Daily Form March 31, 2008
MONDAY MARCH 31, 2008 06:38 ET
One of the most notable features of last week'a action as a whole, and in particular the latter part which coincided with the pullback, was the subdued volume. I remarked last week that the S&P 500 (^SPC) has not, as yet, put in a determined run to break free from the descending trend line through the highs since last October, but on the other hand, there appears to be a lack of conviction amongst the bears about re-testing key support levels.
Cross currents continue to dominate and the market is thrashing around in search of a direction and yet, stepping back from the day to day gyrations, we are basically confined within a relatively narrow range. As marked on the chart the trading channel which has been in place for most of the first quarter essentially lies within one hundred points between 1280 and 1380.
I maintain a relatively bullish stance and believe that a realizable target within the next few weeks is 1415-1420 which marks the 200-day EMA and also the 50% retracement level from the October 2007 high and the January and March lows. Although I attach less probability to the alternative outcome, it is still worth reiterating that there remains a viable possibility that we could break down from the descending wedge pattern that we are still confined by. The key support level is 1260 and things would get ugly if we drop below this.
The chart for the Dow Jones Transportation Index (^DJT) diverged significantly from other broad indices during the Mid March weakness. The chart formation shows that the March lows were considerably above the January lows and an ascending wedge pattern is developing which is often a precursor to an upside breakout. Further retracements would encounter layers of support initially at the 200 day EMA which is just below Friday's close. For an overall bullish perspective on the market to become more compelling one would want to see another move up towards a challenge of the 5000 level in coming sessions.
I shall also be watching the sector fund, XME, which is designed to track the total return performance of the S&P Metals & Mining Select Industry Index. The technical characteristics suggest that the sector is undergoing distribution and there has been a succession of lower highs in recent weeks.
TRADE OPPORTUNITIES/SETUPS FOR MONDAY MARCH 31, 2008
BVN Compania de Minas Buenaventura SA
I was early in my comments in late February that BVN had some typical topping characteristics but following the plunge that took place on March 19th the mining stock has pulled back to a level where there may be further selling ahead.
FCX Freeport-McMoRan Copper and Gold Inc.
Freeport McMorran (FCX), one of the world's largest copper mining companies also looks as though the pullback may be close to having run its course in the near term.
PMCS PMC-Sierra Inc.
I shall be watching PMC Sierra (PMCS) during the course of the week for an entry opportunity on the long side as the pullback extends down towards the 50 and 200 day EMA's.
ROST Ross Stores Inc
Ross Stores (ROST) has a favorable looking pattern on the long side.
ERIC LM Ericsson (ADR)
In the telecom sector, the two Scandinavian competitors Ericsson (ERIC) and Nokia (NOK) also appear vulnerable after pulling back from the very weak sessions that both experienced on March 19.
FRIDAY MARCH 28, 2008 06:41 ET
It was another roller coaster ride yesterday as the market moved erratically in response to divided opinions about the severity of the downturn and new rumors about Lehman Brothers. The S&P 500 (^SPC) still has to put in a determined run to break free from the descending trend line and on the other hand, at least on present showing, there does not appear to be great conviction amongst the bears about re-testing key support levels.
Some comfort will be taken in the bullish camp from the overnight performances in Asia where the Nikkei 225 moved ahead by 1.7% and the Hang Seng Index (^HSI) , with an advance 0f 2.7% looks ready to test overhead resistance at the 50 day EMA.
Several of the large tech stocks pulled back rather sharply and the mood was not helped by weaker than expected earnings and outlook from Oracle. The Nasdaq 100 (^NDX) gave back 2.2% yesterday and yesterday's range covers the span between the 20 and 50 day EMA's.
TRADE OPPORTUNITIES/SETUPS FOR FRIDAY MARCH 28, 2008
AA Alcoa Inc.
Alcoa (AA) looks vulnerable after recently recording a lower high and with a developing flag formation.
CRM salesforce.com
Salesforce.com (CRM) has pulled back to potential support at the convergence of two moving averages.
THURSDAY MARCH 27, 2008 05:42 ET
After rallying back to a level where resistance was to be expected from the 50 day EMA and at the 1350 level which marks the upper boundary of the descending wedge pattern that has been discussed here many times, the S&P 500 (^SPC) retreated in a fairly modest decline.
