You want to see what lack of buying looks like. This is no bull as we head to Labor Day weekend. Enjoy the lack of volume and see you back next week with hopefully a return to school.

 

The SNDK broke out of its weekly wedge and close up big today. This can't be confirmed until Friday's close is in, but this would be very bullish if the support can be held near 55 now as we go on thru August/September. 

 

The market can't be in a bull market until the Semi's and Financials participate fully. We have seen nearly a 20% move off the semi's bottom in July. A nice move indeed.  Lots of resistance in the 35 area and months upon months up to 38 beyond that. I don't see a moonshot taking the consumer and semis much beyond that and even a run past 36 will be tough to maintain at this juncture.  Let it ride and see where these end up but a big snapper has already happened and don't be afraid to pull some chips off the table if you have been long for a while as we near next resistance.

 

 

Aetna got crushed back in late July and has been working off its oversold condition. The problem is that the stock has not filled its gap from the break but is running into major weekly resistance @ the 40 area.  I think this is nearing a nice sell set up as the volume since the major sell off has continued to fall off as the stock has increased in price. A nice divergence indeed.

 

 

Here's one with tons of obvious resistance on the daily chart up near 45 range.  You see it pulled back off the last run up last week, but there is also months of resistance at that level and not a strong buy candidate unless you can pick some up near 35 with a tight 1 dollar stop even down there.  That's how I see it at least.

 

Obviously, FNM and FRE are moving in concert and this chart shows a similar daily breakout, however a range bound weekly chart with declining lows. I read the long term trend still as bearish as long as the wedge holds to the upside and the recent highs near 58-59 aren't overtaken the bears will be in charge.

 

The market continues to work the Chinese Water torture. How else do you explain the Dow up 13 the Nasdaq up 13 and the SP 500 flat, yes zero gain or loss. We truly haven't moved in over two weeks. Let's review a few stocks again using the daily/weekly time frame.  FRE and FNM have broken out of a few month bottom and exploded up over the past 3 weeks. What does it all mean? Bottom in housing, nah too much damage to overcome there, but possibly a nice short trade setting up. Let's take a look. You can buy the dips on FRE down to 58 and sell the rips up to 70 it appears to me for now.  That's the way I read the daily and weekly stances. 

 

Economic Indicators (8/28 - 9/1)

All Times Eastern

---

Here is the Laggner report:

Proliferation of interest only and option arm mortgages took this bubble beyond our expectations so the reversion should be painful. • 32.6% of new mortgages and home-equity loans in 2005 were interest only, up from 0.6% in 2000

• 43% of first-time home buyers in 2005 put no money down;

• 15.2% of 2005 buyers owe at least 10% more than their home is worth (negative equity);

• 10% of all home owners with mortgages have no equity in their homes (zero equity);

• $2.7 trillion dollars in loans will adjust to higher rates in 2006 and 2007. 32.6% of new mortgages and home-equity loans in 2005 were interest only, up from 0.6% in 2000;

• 43% of first-time home buyers in 2005 put no money down;

• 15.2% of 2005 buyers owe at least 10% more than their home is worth (negative equity);

• 10% of all home owners with mortgages have no equity in their homes (zero equity);

• $2.7 trillion dollars in loans will adjust to higher rates in 2006 and 2007.

Average equity extraction $600 billion (5% GDP) annually the past 3 years

Industry experts say loans with reduced documentation now account for about 40% of the entire mortgage pool. In some cases, to compensate for the increased credit risk, lenders charge more for stated-income loans, with rates typically an eighth- to a quarter-point higher than those on a loan with full underwriting requirements.

The vulnerability of stated-income loans to fraud is illustrated in a recent report by the Mortgage Asset Research Institute to the Mortgage Bankers Association: after reviewing a sample of 100 stated-income loans and the accompanying IRS forms, an undisclosed lender recently discovered that almost 60% of the stated incomes were inflated by more than 50%, while 90% of the stated amounts were exaggerated by 5% or more.

About 70 percent of the people who take out an option adjustable-rate mortgage, which lets the buyer avoid paying even the full interest on the loan, end up paying the lowest permissible amount each month, according to the Federal Deposit Insurance Corp., which regulates banks. The amount unpaid is added to the mortgage balance, so borrowers end up owing more than when they started. Having no equity in a home increases the risk of foreclosure, especially when housing values fall and houses are hard to sell.
...
In 2000, just 1 percent of American homeowners who got new loans had these types of loans, but by May 2005, about a third of all borrowers did -- about the same percentage as in May 2006, according to new data from First American LoanPerformance, which tracks the statistics.

