days. There is a little flag pattern developing here. I recently read in another publication that seemingly bullish patterns like the one depicted below often turn into negative signals. So we will have to see if they are correct in their assessment. I read a lot of articles in order to piece together my own trading tendencies. It is important to see what others are doing and whether or not any of it may be applied to your business. Referring to the chart below, the SPX is still uptrending in price when compared to the levels a month ago. When compared to the last few weeks or the last few months, the SPX is consolidating. The ADX is now back in the green and needs to break out up through the 20 level that normally confirms an uptrend. The 50 day moving average hasn’t budged from last week when it was still at about 791. The 200 day SMA has fallen to 970 and is serving as a dynamic resistance level. When the SPX finally tests the 200 SMA, the SPX may be higher than it is now or possibly lower should there be another slide downward. Lately, the 89 day SMA has served as the support. Therefore, the next level of support is at 823.

On the chart above I drew more trend lines to depict the pinching channel. As volatility decreases, the market is basically coiling up like a spring and usually snaps in either direction. Since I wrote last week, the SPX bounced off of the 21 day Exponential Moving Average (EMA) and ran into some price resistance on Friday. Today’s low was at the 8 day EMA (purple line) and bounced up to close about 3 points higher. The Slow Stochastics bounced from its lower low and appears to be curling back over with a lower high. My RSI is a five bar indication of relative strength. With the parameters so tight, today’s decline caused it to tick lower. Therefore, the two oscillators are indicating different directional bias while the moving averages point to continued upward momentum. One might use a point system checklist to determine the net indication of all of the charts.

The NASDAQ 100 (NDX) has been in a seemingly stellar trajectory since March. While the SPX is consolidating the NDX is still making new highs. The internals posted above support this with more new 52 Week Highs than Lows. The NDX gapped lower and climbed back to nearly breakeven. Both the RSI and Slow Stochastics are near over bought territory. Another day up may place the oscillators in the overextended range. However, RSI has ticked a little lower which may indicate momentum is lessening. Support continues to be at the 8 day EMA and then the 21 day EMA. But the NDX hasn’t exactly tested that level since April 1st.

The chart below is the most interesting of the bunch. The NDX has nearly come up high enough to test the 200 day moving average at 1396. Should the NDX be unsuccessful in its quest to break above the widely followed indicator, the NDX may decline on the failure all the way to fill in the gap at 1251. The ADX is moving higher and approaching the 20 threshold. Money Flow isn’t providing any clear information to trade on. Maybe that’s just it. Don’t trade on this data until there is a reason to. I don’t know for sure, but there might be a lot of sell orders at or around the NDX’s 200 day moving average. But I wouldn’t be surprised. The next level of support is at the 50 and 89 day moving averages near the 1225 level. Perhaps the NDX will find resistance, for whatever reason, and decline to fill in the 1251 gap while the 50 and 89 day moving averages climb up higher to approximately the same levels to provide a coincidence support level. I could be wrong and see the NDX break out higher until the SPX finally finds resistance at its 200 day moving average. Time will tell which will occur. The best advice is to trade the trend until it doesn’t work anymore. Simply stated, buy at support and sell at resistance until you get stopped out. Risk management is the first priority and patience is the second.