Volume was heavier on the down move than was seen on the upward move on Tuesday which is of some concern for the bullish argument. The economic data continues to show that the underlying economy is deteriorating, but just how much of that has already been discounted is hard to read. As suggested yesterday the real unknown is the extent to which the recent actions by the Fed will have removed a lot of the fear about financial doom which was also being substantially discounted during the bearish action of the last few months.
The banking index (^BKX) also declined after running into a clearly defined resistance level, but, as indicated on the chart, there is some suggestion that the downward trend-lines appear to be in a state of transition.
We should not be surprised by the price action in the homebuilders sector fund (XHB) yesterday, which, over and beyond all the weakness in the fundamentals, from a technical point of view, shows that the sector fund ran into resistance at the late January high as well as the 200 day EMA. A retreat to at least the 50 day EMA is now on the cards.
TRADE OPPORTUNITIES/SETUPS FOR THURSDAY MARCH 27, 2008
JWN Nordstrom Inc.
The chart pattern for Nordstrom (JWN) shows a series of lower highs interlaced with bearish pullback channels and the stock moved below two moving averages on increased volume.
GE General Electric Company
It is probable that General Electric (GE) could find renewed buying interest as it retreats to the 200 day EMA.
FNM Fannie Mae
It would be surprising if the upward momentum that recently propelled Fannie Mae (FNM) above a key resistance level has been exhausted, and, also noteworthy is the fact that the current pullback has been on declining volume.
WEDNESDAY MARCH 26, 2008 06:21 ET
The S&P 500 (^SPC) is poised at a key level where it is facing the possibility of breaking free from the nested triangular patterns which have characterized chart patterns for several weeks.
As the trendlines indicate there is now the likelihood of an upward breach of the more severe downtrend line which tracks the 50 day EMA. Should we see two decisive closes above this line then I suspect that we will rally back towards 1440 at least, which represents the value on the other trendline and just above the current reading for the 200 day EMA.
Certainly the mood amongst fund managers appears to have improved markedly just in the last few days and many are claiming that the rebound provides ample justification of the view that one should never fight the Fed.
There is clearly a risk that we have moved too far too quickly but the one significant background condition that has been hanging over the market for months - the possibility of collapses amongst major financial institutions - has clearly diminished as a result of recent lifebelts thrown to the money markets.
Although I may be accused of trying to have my cake and eat it, I would still pose as a vital caveat that very critical support in the region of 1260 must hold on any reversals and if we close below that level I would expect selling to rapidly accelerate and, in such a circumstance, the Fed is close to having exhausted its supply of lifebelts to rescue the market from a severe drop.
The Nasdaq 100 (^NDX) has chalked up a gain of more than eight percent since its close at 1687 on the Bear Stearns inflection session of March 17th. Yesterday's close was just above the 50 day EMA which suggests that the easy money has probably been made in the near term. Even if we should advance a little further in the few remaining sessions of the first quarter the 1845 level will present itself as a major chart hurdle.
An alternative way of perceiving the double bottom in the banks and other financials which has been attracting a lot of attention from many analysts is to look at the sector fund SKF which acts a shorting vehicle for the financial sector and which even more strikingly reveals the recent double top for this inverse fund. Going long this fund as it approaches the 200 day EMA is one strategy to contemplate for those who believe that path ahead for the banks will be prone to swift reversals.
At the macro-market timing level one of my favorite proprietary indicators which measure whether key sectors and assets classes are becoming more or less correlated in the co-movements of their prices, turned positive at the end of last week. The manner in which this indicator works is that when there is a notable jump in the degree of inter-market correlation this points to seizing up of liquidity and an impairment of two- way trading. When the degree of correlation declines quickly and remains at a relatively low reading for several sessions this points to a positive improvement in the overall liquidity and often marks an intermediate turning point.
TRADE OPPORTUNITIES/SETUPS FOR WEDNESDAY MARCH 26, 2008
MNTA Momenta Pharmaceuticals Inc
One week ago I cited the favorable pullback pattern on the chart for Momenta Pharmaceuticals (MNTA). The stock has moved up more than 20% since then but is now approaching a potential rejection level close to the early November high just above $13.
