Bill Daily | Plainfield, IL

In a poor take off from my high school athletic days, Wall Street’s mantra for the second straight day, was “Financials, financials, they’re our man, if they can’t do it, lower Crude Oil can!” Consistent with this, the DJIA closed up 207 points, its second consecutive gain of over 200 points. NASDAQ, following Wednesdays successful test of its March low (a positive short- term divergence by NASDAQ, which also occurred in the small and mid cap market proxies), gained 27.50 points. On the NYSE, volume expanded sharply to 1.92 billion shares. There were 1504 net advancing issues. The Oversold – Overbought Oscillator closed at minus 4.5, officially leaving “oversold” territory.

Financial stocks were the big winners, helped for a second consecutive day by short covering. Please realize that from its February 2007 high to its recent low, the Bank Index (BKX/62.19) had declined almost 62%. Consequently, sharp and fast rallies will occur. Has the group and entire financial complex established a “low?” Yes. Is it the ultimate low? I don’t know. In light of the tremendous amount of chart damage that has been done, I believe the basing period will take a long time to be completed.

On the flip side, for the fourth consecutive day, the DJ Utility Average (UTIL/489.44) declined sharply. Just like the recent decline (and two day rally) by the DJIA was related to its financial components, I believe the breakdown by the UTIL is related to its energy components. A number of its component stocks are at 52-week lows; please be careful. Please hedge your short-term utility positions, especially on any type of minor bounce. Additionally, commodities and commodity stocks continue to get sold off and break both their 50-DMA and intermediate-term up trend lines, accompanied by above average volume readings! Going forward, low relative volume rallies (I use the 50-day average volume) would be negative, especially if the rallies record a “lower high” or they “fail” at the 50-DMA! If I can help you, please let me know.

Following its string of recent breakdowns, Crude Oil ($129.29) clearly followed through to the downside yesterday. A Point and Figure chart shows trend line support at $128 and then no support until $122.30 to $121.61 and $120.75. Initial resistance points = $130.80 and $135.14 – $136.00.

Today is day three of a rally. After the type of decline we have been through, one and a half to three day bounces are normal. Consequently, today is an important day, especially in light of the EPS reports that came out last night and this morning.

Today is also important because if the market indices can close the week above last week’s closing levels, the bulls will become more emboldened next week. The SPX (1260.32) closed last week at 1239.49. The DJIA (11446.66) closed last week at 11100.54. NASDAQ (2312.30) closed last week at 2239.08.

In terms of today’s guideposts, watch how the financials trade off of earnings news and how the oil stocks trade after their recent beating. Additionally, the end of day internal statistics will be critical.

Finally, please take advantage of this strength and hedge, reduce, or sell over weighted, underperforming positions!

Wednesday Morning 07/16

A number of years ago my daughter said, “Dad, you need to color your hair,” obviously in reference to my “graying head.” While I did not have any intention to follow her advice, after a day like yesterday I may have to rethink my strategy. Specifically, the DJIA (10962.54) fell 228 points, rallied to up almost 70 and closed down almost 93 points. At its low yesterday, the DJIA touched 10827. This is in-line with the 10800 to 10700 50% retracement range of its entire 20002/2003 to 2007 advance. It should be looked at as a potential “griping area”. NASDAQ (2215.71) moved down to and held above its March low (positive divergence) and actually closed up almost three points. The supposed “talking points” for yesterday’s tape action are numerous and include the Fed Chairman’s testimony to Congress, a sharp reversal in commodity prices, the approaching options expiration and a temporary rule change concerning short-selling.

One significant “talking point” yesterday was the mini-reversal by Crude Oil ($138.75). Crude was up $1.55, down $9.26 and closed off $6.44 per barrel. In light of the negative mini-reversal yesterday, specific short-term support levels of significance are $135.14 (previous low and trend line), $133.03 (50-DMA) and $130.80 (previous low and another trend line). While all are important levels and should be used accordingly, most important is how your specific energy positions react. Please let me know if I can help.

In terms of Natural Gas ($11.47), which has already broken down short-term, the trend line support (a trend line will marginally change each day) that I discussed in my 7/14/08 report now stands at $11.26.

Additionally, from a big picture perspective, I have maintained for a number of weeks now, and am suddenly being joined by a number of other analyst, that the macro areas showing the best relative strength are Healthcare, Consumer Staples, and Utilities.

Conclusion:

On the NYSE, volume expanded to 1.84 billion shares. There were 1574 net declining issues, much weaker than the DJIA. The Oversold – Overbought Oscillator closed at minus 9.0. Most amazing was the number of new 52-week lows. The final reading was 1304. This means that almost 40% of the issues that traded yesterday on the NYSE recorded a new 52-week low. This is an astounding figure and while it clearly includes many “non-common” stocks (preferreds, bond funds, ETFs, etc.), it is indicative of not just a washed-out condition but potentially an exhaustive one as well. Consistent with this, a sharp rally wouldnt surprise me. That said, I don’t think it will be anything other than an oversold, reflex type move.

While the historical comparison isn't completely accurate, due to the preferreds, bond funds, ETFs, etc., the following table puts yesterdays reading into perspective.

