Market Wrap Up June 09/05

by Martin Goldberg

If the stock market is going to head higher it appears that it will have to do so without the leadership of the transportation index. In fact, the intermediate term picture of the transports is quite bearish. Can the stock market forge ahead in the short term with leadership from the Nasdaq, while the transports falter in the intermediate term? Can the stock market forge ahead in the intermediate term while the Nasdaq trading rally leaders falter in the short term? As this article is drafted on Wednesday evening, it seems as if we will get insight that may prove valuable to answer these questions by studying the market’s reaction to the positive talk that Mr. Greenspan presented before congress today and Intel’s “mid-quarter update.” There is more discussion on that in “Today’s Market” below.

Transports Flash Warnings

The chart below is a 2-year weekly candlestick chart of the Dow Jones Transportation index. While the most recent rally was decisive and impressive for short term traders, there are some key intermediate term features of the transportation index that are quite ominous. The chart may have formed the right and final shoulder of a simple head-and-shoulders (HAS) reversal formation. Of course, the pattern is not completed until the neckline is broken. Yet examining the most recent three weeks of trading indicates that as of Wednesday evening, this week’s red (down) candlestick engulfed the previous two weeks of trading. The immediate implications are bearish.

If we pull back to the three year weekly as shown below, a long term trendline can be easily observed. The linear trendline which has its origin in March of 2003 was broken decisively during the first quarter of 2005. It has since rallied back to the lower part of the former support trendline, and it appears to have failed this week when it bumped its head against what is now a resistance trendline.

Moving forward to the 6 month daily chart, Wednesday’s action featured a big ugly high volume down candlestick. While the entire stock market advanced, the transportation index advanced also, but on particularly tepid volume. Although the general stock market continued to be strong over the last few weeks, the transportation index struggled with 3600 as it finally gave it up decisively on Wednesday. We’ll see how the market reacts to the positive Greenspan talk on Thursday, and the “mid-quarter update” by Intel. Failure to rally significantly on this news and maintain the gain could present entry points for shorting the Dow Transport exchange traded fund (IYT).

Is there a particular company in the index that may provide a trading opportunity? Norfolk Southern Corp. has seen its top and its “black cross” (50-day moving below the 200-day moving average). Note the support/resistance area at about 33 and its rejection at its 50-day moving average.

A look at the shorter term chart shows a particularly ugly day of trading on Wednesday – an “engulfing” pattern taking in the previous 8 trading days. Three popular momentum indicators are saying “Sell.”

Yet the short term risk/reward ratio for shorting near the Wednesday is very close to 1 to 1 which is not sufficient to trade. The short-term risk is equal to about 1.33 points (the difference between the Wednesday close and the top of the red Wednesday candlestick). The short-term reward is equal to about 1.67 (the difference between the Wednesday close and the short-term support at about 30). A rally on Greenspan and Intel happy talk may present a better bearish short term entry point for NSC. In the intermediate term, there is still a lot of hope in this stock and the general market is in a bullish rally until proven otherwise. Having topped in March, there is a lot of hope for “bargain hunters” and too-early-shorts that need to get “run in” until NSC can crater. A look at its long-term cyclical trading patterns may provide guidance into the big picture and potential future behavior of this cyclical stock.

Internets Weak in the Face of All the Google Hype

Why do I torture myself? A couple of days ago I listened intently as Cramer shouted his rationale as to why the company Google was worth more than Time Warner. I actually listened. In the face of several Wall Street analysts' upward revisions to price targets for Google, much publicity from CNBC, and a positive cover story about Ebay in Barron’s, it may be surprising that the internet index reveals some short and intermediate term weakness. The good news and publicity for the internet stocks is at a relatively high level, and yet the internet stocks may be faltering. Below is a weekly chart of the exchange-traded internet holders (HHH). Note the loss of weekly momentum as the ETF was turned away near the RSI mid-point and the relative price (compared to the S&P 500) has turned down recently. As with the transports, the Internet Holders ETF appears to be making a nice and tall HAS reversal pattern. In spite of all the Google publicity, and the strength of the recent stock market rally, it is significant that the formerly strong internet stocks have bounced relatively little in the recent rally. The ETF may present a trading opportunity, especially if there is a rally on positive remarks about the economy by Greenspan, and Intel is optimistic during their mid-quarter update. After entry, the logical stop-out point would be a close decisively above the 40-week moving average (200-day MA, above 60.1 decisively).

Here’s the short-term daily for the Internet Holders depicting the risk/reward limits for the short-term. If things go as planned, this will present a good bearish entry point. Are there any other possible scenarios? If Greenspan says something bad about the economy that took out the weekly neckline decisively (shown on the chart above), that would probably be a “breakout” worth chasing to some degree. Yet of course, this is unlikely to occur in the short term as the Greenspan discussion before congress is likely to be positive and optimistic.

Worth Watching, Not Trading – The Homebuilders

The homebuilder index now sits at a critical juncture. If it breaks decisively below its former high, that would be bearish in the short term. At this point, practically anyone in this stock long is there “for the rise.” If it doesn’t get a rise, it is likely to drop back to the 800 area which is support (and ex. resistance). However, as described last week, the big move in the builders is likely to be many months away, as there is a lot of hope to be wrung out of these stocks, and there are many early shorts to be “run in.” The tops of bubbles are difficult to trade.

Today’s Market

Here’s the headline from today’s Yahoo Finance after the close of trading:

“Greenspan Says Economy Is on Firm Footing”

So I ask you, just what was he going to say? After being up late last night contemplating the Chairman’s testimony, I dreamt that Greenspan was playing the song, “Blue Skies” on the clarinet.

Pretty much as expected the stock market reacted with a rally on the positive Greenspan talk. After hours Intel announced a rosy “mid quarter update,” but the after hours trading is down for Intel and most Nasdaq stocks. Yet, it’s an illiquid after hours market and I wouldn’t be surprised to see Intel trading up by tomorrow mid-morning. The Nasdaq was back to its leadership roll trading up 16 points to close at 2077, the Dow Up 0.25% (10,503) the S&P 500 up 0.52% (1201), the S&P mid-caps up 0.57%, the Russell 2000 small caps up 0.93%, the internet holders up 0.96%, and the Dow Jones Transports DOWN 0.24%. Volumes were heavier today than yesterday, indicating that some rally follow through in the major indices is likely.

In the short run, the 10-year note interest rate is showing some signs of strength as the hammer a few days ago has not been violated. A decisive swoon in the bond market (interest rates up), would break the effective intermediate term down trendline. If interest rates move higher, it may spark public psychology to buy the last home before interest rates head up for good.

In spite of a marginally down bond market and an article in the "Heard on the Street" section of the Wall Street Journal entitled, “Housing Market Sizzles, But the Stocks Are Less Forgiving," the homebuilding index was up today. As I said before, the tops of bubbles are tough to trade. I’m hearing a lot of discussion about how there will not be a rapid bursting of the housing bubble. This flies in the face of most technical analysis in that parabolic moves rarely end quietly. Does the following chart of NVR Homes from single digits to over 800 into the future seem plausible to you? …It doesn’t to me either.

The expected behavior would better be described by the following chart of the Nasdaq bubble.

Oil was up over $3.00 today. “It’s a bull market.”

Have a great evening.

Martin Goldberg

Martin F. Goldberg, MS, P.E.
Market Analyst
email mdelmgoldberg@comcast.net