EK Eastman Kodak Company
In my weekend commentary I featured Eastman Kodak on the long side and the stock performed unusually well in Monday's session with a 6.5% gain. There are positive divergences that suggest this could move higher but the hanging man formation just below the 50 day EMA is a reason to be cautious in the near term.
PETM PETsMART Inc.
Petsmart (PETM) has the qualifying characteristics for a bear flag interpretation and the stock has moved up the ascending channel to probable resistance from the 50 day EMA which is just overhead.
Along with the rest of the equity market, the S&P 500 (^SPC) failed to hold on to early gains and prolong the strong advance from Tuesday's epic session.
The pattern that is evolving in the index suggests that a definite directional breakout lies ahead. The breakdown from the triangular pattern with its upward bias that took place at the end of February was the first resolution of the hesitation about direction.
The descending triangle/wedge pattern appeared to be on the verge of being resolved in favor of a downward breakdown prior to the Fed's momentous decisions of the last few days. However, further uncertainty and indecision is reflected in yesterday's give back.
The bulls would offer the interpretation that a further testing of the 1270 level would be very healthy and if, as is alleged, Monday's trading was the catharsis event from which embryonic bull markets are born then we should see strong buying emerge as we re-test 1270/1280. This would also fit neatly into an end of first quarter window dressing scenario.
My major concern with this interpretation is that too many talking heads are calling for it and new "bull" markets do not usually begin in such an obviously logical fashion.
Many Asian markets, including Japan and India, were closed for public holidays today but the Hang Seng Index (^HSI) continued the downward trajectory that we have been focusing on recently. The index has reversed swiftly after Tuesday's rally and the pattern suggests that last August's low is proving to be a strong attractor that will require probing in coming sessions.
One of the main themes in yesterday's trading was heightened activity in many of the exchange traded sector funds, especially resulting in many ETF's that feature commodities slumping badly. Evidence of the major shifts can be seen in the chart for the Gold and Silver index (^XAU), which admittedly is not an ETF but shows as does the next chart which is such a fund the kind of vicious selling that arose yesterday in many commodities.
Several factors are at work here. There are signs that some institutions are rethinking their overall asset allocation strategies in the wake of the major policy moves that the Fed has taken over the last few days. Some re-allocations may be predicated on the view of some large fund managers that equities may have put in a base and be ready for a rally. Another, and I tend to believe, more palatable notion is that a lot of the hot money that had been creating bubbles in certain commodities was part of an overall bear raid on the financial sector that, having claimed a major victim, may now be re-grouping.
Yet another plausible factor is the de-leveraging that is taking place amongst hedge funds where each day seems to bring new margin calls.
The exchange traded fund for Silver (SLV) has dropped precipitously in the last couple of sessions and the momentum and MFI chart reveal exactly the kinds of negative divergences that anticipated this.
Further evidence that major asset allocation decisions are being made is revealed in the chart for the ETF that tracks the energy sector, XLE. The fund posted one of its largest drops of more than six percent and managed to break through all three moving averages on substantial volume.
SCHN Schnitzer Steel Industries Inc
Schnitzer Steel Industries (SCHN) shows a series of lower highs and yesterday's shooting star formation and the negative momentum divergences put me on the short side for the intermediate term. As I mention in the disclaimers embedded in the commentary, this does not mean that I am suggesting that the stock will go down in today's session or even that I suggest going short during today's session but rather that I shall be looking for a good entry point to go short in the coming sessions.
WB Wachovia Corporation
The chart for Wachovia Bank (WB) shows a rather striking candlestick with a long upper tail showing that the intraday gains yesterday were faded throughout the session with the stock closing more or less on its opening and low price for the session.
Although I remain cautious on the financials I would suggest that the stock has the possibility of making a move up to the clear line of resistance that is shown and which corresponds to the 50 day EMA.
RS Reliance Steel and Aluminum
Reliance Steel (RS) is yet another example of a commodity based equity that looks vulnerable at least down to the 200 day EMA.
TUESDAY MARCH 18, 2008 03:50 ET
The S&P 500 (^SPC) managed to contain its losses to less than one percent in, even by recent form, an unusually tumultuous session. The sentiment across the markets went through phases of fear and trembling that Bear Stearns could not be an isolated case to waves of semi euphoria that this might just be the kind of event from which an inflection bottom could arise.