The Ten year interest rates have been hammered from the July highs of %5.25 to Friday's lows of %4.79. That's a monstrous %10 move down so far. On the daily chart it appears there is some short term support here @ 4.75% going back to March of this year. If we go to the weekly stat chart you can see even deeper long term support here @ the 4.7% area. My bet would be the FED has talked rates down here in the interim but will be heading back the way of the bullish trend on the weekly that is still in place.

This chart of regional NW bank CACB looks like a possible candidate of what technicians call throwovers.  What that means is the stock appears to break out only to quickly retrace the new breakout area after a short time. This is a logical point to short this name with stops placed over the most recent highs. It appears with the slowing of real estate and growth nationally and what will be coming to parts of NW USA soon. This high growth small regional financial institution appears in the topping process.  Logical stops prevent high risk but downside appears to be at least in the 27.5 range over the next few months, while the risk is about 3 pts higher in the low 37's which was the old high.  So a nice 2/1 play here on risk reward has set up. 

CSCO's charts look much like the rest of the market spinning and churning but in the end really treading no where in the water.  Its not a convincing bullish picture that the tech bulls keep touting to me. That's why you have to step back and view multiple time frames to really get the entire picture. If you added in the monthly chart it would be a very bearish chart. 

I don't know about you but the "kid" doesn't look much better than it has since 2001, just stuck in the middle with you and spinning right round baby right round.

I'm gonna gitcha gitcha gitcha, one way or another. Blondie calls this chart as it appears it is nearing a volatile move but no need to guess the move as both the daily and weekly confirm that this name wants to gitcha one way or another. Wait for the breakout and follow on in.

 

Another two charter here to view. GM Has had been the darling of the DOW 30 for the 06 year. Usually its the crap from the previous year that likes to run. Looking at both the daily and the weekly charts and upper resistance being tagged, the name looks like its ready to resume its longer term bearish stance. 

Part of my weekend routine is to review about 125 US and international indices and find trends both up and down on different time frames. I start with the Daily, go Back to weekly, then add the Monthly charts. This helps me discertain the true near term trends with the longer term trends. I then break down the leader and laggards within the leaders and laggard indices and find ideas for my trading week. This is particularily important in illiquid days like we are stuck in for the next few weeks. The busy stock season is really from November thru April, but part of my regular routine is to see what is up. I came up with a good picture of what looks like a uptrend recently in the SNDK name after a nice 3 week run.

So that is a pretty bullish chart on the recent daily action, but when you pull back to the weekly you see the true picture which is one of a bear. I would be a seller here with pretty defined risk at the line as we will probably pull back from this spot as this weekly bearish wedge is pretty solidly defined. 

I thought I would post two very thoughtful emails from readers responding to my last week's column, which seemed to hit some nerves:

 

FROM A RETIRED LIEUTENANT COLONEL:

 

 

 

 

Peter, your commetns on Iran/ Shiite further trouble in this weeks column are right on the dot...sort of ...  As a Muslim Turk with a special interest and deep knowledge / experience on the topic, I thought I would share with you quickly the history behind the whole thing, and because of it, I never did figure out what we (the US) were thinking in going into Iraq ... Iran spent 1 million lives trying to get Shiite influence into Iraq, and we spent billion in aid to Iraq to stop it... Then we went in and did it for them!   Shiites are gaining influence very quickly, Hezbolla is strenghtening as a result, backed by Iraq and Iran... Bad news is Shitte have suffering, pessimisn, resistance, and war woven into their core beliefe system, dating from the time of Muhammad's death.  Basically, in a nut shell, Muhammad dies, the vast majority wants a replacement leader based on a democratic system / vote of the elders.... Those are the Sunnis.  A handful of them say that the ascension should be by blood ties to Muhammad, and scream foul - Mohammads son in law rides off into the forest promising revenge and take ocer with some other guys, those are the Shiites. They are STILL waiting to take over, even though the concept doesnt even apply any more... They are dangerious by dogma, by politics, and will do things, for the sheer fun of it, and IRAN is dangerious, and now so is IRAQ.
> 
> That said, there is no way Iran can ever engineer a coup on Saudi, because the Saudis are Sunnis, and it just wont happen. The people that could do a coup is not open to influence by Shiites.  Way too deep rooted of hatred.   Osama and his cronies would love to do it,,,, BUT, the Saudi royals keep the people JUST SO fixated with enough social programs to avoid any questioning of the status quo.  Free housing, free stipends, free health care, etc. to all Saudi citizens.  Unless there is economic turmoil, a Saudi coup is highly unlikely.

