TDTrader Report (full) - Friday 6-Aug-04 - 11:00AM New York / 5:00PM Brussels
***Market Overview*** -- One down, five to go. With the Employment Report (today) out of the way, the FOMC Meeting (Tue), Republican Convention (29-Aug), High Oil Prices (Now), Election (Nov) and Terrorist Threat (???) are left lingering. As noted over the last few weeks, these items have created both a wall-of-worry and a wall-of-uncertainty. A wall-of-worry is surmountable, but this wall-of-uncertainty is likely to keep downward pressure on stock prices. Selling pressure is not that intense, but clearly outpacing buying pressure and one has to wonder what could be the catalyst to entice buyers back in force. After the employment report, it is unlikely that the Fed will be able to move the market with the FOMC meeting. The Fed was looking for strong growth in the second half. Retail sales and the employment report have thrown a little cold water on this idea. Could the Republican Convention spark a rally? No matter what party or candidate you endorse, these conventions are hardly the stuff of excitement and usually bring out the more radical players within each party. America is about as polarized as it has ever been and a convention is unlikely to produce much change. As for the rest, the election is likely to remain uncertain, oil prices are not coming down anytime soon and the terrorist threat will be here until November (possibly longer). The technical situation is clearly breaking down in a number of key indices, sectors and stocks. In addition, the fundamental situation argues for more uncertainty at best. Uncertainty may not warrant an increase in selling pressure, but is likely to curtail buying pressure. Low volume reflects disinterest and this is more bearish than bullish. Stocks can fall simply from a lack of buyers and no real increase in volume. In fact, a high volume decline may be the best thing for the bulls as these low volume declines can drag on.
***COMPQ Weekly Chart*** -- The fact is that the index continues to make lower lows and lower highs within a falling price channel that extends from January. The entire year (2004) has been one zigzag lower and the index is now testing the lower trendline. In addition, COMPQ has broken the Oct-02 trendline and large price channel. The 2004 decline certainly looks like a correction, but must be respected as bearish as long as the lower lows and lower highs persist. As such, lower prices should be expected and the downside target is around 1650, a level confirmed by a 62% retracement and the summer consolidation.
***COMPQ Daily Chart*** -- Looking back at the February and May reversals, it is interesting that the index firmed and reversed soon after a gap down. These down gaps were followed by up gaps to create island reversals of sorts. In addition, the down gaps were quickly filled and became exhaustion gaps. So just how bearish are support breaks? The index broke below the February low with two down gaps in May. However, turning bearish immediately after the gaps would have led to a whipsaw as the index recovered the very next day. The current swing is clearly down and dominated by the red trendline and red resistance line. Similar lines formed in February and May, as did gaps similar to today. I am not about to turn bullish now, but will speculate that a recovery and close above 1900 would be quite positive. Barring that, further weakness is expected.
***S&P 500 Weekly Chart*** -- With a sharp decline this week, the S&P 500 looks likely to loose the battle for 1100. The index battled 1100 in March, May and July. However, August appears to be the undoing of 1100 as the index extends its streak of lower lows and lower highs in 2004. SPX remains within a falling price channel and headed for a bout with the trendline convergence around 1050. The gray trendline was drawn parallel to the lower trendline and does not have a second touch (yet). After 1050, the next support area is around 1000.
***S&P 500 Daily Chart*** -- The swings within the falling price channel have dictated the positions on SPX. The current swing is down and the only sign of support is the lower trendline extension. The red trendline extending down from 1147 sets the bearish tone. In addition, SPX established an important reaction high at 1109 this week. It would take a move above 1109 to savage support at 1080, break the trendline and turn the swing bullish again. As long as 1109 holds, the expectations are for further weakness.