While traders may be disappointed if the Fed fails to deliver at least 75 basis points today, many are now expecting it to be 100 bps, there are increasingly disturbing developments in China where the central government is preparing to hike rates to ward off inflationary pressures. Diverging from the Nikkei in overnight trading the Shanghai Exchange (^SSEC) and the affiliated Hang Seng Index (^HSI) are still in firm downward trajectories. The Shanghai index closed with a four percent decline and after peeking above the 6000 level in October now seems to be headed towards the 3000 level.
The DAX index in Germany (^GDAXI) was one of the weakest markets in European trading yesterday. In fact the SMI in Switzerland outpaced it on the downside with a more than five percent drop which can le largely attributed to a rout in the shares of UBS.
The DAX lost 4.2% and closed more or less on its intraday low. It will now face stiff resistance on the rebound at the 6430 level which provided support throughout last week's buffeting.
London's FTSE also suffered with an almost four percent decline and one of the contributory factors was an almost 10% decline for Barclays which had been an owner of a substantial stake in the equity of Bear Stearns. But the story that is concerning many is the plight of sterling, which reached record lows against the euro yesterday, and a fear that international capital flows may be steering clear of the UK because of the strong parallels between structural issues in its economy and those now causing havoc in the US.
One of the main supports for the UK economy, and super inflated London residential real estate, has been the inflow of funds as footloose wealthy individuals from Russia, Asia and the Middle East, after shopping around for the most favorable tax regime have, until very recently, reached the conclusion that the UK is the world's most desirable onshore tax haven. In another instance of how fiscal and monetary policy has now become captive to propping up the capital markets the government of Gordon Brown is having to take a more conciliatory tone to the non-domiciled "residents" as capital flight from sterling and a property crash in London would see the UK enter a vicious downward spiral.
Despite the sea change in Fed policy which allows investment banks to gain liquidity for their arcane financial instruments the broker/dealer index (^XBD) still slumped by more than 10% yesterday.
One of the real problems for the sector is that with the securitization business almost dead and buried a major earnings stream has now dried up. Traders are discounting a slump in future earnings as much as selling because of concerns about liquidity implosions.
TRADE OPPORTUNITIES/SETUPS FOR TUESDAY MARCH 18, 2008
The stock for Lehman Brothers (LEH) yesterday reminds me of a scary bungee jumping experience. Reports emerged during the session that some financial institutions were instructing traders not to engage in counter-party risk with Lehman and the stock looked as though it was on the verge of freefall. More than 220 million shares were traded and, it is a sign of the times, that an investment bank which lost more than 20% in just one session was being reported by some observers as having had a "relatively good day".
Momenta Pharmaceuticals (MNTA) has a complex and unorthodox pullback pattern but it still appears that the buying surge on February 29th will see some follow through.
The chart of the day has to the one for Bear Stearns (BSC) which closed Friday at exactly $30. We now know, after emergency meetings in New York on Sunday evening, that the stock is worth just $2 this morning with an implied market cap of $240 million. JP Morgan is prepared to pay that for a business which at one point was valued at almost 90 times that. And there is a suspicion that JP Morgan was only prepared to pay that amount when it was provided with a $30 billion safety net under the assets on Bear's balance sheet.
The developments of the last 24 hours make even more surreal some of the discussions from last Friday when several analysts and pundits busied themselves discussing whether Bear Stearns really faced a solvency crisis or a liquidity crisis. When a company attempts to profit from leverage of perhaps 20/30 times its actual cash holdings (as both Bear Stearns and Carlyle Capital were), it does not take much of a hiccough for things to unravel very rapidly.
If one was to take the comments of Bear's CEO at face value (some unhappy hedge fund investors will remember that doing so last August was not a good idea), the rapidity of the un-raveling was truly spectacular. In Friday's announcements the company suggested that the crisis had arisen within just the preceding twenty four hour period (conveniently putting the critical time-frame after a CNBC interview in which the company's CEO denied that there were any problems). Class action lawsuits, citing a lack of transparency in Bear Stearns communications with its clients and investors had been piling up even before Friday's demise, and one can only be curious as to who may be called upon to defend such litigation and if damages are awarded who may have to pay them.