So I had mentioned three more Fad stocks of recent history and I just had to laugh when I brought up the charts. The Foreman Grill is made by SFP, the late nite natilus equipment made by NLS and TASR need no introduction but let's see how the fads are going with these faders.

Realistically these stocks will fade into oblivion and possibly bankruptcy or zero over time would be my guess. Consider fad stocks as just that and trade em but don't get sucked into the long term buy and hold on these types of specs.

 

I was reading recently how Krispey Kreme is shutting down one of their bay area stores. Well i think most new that a donut shop was not the huge new business opportunity back in 98-2000 when they were trading like internet stocks. Donuts of course it was a fad. Strange that another fad stock which is a diet company NTRI will in my opinion meet the same fate over time. Just like the donuts before, the foreman grills, the Taser guns, the weight lifting systems, all fads all go the same way. Be careful in your investments to recognize fads over real growth opportunity.  HANS will most likely follow the same path as all these names.

Growth of these fad companies and their products is met with overwhleming underperformance as the next great thing comes along and revenue models can't keep up with the priced of the stock.

The robotic surgery is a great idea and one with merit but the stock of ISRG has gotten way ahead of itself and the chart to me is projecting a swing of price back to the 60 level from where it lies today. The stock is breaking down on all time frames and any test of the 100 price level would be nice selling areas. 

What happened to our breakout in volatility in May. We almost entirely retraced the move out we had and have gone back to the brutal dryness in vols that we had the first 4 months of 2006. Ultimately, this complacency I think will bring big upside or downside as we come into the busy season of the markets.  I think this may be the retest of the bottoms we pained in the early year and should bounce sometime this fall and bring some big up or downside, just as the price action in the indices show also. 

Let's overlay the SPX chart and you can see last time the VIX was this low it matched the highs on the SPX. Early indications even show a slowing of the Stochastics here on the SPX. Watch the behavior and weakness under 1280 on a close would not portend strong things for the bulls. 

As we approach the weekend and the upcoming labor day week in less than 10 days, the markets are really grinding. Looking at the 5 day SPX action of -4.49 pts, yes that a net negative 4.5 pts in the past 5 days we are truly driipping in chinese water torture fashion into the holiday and it is still 7 trading days away. The volume is lame/stagnating, just choose your adjective. A good time to kick it with the family as school will be heating up soon and the trading desks really won't be back to full staff I suspect until the week of Sept. 11. I was even speaking with a currency trader yesterday who fashions himself as a penny player who told me one of his desks told him on his small $3 milllion order this week that he was providing much needed liquidity.  That's pure humor when you think of how huge the currencies trade. He laughed  and I took note that the summer is definitely winding down and enjoy what is left of it at the pool or on the golf course because the mornings are chilling and fall is already in the air. 

Two names I like to watch as leaders of the overall market are the BBH or biotech index and Mother Merrill (MER). I generally find the market can't go up or down without the two of these acting in concert.  What I see on the BBH is a repeated contraction of range between 170 and 180 and with about 5 touches at the 180 area and that area also being former resistance, the bull will continue to be stifled unless the biotechs can break out of that area. I would bet that a move up or down from this range will lead us in the next move.  Mother Merrill looks somewhat better but still has plenty of overhead resistance ahead of it and portends patience be shown until new highs for the bulls  can be overcome and 80 is firmly behind us.  So we have two of my favorite indicators showing entire indecision as is the feeling for most of the US equity markets. A good time to wait for price to lead us up or down.  

 

MSFT had a nice rally during the market's recent run that included another 30 billion dollar buy back of the stock by the company. Does it really matter or did the stock run right to the long term resistance on the long term chart going back 5 years today @ 26.25. It nailed it, then proceeded to sell off. A perfect picture of resistance and just how powerful a force it can be and another reason for looking at multiple time frames when searching for trends and moves to come in asset classes. 

 

Some enlightening info out of the NAHB Today on affordability in housing.  Buy the Midwest short the West looks like the pairs trade to take to get to the reversion to the mean of 40 on the index nationally.

