Volatile Day in the Markets Leaves Mild Recuperation

Good day! It was quite a crazy session on Wednesday after Tuesday's massive selloff left investors and traders alike wondering just which door to run to. The indices did manage to recover some of Tuesday's losses as we expected, but it was not at all easy, and the S&P 500 and Dow Jones Ind. Average even managed to establish lower intraday lows. This took place after the indices moved higher in the premarket and opened into the 15 minute 200 simple moving average zone intraday, as well as price resistance from Tuesday's morning lows. With an extreme gap now in play, the odds were strong that the gap would attempt to fill. Some initial hesitation for the first 30 minutes of the session led to a better test of the 15 minute 20 sma zone, but volume declined on this slight upside move and the market turned around quickly into 10:00 ET on the heels of June's existing home sales data.

Last month the real estate market experienced a sharp drop in the sales of existing homes. The 3.8% decline marks the lowest sales pace in nearly 5 years as more and more home sellers are pulling their listings. Even with this decline, the supply of homes on the market remains at a 15-year high with 8.8 months' worth of sales (or 16 months and a price reduction of 18% if you want to just count how long my completely renovated home in southern Florida has been listed! Ugh!). Countrywide Financial Corp. (CFC), which is the nation's largest mortgage lender, and who reported a 33% drop in quarterly profits on Tuesday, fell another 1.6% on Wednesday.

All in all though, home prices are still out of reach for many would-be home owners, and unfortunately I am in complete agreement with many who feel that this slump is still quite a ways away from the bottom. I would not be at all surprised to still be stuck here for the next year given the massive overdevelopment of new homes in my area and the insane deals these developers are making in a feeble attempt to unload their inventory. New home sales data for June is due out on Thursday. If by chance anyone would love to live in a gorgeous courtyard home in a well-established gated community, 10 minutes from the beach, feel free to give me a call! Preferably sooner than later since hurricane season is about to start! With the addition of two new family members this past year, ages 4 and 8, I REALLY need a larger house!!! Thanks in advance! =)



Ok, ok, since I still haven't quite convinced you, I suppose I better get back to telling you about the rest of the market action on Wednesday...

Once that 10:00 ET selling hit, there was no turning back until the market had made its way back into Tuesday's lows. The major indices didn't even stall enough at 5 minute 20 sma support to form more than a cursory continuation pattern with an inside range bar and then a return of the bulls at 10:15 ET. The momentum increase somewhat as the previous lows approached and finally formed an exhaustion move as the 10:45 ET reversal period hit. This corresponded nicely to the previous day's lows in the Nasdaq Composite, but was a slightly lower low in the Dow and S&Ps. The result was a 2B reversal in those indices and a double bottom in the Nasdaq which eventually took the market back to the 15 minute 20 sma resistance that had held earlier in the session.



After heavy volume throughout the morning, the volume finally died down a bit mid-day. After hitting the 15 minute 20 sma, the momentum within the indices also began to turn back over. The market pulled back off the resistance into noon and then hit the 15 minute 20 sma again around 12:30 ET, but this time at a much more gradual pace than before. This upside into the resistance occurred on the lightest volume of the session so far, which indicated a lack of truly dedicated buyers and after a small pullback into 13:00 ET, the selling increased for a second time on the day going into 13:30 ET.

As in the morning, this low held the previous one in the Nasdaq Composite, but the Dow once again saw a slightly lower low, creating a second 2B low in that index. The slight flush into this low, but on lesser volume than into 10:45 ET, showed us that while the bears were still unsure about buying, they recognized the support and were hesitant to break it. After a brief pause when they contemplated the level, the market popped quickly back to the 5 minute 20 sma resistance zone. This pushed the indices into a sloppy range along that level into the 14:00 ET correction period, at which point the resistance broke and took the indices back into the 15 minute 20 sma for the third time.

Typically a third test of support or resistance is the one most likely to break. The market had not broken the third test of lows because in the Dow each low was slightly lower than the last, hence creating more of a rounded appearance. Each test of lows was also at a more gradual pace than before, leaving less momentum to push through the support. As a result, in this case the third test held. On the upside, however, the resistance became closer and closer each time, so the market had less and less work to do to make it into that level and the slowing downside momentum meant that more steam was available for the bulls. The indices broke through this 15 minute 20 sma resistance when the 15:00 ET correction period hit. This happened after it hugged it for about half an hour beginning just before 14:30 ET with lighter volume throughout that congestion.