Given the plunges in Asia and with Germany's DAX now down more than 3% and well below the August 2007 low, the open this morning in New York promises to be an ugly affair. Where might support be found on the S&P 500 in today's session? The 1220 area, which marked the lows from June 2006, would register a five percent fall from Friday. Although it is entirely feasible that we could do that all in one session it might require some whipsaws and short squeeze shenanigans first. On a longer term basis there are clear technical targets down to 1175 and 1140.
The Nikkei 225 (^N225) dropped below the 12,000 level that I cited in a CNBC Interview at the beginning of the year and which can be reviewed here.
A key forex rate to watch during this coming week will be the cross rate of the dollar against the yen. The rate has now fallen well below 100 and further slippage has the potential to cause even more painful de-leveraging by hedge funds as carry trades are unwound.
The long term monthly chart for the CBOE Volatility Index (VIX) takes in several financial panics and crises. One (perhaps cynical) way of interpreting the clear downward trend from 2003 until late in 2006 is that it coincides with the great period of financial engineering and expansion in securitization. The proliferation of almost limitless notional credit was accompanied by a growing belief that new structured credit instruments allowed for far better distribution of risk which in turn made the capital markets a much safer place.
On Friday the VIX move above and closed above 30.
What is notable about the right hand side of the chart is that heightened volatility is no longer episodic and sporadic as in the earlier period but has been steadily building since early 2007. To use some medical terminology the incidence of risk is now more of a chronic condition than an acute one.
The Hang Seng index (^HSI) plummeted more than five percent in Monday' session. Remarkably the August low has still to be challenged which only highlights the extent of the "bubble" that developed in this market in late August and throughout September of 2007.
FXF
For those following the forex market, FXF, offers an exchange traded fund for the Swiss Franc, which allows one to profit on the short side of the dollar and benefit from further strength in the Swiss currency which has now broken for the first time below the parity level against the US dollar.
EOG EOG Resources Inc.
As follow up to last week's recommendations on the long side, EOG Resources (EOG) moved ahead 8.3% and Goldcorp advanced by almost 7% in a difficult week to be on the long side.
A long straddle options strategy for Amgen (AMGN) that was suggested here in February would have benefited from the recent abrupt breakout and reversal behavior.
Keep an eye on Lehman Brothers (LEH) which fell more than 14% on Friday and which cannot be immune from some of the concerns that afflicted Bear Stearns.
The chart for Goldcorp (GG) shows the break above resistance at $44 and there is obvious potential for a continuation to higher ground.
ROH Rohm and Haas Company
Rohm Haas (ROH) has a bearish pullback pattern and looks vulnerable as it closed near to clear resistance from the convergence of the 20 and 50 day EMA's.
Given the remarkable recovery and reversal in the US equity markets yesterday it is legitimate to ask the question - have the lows of January been successfully tested?
To be honest I don't think anyone would take whatever answer I was to give to the question very seriously because this market is too full of surprises for anyone to provide anything other than a guess. It is hard to believe that Standard & Poor's who were consistently wrong leading up to the current crisis in the asset backed securities arena should be that prescient in calling a bottom in the sub-prime mess.
Another sobering thought is that the fall-out from the collapse of Carlyle Capital Group (and others waiting in the wings) is likely to end up in the Fed's portfolio in exchange for Treasuries. Perhaps the Fed is acquiring really good assets at the bottom of the market but it does raise questions about what the function of the central bank is.
Back to the charts and the Nasdaq 100 (^NDX) faces hurdles at the 50 day EMA currently around 1825 and a very firm and long lasting resistance line near to 1850.
One of the most revealing charts is for Germany's DAX index (^GDAXI) which shows a hammer candlestick with yesterday's intraday low at almost exactly the same level touched on January 23rd. It looks just a little too neat for me to conclude that we have avoided the drop down to new lows.
Comex Gold futures surged above $1000 per ounce yesterday satisfying the target that I have discussed here several times. If gold keeps moving higher then the trend for the long end of the yield curve, once some of the panic in the credit markets dissipates, and for the utilities sector cannot be too rosy.