WEEKLY SECTOR WRAP-UP

The Materials Sector (XLB) may bounce and meet resistance at around $39. Regardless, the materials are in a confirmed downtrend and must see a capitulation before a strong rally occurs. As hedge funds continue to sell off their holdings, expect continued downward pressure.

The Health Care Sector (XLV) has been doing quite well and is now in a correction. I expect a successful test of support at $32; otherwise, the rally is over. Notice how the correction is highly irregular and formed on huge volume on the down days, a bearish sign.

Consumer Staples (XLP) is the best performing sector yet. In recessionary times, the staples will outperform the general market. The continuation gap suggests that the staples have much more room to the upside. The sector has major support to drop back to, if needed, against the 50-day and 200-day MA’s.

The Consumer Discretionary sector (XLY) is performing tremendously well along side the staples. This is surprising since the sector represents non-essential consumer spending. Currently, the sector is trading in a neutral range and needs to break away from the 200-day MA in the next several days. Otherwise, this will mark the 5^th rally attempt, and flash a warning signal of an impending breakdown.

The Energy sector (XLE) has broken down along with the materials sector. The small bounce should continue, but not for long as the trend remains downward. There is major resistance at $70 and also notice the increasing volume. Capitulation should arrive shortly.

Have the Financial Sector (XLF) found a bottom? All I can say is it’s a short-term one. A clean break above $23 is considered a buy, but it must occur soon. The churning at the 50-day MA marks numerous rally attempts to continue an uptrend. Note the increasing volume.

The Industrial sector (XLI) is another group that hedge funds are dumping hand over fist. Expect a bounce from $33, possibly forming a double bottom. A failure at this level will mark the beginning of another primary down leg.

The NASDAQ rally is over, and the Technology sector (XLK) is fighting for its life (yes, the markets have a life of their own, right?) to maintain support at $21.50. If this breaks, there will tremendous downside risk as the downward trend continues. Notice how the technology sector is making lower highs, a bearish sign.

The Utilities sector (XLU) resembles the breakdown in the materials sector. The current consolidation is most likely forecasting a sharp downward continuation. Note the increasing volume on the breakdown.

TODAY'S BREAKOUTS & BREAKDOWNS

Republic Airways (RJET) broke out on one of my favorite patterns where the white candle slightly exceeds the high of the previous white candle. RJET broke out from $11 resistance, but on lower volume. Also notice that RJET is forming a higher low, a bullish sign. The further decline in oil will fuel this one to new short-term highs. I’ll add this to my watch tomorrow.

The price of refineries typically has an inverse relationship with the price of oil, but I don’t understand why Frontier Oil (FTO) would move up 12.7% today on no apparent news. My guess is that Hurricane Ike is heading toward Houston, home of the Texans, but also a lot of refineries. The breakout may be a false one, but FTO did break above the 50-day MA. Wait for confirmation tomorrow as well as updates from the National Hurricane Center.

Oil, at the time of this writing, is sitting at $100.96 on the NYMEX. The Amex Oil Index (XOI) was up 2% today and added fuel for Sunoco (SUN), which by the way, has no refineries in the area. After completing a descending triangle, SUN broke to the upside on high volume. Typically, these formations break to the downside. There is resistance at $48, but the major area lies at the 200-day MA at $50.25.

As oil prices continue to drop, automakers such as General Motors (GM) will jump in response. In addition, news that automakers may receive $25 billion in low-interest loans helped GM to breakout. The proposal is still being discussed in Congress. GM was forming higher lows and consolidated at the 50-day MA without any breakdown. GM should hit $15 in a few days, meeting resistance at the previous short-term high.

Allergan (AGN) gapped up and maintained momentum throughout the day after the company released studies showing that Botox may treat headaches. Umm…I don’t know about you, but I’ll stick to my aspirin. AGN will be asking the FDA for approval next year. Meanwhile, it looks like AGN is heading higher. This stock has the tendency to breakout after month long consolidations, but typically the breakouts are stronger the longer a stock consolidates. While the headache treating Botox may be promising, the clean break through the 200-day MA is a promise.