 

From the NAHB site . . .

NAHB-Wells Fargo Housing Opportunity Index (HOI)

NAHB has complete Housing Opportunity Index (HOI) materials from metro levels, to regional listings, to national reports. Also, learn more about how the interest rate affects housing affordability. Search the resources compiled below by title, detail, or date. Take your time and browse, read, download or purchase the information that interests you. http://www.nahb.org/page.aspx/category/sectionID=135

Last week Celgene (CELG) took a dive after Goldman Sachs initiated coverage with a neutral rating.  According to TheStreet.com, GS has a $50 price target on CELG:  the stock is down a further buck so far today.  Celgene is one of my favorite biotechs.  CELG's chart is technically bearish, but the company's fundamentals are strong.  I'm a bit confused as to why the Market chose to only look at the neutral rating and disregarded the $50 price target.

 

In The Daily Blog on August 8, after AMLN had taken a similarly irrational dive, I suggested waiting a day or two until the stock bottomed out and then buying.  AMLN (whose chart was also bearish) is up 12% in the past two weeks.  My take is the same will happen with CELG.

 

AV

We rallied during August expiration week. The rally was strong and broad but the volume was week. Just pull up weekly charts of any stocks and you will see declining levels of trading on most any name or index as we rush higher. Its a news vacuum and makes it easy to run the game up. I think we will fall next week as we normally fade the options expiration week.  The NASD oscillator is big time overbought. 

A hearing is underway in New York  in which Bristol-Myers-Squibb (BMY) is seeking to halt sales of generic Plavix, used to treat blood clots, by Canadian generic drug company Apotek.  Plavix is BMY's biggest product, with annual sales of $4 Billion.  In the hearing, BMY is seeking an injunction which will prevent Apotek from selling the drug.  It is not clear when a ruling will be handed down:  it may be today, it may be weeks away.  I have no idea which way the Judge will rule.  I do know that either way BMY is going to move substantially.

 

I think some profit can be make off this volatility.  This is a speculative play, though the speculation is not what the verdict will be, but, rather, when it will be handed down.  I think there's a good options trade here.  Looking at September options, I think a straddle at $22.50, that is, buying both a Sept 22.5 Put and 22.5 Call, looks like a good play.  This position will bear fruit if a ruling is handed down before September 22, and if the stock price moves out of the $20 to $25 range.  The same position with a $20 strike price moves the range down a bit.

 

AV

Well we had another winning day for the bulls and it played out as we expected, dull.  AD was lagging all day but mainly slightly in the green so still strong. Volume weak once again, and options pin behavior seems to be in full effect. We expire tomorrow with SP right here @ 1300, Nasties @ 1580 and Russell pinned here near 710-715. HPQ really behaved terrible on that resistance point I mentined last nite, they took em up to 36.7 premarket and then took the toys away and hammered HPQ all day down to 35.  DELL getting hit after market with revenue recognition stuff.  The hits keep on coming.

I was watching an episode of the new drama on Showtime called Brotherhood, and there was a scene where the lead character, a Rhode Island Statesman is being goated by his cohorts to recite a quotation he has on his wall in his assembly office. It is obvious it has deep meaning to him and the delivery was powerful and somewhat quieted his non believers. I think it has been years since I read some Kipling, but I looked up the speech and found it inspirational and thought I would share it here as I call it another day. 

 

If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or, being lied about, don’t deal in lies,
Or, being hated, don’t give way to hating,
And yet don’t look too good, nor talk too wise;

If you can dream - and not make dreams your master;
If you can think - and not make thoughts your aim;
If you can meet with triumph and disaster
And treat those two imposters just the same;
If you can bear to hear the truth you’ve spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to broken,
And stoop and build ‘em up with wornout tools;

If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breath a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: “Hold on”;

If you can talk with crowds and keep your virtue,
Or walk with kings - nor lose the common touch;
If neither foes nor loving friends can hurt you;
If all men count with you, but none too much;
If you can fill the unforgiving minute
With sixty seconds’ worth of distance run -
Yours is the Earth and everything that’s in it,
And - which is more - you’ll be a Man my son!