The indices rallied sharply out of 15:00 ET and within only a few minutes they were all the way back into the congestion from the opening prices. This stalled the buyers, but the pace was so strong that it was difficult for the market to simply turn back around. Instead, the 5 minute 20 sma support held into the close, even though this close still left the market looking weaker on the 5 minute charts by hugging that 5 minute 20 sma instead of bouncing right back off it.



Although I had a slew of stocks on my watch list which gapped strongly into the open on Wednesday, many of the gaps were too extreme for decent momentum continuation moves and they spent the day stuck in choppy trading. On the upside these included CB, PLT, AMZN, EGLE, and PRAI. Chubb Corp. (CB) gapped on earnings that were up 19% from the previous year, adding 6% by the end of the day. In Plantronic Inc. (PLT) its rally was another earnings move in which it gained 11.3%. Amazon.com (AMZN) made headlines when it reported earnings that more than tripled in the second quarter and sent the stock higher by 24.4% into the closing bell. Eagle Bulk Shipping Inc. (EGLE) rallied 15.4%, all of it with the morning gap, when it announced plans to acquire a fleet of ships from a Greek company. PRA International (PRAI), on the other hand, saw its 7.8% rally resulting from plans to be taken private.

On the downside the extreme gaps which saw little action past the open were SKX, PNRA, NTRI, and JOYG. Sketchers USA Inc. (SKX) shares fell 21.4% after announcing a 27% increase in operating expenses with its earning release. Panera Bread Co. (PNRA) also fell victim to rising costs. In the past year, even though revenue rose 28%, costs increased 33%. Another stock tumbling on earnings news was NutriSystem Inc. (NTRI), which fell 10.8%. Ironically, it actually beat earnings expectations of about 85 cents a share with earnings per share of 96 cents. Joy Global Inc. (JOYG) lost 11.9% when it cuts its fiscal 2007 financial forecast.

In the overall market, the Dow Jones Industrial Average ($DJI) gained 68 points to end the day at 13,785 on Wednesday. It was led by Boeing (BA), which had rallied 3.3% into the open on better-than-expected earnings. The S&P 500 ($SPX) rose 7.05 points, closing at 1,518. The Nasdaq Composite ($COMPX) climbed 8.31 points. It closed at 2,648.

Despite the somewhat higher prices on Wednesday, the Dow and Nasdaq still have room before hitting the larger 50 day simple moving average support. In the S&P 500 the next major support level is the 100 day sma, which is slightly above June's lows. The market still has room to bounce to its 60 minute 20 sma resistance, but the larger daily support remains a magnet for decent potential to hit still at some point this week.

Market Edges Highs, but Trading Remains Light

Good day! Although the holiday week is behind us and we are heading into earnings season, volume remained light on Monday. This continues a string of slower than average Mondays in the overall market which was primarily range-bound throughout the session. By the end of the day the Dow Jones Industrial Average ($DJI) had risen 38.29 points. It was the leader in the relative strength department, but still only gained 0.3%. The S&P 500 ($SPX) climbed a mere 1.41 points. The Nasdaq Composite ($COMPX) also had only a slight gain with 3.51 points. Both of these were only an increase of about 0.1%.

I have a presentation coming up this weekend in Denver sponsored by the CBOT, so a lot of my trading since I returned from vacation has been focused on the EMinis in order to use them for examples. While I've done well, a focus on individual stocks would have served me better, since a lot of individual stocks on Monday really outperformed the market as a whole.

Leading the Dow on its steady journey were some of the most recognized names in the market. Alcoa Inc. (AA), which is always one of the first to announce earnings and which was due out after the closing bell, led the way with an increase of 1.7% (+$0.70) on Monday. Incidentally, it later reported that while net income fell 3.9% last quarter, revenue rose 3.4%. This was somewhat short of expectations and AA did end up moving lower by about 1% in afterhours trading.