No surprise that Merrill Lynch (MER) got taken down along with Lehman (LEH) today. I would say that after Lehman, Merrill is the weakest firm, given the atrocious losses they reported over the past... (how long has it been?). Remember the $8.5 billion offering (at the $22.50 level) in July 29^th? Investors may be wondering what they were thinking. After forming a descending triangle, MER made the typical move by gapping down on strong volume. There’s no sense in going long MER. Shorts should consider waiting for a dead cat, using the gap as resistance.

Sunrise Senior Living (SRZ) reported a loss of $0.63 per share vs. earnings of $0.15 per share a year ago. This company is full of trouble. Remember back in March when SRZ had to restate earnings from 1996-2005 which effectively reduced earnings by $173 million? SRZ also reported a loss for Q1, too, of $49.9 million. This is something investors shouldn’t touch, and the price action showed it. In the past two days, SRZ fell from $21 to below $16 today. Two warnings would have prevented this loss: 1) yesterday’s break in the trend, 2) break in the 50-day MA. This stock was toast before today even came. Who says technical analysis doesn’t work?

Kenexa (KNA) popped 26.4% today after the company announced that they lowered revenue expectations to $54 - $56 million from $57 - $59 million and income expectations to $10.3 - $10.6 million from $11.4 - $11.8 million. But that’s not all, 10 analysts came out today issuing reports on KNXA! This stock was toast in the morning.

• FBR – Reiterated “Market Perform”, reduced target price to $19 from $25
• Brean Murray, Carrat & Co. – Reiterated “Buy”, reduced target price to $23 from $25
• Jefferies & Co. – Reiterated “Buy”, reduced target price to $22 from $27
• Wedbush Morgan – Reiterated “Hold”, reduced target price to $19 from $21
• RBC Capital Markets – Reiterated “Sector Perform”, reduced target price to $18 from $21
• Maxim Group – Reiterated “Buy”, reduced target price to $26 from $30
• Credit Suisse – Downgraded to “Neutral” from “Outperform”
• KeyBanc Capital Markets – Downgraded to “Underweight” from “Hold”, target price $15
• Lazard Capital Markets – Downgraded to “Hold” from “Buy”
• Susquehanna Financial – UPGRADED to “Neutral” from “Negative”

Two things surprise me the most (not!): 1) Only one upgraded the stock out of nine, 2) how the heck do most of them reduce their target prices without downgrading their rating? This is some serious herding behavior and terribly confusing if you ask me.

READER'S REQUEST - Fossil (FOSL)

Fossil (FOSL) appears is trading in a range on declining volume. Short-term support is at $28 and long-term resistance is at $31. It appears that FOSL is forming a symmetrical triangle within a larger neutral range. A breakout at $32 is considered bullish and a continuation of an uptrend and a breakdown under $28 is considered bearish and signals a reversal. Both actions should accompany high volume. The most obvious characteristic of neutral range-bound trading is between the 50-day MA (blue line) and 200-day MA (red line).

The S&P Retail Index ($RLX) is still in a confirmed uptrend without any major breaks. There is strong resistance at 425 and the index may consolidate for several weeks. The retail sector is currently outperforming the S&P as a whole and is demonstrating strong leadership. Notice how FOSL is slightly divergent from the index? If the retail index breaks above resistance and continues to move up, there’s a high likelihood that FOSL will breakout to the upside almost immediately so watch out for it.

TODAY'S BREAKOUTS & BREAKDOWNS

There’s only one stock that met my breakout criteria for today, and that’s Eddie Bauer Holdings (EBHI). This is a nice rounded consolidation play that gradually broke out on higher volume on the preceding days. The continuation gap in the beginning of August lived up to its name and EBHI made a new 9-month high. The next level of resistance is at the $9.40 area back in Aug-Oct 2007. It looks like EHBI will make higher highs from this point on.

