The Nasdaq composite appears to have failed to hold its New Year's high. The daily chart shows a fairly consistent pattern of lower highs and lower lows that occurred after the 2192 level was whipsawed to the downside early this month. The 20-day exponential moving average (EMA) crossover has been a fairly good trading tool for the Nasdaq composite over the last year, and the Nasdaq composite now (as of Wednesday evening) sits about 18 points below its 20-day EMA.
Similar and more precise action occurred in the Nasdaq 100. The Nasdaq 100 ETF (QQQQ) failed to match its late December 2005 high by only 0.10 point, before it turned downward early this month.
The S&P 500 appeared to have broken its March 2005 high; yet that turned out to be a whipsaw. The S&P 500 now sits less than 1% below its March high. Earlier this month, I said that the high had to be taken out decisively to suggest a “new high” was made. Similarly the index has not yet broken decisively below 1229 either, and therefore, the rally must still be given the benefit of the doubt for now.
However, when the Nasdaq has outperformed the S&P, it has generally been a good sign for the overall market during the trading range phase. It appears that most recently, the S&P is outperforming the Nasdaq, and this coupled with the apparent 1229 whipsaw, may be a signal of danger for the overall market. (See lower portion of chart - green relative price trendline.)
The S&P mid caps led the rally of the late April bottom. They produced a fairly linear up trendline since that time, which has been decisively taken out early this month.
Similar action was seen in the Russell 2000 small caps. The action over the last few weeks has been poor.
Dow Jones Industrial Average
While I will not site you chapter and verse technical analysis on the Dow Industrials, I will say that a look at the one year daily chart shows an index that is overbought, erratic, tired, and not poised for a move higher. Don ’t you agree? A look at the three popular moving averages (20-EMA, 50-SMA, and 200-SMA) all clustered within a few points of each other, coupled with the MACD (12,26,9) showing loss of momentum, suggests a sharp move down may occur soon. A close above 10,750 for the Dow negates this observation, obviously.
The Dow Transports have behaved nicely over the last couple of weeks, considering the action in the price of oil and the fundamental picture in the airlines. Yet a $3 swoon in the price of oil on Wednesday failed to ignite a significant transport rally. If I may digress from technicals for a moment, the companies within this index are among the oldest and most established businesses in the world. So from a valuation perspective, you would think that they would pay more than 1% in dividends. Yet that is the approximate dividend payout rate for the Dow Transports. As investments, “Sell ‘em all!”
The Dow Transports failed to break above previous year’s highs, and now appears as though the intermediate term trend is down. A close decisively above 3820 would negate this observation. The action of the transports at its support at 3350 will have implications in the long term trend of the stock market as discussed below.
Buying into apparent breaks of support of neckline whipsaws has been a successful strategy during the trading range phase of the stock market. Some of the more memorable whipsaws occurred with Cisco at 17.5 and Oracle at about 10. Yet of late, it appears that some former market leaders may have lost the ability to “save” apparent support breaks in their charts. This is action well worth watching because many leading stocks are now at critical junctures where their support necklines are being challenged from above.
Fed Ex Corp.
Dow Transport, FedEx (FDX), has broken an important support (labeled “important”), yet the rally above support was not decisive or tradable. A break back below the “important level” may carry important bearish implications for the overall stock market. Similarly, a whipsaw back above support and the FDX 50-day moving average would be important in its bullish implications.
The beginning of the end of the real estate bubble is likely to be signaled when luxury homebuilder Toll Brothers’ chart breaks down. As you can see from the 6-month daily chart below, TOL is challenging its neckline from above. I would consider a chart breakdown a decisive neckline break of the head-and-shoulders.
Below is the monthly chart of Fannie Mae dating back to mid-1995. Note that FNM is near key support of a multi-year trading range at 49. If FNM breaks decisively below 49, the measurement principle suggests that it will reach a price objective of about 29 or less. The fundamental picture suggested by many analysts on this web site may be confirmed by the technical picture. If FNM closes decisively below 47, you must give them their due. There are legions of accountants in Washington D.C., working on their earnings restatements. Looks like a buy to me!