-Rudyard Kipling

HPQ making big waves after hours on the earnings beat.  I was saying today that the stock sure is trading like it expects big numbers and the gutsy trade would be to still buy the pre earnings as it will probably squeeze higher. Well I said it, but didn't take the trade and the stock is now approaching the 50% retracement level from the March 2000 highs. The trade afterhours already took out this level with the 36.25 being that area. It all depends on where we close August, but if we close above this key area, it just may be that HPQ is going higher in the face of Dell's big miss and the corporate client still not showing increased computer buying. Is this move for real or will the market begin to hold this area of resistance and sell off the next few weeks into September. Something to watch. .. Could be a key indicator.

 

 

 

As the housing bubble begins to unwind, we are now at a point where prices are just beginning the correction phase.  The phase in past corrections lasts 2 to 5 years and I would suspect we are no longer than 4-6 months in on the price reduction phase.  Easy credit took prices up and tightening credit will take the prices down. The illiquidity of the housing market's makes the correction phases longer and deeper than most imagine.  If we look at the US home construction index we can see the selloff has been violent over the past year and fell over 50%. I wouldn't be suprised to see some bounces in the stocks in this index with the Fed is done talk but reality is inflation is truly around %5 when you add back in all the items the fed chooses not to count. I am still in the court that the Fed doesn't mind inflation vs. deflation and they are not done raising rates. They may rest, but more will be coming.  I see a bunch of resistance on this chart up to 665 then 700, so we may bounce up to those levels but beyond that will take some serious effort. 700 is an obvious Fib retracement area of about 50% of the most recent move down. That offers traders a possible 80 more pts or 15% from here and the downside risk from here to new lows is much higher than that.  I see housing prices correcting especially in the most overbought coastal areas of the US as we are already beginning to see in Florida and California as is evidenced by these unique http://flippersintrouble.blogspot.com/ and

http://ocfliptrack.blogspot.com/  and http://bubbletracking.blogspot.com/ If you don't think the consumer will effect the broader economy, when they make up 70% of the GDP, I just don't think the soft landing can be achieved with the reality that is starting to strike the American consumer. Winter/Spring of 07 will be very interesting times for Real Estate.

 

 

 

Have you heard of these new transportation devices called cars? Apparently the market has discovered them and rallied one of the makers' stock over 37% over the past two weeks. The most vicious rallies always occur during bear markets. I don't see this as anything but another bear market rally. Plenty of resistance overhead on F in the mid 8's and the stock has just exploded. If you caught the bottom near 6 it might be time to lighten up as I don't see auto sales hitting a bottom any time soon. CCI, RSI, MACD and OBV are all showing extreme overbought signals . . 

 

Sometimes all you can do is look at the charts and follow the herd.  The CPI apparently was "just right" as this goldilocks economy keeps on chugging. HPQ beat and smashed and was up huge afterhours and looks like all trains are heading north for the time being. I think you can now be long this market with danger again on any break of 1280 again on the SPX, but as long as that line holds it looks like the old highs are going to be tested. We have had 3 gap ups in a row so I wouldn't be suprised to be some resting soon. We also have options expiration upon us Friday. The trading next week will be paramount to see if the 1280 level can be held as we go into super slow season thru labor day after this expiration.  That's what the charts say, buy the dips with defined risk and let the bulls play the game for the time being.  Trade em don't love em.

Copper a leading indicator of markets seems to be indecisive at the moment just like most of the major indices. It appears to me that lower highs and higher lows are being made currently but the wedge forming seems like it will be resolved up or down by early/mid september. Should be good signal for the overall markets. Just another arrow in the quiver. Let's watch 374 on high end and 321 on the low end . . .

 

What Trading Teaches Us About Life

By Brett Steenbarger, Ph.D.

Trading is a crucible of life: it distills, in a matter of minutes, the basic human challenge: the need to judge, plan, and seek values under conditions of risk and uncertainty. In mastering trading, we necessarily face and master ourselves. Very few arenas of life so immediately reward self-development--and punish its absence. So many life lessons can be culled from trading and the markets: 1) Have a firm stop-loss point for all activities: jobs, relationships, and personal involvements. Successful people are successful because they cut their losing experiences short and ride winning experiences. 2) Diversification works well in life and markets. Multiple, non-correlated sources of fulfillment make it easier to take risks in any one facet of life. 3) In life as in markets, chance truly favors those who are prepared to benefit. Failing to plan truly is planning to fail. 4) Success in trading and life comes from knowing your edge, pressing it when you have the opportunity, and sitting back when that edge is no longer present. 5) Risks and rewards are always proportional. The latter, in life as in markets, requires prudent management of the former. 6) Happiness is the profit we harvest from life. All life's activities should be periodically reviewed for their return on investment. 7) Embrace change: With volatility comes opportunity, as well as danger. 8) All trends and cycles come to an end. Who anticipates the future, profits. 9) The worst decisions, in life and markets, come from extremes: overconfidence and a lack of confidence. 10) A formula for success in life and finance: never hold an investment that you would not be willing to purchase afresh today.