Boeing Co. (BA) also moved strongly higher in Monday's session on news, but while AA climbed throughout the day, BA's gains came in the form of a strong upside gap smack into price resistance at the year's highs. BA had hit $101.45 just over a month ago and it retested that zone with a high shortly after the open of $101.32. It had been moving higher over the course of the past two weeks after a nice two-wave pullback off those earlier yearly highs. On Sunday the company then announced that it had orders for 35 of its new 787 Dreamliner commercial jet that made its debut on Monday. The first deliveries are slated for 2008 with the 787 seating between 210-150 passengers. One of the highlights is that it is anticipated to use up to 20% less fuel per passenger than other planes of a similar size.

The other top Dow movers were American Express Co. (AXP) at +1.5%, Caterpillar Inc. (CAT) at +1.3%, Intel Corp. (INTC) at +1.1%, Exxon Mobil Corp. (XOM) at +1.1%, and General Motors (GM) with a gain of +0.8%.

Johnson & Johnson (JNJ), another Dow component, rose 0.9% on news of a share repurchase program. While not in the Dow, ConocoPhillips (COP) also made headlines intraday when it surged at 2:30 ET on news that it planned to buy back up to $15 billion of its shares through the end of 2008. One attraction of these buybacks is that since they reduce the number of shares outstanding in a stock, they will tend to give per-share earnings a nice boost. Buybacks in the S&P 500 hit a record monetary level in the first quarter of this year of $117.1 billion. This is a 17.5% increase as compared to the same period last year.

Even though Nasdaq as a whole did not make many waves on Monday, some of the largest gainers in the overall market were not in the Dow, nor the S&P 500, but rather the Nasdaq. Among the strongest intraday movers were Taser Intl. Inc. (TASR), Amazon (AMZN), Sandisk Corp. (SNDK), Crocs Inc. (CROX), First Solar Inc. (FSLR), Isis Pharmaceuticals Inc (ISIS), JA Solar Hldgs (JASO), and my favorite stock of the year... Schnitzer Stl. Inds. (SCHN). Each of these had at least a very strong morning, and the majority had a very nice trend day on Monday.



Despite some really great moves in equities, the overall market was not terribly exciting. A slight gap higher was followed by a couple of small pivots back and forth in the first hour of trading. The Dow and S&Ps had ran into the previous highs, which we had been watching for resistance, and the rally from the previous afternoon served to exhaust the buying even though the market made a second attempt at highs into the 10:15 ET reversal period intraday after a somewhat faster drop out of 9:45 ET. Volume was lighter on the second bout of intraday buying on the 5 minute time frame though, and shortly after 10:30 ET the downside momentum increased, leading to new intraday lows and about a 50% retracement of the previous day's range in the Nasdaq and S&P 500.



The price retracement and support, combined with the Dow's 15 minute 20 sma support and an increase in volume exhausted the sellers into 10:45 ET. I picked up the NQ (Nasdaq EMini) at 2003.25 at 10:46 ET for a pivot trade. The momentum was also slowing and rounding off at lows in the Dow at the same time. I choose to buy the NQ first because it showed the greatest exhaustion. I added the YM (Mini-Dow) soon thereafter at 10:55 ET. I had to hold through a very slight flush of a few points, but the rounding off continued and the 11:00 ET reversal period held the Dow as it completed its closure of its morning gap and soon the three major indices were all heading higher.

The late morning bounce began quickly enough, moving nicely into the 5 minute 20 sma, but after taking back about half the earlier losses they ran into trouble. The daily charts were still very extended and the morning decline was simply too strong to sustain decent upside momentum on Monday. While I continued to favor the bulls, trading became very sloppy in the indices and it was necessary to just hold on and trust my bias since there were very few "pattern" setups throughout the remainder of the day. The uptrend channel on the 5 minute broke lower for about 30 minutes at 2:00 ET, but soon reversed back to the upside and was retesting the morning highs by the 3:00 ET reversal period. The sloppy action then returned for the final hour of trading with the 15 minute 20 sma serving as support.



Although we don't really have any reversal pattern triggering at this point on the larger intraday and daily time frames, the upside momentum has me concerned because the types of declines we experienced mid-morning on Monday are very common with this type of buying. It simply does not take much for the bears to grab hold. I am not going to be very aggressive on the short side just yet though, and will likely treat those setups that I do come across intraday more as daytrades than swings. Exceptions would be setups such as Panera Bread (PNRA) on 6/6 and Genzyme Corp. (GENZ) on 7/6. These types of gaps tend to have continued selling and are nice for swings when you catch them early on.