Market Wrap, Wednesday, 04/29/2009 Broader Markets Advance Nicely on Seemingly Negative News by Robert Ogilvie Click here to email Robert

HAVING TROUBLE PRINTING?

The Index Futures were bid up substantially in the pre-market ahead of the GDP numbers due out at 8:30 AM. The quick recap of the numbers had them estimated at an annualized 4.7% decline from the prior quarter as business components were expected to create resistance. The actual reading was a decline of 6.1% or 1.4% worse than expected on personal consumption decreasing 4.3% from the prior quarter’s 2.2% decline. Core personal consumption expenditures climbed 1.5% after increasing 0.9% in the fourth quarter. Core PCE was expected to increase just 1.3%. Stock futures continue to sport a strong lead over fair value. Normally, this type of report would have taken all of the wind out of the sails in the pre-market. However, the futures actually climbed as investors and traders focused on the next report at hand, the Federal Reserve’s FOMC rate decision. Also helping the markets were reports from Britain regarding an upgrade for Barclays (BSC) by HSBC. Allianz (AZ) found some legs from a Dow Jones report that stated that the company expects to break even in the first quarter. A report from Bloomberg stated that at least six of the nineteen largest U.S. banks may require additional capital also failed to discourage investors as bank stocks opened with strength.

By 2:00 PM Eastern, the markets were all showing solid gains ahead of the FOMC rate decision. In the FOMC announcement, the Fed said that household spending has seen signs of stabilization, but will continue to be pressured by job losses, decreased housing wealth and tight credit conditions. The committee expects continued weak economic activity, but feels its policy actions combined with fiscal stimulus should help contribute to a gradual resumption of sustained economic growth. In addition, the poor economic environment in the U.S. and overseas led the FOMC to believe that inflation will remain subdued, with a risk of persistent inflation at levels below those that promote economic and price stability. The vote to leave the fed funds rate unchanged was unanimous. After some initial volatility the SPX and NDX ran up to their intraday highs by 2:30 PM and quickly fell back to their pre-announcement levels by 3:00 PM. Before the day was over, the NDX had fallen to nearly its open price level of 1375 while the SPX had fallen to about 868 or its 10:00 AM breakout level. All in all it was another volatile FOMC day that didn’t disappoint.

While the SPX and Dow Jones climbed roughly 2.1% on the day, the Ten Year Treasury Note (TNX) climbed up 9.4 Basis Points (BPs) to a yield of 3.096%. This marks a new breakout high above the two previous attempts in February and March. There is a little resistance at 3.2% from the 200 day moving average and the fact that 3.2% was the low range of the Ten Year for a while until the Fed and Treasury became buyers of their own bonds. The trend in rates appears to be up for the short run but there is a possibility to see some buying of bonds should the equity markets become less desirable.

The market internals showed widespread strength as mentioned above. The NYSE (NYA) climbed 2.72% on 1.47 billion shares. That level of volume, however, is 200 million shares less than the 50 day average volume. The exchange had 2,512 advancing stocks versus 450 decliners or an 85% win/loss ratio. New 52 week Highs outpaced New 52 week Lows with 8 to 1. The NASDAQ Composite almost fared as well with a 2.28% advance on 2.4 billion shares which was slightly above the 50 day average of 2.28 billion shares. 2,125 stocks advanced and 633 stocks declined on the NASDAQ Composite for a 77% to 23% advance decline ratio. There were 34 New 52 week Highs and 11 New 52 week Lows. While the NASDAQ Composite had a accumulation day, the NYSE was unable to post one as well because of a lack of volume.

As I mentioned in Monday’s Market Wrap, I will cover the last two days of economic reports for the week in today’s wrap because there were so many other reports between Tuesday and Wednesday. There are a few higher profile economic reports due out tomorrow morning. One, for instance, is the Initial Unemployment Claims that is expected to show five thousand more lost jobs from last week’s report. Also due at 8:30 are Personal Income and Spending. Both are expected to show slight declines from March. The employment cost index for the first quarter is expected to increase 0.5%. Finally, at about 9:45 AM the Chicago PMI (Purchasing Managers Index) for April is due out and expected to be 34 versus March’s 31.4. Friday has the ISM Index, the Michigan Sentiment and the March Factory Orders. As I mentioned in the opening section, the GDP report missed and the market shrugged it off. I don’t believe the market will continue to do post gains on negative news for a long time.