I had posted my weekly letter to Peter's letter early this am, since we had some email issues over the weekend that prevented him from adding my piece. I posted my written piece early this am, but the charts were left off so I wanted to make sure you get to see the bigger picture of the oil services and the oil index.  I again think that a sell off in oils may not be as positive of an event that the talking heads believe because the sell off may not be that deep . . .

I have talked in the past about key numbers on the Fibonacci Series. One I like to use is the 71% retracement level. I find that on any time frame if an asset class retraces the 71% of the move whether up and down and takes it over, then it will usually test the old high or low the asset had seen. A great long term chart of the SPX shows the high of the SPX from 3/00 was 1553.1 and the low of the recent move in 02 was 768.6, any guesses what the 71% retracement was from this multi year move? Try 1326.7. The significance? It just happens to be exactly the key retracement level of 70.7% as we have been discussing. If this number can be overcome, expect the SPX to test the March 2000 highs, if not expect the next leg of the bear to resume on major US equity indices.

 

Here is a chart of the SPX on the 5 minute level and you can see it is a mirrored inversion to the VIX we previously posted on the 5 minute level. As the VIX approached the support and turned @ 13.5  you see the SPX sell off!

I had said about a week back that the VIX was approaching a longer term support on the daily chart near 13.5 and that would be a supreme selling opportunity if we pulled back to that level. Well today, you got that opportunity as the VIX pulled back to about 13.41 as the market gapped up on the "peace accord" in the middle east. Reality is, we have to go back to the domestice economy and the news once the cease fire news is played out. As expected the lack of concern and complacency showed its hand when the VIX by noon EST came to 13.41 and then the market crumbled as the dumb money was fleeced this am on the peace process and the market reversed hard and gave it all back.  Let's look at both the daily to see the support that I detailed and then the sharp 5 minute rally off the support when you see the intraday chart right @ noon est.

 

The Bulls ally is not today's Major Reversal. Yes thin market volume wise,  but monday am gaps are typcial of bear market behavior and friday sell offs are also typical and these have been the patterns the past few months as we bide time and chop between the new ranges of 1220to 1290 on spx.  I think the key thing to watch here is the continued weakness we discussed this am we are seeing in Oil and the Oil Service names, and yet, the market continues to flail lower. Until we see leadership elsewhere, I maintain, that lower oil could easily bring us lower equities overall.  Energy has been the leader and we sure aren't seeing a pick up in Tech or Trannies or XBD or financials much longer than the old highs.  Dynamic times and range bound tightness remains the trade of the day. . .

 

 

Hedging Your Bets With Matt Davio:  Dark Side

Vacations are in full swing for traders as we enter the slowest period of the year. July earnings are 90% complete and over 72% of the S&P 500 companies beat their numbers. What is important is the guidance and the reaction to such earnings.  I didn’t see a lot of backside strength to the past earnings numbers and, as a matter of fact, we saw a good deal of downward guidance.  Of course, the market is forward looking and, to this trader, the market appears very tentative.  I think Autumn will be very exciting, especially the October earnings season. 

The talking heads put their desired spin on this years earnings and Bernake has paused, as wanted by most analysts and media types. The jury is out on whether we have seen the last interest rate rise or not, but there is no doubt in my mind that we are in a changing environment.  The strongest sector in the SPX over the past 3 years has no doubt been Oil and the related businesses, this to me has been the prime reason the market has held up as strongly as it has in the face of interest rate rises. 

I want to look a bit at the Oil market today. I would like to approach it from solely a chart perspective.  Oil has been downright scary, nearing $80 a barrel in today’s prices.  Even our trusted CNBC has been over-covering the NYMX pits for oil, which is generally not a good anecdotal sign for oil bulls when the dead money media sources pile in and saturate us with the “fever” in the pits.  Let’s take a look a the charts of Oil futures and OSX, which is an index of the oil service providers including drillers and riggers.

