i-Trader

07.30.04 - Outlook

A New Month The markets completed another dismal July, with the DJIA, Nasdaq and S&P 500 gaining 1.8%, 2.1% and 1.4% respectively on the week.

The final week saw the DJU4 test to key support at 9900, the line-in-the-sand laid out in last week's outlook, before closing out the month back above the 10000 level. The bulls must now regain at least 10170 on a closing basis to turn the tide in their favor. The short-term outlook is unchanged with buyers controlling the action at 9900-9965 and sellers at 10090-10150; the intraday action of the past 3 days was dominated by buyers at 10070-10090 and sellers at 10130-10150. The bulls must now regain at least 10170 on a closing basis to turn the tide in their favor. A close below 10070 sets in motion a retest of the 9900-9965 area.

Longer term, there are three possible scenarios. The first and most optimistic, is that the market is in a basing period after the 2003 strong move higher. If that is the case, confirmation of a stronger move comes on a close above 10170. If this is accomplished it will produce a pullback in the bonds/notes. The second and more likely scenario in my opinion is that the indices are set in a long-term consolidation range working off the excesses of 2000-2003. The final possibility is that the action of the past few months is setting up another leg down in the bear market. For traders, any of the three scenarios will likely lead to a consolidation range between 9900 and 10150 in the near term as participants take a wait and see attitude as the excesses of the past month's selling are neutralized.

While the equity markets have been ruled by sellers, the buyers have been in control of the interest rate instruments and the US dollar. The buying continued in the final week of the month as rumors of new terrorist threats and news of embassy bombings crossed the wires. The US long bond is back to key resistance in the 109-110 after a drop early in the week, basis the Sep contract while the US dollar index is once again flirting with the 90 level following the turn around two weeks ago. Note that the USU4 110 level is roughly a 62% retracement of the Mar-Jun move; the 9000-9050 zone on the US dollar index (cash) constitutes a few different retracement levels based on various swing moves over the prior 12 months.

The energy market is another key part of the daily news. Crude oil broke out to record highs this past week - though not on an inflation adjusted basis. CLU4 based in a 600 pts range for nearly 2-1/2 months before the breakout move. Therefore, the momentum is to the upside with a potential target of $48-50/bbl. Though a failure at the current levels is possible, pullbacks to the 4150-4200 level, basis the Aug 04 contract, must be considered tests of the breakout zone. A close below at least 4150 is necessary to confirm a failed breakout.

07.30.04 - The Range

The Range A quick update today. Despite two bombings early Friday AM, the bulls managed to hold the lines in the market. Since late-Wednesday afternoon the DJU4 has traded a 10070-10150 range while the NDU4 and SPU4 traced out ranges between 1385-1407 and 1094-1104 respectively. Friday the techs played catchup, finally breaking to the top of the 8-day range that began on 07.21 (DJ 9900-10150, ND 1360-1416 and SP 1077-1107). one final test down in the final 40 mins Friday afternoon was not confirmed by the tape and once the shorts that were playing for the breakdown were caught, they scrambled to get out before the close. The result - a 75 pts move in DJU4 in the closing minutes.

The DJ 10070-10150 has seen buyers stepping in at 10070-10090 with sellers controlling 10130-10150, continuing to confirm Thursday's breakout at 10085 as key support. The DJU4 continues to need a close above 10170 to turn the momentum back in favor of the bulls in the short-term. However, the strong close by NDU4 and SPU4 on Friday set up more upside. With all three indices now in breakout modes, the buyers need to step up to the plate. Can the bulls finally break through the ceilings with the month-end pressures gone? DJU4 10150 is the key. There's an old traders' adage that there are double tops and triple tops but quadruple tops do not exist. Therefore, another test to DJU4 10150 should produce breakout, especially if confimed by the tape. A break and close below 10070 puts the bears back in control.

07.29.04 - The Hat Trick

Month-end Follies Hat Trick Wednesday evening I commented that "... the major indices testing up to key resistance levels at DJU4 10090-10150, SPU4 1097-1102 and NDU4 1397-1408 should see the rally stall 07.29." This was indeed the case on 07.29. The market internals were strong from the open Thursday though the price action was refusing to follow through. An opening test to the DJU4 10150 area was quickly turned away with prices dropping back to Tuesday's breakout area at 10085 by mid-morning. The tape refused to confirm the selling however and by midday the DJU4 was once again knocking on the ceiling at 10150. Rumors on the terrorist front however produced some major gyrations from this point. News of possible threats in Mexico gave sellers reason to push the market to new session lows with DJUA hitting 10070. Just as was indicated on the first test down, the tape refused to confirm the price action. By late afternoon prices snapped back to 10150 for the third time, fueled by a final-hour rumor of a captured major Al Qaeda member. Then news of a suspicious vehicle in D.C. provided the reason for the third failure at 10150, yielding a quick 50 pts drop before rebounding once again to close higher on the day.

