WEEKLY TECHNICAL COMMENTARY - Sept 2nd-5th

UPDATE: As of 5AM, Crude is down over $9/barrel!!!

HAPPY LABOR DAY!

THIS WEEK’S ISSUE:

• In Play: Hurricane Gustav, Oil / Natural Gas, Gulf of Mexico Operations, Airlines
• Market Commentary: DJIA, NASDAQ, S&P 500, CBOE VIX
• Currencies: USD, EUR
• Commodities: Gold, Silver, Industrial Metals, Agricultural, Livestock
• After Earnings Review: COCO, BWS, MW, PETM, DLM, FLE
• This Week’s Watch: Economic Reports & Notable Earnings Releases

IN PLAY: HURRICANE GUSTAV, OIL / NATURAL GAS, GULF OF MEXICO OPERATIONS, AIRLINES

After reaching wind speeds of 150 mph and getting bumped up to Category 4, Gustav has weakened considerably and is now a tropical storm. This is good news to the people of New Orleans and they are spared the fate that Hurricane Katrina brought 3 years ago. Traders discounted the potential damage of the storm by selling off oil and natural gas throughout Monday.

As of 11PM (9/1) – Oil fell $4.29 to $111.17 and natural gas fell $0.393 to $7.550.

Oil prices rose ahead of the impact in the Gulf of Mexico and on August 27, oil and gas companies implemented shut-in procedures and evacuated personnel from platforms. By August 30, 76.77% of oil production and 37.16% of natural gas production had ceased. By August 31, 96% of oil production ceased.

The following public companies have oil & gas/drilling/shipping operations in the Gulf of Mexico: Nabors Industries Inc. (NBR), Chevron Corp. (CVX), BP Plc. (BP), Marathon Oil Corp. (MRO), Exxon Mobil Corp. (XOM), ConocoPhillips (COP), Anadarko Petroleum Corp. (APC), Apache Corp. (APA), Diamond Offshore Drilling Inc. (DO), Ensco International Inc. (ESV), Helmerich & Payne Inc. (HP), Hercules Offshore Inc. (HERO), Parker Drilling Co. (PKD), Noble Corp. (NE), Pride International Inc. (PDE), Rowan Companies Inc. (RDC), Transocean Inc. (RIG), among others.

Possible refinery shut-ins and estimated barrels of production cut:

• Cupet Nico Lopez Refinery (122,000)
• Calumet Shreveport. LLC Refinery (35,000)
• Valero Saint Charles Refinery (185,000)
• Valero Refining Co. Krotz Springs Refinery (80,000)
• Shell Chem LP Saint Rose Refinery (55,000)
• Placid Refining Co. Port Allen Refinery (48,000)
• Murphy Oil U.S.A. Inc Meraux Refinery (120,000)
• Motiva Enterprises LLC Norco Refinery (226,000)
• Motiva Enterprises LLC Convent Refinery (235,000)
• Marathon Ashland Petroleum LLC Garyville Refinery (245,000)
• ExxonMobil Baton Rouge Refinery (493,000)
• ConocoPhillips Belle Chasse Refinery (247,000)
• Chalmette Refining LLC Refinery (187,000)
• Total Production: 2,278,000 barrels+ (and counting)

The USO and the UNG will gap down tomorrow as traders continue to sell of the energy sector. The USO will test the 200-day MA support. The UNG, having broken the 200-day MA in mid-July, will resume its downtrend. Investors and traders looking to short oil and natural gas may choose the Ultrashort Oil & Gas ProShares (DUG) as an option.

The airlines should see a major spike as oil sells off. Airlines to watch: AMR Corp. (AMR), Delta Airlines (DAL), Continental Airlines (CAL), UAL Corp. (UAUA), US Airways Group Inc. (LCC), Southwest Airlines (LUV), JetBlue Airways Corp. (JBLU), Alaska Air Group (ALK), AirTran Holdings Inc. (AAI), Hawaiian Holdings Inc. (HA), among others.

Watch for Hurricane Hanna in the Caribbean heading towards Florida, one storm developing near the Leeward Islands, Tropical Storm Ike heading towards the Caribbean, and one storm near the Cape Verde Islands off Africa.

MARKET COMMENTARY -- INDU 11,628.06, COMP 2,414.71, SPX 1,292.20, RUT 737.60, VIX 20.65

The major indices continue to move in a secondary reaction rally. The major difference is that the volume for last week is weaker than the past three weeks’ volume. The drop off in volume can be attributed to the pre-Labor Day holiday, however, the drop off started weeks ago near the beginning of the rally. With a drop in oil prices, the market should be able to maintain their upward direction for the very short-term, while continually displaying signs of weakness in volume. A reversal is not out of question this week.

The Dow ($INDU) and the S&P 500 ($SPX) are forming ascending triangles and may be able to breakout due to the large decline in oil. Their rallies are still weak as volume continues to become more and more unimpressive. If a breakout on low volume occurs, investors and traders should see that as a warning sign. Any breakdowns from this point in the Dow and the S&P 500 will most likely indicate that the rally has ended as both indices are on their 4^th rally attempt at the 50-day MA. The NASDAQ ($COMP) has pulled back and is currently consolidating around the 2360 – 2415 area. A break below 2325 is considered a sell signal.

The Relative Strength Index (RSI) has leveled off for the Dow and the S&P 500 and is declining for the NASDAQ. This divergence, along with the price-volume divergence, is a clear indicator that the rally is weakening from previous weeks. The fundamentals in the economy remain virtually unchanged and this week’s economic reports (on page 8) should be highly noted for any surprises.

The CBOE Volatility Index ($VIX) remains in a downtrend and looks likely to continue as the drop in oil prices will rally the markets for the very short-term.

CURRENCIES: US DOLLAR & EURO

I want to use this issue to focus not on a daily short-term chart of the USD or the EUR, but a weekly, 2-year chart to show the significance of the movement that occurred in the past +/-20 days. The USD formed a perfect double bottom, effectively ending the multi-year downtrend it’s been riding. The sharp rally that we saw is an extremely strong indicator of a reversal in sentiment. Likewise, the EUR showed a reversal in sentiment, forming a perfect double top. The USD broke through 2 key resistance areas and is now clear to resume its uptrend and the EUR broke through 2 key resistance areas, effectively breaking its multi-year uptrend. Both currencies should be able to continue in their respective directions for the short-term.

What helped the USD? For starters, the July US durable goods orders came in at 1.3% vs. an expected 0.1% increase. Existing home sales rose 3.1% to 5 million sales in July vs. an expected 4.9 million sales. However, the average selling price was $212,400 down 7.1% vs. a year ago and the supply of existing homes increased to 11.2 months from 11.1 months. This is both positive and negative news as the US housing continues to wrestle with the glut of supply and a non-improving credit environment. Personal spending in July increased by 0.2% in line with expectations vs. a 0.6% increase a year ago, however personal income fell 0.7% missing expectations of a 0.2% decrease. This and other global macro factors have put the USD in a consolidation zone.

The Top 5 most important indicators for the short-term USD:

• Non-Farm Payrolls
• ISM Non-Manufacturing
• Personal Spending
• CPI
• Existing Home Sales

COMMODITIES: GOLD, SILVER, INDUSTRIAL METALS & LIVESTOCK

As the USD spikes, it is only natural that Gold (IAU) and Silver (SLV) fall in tandem. The entire commodities universe is in a correction or worse, the start of a major downtrend. Technically, IAU and SLV look terribly weak and I have reason to believe that the current rally is only a secondary reaction, a pause, for both commodities to resume their downtrend. Both precious metals face significant multi-month resistance overhead in addition to breaking both the 50-day MA and 200-day MA. It is highly unlikely that gold and silver prices will see their highs in the short to intermediate term.

For the industrial metals ($GYX) and livestock ($GVX), I have used the Goldman Sachs Commodities Index as both are reliable indices in tracking both commodities groups. The industrial metals tracked are aluminum, copper, lead, nickel, and zinc. All commodities are well off their highs. The trend for the industrial metals group continues downward.

The $GVX livestock index includes feeder cattle, live cattle, and lean hogs. Again, live cattle are at their all time highs while feeder cattle may start to correct in the short-term. Lean hogs spiked to 90 and now stands 68.42, within 3 weeks. The livestock index has broken its trend and is likely to be the next group to start a downtrend.

AFTER EARNINGS REVIEW: COCO, BWS, MW, PETM, DLM, FLE

COCO – On Tuesday August 26, before the market open, Corinthian Colleges Inc. (COCO) reported a Q4 loss of $0.01 per share or $620,000 on $274 million in revenue vs. a loss of $0.10 per share or $8.756 million on $231.62 million in revenue a year ago. Excluding charges, COCO would have earned a profit of $0.11 per share. For the full fiscal 2008 year, COCO earned $0.25 per share or $21.3 million on $1.07 billion in revenue. Shares gapped down opening at $15.58 and sold off throughout the day to close at $13.09, down 19.3% on 11.16 million shares.

Technically, COCO formed a large breakaway gap, which in this case signals the beginning of a major downtrend. The gap formed on huge volume and also failed the 50-day MA, and has now become a confirmed short candidate.

BWS – On Wednesday August 27 before the market open, Brown Shoe Co. (BWS) reported Q2 earnings of $0.05 per share or $2.2 million on $569.2 million in revenue vs. $0.22 per share or $9.8 million, a drop of 77.4% compared to a year ago. The results included a $0.15 charge for the relocation of its Famous Footwear unit’s headquarters from Madison, WI to St. Louis, MO (the transition should be completed by the end of Q3). Analysts expected earnings of $0.06 per share on $589.9 million, missing both earnings and revenue targets. Shares dropped around $15 or down 5% in the pre-market, opened at $14.95, and closed at $15.37, down 3.2% on 1.5 million shares (over 2x average daily volume).

Technically, BWS has been trading in a range since the start of this year (8 months). Bullish indicators include: a flattening of the 200-day MA, a rise in the 50-day MA, higher lows and higher highs. There is major long-term support at $12 and major long-term resistance at $17-$18. For the short-term, BWS entered into a short-term trading range and found support at $14 on August 28.

MW – On Wednesday August 27, after-hours, Mens Wearhouse (MW) reported Q2 earnings of $0.63 per share or $32.8 million on $545.3 million in revenue vs. $1 per share or $54.2 million on $569.3 million in revenue a year ago, a drop of 39% in income and a drop of 4.2% in revenue. Excluding a one-time item, MW would have earned $0.72 per share. Analysts expected earnings of $0.70 - $0.71 per share on $553.2 - $554.6 million in revenue. Shares gapped up $1.18, opened at $21.19 and closed at $21.61, up 8%.

Technically, MW formed an area gap. Around 90% of area gaps close within a week. MW still remains close to their long-term lows and has traded in a range of $15 - $26 since the start of 2008. A breakout above $26 is considered bullish and a break down below $15 is considered bearish. MW will likely meet resistance at the 200-day MA and trade in a range bound by both the 200-day MA and the 50-day MA.

PETM – On Thursday, August 28 after-hours, PetSmart Inc. (PETM) reported Q2 earnings of $0.30 per share or $37.2 million on $1.24 billion (up 11%) in revenue vs. $0.35 per share or $47.1 million (down 21%) on $1.12 billion a year ago. Results included a one-time benefit of reductions in insurance, stock option expenses, and timing of rent reimbursement from MMI Holdings. Analysts expected earnings of $0.28 - $0.29 per share on $1.22 billion in revenue, beating both earnings estimates and revenue targets. Shares gapped up to open at $26.15 and rose higher throughout the day to close at $27, up $2.58 or 10.56% on 10.83 million shares traded.

Technically, PETM showed a classic flag set-up for a long position and formed a breakaway gap in the mid-term which can also be construed as a continuation gap in the short-term. A break from the neutral trading range on 4x the average daily volume is a huge positive and PETM is an excellent candidate for a long position. PETM meets resistance at $29, however, major resistance was broken and PETM is highly likely to continue upward.

DLM – On Thursday August 28, before the market open, Del Monte Foods Co. (DLM) reported a Q1 loss of $0.05 per share ($0.04 from continuing operations) or $10.1 million on $726.2 million in revenue vs. earnings of $0.02 or $3.5 million on $626.8 million in revenue a year ago. Revenue increased by 15.9% due to price hikes, volume growth, and new products. Discontinued operations added a $0.01 per share loss to the results. Analysts were expecting a loss of $0.03 per share, missing expectations by $0.01 per share. The stock gapped up and opened at $8.98, sold off throughout the day, and closed at $8.60 on 1.83 million shares, up $0.01 from Wednesday’s close of $8.59.

Technically, DLM is down from its recent high of $12.94 on July 13, 2007 and has been drifting down ever since. In May and June, DLM suffered from large one-day drops, sending the stock in a downward spiral. So far, DLM recovered, but on Thursday, it formed a bearish gap up, which is one of my favorite patterns to short. The likelihood of a decline from this point is extremely high. Anyone that wants to short can hold a position till it reaches the 50-day MA at $8.20. Going long is ill-advised.

FLE – On Thursday, August 28 pre-market, Fleetwood Enterprises Inc. (FLE) reported a loss of $0.42 ($0.41 cont. op) per share or $29.1 million vs. a loss of $0.04 per share or $2.3 million. $0.01 was due to discontinued operations. Revenue fell to $289.9 million from $488.3 million, down 41% vs. a year ago. Analysts expected a loss of $0.18 per share on $346.8 million in revenue, missing expectations more than double.

Technically, FLE is still in a primary downtrend and currently testing the $2 support level. Any break down below $2 warrants a short and a break out above $2.80 would be considered a “cautious” long on a double-bottom. FLE has failed the 50-day numerous times and the MA remains a valid resistance point.

THIS WEEK’S WATCH:

Economic Reports: Tues. (ISM Manufacturing, ISM Prices Paid, Construction Spending), Wed. (Total Vehicle Sales, Weekly Retail Sales, Beige Book, Factory Orders, Weekly MBA Mortgage Applications, Thurs. (Weekly EIA Inventory, ADP Employment Change, Non-farm Productivity, Unit Labor Costs, Initial Jobless Claims, ISM Non-Manufacturing, ICSC Chain Store Sales), Fri. (Non-farm Payroll Change, Unemployment Rate, Average Hourly Earnings)

Noteworthy Earnings Reports: Tues. (AVA, DHT, MATK), Wed. (CWST, CASY, PSS, GES, HRB, HOV, ISLE, JOYG, NCS, SAI, SPLS, UNFI), Thurs. (ABM, ADCT, CRMT, BRLI, BTH, CAE, CIEN, COO, FCEA, JOSB, MDZ, MOV, PEC, TTWO, TOL, ULTA, UTIW, WIN), Fri. (NSM, PTI, SCMR)

Full Disclosure: None at this time.