PF Changs China Bistro
Restaurants were a leader in the bull market and held tough during the trading range phase. Upscale restaurant, PFCB is a leader among the restaurant group. It recently formed a broadening pattern, and broke below the horizontal neckline of the broadening pattern as shown in the 3 year weekly chart, below. If the stock breaks back decisively above the neckline, I think this would signal more of the same in the market – erratic action and indices within trading ranges. Yet if it rallies to the neckline on low volume and fails by resuming its downward trend below the neckline, that may be significant for consumer stocks in general, and it may signal resumption of the bear market. Breakdowns of leading stocks not involved in corporate governance indiscretions, have thus far, been rare.
While the action in Changs China Bistro suggests perhaps a market turning to bearish, the action in upscale retailer, Nordstrom (JWN) suggests the opposite. Note the apparent neckline break; yet bears were severely punished Wednesday following Nordstrom’s rosy quarterly earnings report and forecast. There will likely be more steam in today’s rally, and when the rally is over, this would likely present a good opportunity to sell Nordstrom shares.
The major averages finished little changed today with a bias to the downside. Following the ugly action on Tuesday, the market so far produced at best a weak or nonexistent rally. This is in spite of a correction in the price of oil. Google decided to issue more shares while Wall Street apparently sang their praises. After hearing the news, I checked to see if the South Sea Company still traded publicly for a possible sister stock play. (It didn’t.) For my money, I think a study of the Google action going forward will speak volumes as to whether the US stock market will head higher or whether it will proceed downward. The technical chart of Google is shouting “get out,” yet in the face of the secondary offering, the stock hung tough today. All momentum has been lost in this stock, and there may be gaps to fill near 220. The stock sits decisively below its 50-day moving average, and has completed a rising wedge breakdown. This is the Poster Child for excessive stock market optimism and if headline producer Google is taken out, it is likely to be devastating to market sentiment. And without valuation, sentiment and optimism is all this market has as its underpinning.
And since I am on the subject of companies without fundamental underpinnings, a key leading sector appears to be in the midst of a stock market sell off – that is the teen apparel retail sector. Virtually no companies in this sector pay any significant dividends. This isn’t a new “industry,” but rather one of the oldest sectors in the stock market. So when none of the companies pay any dividends, it is reasonable to question sky high valuations. There are two key necklines that warrant attention – Gap Stores (GPS), and Aeropostale (ARO).
Following its IPO a little over 3 years ago, the company has been in a fairly well defined trading range between 33 and 26. Following an analyst downgrade, the stock appears to have broken down below its support line near 26. Yet with their quarterly earnings announced after the bell, it will be important to note whether the stock rallies back above the former support line or if this line holds as resistance.
There is probably no need for pity for company management because although ARO is a fairly new public company, insiders now own only about 2% of its shares according to Yahoo Finance.
Another support line worth watching is that of household name Gap Stores (GPS). With support at about 20, Gap Stores reported disappointing earnings after the bell and the stock is selling off. The neckline is important for this widely held stock.
The recent action in the retailers and homebuilders makes one wonder if the same course of events that happened in the recent past will occur yet again. That is, when consumer stocks are weak, a subsequent bond market rally produces low interest rates that produce another wave in consumer refinance that produces more sharp tradable rallies for the consumer stocks and homebuilders. In spite of a bond market rally over the last week or so, the action of an important stock is so far suggesting that the foregoing turn of events will not occur this time. The importance of this stock and its relevance to today’s US economy and stock market can be noted by its ticker symbol – LEND.
While the bond market rallied, LEND broke below its support/resistance line, where it closed below its 200-day moving average today.
In other neckline action Toll Brothers may be working on a “save.”
Nordstrom failed to penetrate its 50-day moving average. The risk / reward ratio favors the bears in this stock.
Oil is in a bull market in spite of a correction and an even bigger correction in the stocks.
Got to go. Have a great evening!
James J. Puplava Financial Sense™ is a Registered Trademark
P. O. Box 503147 San Diego, CA 92150-3147 USA 858.487.3939