The DJU4 held its breakout area Thursday with the NDU4 and SPU4 following along on month-end buying. Nothing has changed however. At a minimum, the DJU4 needs a close above 10170 to turn the momentum back in favor of the bulls in the short-term. The SPU4 however has now joined the DJU4 on a breakout of the prior five-days' range. The NQU4 is the lone laggard. If this market is to move higher, the NQU4 must breach 1414 on the upside and if it does, confirmed by a DJUA close above 10170, look for targets of DJU4 10250-10300, NQU4 1430-1450 and SPU4 1115-1125. The question remains, will the techs continue to be the anchor of the broad market or will their non-confirmation weight on the bulls' psyche? We may have to wait until 08.02 to find the real story since the Friday 07.30 will be suspect due to month-end institutional shenanigans. There's an old traders' adage that there are double tops and triple tops but quadruple tops do not exist. Therefore, another test to DJU4 10150 should produce breakout, especially if confimed by the tape.

07.28.04 - Coast-to-Coast

Coast-to-Coast Wednesday trapped both buyers and sellers producing a coast-to-coast move. The early retest back to the prior-day high for the DJU4 was not confirmed by the SPU4 or NDU4 and the early market internals were weak with A/D readings in the -500 area and getting weaker. Also, US notes and bonds tested to the key support levels mentioned yesterday at FVU4 108'16-108'24, TYU4 109'08-109'16 and USU4 106'00-106'08 and held. The end result of these confirming signals was a 60 pts drop in DJU4 in less than 30 minutes, finally breaching 10000 by late morning. The selling continued with the DJU4 testing down to the 07.27 breakout area at 9965-9975 while the NDU4 tested the 07.26 lows. The test of the breakout area found buyers and once they pushed the indices back above midday resistance levels the shorts ran for the the exits. As the remaining intraday shorts realized that they were in serious trouble as the final hour wore on, the stampede for the door pushed the DJU4 to 10133 with the NDU4 and SPU4 hitting 1395 and 1099 before stalling.

Now what? The outlook remains unchanged with one caveat. At a minimum, the DJU4 needs a close above 10170 to turn the momentum back in favor of the bulls in the short-term. The extreme volatility of the prior three days needs to be neutralized. This fact coupled with the major indices testing up to key resistance levels at DJU4 10090-10150, SPU4 1097-1102 and NDU4 1397-1408 should see the rally stall 07.29. Caution is warranted however since it is month end and the institutions wil complete their agenda for window dressing no matter what the consequences. The past five days produced ranges of DJU4 9900-10085, NQU4 1360-1414, SPU4 1077-1097. Note that the DJU4 is the only one of the three to breakout of the range on Wednesday though the SP did manage its highest close in the range. If the techs can get off the floor and buyers step in in the SPU4 as well, the DJU4 has an initial upside target of 10270. Which divergence will play out - the weak techs pulling the broader market back inline or vice versa?

07.26.04 - The Test?

The Test? Monday saw the sellers push the DJIA to 9900 as expected while the Nasdaq 100 cash index tested to 1360. Note that this index found support in 11.03 and 03.04 at roughly 1355-1365. The SP500 tested to the upper-1070s on Monday, just above the mid-May low. Therefore, the test is on and its time for the bulls to make their stand. At a minimum, DJU4 must close above 10020 to stabilize the market with a close above 10170 turning the momentum back in favor of the bulls in the short-term.

The bulls have there work cut out for them. Monday saw each rally ultimately turned back as even the weak shorts were unwilling to capitulate. The main concern at this point is that traders are expecting and looking for "the rally". A quick search across trading rooms and websites demonstrates this with numerous comments about "...oversold...", "...short-covering rally coming...", etc. As long as most seem to be on the lookout for this potential, it will not come. There needs to be a downside capitulation move - one that occurs on high volume, extremely negative tape reading (breadth, NYSE ticks, etc.) - before a sustainable rebound will materialize. For now, the 9900-10150 range continues to play out with the downside tested Monday. A close above 9975 sets up a test of the upper end at 10010-10150.

07.25.04 - Outlook

Dow 10000 - Now What? The markets are at a critical juncture. July has seen the bears rule the equities, slapping the DJIA from its mid-June highs in the mid-10000 area to close below 10000 on 07.23, the first sub-10K close since May. The bears and bulls both have their sights set on the line-in-the-sand at 9900 as this seasonally weak period continues.

While the equity markets have been ruled by sellers, the buyers have been in control of the interest rate instruments and the US dollar. The US long bond is back to key resistance in the 109-110, basis the Sep contract while the US dollar index is once again flirting with the 90 level following last week's turnaround. Note that the USU4 110 level is roughly a 62% retracement of the Mar-Jun move; the 9000-9050 zone on the US dollar index (cash) constitutes a few different retracement levels based on various swing moves over the prior 12 months.

YTD, the major indices are down roughly 2-8% with the Dow falling in the middle of the range. As for what to expect from this point forward, there are three possible scenarios. The first and most optimistic, is that the market is in a basing period after the 2003 strong move higher. If that is the case, this week the bulls must make a stand and if they do such a development will produce pullbacks in the bonds/notes and US dollar. However, for the DJIA to regain the 10000 level will require some instituional committment as it is a key psychological level and the 10150 area is key overhead resistance on the Sep contract. This leads to the second and more likely scenario in my opinion. The indices are set in a long-term consolidation range working off the excesses of 2000-2003. The final possibility is that the action of the past few months is setting up another leg down in the bear market. For traders, any of the three scenarios will likely lead to a consolidation range between 9900 and 10150 in the near term as participants take a wait and see attitude as the excesses of the past month's selling are neutralized. Stay tuned!