Oil is clearly still in a long term uptrend, but it has been battling the higher levels most of the summer and a key sign to me was the reaction crude had this week after the BP-Alaska Pipeline break. Oil actually fell about 8% from the highs after this event. 

 

The Oil Services Index has also been in a 3 year uptrend but has been showing signs of topping behavior that really began in the early portion of 2006.  As you can see from this chart, if the recent down move from the top here approached 20% (238-186), we have an important neck line drawn that must hold for the Riggers and Drillers to continue their bull run. This must be watched and if that line breaks, oil could be heading back down after its run.

 

 

 

The bottom line is that energy and oil names have been leading the topping pattern we see in the SPX, which is in the process of putting in on this leg of the bear market.  If this bull leadership is to diversify, someone needs to step up, as I still don’t see any other large sector ready to lead the bull back.  Semi’s are in the dumps, Transportation is breaking down, and Financials and Brokers are looking potentially double-toppy, with no confirmation there yet. The divergences continue to build but the walls are beginning to be broken down on the bull case longer term.

Sad story I just read on ESPN mag, sure seems like Maurice Clarett's chart has hit bottom.  I wish the former Buckeye well.   Hope he pulls out his death spiral and conquers his demons.

 

Analog Devices, Inc. had a big miss again tonite and this continues the pain for the Tech industry.  I don't see the big companies buying up technology, the CSCO beat got it back to even now for the past 3 years. What is so exciting about this? Get's me, CSCO is a big elephant and mainly irrelevant as the markets show.  ADI will drag down the Chip sector again tomorrow as it is a major component to the SOX. The hits keep on coming. The stock is trading down to 28.2 in the afterhours which is below the Oct 01 lows, so if these lows hold I would suspect 22 to 17 could be in the future for this stock.

 

 

Pull out the 15 minute chart of SPX cash and you will see the high of the week was yesterday @ 1283.74 and the low was hit today on the foiled terrorist attempt in the UK @ 1261.3. Magically the closing prices today took us to the %50 retracement level of 1272 and the bell rang. For this trader to see continued move higher tomorrow we will have to see the next key level of 1277 closed over by Friday and hold for the weekend. The volume was again weak a pathetic like a summer day in the market's can be.   I don't see alot to get excited about again until we close well above 1290 or maintain more than a day under the 1270 level like we did on Wednesday nite.

 

Three weeks ago in the Daily Blog I introduced my version of the enjoyable "Smart Money" screens from The Wall Street Journal.  My thinking was with the economy slowing it's easier to find weak stocks that will get taken down than strong stocks that have to swim against the current.

 

To recap, I screened for biotech stocks trading above $10 and within 50% of their 52-week high.  I only choose stocks with current assets <$150M, average (3 month) volume > 150K, and net income << 0.  From this list I pulled out stocks with weak technical attributes. 

 

After the financial screening I looked at clinical progress.  The value of a biotech company is in it's pipeline.  I evaluated a "clinical index" in which I assigned 1 point for each Phase 2 study and 4 points for each Phase 3 study.  Note, this empirical approach doesn't take important aspects like disease target into account.

 

My last selection criteria was management.  I only selected companies with an exceutive to employee ratio of at least 1 to 8.  Imagine if Novartis or Merck had 1 executive for every 8 employees:  there's a reason they don't.

 

I came up with three companies:  Alnylam Pharmaceuticals (ALNY), Biocryst (BCRX), and New River Pharma (NRPH).  I predicted they would decline at a greater rate than the rest of the Market over the next 1 to 2 months.

 

So, after 3 weeks the S&P 500 is up just under 2%.  Of the stocks in the bear screen ALNY has faired the best losing only 1.3%.  BCRX has dropped 27.8%, and NRPH has dropped 10.7%.  Percent gain for an equal weight short portfolio of these three stocks since July 20 is 12.7%.  I'm not sure how much farther BCRX has to go, but I think ALNY and NRPH could still drop some more.

 

AV

Well, that was certainly an ugly bearish reversal today.  I dumped my QQQQ yesterday because I'm seeing a lot of technical improvement in a lot of stocks on my watch lists.  That is usually a short term bullish sign.  The market hasn't yet got the signal.

