Weekly Technical Commentary by Art Huprich

With the Defensive Team Still on the Field, a New Line in the Sand

Support Level is in Place

Friday Morning 06/26

My statement yesterday about “participants shifting their mindset to selling strength” was not just ill-timed, it was wrong, so far. Major stock market indices easily overcame an initial decline (DJIA was down 40 points at the open) and ended the trading session with 2% + gains. The DJIA gained 173 points and the NASDAQ added 37 points. I was surprised how easily Wall Street shrugged off the testimony of Federal Reserve Board Chairman Bernanke surrounding the Bank of America (BAC/$12.35/Strong Buy) acquisition of Merrill Lynch. I believe that end-of-quarter shenanigans and the rebalancing of the Russell 2000 Index played a role in yesterday’s tape action. On the NYSE, volume expanded to 1.17 billion shares. The advancing versus declining volume figures was good and there were 1871 net advancing issues. 14 new 52-week highs were registered.

Consistent with the stock market testing and holding support Wednesday (6/24/09), good internal readings yesterday, and the market’s ability to hold its gains throughout the trading session yesterday, the SPX and DJIA recaptured their rising 50-DMA; a bullish development.

While the Health Care Select Sector SPDR Fund (XLV/$26.37) isn’t dynamic or exciting, it looks to be gaining some sponsorship. A move to the upper $20’s to $30 looks doable. Please use a violation of support accordingly.

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Conclusion

The testing and holding of the May lows and recapturing of the 50-DMA brings some relief and creates another “line in the sand” for the market. This can be seen on the following chart.

Specifically, unless the May lows are violated, I am not even going to think about “retesting the March levels” (this is in response to a good question I received yesterday), no less the April lows.

Click to enlarge

Thursday Morning 06/25

Following a 105 point jump by the DJIA all I heard after the FOMC announcement was “traders are selling the news.” To which I say “hogwash.” Maybe the DJIA sold off and closed down 23 points, but the rest of the market was up. The range was between +0.63% ($NYA) and +1.6% ($NDX), with the average stock market index gain of approximately 1.0%. While participants appear to be shifting their mindset to one of “selling strength,” yesterday was not one of them, in my opinion. On the NYSE, volume contracted to 1.10 billion shares. There were 1364 net advancing issues.

When reviewing your portfolios please consider removing stocks exhibiting poor relative or absolute price strength, tighten stops, or contact your financial advisor for specific ways the options market may help you.

Conclusion

If you are looking for a short-term “green shoot” or “brown shoot” for that matter, consider the Dow Jones Utility Average ($UTIL/352.37).

A move above initial resistance at 360.07 (aggressive accounts can use intraday prices, conservative accounts can use closing prices) would imply a bee-line towards the longer-term downward sloping trend line, which will marginally decline each day, currently at approximately 376 to 377.

The “brown shoot” would be a close below the uptrend line, currently at approximately 341.50.

For the time being, I’ll let the market dictate which “shoot” gets fertilized and then trade accordingly.

Click to enlarge

Wednesday Morning 06/24

Here are the most recent weekly BULL - BEAR investment newsletter advisory sentiment figures and a portion of their comments, published by Investors Intelligence:

“Most averages ended a month-long winning streak with modest losses last week. That prompted more advisors to adopt a cautious stance, continuing the trend that began a week ago. The increase in the bears came from both the bullish and correction camps. The BULLS moved lower to 43.6% from 44.8% the previous week and 47.8% the first week in June. The BEARS rose to 28.7% from 26.4% and 23.3% the two previous weeks. The advisor readings still have to be considered negative from two weeks, but a further shift could see neutral status shortly.”

Relative to yesterday’s tape action, the DJIA fell 16 points. The NASDAQ fell just over one point. On the NYSE, volume contracted to 1.21 billion shares. There were 164 net declining issues – inline. The Oversold – Overbought Oscillator closed at minus 4.0 – minus 5.0 is the start of this indicator officially being “oversold.” New 52-week lows, while a very small number (5), beat new 52-week highs (2) – concerning.

Earlier in the week the Semiconductor Index ($SOX/253.66) violated its rising 50-DMA and a 10 week uptrend line. If you are long this complex, please be careful and consider reviewing your positions. If I can help you identify “next support”, please let me know. As for the $SOX itself, next support is closer to 236.

Conclusion

At their intraday low yesterday the DJIA hit 8286 and the S&P 500 traded under 889. These “prints” were approximately 40 and 8 points, respectively, from the upper end of the indices initial ranges of support. For the DJIA, that support range = 8246 to 8221. For the SPX, that range of support = 881 to 878.

Consequently, while the Bears still have the ball, some type of topside bounce (related to the end-of-quarter) should occur “in and around” this area. The quality of such, in terms of volume, breadth, high-low figures, and the market’s ability to hold the intraday gains, will go a long way in discerning its staying power, or lack thereof. Consistent with this, a poor quality rally which leads to a violation of the support levels listed above, will be much more damaging to the respective indices chart configuration and the market overall.

In the meantime, regardless of a topside bounce, regardless of a violation of support and regardless of another testing and holding of support, given the decline that many stocks have experienced over the past week or two, managing individual stock risk (sell or hedge technically or fundamentally weak positions, lock in full or partial profits) and overall portfolio risk (wealth preservation), remains a must!

Tuesday Morning 06/23

Whether one relates yesterday’s decline to comments from the World Bank, a report highlighting insider selling, the recession, or concern about the two-day FOMC meeting starting today, it is clear that last week’s negative technical underpinnings (narrowing rallies, secondary uptrend line break, increasing selling pressure, reversal down by NYSE Bullish Percent Index, etc.) played a role in yesterday’s almost 2.5% to more than 4% decline. The DJIA (8339.01) and the NASDAQ (1766.19) closed at their intraday lows, down 201 and 61 points, respectively. On the NYSE, volume contracted to 1.39 billion shares. There were 2,373 net declining issues. For those wondering, the Oversold – Overbought Oscillator closed at minus 3.1.

In light of yesterday’s action, the SPX and DJIA closed below their rising 50-DMA (support). One short-term guidepost is the indices’ ability to recapture these moving averages, which will marginally change each day. Currently, the 50-DMA for the SPX and DJIA = 899 and 8378, respectively. The NASDAQ remains above its rising 50-DMA, currently at 1742. While I am on it, another future guidepost will be how the major indices contend with the now three-week amount of overhanging selling pressure that has been established.

In light of the broken trend line yesterday by Crude Oil, a testing of the multi-month uptrend line and 50-DMA in the $60 to upper $50s range should not be surprising. A pullback of this nature, followed by some stability and base building action, would likely provide a good entry point for the stocks.

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Conclusion

Finally and within the context of analyzing the stock market’s tape action one day at a time, the DJIA and SPX are trending downward and approaching their lows from the middle to later part of May – next support.

Here are their respective support levels. SPX (893.04): 881 to 878. DJIA (8339.01): 8246 to 8221.

The quality of any topside bounce, in terms of volume, breadth, and leadership etc., in addition to the indices’ ability to recapture their respective 50-DMA, will be a good short-term “market tell” going into quarter-end.

Charts courtesy of Thomson Reuters

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