Washington Mutual (WM) hit a 17-year low! Goodness, and it looks like its going lower. Shares are down 29.7% today on 213.8 million shares, nearly 3x the average daily volume. If big house Lehman (LEH) is having major trouble finding capital, then Washington Mutual will have a field day trying to find it. It now costs $4.3 million + $500K per annum to insure $10 million in WM debt for five-years, up from $3.2 yesterday. That translates into a possible 85% chance that WM will default within five-years, according to investors. Don’t expect any type of quick bounce on WM as the selling momentum is clearly increasing from the past 2 days. Long positions should be entirely avoided, and I don’t have to remind you how quickly fear precedes panic.

Raser Technologies (RZ) dropped 13.5% today, mostly likely contributed by forced liquidation/margin calls from institutions. Management did reaffirm their outlook, but the stock has broken may support at $7. Once a break like this occurs, it is very difficult for a stock to climb back out.

Las Vegas Sands (LVS) dropped along with Wynn Resorts (WYNN) and other casinos on a report issued by the Nevada Gaming Control Board stating that casinos earned (or won) a 13% decrease in revenue vs. a year ago. The results were even worse for Strip casinos, down 14.7% to $519.2 million. Don’t people gamble more, not less, during recessionary times? LVS formed a descending triangle and broke support at $40. The next major level is at its July lows at $30.

I’m not sure what happened to Griffon (GFF) today, but traders eagerly dumped the stock (down 8.3%). After forming a breakaway gap from consolidation, GFF was unable to find support at the 50-day MA and continued downward to break the 200-day MA. I’m not sure who’s still holding, but they might want to think about it. The next area of support is at $8.50-$8.75, and it’s a strong one. Selling momentum should subside and consolidate in the $8.75-$9.50 area; otherwise, GFF has no chance.

GFI Group (GFIG), an investment broker (no surprise), dropped 24.4% today on news that the company was unable to reach a deal with Tullett Predon (TLPR: UK), a broker in London. Tullet’s stock isn’t doing too well either. They’re down about 25% from their high in February to 382.75. Although the entire space within a gap is considered support, if there’s a major violation within that empty space on huge selling volume, then that’s a clear warning sign. Today just happened to continue what wasn’t finished. Expect a bounce from the $7 level in the near-term.

Photon Dynamics (PHTN) is awaiting closing clearance from the Committee on foreign Investment. This follows the announced acquisition by Orbotech for $290 million. Today’s action seems unusual to me. The announcement wasn’t announced until after 2:30PM, but the stock broke down starting at 11:45PM. Either way, PHTN did hit a low of $10.74 but was able to sharply regain some lost ground. The gap from the Orbotech is entirely filled.

Goldman Sachs downgraded Calamos Asset Management (CLMS) to “Sell” from “Neutral” and adding the firm to Goldman’s Americas conviction sell list. Shares dropped nearly 12% and looks like it formed a breakaway gap, cutting through both the 200-day and 50-day MA’s. Expect continued downside for CLMS.

Melco (MPEL) was a stock I shorted a while ago back in June, but I never expected it to hit $5. MPEL is down 11.3% today due to a likely drop in revenue from A-Max’s VIP level (A-Max is a partner with Melco). The money that high rollers are betting dropped 18% to $33 billion in August from $40 billion in July. Analysts aren’t worried about the drop, but investors are. Who should you trust? Well, Jefferies & Co. reiterated their “Buy” rating and price target to $18 and JPMorgan reiterated their “Overweight” rating. MPEL looks like it’s going down even further.

Cavium Networks (CAVM) took a 10% hit today on something that didn’t come from any news. It appears to be the systematic sell-off continuation since 3 days ago. CAVM dropped below their Feb-March levels and have hit a brand new low since its IPO in March 2007. There are no more support levels remaining at this point.