 

--PN

Double tops are typically seen with at least a month time frame between the respective tops on the pattern followed by neckline breaks.  The Banking and Biotech indices are two more that although still not technically broken are showing potential signs of breaking down and topping out. The Biotech index will be in bear mode when 600 neckline is taken out. The Banking index is not nearly at a top, but sure appears to be testing the earlier tops and have not taken out the highs yet from a few months back. Some more data for Ben and crew to watch here as these are two more key sectors that must lead for the "bull" to be back longer term. Without the leadership, pull the plug and the game is back in the bear's court. 

On our trip to Colorado I spotted Goldilocks and the three bears, some say it was Bernake, Beavis, or Heli Ben, but the consumer looks tapped out to this trader not pent up.

Here are the 3 charts that you must have showing positivity for this trader to call this a bull market. I don't see anything but more pain in the semis, housing, and transportation indices. So Grab the Bear by the tooth and don't get bit!!

 

An extremely slow day leading into the Fed policy announcement which was, after all this waiting, an anti climax. The pause itself was already priced in and the modest changes or lack of clarity to the accompanying policy statement left the markets in an unsettled state. So they did a quick head fake and then sold-off. The NASDAQ closed just 8 points shy of its lower pivot point with most major tech sectors closing in the red, the lone exception being internets. So many divergences to this trader and we are still in no man's land. The SPX is locked in the 1270 to 1290 range we will either go higher if we get a close above 1290 or lower on a close below 1270. That's the way this trader sees it at this point. TRAN, HGX, SOX all look ugly. Financials and Brokers still look ok. What to make of it. Let the marekt play out, but no doubts in my mind the consumer is in big trouble and with it, GDP and profits will follow regardless of what the Fed does. The real damage and the conundrum is yet to come.

Amylin Pharmaceuticals (AMLN) dropped a bit over $3 today.  The stock, which was trading at $50 on July 26, closed today at just over $43.  In my own, admittedly limited, knowledge of technical analysis I see the stock broke out of an ascending triangle, on good volume, in the opposite direction Edwards and Magee would predict (note, in Technical Analysis of Stock Trends they do make clear this type of analysis is not absolute).  MACD is also bearish.

 

Amylin is a good company.  Their diabetes drug, Byetta, is selling so well they're having problems keeping up with supply.  This problem is less than ideal, but steps are in the works to fix it.  A drug company could have far greater problems.  Don't forget, Byetta is also in a Phase 2 study to treat obesity.  Diabetes and obesity are both big, and growing, markets.  As well, Amylin is collaborating with Nastech (NSTK) to produce an inhaled form of Byetta.  I don't know why AMLN is tanking, but when it stabilizes (give it a day or two) I think it will definitely be a buying opportunity.

 

AV

MOT looks like a nice possible short setup here, first let's look at today's 5 minute look and see that a potential double top was established. Let's pull back to the past 3 years and view the weekly and you see that there is tons of overhead resistance on MOT and looks like this recent snap back rally is one that can confidently be sold up to 25's which would be new highs. The stock looks pretty tightly locked in between 18.5 and 24.5. So sell up to the old highs and buy the dips looks like the range bound market we have been locked into for years.

 

 

In and Ode to Queen, the multi year parabolic run on HANS is over finally. The stock was unfortunately impossible to borrow long term on the short side and offered no options of liquidity so it was difficult to play on the short side at all. The key point here is risk for me. If you were long this thing and woke up today the stock was down another %20 right off the back of another 25% over the last few weeks.  Not alot of ways to "hedge" that risk if you were long this name and no real chance of buying put options to protect your downside, and a stop loss would have pinned a nice 20% plus loss on the open this am.  I sure don't see stocks going up in this manner in this stock market. Pure bear market action if you asked me all around. Short term this stock looks like it has put an intermediate bottom in but I sre would sell all rallies to the 35-38 price range.  This stock no doubt will be much lower but the easy money has been made if you could borrow this name and were involved.  Pray for rallies to sell at this point, no doubts in my mind another Fad stock bites the dust and ultimately will be much looooooower. 

I am back after a nice 11 day break from the screens and it apperas there was a great deal of static but in the end very little overall movement since I departed on 27th.  Now it appears to me that although many divergences and according to the Fed Funds Traders who are 85% sure that the Fed is done and the Fed is done rally looks tired to me by many of my charts. I am sure we will have to do the obligatory look/see for Benny on Tuesday but by this VIX chart you can see that the retest of the trend line on volatility has finally been met and the bear can most likely resume barring world peace and cancer cures tomorrow. 

 

 

We're back!  This week's newsletter is posted.  See Vaino for a very interesting stock pick!!