***Breadth shows widespread selling*** -- The AD Line is a cumulative measure of advances less declines. This chart shows the AD Line for the Nasdaq 100, S&P 500, S&P Midcap Index and S&P SmallCap Index, which is a good cross section of the overall market. It is clear that the Nasdaq 100 AD Line is leading the way lower as it nears the May low and techs are not the place to be. The other three AD Lines saw big advances in May and June, but all three failed at or near their prior highs. What’s more, all three are now nearing their May lows and the AD Line for the S&P SmallCap Index is leading the way lower. Except for the Nasdaq 100 AD Line, the S&P SmallCap Index AD Line is the closest to its May low. This indicates that small caps are leading the decline. These are the very stocks that led the advance over the last few years. As with the indices themselves, we will be watching the late July reaction highs (resistance) in the AD Lines for signs of strength.
***Stick to Value*** -- Despite the decline over the last few weeks, two styles are holding up rather well: large-value and mid-value. As these AD Lines show, large-value and mid-value are holding well above their May lows. The AD Lines for large-growth and mid-growth moved below their May lows and remain the weakest of the six. Small-growth and small-value are holding above their May lows for now, but are quite close to these important support levels and clearly weaker than large-value and mid-value.
***Oil Service stocks stall*** -- Despite oil moving above $44 and remaining at relatively high levels for many months, the Oil Service HOLDRS (OIH) is still having trouble with its March high. WTIC peaked around $38 in March and April. If you had told me that oil would move above $44 in early August, I would have predicted the Oil Service HOLDRS (OIH) to move well above their March high. However, OIH has been and continues to underperform WTIC. The current pattern looks like a symmetrical triangle or consolidation with resistance near the March high (~75). A move above 75.36 (30-Jul high) would forge a breakout and argue for further strength into the low 80s. Conversely, a failure to breakout and move below 70 would be quite negative.
***Retail and the S&P 500*** -- The retail group forms an important part of the cyclical sector and the economy. By many estimates, consumer spending drives 2/3 of GDP and consumer sentiment in general is widely followed on Wall Street, not to mention Main Street. As such, it makes plenty of sense to follow the Retails HOLDRS (RTH) for clues on the overall market. As the chart shows, the Retails HOLDRS (RTH) broke neckline support of a large head-and-shoulders pattern. These are major reversal patterns and weakness in this group bodes ill for the overall market. In addition, the stock broke the third of three fan lines in July and the downside target is to the 75-80 region. This area is confirmed by a 50-62% retracement of the Mar-03 to Mar-04 advance.
***It’s a large cap world*** -- The Retails HOLDRS (RTH) are obviously weak, but which retail stocks are leading the ETF lower. As with the major indices (SPX, OEX and NDX), a few large caps dominate. Lowes (7.68%), Home Depot (15.48%), Wal-Mart (21.98%) and Target (7.84%) account for over 50% of Retails HOLDRS (RTH), which includes 20 stocks in total. Never mind what the other 16 are doing. Wal-Mart, Home Depot and Lowes peaked in late March or early April, while Target peaked in mid June. Why are retail stocks weak, especially these key players? Part of the blame can go to high oil prices. The more price sensitive the consumer, the more adversely he or she will be to high oil prices. Wal-Mart attracts a price sensitive cliental and a rise pump prices is likely to cause a decrease in discretionary spending. Sure, the basics remain unchanged as we all need food and beverages. However, the higher margin items (electronics) and non-basics (brand names) are likely to be affected.
***Semiconductors and the Nasdaq*** -- The semi-conductors led the market lower by underperforming the Nasdaq in January. The price relative (SMH relative to Nasdaq) formed a bearish divergence in Dec-Jan and this foreshadowed an extended decline. The semi’s led on the way down and should lead on the way up. Even though SMH is holding above its July low, we have yet to get any serious signs that the semi’s are ready to lead the Nasdaq higher. SMH came close to fulfilling the double top target (~30) in July, but remains below the BIG BLUE trendline and in a clear downtrend. SMH gapped down in July and has yet to fill that gap. In addition, the stock formed a reaction high on 21-Jul, which happens to be right in the gap zone. As long as the stock holds below the 21-July high, thinking bullish is premature.
forums.delphiforums.com
decisionpoint.com |