Tuesday Morning 07/15

Who ran in Pamplona Spain recently; was it the bulls or bears? Further concerns surrounding the regional banks, selling of brokerage stocks and terrible reaction by the stocks of FNM and FRE to the corporate news announcements over the weekend, (proving the importance of two Wall Street axioms 1) reaction to news is often more important than the news itself and 2) learn to separate the company from the stock) produced another dismal day for the financial complex and in turn, the broad stock market. Specifically, after gaining almost 130 points at the opening bell, the DJIA (11055.19) lost 45 points. NASDAQ (2212.87) underperformed, falling 26 points or almost 1.18%. NYSE volume contracted to 1.39 billion shares. There were 1615 net declining issues, a terrible reading relative to the DJIA and 721 new 52-week lows. The High-Low Index currently stands at 5.54%, the lowest since October 5, 1990, when it fell to 2.37%. The Oversold – Overbought Oscillator closed at minus 8.2.

The stock market’s inability to rally despite a washed-out condition is indicative of the magnitude of the prevailing and future headwinds that it is dealing with. Let me repeat that following the successful “March retest”, I was wrong in believing that the stock market had discounted the worst.

Speaking of headwinds, besides the poor reaction by FNM and FRE to the weekend news, the Bank Index (BKX/50.01) fell 8.50% and closed below its “1998 Long Term Capital Management” low. Short-term snap-back rallies aside, I believe this is telling us that more problems exist in the mortgage-credit arena. Additionally, the Broker-Dealer Index (XBD/128) closed beneath its March intraday low and recorded a new 52-week relative strength low.

Along this line, here is paraphrase of something written yesterday by Dorsey-Wright and Associates that I completely agree with.

“The U.S. Olympic Track and Field Trials recently concluded. Our team has been selected, and in less than a month the world’s best athletes will compete in Beijing. For those unfamiliar with the selection process, it is quite simple: Finish in the top three of your event and, assuming you have met the Olympic A performance standard, you make the team. No politicking by the athletes to be added to the team, no committee meetings, no ‘expert’ opinions are needed to select the team. The only factor to the decision is performance.”

“Likewise, relative strength portfolios (relative strength measures the price performance of a stock versus a market average or universe of stocks. A stock’s relative strength can improve if it rises more than the market in an uptrend, or goes down less than the market in a downtrend) consist of securities that have performed the best over some time frame. It wouldn’t make much sense for the United States to send our losers to Beijing. Yet, this is the same mentality which prevails among ‘bottom feeding’ investors who are constantly looking to pick tomorrow’s best performer by looking at yesterday’s worst. Every now and then future winners (whether in track & field or stocks) come from past laggards, but your best probabilities of long-term success come by sticking with the winners.”

The S&P 500 (SPX/1228.30) fell 11 points, joining the DJIA in a defined down trend. A test of the 2006 June – July support lows of 1224 and 1219, is forthcoming.

Looking past that, do the odds favor that the SPX retrace a full 50% of the entire 2002/2003 to 2007 up trend, which equates to approximately 1170? Yes. Please refer to the following charts.

Monday Morning 07/14

Another hurricane hit Wall Street Friday. This time the storm was in the form of Crude Oil hitting another record intraday high, “Fannie (see 7/10/08 report) and Freddie” and a number cuts on CSCO. Consistent with this, the DJIA swung from down 252 points to plus 10 and closed down 128 points. The DOW’s (11100.54) intraday low was 10977, not far from the “10800 – 10700 retracement levels” (2002/2003 lows to 2007 high) we’ve been watching! NASDAQ (2239.08) recorded similar volatility, closing down 19 points. On the NYSE, volume expanded to 1.72 billion shares. There were 1113 net declining issues. New 52-week lows (897) overtook the reading from the March lows, implying there was some “real” selling Friday (this is actually good). Yet this is still below the January reading in which 1114 NYSE stocks (traditional figure) hit new 52-week lows. The Oversold – Overbought Oscillator ended at minus 7.6.

Following the completion of a bullish short-term inverse head and shoulders pattern approximately three weeks ago, Gold ($960.60) completed a bullish, short-term, cup and handle pattern Friday. Both patterns imply a retest of the recent highs between $1004 and $1040. Following is a chart of Gold, showing minor support levels at $946 and $913 followed by its 200-DMA, currently at $874. Pro-active accounts that will take profits and cut losses, can gain exposure to Gold either through the exchange traded fund (ETF) universe.

Speaking of commodities, contrary to Crude Oil ($145.08), Natural Gas ($11.90) has recorded a short-term breakdown. Natural Gas closed beneath both a multi-month up trend line and its 50-DMA. Next support, defined by an uptrend line drawn off its late December 2007 low and which will marginally change each day, is $11.21.

Conclusion:

While not every major down trend by a market index has ended with a “low-rally-retest” sequence, according to my figures most major down trends by market indices have ended with a “low-rally-retest” sequence.

Low-rally-retest sequence still holding: NASDAQ – NDX, RUT – SML and MID. The NYA is holding on by a hair.

Teetering, on the verge of failing (in other words, Im not sure): SPX. The SPX closed for the third consecutive day under 1256. In light of Friday’s move up off its lows and this morning’s early quotes, I am still going to give it the benefit of the doubt.

However, if the SPX fails to close above 1256 today or if it closes over 1256 today and fails to follow through, I’ll put it in the “failed” category and treat it accordingly.

In the meantime, within the context of numerous sector and stock specific down trends, please use strength to hedge, reduce, or sell underperforming stocks or sector specific positions.

Company Name

Ticker

Priced as of

07/17/08

RJ&A Rating

(if Applicable)

Cisco Systems

CSCO

$21.52

Market Perform

Fannie Mae

FNM

$10.93

Freddie Mac

FRE

$8.33

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Weekly Technical Commentary by Art Huprich

Friday Morning 07/18

Wednesday Morning 07/16

Conclusion:

Tuesday Morning 07/15

Monday Morning 07/14

Conclusion: