WEEKLY TECHNICAL COMMENTARY (Oct 6 - 10)

THIS WEEK’S ISSUE:

• In-Play: The Battle for Wachovia (WB)
• Market Commentary: S&P 500 ($SPX), NASDAQ ($COMP)
• Update: Russell 2000 Small-cap Index ($RUT)
• Update: NYSE/NASDAQ/AMEX New-Highs/New-Lows Index, CBOE Volatility Index (VIX)
• Currencies: U.S. Dollar Index ($USD), Euro Index ($XEU)
• Commodities: Crude Oil ($WTIC), Gold ($GOLD)
• This Week’s Economic & Earnings Reports

U.S. FUTURES (as of 6:00AM EST): DJIA (-2.59), SPX (-2.95%), COMP (-2.94%)

IN-PLAY: THE BATTLE FOR WACHOVIA

Haha…I posted Part 1 of the battle on a previous post on my blog (http://www.weeklyta.blogspot.com) so I’ll get on with the developments, which is part 2 of the comic. If this goes on for a while, I will create an entire comic strip to chronicle the event. It’s an exciting and educational way of breakdown something that’s extremely complicated.

What’s happening now is that on Saturday night, Citigroup (C) asked NY Supreme Court Justice Charles Ramos to issue a order blocking the sale between Wachovia (WB) and Wells Fargo & Co. (WFC). Citigroup’s claim is that WB breached the exclusive agreement (entire agreement found on my blog) between WB and C. C is seeking $60 billion in punitive and compensatory damages against WFC for interfering with the deal.

In response, WB asked U.S. District Judge John Koeltl to declare that the agreement between WB and WFC “is valid, proper, and not prohibited by a letter agreement between WB and C. Koeltl vacated Ramos’ order, however scheduled a hearing tomorrow (Tuesday) for all parties to present their case. This is a complicated matter that can last for a very long time since both WFC and C are large institutions with a lot of money, backing, and attorneys and neither party will back down without putting up a fight. What’s for certain is that both WFC and C has devoted considerable resources in terms of time and money to engage WB, therefore, both institutions have personal interest to get this deal done. The question is: Who will win?

When WB signed the agreement with C to sell their banking operations, it was noted that if WB did not sell part or all of their operations, they risked seizure by the FDIC the very same day. Therefore, the ultimate loser in this battle is WB with possibly only days to survive. In any case of failure, the FDIC would step in as it has done many, many times this year.

The most important section of the letter agreement between WB and C is the following paragraph:

"In consideration of the foregoing and other good and valuable consideration the receipt and adequacy of which are hereby acknowledged. Wachovia hereby agrees that, during the period commencing on the date hereof and ending on Exclusivity Termination Date (Oct 6,2008), Wachovia shall not, and shall not permit any of its subsidiaries or any of its or their respective officers, directors, employees, investment bankers, attorneys, accountants, consultants or other agents or advisors ("representatives") to, directly or indirectly. (i) solicit, initiate or take any action to facilitate or encourage the submission of any Acquisition Proposal, (ii) enter into or participate in any discussions or negotiations with, furnish any information relating to Wachovia or any of its subsidiaries, assets, or businesses or afford access to the business, properties, assets, books or records of Wachovia or any of its subsidiaries to, otherwise cooperate in any way with, or knowingly assist, participate in, facilitate or encourage may effort by, any third party that is seeking to make, or has made, an Acquisition Proposal....."

However, many people argue that the letter agreement is non-binding. I am neither an attorney nor do I have inside information on the matter but it appears that this case is not clear cut. I do agree with the fact that the deal between WFC and WB may be the best for shareholders given that the deal goes not require government assistance, keeps WB intact, and benefits taxpayers. Ultimately, shareholders and regulators will have to approve of any deal and that cannot take place during litigation. What everyone can agree on is that a deal must be consummated quickly. This has once again placed uncertainty in the markets in a time where we don’t need any more uncertainty.

According to the Wall Street Journal, C and WFC may “carve out” WB with C taking WB’s northeast and mid-Atlantic branches and WFC taking southeast and California branches to reach a compromise. No deal has yet been consummated at the time of this writing.

MARKET COMMENTARY – SPX 1,099.23, COMP 1,947.39

The market continues to decline, hitting new lows 2-3 days out of the week. As I mentioned before volume must confirm price action. Once the short ban on financial stocks began, volume on all exchange got cut in half. This past week we are again seeing volume increase on the down days and volume decrease on the up days, which is bearish. This has occurred many times and I have stated this many times in previous commentary. The start of a major rally and the subsequent confirmation days must be confirmed with volume. With the short ban in place, that is extremely difficult to do.

I would like to point out that we may see a short-term low, marked by a capitulation day sometime this week. I am looking for a major gap down at the open today possibly followed by a sharp decline. If a sudden and sustained rally does occur and closes near its highs, then it is time to go long. I am advising all short positions to be covered during the weakest first hour of today’s trading. This is in support of the major oversold levels in several technical indicators, mainly the slow stochastics. This will be corrected soon.

The SEC stated that the short ban will be removed 3 business days after the bailout plan is signed into law. This could be Wednesday or Thursday, depending on the time in which the SEC decides to remove the ban. We should see a marked increase in volume on Thursday and Friday as a result, giving the market the opportunity to act in an undisrupted manner.

As for support levels, the 10,000 level in the DJIA is key support in 2005, the S&P 500 must hold the 1,000 level which is a key level in 2004 and the NASDAQ must hold the 1,900 level which is a key level in 2005.

UPDATE: RUSSELL 2000 SMALL-CAP INDEX ($RUT)

I’m adding the Russell 200 ($RUT) in a separate section to highlight the importance of the index this past week. Below, the chart on the left is a 5-year chart and the one to the right is a 10-year chart:

The significance is that the RUT broke out of its consolidated reactionary rally on Friday and hit a new low. The RUT is the last remaining index to decline to the levels of the DJIA, SPX, and the COMP. Looking at a 10-year chart (to the right), we have a long ways to go for the small caps. The larger capitalized stocks took the first hit in 2008 and it only makes sense for the small-caps to follow suit. Due to their smaller size, small-caps face a greater risk of a sharper decline in the next few months. Also note that the other 3 indices started their 3^rd primary leg down and the RUT only started it’s 2^nd primary leg. This divergence will soon be corrected and I expect the RUT to take the largest hit in the next few months of all indices.

Critical support is at 600 in 2005, which I expect it to break. Afterwards, the 500 level in 2004 is the next target area. At this point, given the sharp decline in the past two days, I expect the RUT to decline in a sudden, volatile and erratic move. Expect considerable selling in the small-caps in the coming weeks.

On the head-and-shoulders pattern, every technician views a pattern slightly different from other technicians. In the 5-year chart (to the left), I view the pattern drawn by the blue lines. Others may consider the purple lines. In either case, there is no disagreement that the pattern has now been reached due to break in the necklines.

UPDATE: NYSE/NASDAQ/AMEX NEW-HIGHS/NEW LOWS INDEX, CBOE VOLATILITY INDEX (VIX)

Below are the New-Highs/New-Lows Indices for the NYSE, NASDAQ, and AMEX. Notice that we are still hitting a lot more new lows than new highs. On Thursday, we hit 5 new highs and 778 new lows and on Friday, we hit 4 new highs and 1076 new lows. This gap is getting wider and wider, killing the chance for a major recover that certain people are still preaching about. Charts do not lie and they paint a very clear picture of what is going on in the markets. This is an undeniable truth in technical analysis. Notice how the AMEX fell the sharpest – most companies on the AMEX are small-to-micro caps. These indices must improve for any confirmation of any type of rally.

I stated in the previous commentary that the VIX will breakout and stay elevated in the 40’s level. This has held true. This is a high-and-tight flag that formed, and these patterns have extremely high reliability and a low-failure rate. These patterns are one of my most favorite patterns to look out for. The VIX is currently consolidating between 40 and 47, however, there is concern as the pattern is overextended. I do expect a bounce in the markets this week and also a slight pullback for the VIX. The fear level remains elevated now that Europe and Asia are the next regions to fall amid the credit crisis.

CURRENCIES: U.S. DOLLAR INDEX ($USD), EURO INDEX ($XEU)

Focus is placed on the U.S. Dollar and the Euro because of the significance of the levels they are at. The USD made a new high and I do expect consolidation, if not a breakout higher. The XEU is testing support. On long-term charts, it appears that the USD will be heading higher after forming a higher low and the XEU will be heading lower. These trends can remain in place for many months unless there is a great and sudden shift in global macro factors affecting both currencies. Both currency indices use the 50-day as support (USD) or resistance (EUR) and make note of their guiding pattern.

COMMODITIES: CRUDE OIL ($WTIC), GOLD ($GOLD)

Just like the XEU (Euro Index), commodities such as oil and gold are testing support levels. Oil follows the 40-day MA and gold follows the 20-day MA as of now. Make note of their respective support levels and react to any clean and full breakdowns. A low-risk trade would involve waiting for a confirmation day of any bounce or a continuation of the decline.

THIS WEEK’S WATCH

• Make note of any intraday reversal and rally into the close on either Monday or Tuesday to make capitulation day. Expect the market to gap down considerably in the morning.
• Pay attention to the VIX
• Note successful or failed tests in support/resistance for the USD, XEU, Oil, and Gold
• Be aware of the notable economic and earnings reports below

Noteworthy Economic Reports: Mon. (ICSC-Goldman Store Sales – 7:45AM, Consumer Credit – 3:00PM), Tues. (MBA Purchase Applications – 7:00AM, Pending Home Sales – 10:00AM, EIA Energy Status – 10:35AM), Wed. (Chain Store Sales, Jobless Claims – 8:30AM, Wholesale Trade – 10:00AM, EIA Gas – 10:35AM), Fri. (Import/Export Prices – 8:30AM, Int’l Trade – 8:30AM, Treasury Budget – 2:00PM)

Noteworthy Earnings Reports (planned): Mon. (AEP, IDT, VOXX), Tues. (PAR, AYI, AA, ZZ, YUM), Wed. (COST, LNN, MON, RT), Thurs. (RBN, SABA), Fri. (GE, HST, SLAB)

BLOG OF THE WEEK: HEADLINECHARTS BLOG! (http://www.headlinecharts.blog.com)

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.

WEEKLY COMMENTARY - AUGUST 25th-29th

MARKET COMMENTS -- INDU 11,628.06, COMP 2,414.71, SPX 1,292.20, RUT 737.60

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 two weeks’ volume. Notice the down slope in volume as the rally progresses as down days possess more volume activity than the up days in most indices. In addition, the INDU and SPX rallies have both weakened over the past week as they continue to test the 50-day MA. Both indices are in a wedge pattern, which is considered bearish. Friday has marked the 3rd rally attempt for both indices and both most penetrate their short-term recent highs for a continuation. The COMP has tested and failed the 200-day MA in addition to upper resistance around the 2475 level. Notice the tapering of volume is even greater than the previous 2 weeks. Friday’s gap up shows very little enthusiasm and we expect the COMP to test the 200-day MA one or two more times.

(click on chart to enlarge)


All Charts Courtesy of Stockcharts.com. Copyright ©1999-2008 by StockCharts.com Inc., Redmond Washington. All rights reserved.

The RUT formed a double Adam-and-Adam bottom, entered into a congestion zone mid-July to mid- August, made a new short-term high, met resistance at the 765 area and is now testing the 200-day MA. The RUT must penetrate the June and August highs for the trend to continue in strength. The RUT may trade in a range if resistance levels once again pose a problem. Nonetheless, the RUT is the best performing index shown.

We are now neutral in the short-term of whether or not the rallies will continue in the same initial strength as they did in last month. The reasoning is that volume for the past 3 weeks remain weak and has gotten weaker each week, hitting new short-term lows in volume. This level of “inactivity” is a graphical representation of weak institutional inflow, which is much needed to sustain rallies. We expect a mixed, neutral movement for all four indices for this week. Expect the INDU and the SPX to continue to test the 50-day MA and the COMP to retest the 200-day MA. Again, Volume confirms price action.

ADVANCE-DECLINE (A-D) & NEW HIGHS-NEW LOWS (NH-NL) LINES

The Advance-Decline lines and the New Highs-New Lows lines for the NYSE, NASDAQ (COMP), and AMEX are shown below. The best clues come from any divergences from the indices. The NH-NL line divergence with all indices vs. their respective exchanges continues to widen. Note the continuation of the lines in a neutral or downward trend while the rallies for the indices (and their respective exchanges) continue upward. Also note the A-D lines for each exchange and how the AMEX A-D issues are divergent with the other exchanges.

(click on chart to enlarge)

All Charts Courtesy of Stockcharts.com. Copyright ©1999-2008 by StockCharts.com Inc., Redmond Washington. All rights reserved.

The US Dollar did make a pullback as expected last week; however, we would expect continued consolidation or a deeper pullback at least to the 75 support area. The Euro has also pulled back as expected and we believe the Euro will either trade in a range or resume its downtrend for the short-term. Note 50-day/200-day MA crossovers for both currencies.

THE US DOLLAR/EURO, GOLD/SILVER, OIL/NATURAL GAS

(click on chart to enlarge)

All Charts Courtesy of Stockcharts.com. Copyright ©1999-2008 by StockCharts.com Inc., Redmond Washington. All rights reserved.

Also expected last week, Gold (AMEX: IAU) has pulled back to the 83 resistance area. Silver (AMEX: SLV) has pulled back as well, but did not fill the previous gap. We expect both commodities to trade in a range for the short-term. Also note the imminent 50-day/200-day MA crossovers.

Oil (AMEX: USO) spiked on Thursday due to a decline in the US Dollar as well as Russia’s presence near Georgia’s two main pipelines. We expect the USO to trade in a range bound by the 50-day MA and the 200-day MA. Natural Gas (AMEX: UNG) continues to slide in a downtrend, and we expect that to continue, but also expect a sharp spike away from extremely oversold levels.

AFTER EARNINGS REVIEW

(click on chart to enlarge)

All Charts Courtesy of Stockcharts.com. Copyright ©1999-2008 by StockCharts.com Inc., Redmond Washington. All rights reserved.

ADI – Reported earnings of $0.44 per share from continuing operations, missing analysts’ expectations of $0.45 per share. Q3 income rose to 4138.6 million vs. 120.4 million a year ago. Revenue rose 7% to $659 million, practically in-line with analysts’ expectations of $658.9 million. Shares opened at $31.14 and drifted down throughout the day to close at $29.29, down 9% on 11 million shares traded.

FMD – Reported a loss of $0.53 per share due to a continued weakening in the student loan market and a decline in the value of receivables vs. positive earnings of $0.83 per share a year ago. Analysts expected an average loss of $0.53 per share, missing expectations. Revenue dropped to a loss of $40.4 million vs. a gain of $197.1 million a year ago. Shares closed Friday at $3.67, up $0.06.

BJ – Reported $0.61 per share on $2.65 billion in revenue vs. $0.55 per share on $2.25 billion in revenue a year ago. Analysts expected $0.57 per share on $2.67 billion in revenue, beating earnings estimates but missing revenue targets. Shares dropped 7% to close at $37.71.

HPQ – Reported $0.80 per share or $2 billion on $28 billion in revenue. Excluding one-time items, HPQ would have earned $0.86 per share, beating estimates of $0.83 per share. The company also raised its Q4 outlook by announcing that it expects to earn between $0.95 - $0.97 per share. Shares rose 6% to $46.16 on 33.1 million shares.

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All Charts Courtesy of Stockcharts.com. Copyright ©1999-2008 by StockCharts.com Inc., Redmond Washington. All rights reserved.

CTRN – Reported earnings of $0.20 per share, beating estimates of $0.17 per share by analysts. Revenue rose 16% to $338 million. The company also reiterated its guidance for the fiscal year. Shares rose $1.81 or 10% to close at $20.26. Shares the previous day dropped 11%.

PERY – Reported a loss of $0.36 per share or negative $5.4 million vs. net income of $267,000 or $0.02 per share a year ago. Analysts expected PERY to report a loss of $0.02 per share, widely missing expectations. Shares got crushed, dropping 25% or $5.77 to close at $17.23.

JDSU – Reported a loss of $29.8 million or $0.13 per share vs. a loss of $17.9 million or $0.08 per share a year ago. The loss was due to heavy acquisition-related charges. Shares fell 12% to $10.42, down $1.55 on 22 million shares traded.

NVTL – Reported preliminary results and expected to earn $0.03 per share for Q2 or $25,000 vs. $8 million or $0.25 per share a year ago. Analysts were expecting $0.14 per share, entirely missing expectations. NVTL expects a loss for Q3 of $0.03 per share while analysts were expecting earnings of $0.18 per share causing analysts to revise all estimates for the remainder of the fiscal year. Due to a delay, NVTL received notice from NASDAQ for failure to file its 10-Q and may be delisted if unable to meet listing requirements. Shares fell $2.11 or 25% to close at $6.29 on 7.2 million shares.

SELECTED INDUSTRY GROUPS

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All Charts Courtesy of Stockcharts.com. Copyright ©1999-2008 by StockCharts.com Inc., Redmond Washington. All rights reserved.

This Week’s Watch:

• The DJIA and SPX will continue to test the 50-day MA, the COMP will continue to test the 200-day MA. The RUT may re-test its June high. Note any increases in volume (if any) on positive days during the current rally.
• Several COMP industries are bound between the 50-day and 200-day MA’s. Note any breakouts or breakdowns.
• Numerous retails will report earnings this week as well. Last week, retailers mostly reported negative earnings. Make note of both positive and negative reports.

Economic Reports of interest: Mon. (Existing Home Sales), Tues. (S&P/Case Shiller Home Price Index, Consumer Confidence, New Home Sales, House Price Index, Richmond Fed Manufacturing Index, Weekly Retail Sales), Wed. (Weekly MBA Mortgage Applications, Durable Goods Orders), Thurs. Prelim Q2 GDP, Prelim Q2 Personal Consumption, Prelim Q2 GDP Price Index, Initial Jobless Claims), Fri. (Personal Income, Personal Spending, PCE Core, University of Michigan Consumer Confidence).

Noteworthy Earnings Reports: Tues. (COCO, SFD, BGP, CHS, JCG, AEO, BIG), Wed. (BWS, MW, DLTR, TLB), Thurs. (WSM, SHLD, ENER, ZLC, NOVL, MCRS, PETM, OVTI, GCO, DELL, TIF, DLM, FRED).

Contact: John C. Lee // E-mail: JCLee84@hotmail.com // Website: www.WeeklyTA.blogspot.com

*For fundamental-related articles, please visit: http://seekingalpha.com/author/john-c-lee