I counted the earnings releases scheduled for tomorrow and found that there were over 600 domestic and foreign stocks reporting. I took it upon myself to post the 50 most recognizable stocks. Dow components Exxon Mobil (XOM) and Proctor & Gamble Company (PG) are reporting tomorrow. Some consumer related stocks like Build a Bear (BBW), Ethan Allen (ETH) and OfficeMax (OMX) also report. Since technology seems to be the strength behind the NASDAQ rally, QLogic (QLGC), Motorola (MOT), Maxim Integrated (MXIM) and Affiliated Computer Services (ACS) may be of interest.

The S&P 500 gained 18.48 points to close the day at 873.64. The high of 882.06 broke above the February highs as indicated on the chart below. The upper and lower Bollinger bands are narrowing which may be an indication of a volatile move in either direction. As option traders, we can take advantage of the volatility by buying VIX call options or buying both a call and a put which is commonly referred to as a debit straddle or strangle. The problem with buying options is that they have costly time decay. However, with the VIX declining to lows not seen in over six months, one might benefit from the expansion of volatility as well as the directional move of either the call or the put. Just to clarify, a straddle or strangle will have a losing position on one side and a profitable position on the other side. The goal is to define and reduce the risk and hopefully profit more on one side than you lose on the other. It may seem strange to take a counter trend trade when the index is hitting its head at resistance that appears to be giving way. Other supporting data to a continued uptrend is that of RSI climbing up toward overbought territory with no end in sight. On the other hand, the Slow Stochastics is contradictory to the RSI in that it declined below the 3 bar moving average (green line). There doesn’t appear to be much resistance to this market except for the horizontal line that was breached and the upper Bollinger band that was touched. Since the close was back below the old resistance, we may actually see a little pull back that may provide another long entry.

The chart below is the daily SPX chart with the 50, 89 and 200 day moving averages drawn on it. I have expanded the chart back to show the next high above the current levels. The 127% Fibonacci extension level correlates almost exactly with the previous high from early January at 945. The high level of the SPX on 12/31/08 was 910. So there might be some selling pressure here as investors look to cash out at breakeven for the year. When playing blackjack, I like to get up from the table when I get back up to break even. We may see a sell off to the 89 day moving average at about 824 before testing these levels. Also of interest is the dynamic resistance level of the 200 day moving average. At its current trajectory, it could correlate near the resistance levels from the Fibonacci and price resistance lines. Also of note is that the 50 day moving average is beginning to curve upward and suggests that the intermediate trend is now up. We know from the 8 and 21 day Exponential Moving Averages (EMA) that the short term trend has been up for over a month. Remember to trade the trend and be patient for entries; especially at these levels. There is no need to try to jump on the boat at these levels unless the entry is at the 21 day EMA and you can establish a tight stop. In fact, one could argue that waiting for a test of the 89 day moving average would be better at this point. Of course these are just trading technique suggestions and not recommendations to trade. The only recommendation I might make is to make certain you develop trading rules for entries and especially for exits. In fact, the exit is the most important part of trading.

The NASDAQ 100 (NDX ) broke above its 200 day moving average in intraday trading and then failed to close above the long term resistance level. Failure to close above this level may provide reason to jump on the short side of the market. Even though the ADX is breaking above the 20 level that confirms that the established direction is now a trend, the close of the NDX below the coveted 200 day moving average may be a signal that the index’s strength can’t keep it up forever without a little break. A short entry at these levels or possibly an early morning tick up may provide a good entry point. Risk management on this type of trade example would either be a close above the 200 day or a break above 1398 or today’s high. There is still that wide open gap at 1253 I keep watching. Good luck in the markets tomorrow.

The final chart of the wrap is that of the Gold 100oz. June Futures Contract. I have drawn various trend lines to point out that while gold bounced nicely off of its 200 day moving average, as I thought it would, the directional bias is to the downside. The down ward channel shows that resistance was met at 920 on Monday. This resistance correlated with the 50 day moving average. The 89 day moving average was attempted to be breached today but proved to be too great. Perhaps there is another test a little higher and then back down for the hard commodity. We can only predict what might happen. That is why we need to a little wrong and a lot right. Have a nice night.