Sam Collins

Traders: On Your Mark, Get Set

by Sam Collins   10/31/08

Thursday was another swinging day of trading, starting with the opening bell when the Dow (DJI) rocketed 270 points higher in the first five minutes. It then fell to the low of the day by noon Eastern with a small negative reading, then it moved back near the opening high by 3 p.m. Eastern, followed by a sharp sell-off to the day's lows. Finally, in the last minutes of trading, a wild rally that took the average back up again to just 80 points under the opening high. At the end, the Dow closed at 9,181, up 190 points.

Blue chips were strong, especially in the closing minutes, with all but five of the Dow-30 on the plus side.

Intel (INTC) gained 7.2%, Walt Disney (DIS) gained 5.7%, and JPMorgan Chase (JPM) rose 5.35%. American Express (AXP) gained 3.4% even after an announcement that it would cut 10% of its workforce, and ExxonMobil (XOM) rose 0.5% after reporting nearly $15 billion in profit for Q3.

Energy, utilities and industrials were the strongest sectors. Telecommunications and financials were the laggards. Motorola (MOT) fell after reporting a loss.

Before the opening bell, the Commerce Department estimated that the U.S. economy contracted by the most since the end of the last recession in late 2001. And the Labor Department said that jobless claims held steady at 479,000 new applications for the week ending Oct. 25.

At the close, the Dow (DJI) advanced 190 points to 9,181, the S&P 500 (SPX) gained 24 points at 954 and the Nasdaq (NASD) rose 41 points to close at 1,699.

Volume on the New York Stock Exchange was 1.4 billion shares and advancers exceeded decliners by just under 5-to-1, while on the Nasdaq, more than one billion shares traded and advancers were ahead by 3-to-1.

The December crude oil contract reversed from a high of $70 a barrel, closing at $65.96, down $1.54. The Amex Energy SPDR (XLE) gained $2.22 closing at $50.35.

The December gold contract slid $15.50 to close at $738.50 per troy ounce, and the PHLX Gold/Silver Index (XAU) rose $4.77 to close at $85.29.

What the Markets Are Saying

Yesterday morning, I issued the first breakout alert of the bear market, which essentially said that for the breakout to occur, the Dow (DJI) must close above 9,300 and the S&P 500 (SPX) must close above 985.

My conclusion was based upon the following factors: sentiment, momentum and monetary indicators are all bullish, with the CBOE Volatility Index (VIX) at astronomical highs.

Further, our internal Collins-Bollinger Reversal (CBR) buy signals were flashed on Oct. 23 on the Dow and S&P 500. Of the past 14 days, five had major daily rallies and that makes for a successful test of the Oct. 10 low -- the tests of the bottom have been on very light volume.

What's more, bad news has been ignored by the markets for more than a week: Consumer Confidence is the worst ever, GDP is off .03%, crude oil prices are higher, the U.S. dollar has strengthened as foreign markets have collapsed, and many are convinced of a deep recession -- or worse. We have reached beyond fear to resignation! Doom and gloom are upon us -- a great contra-indicator.

In addition, the internal indicators: stochastic, momentum and the Moving Average Convergence/Divergence (MACD) -- are all buys and arching up from oversold.

And, there is room to make a "Big Bang," as there's no resistance from S&P 985 to my target of 1,100 -- and not much even there until SPX 1,200. And record money-market balances support the "Big Bang."

In the last minutes of Thursday's trading, a powerful surge of buying pushed the Dow up more than 200 points. That changes the pattern of strong selling on the close that has dominated the immediate resistance at Dow 9,300 and may indicate that programmed selling at that area has been completed.

But there are some negative factors: There has not yet been a breakout, so this is an alert, not a strong directive to buy now. Why?

The volume is very low but that could be a positive indicator of the final phase of a drive to new bear-market lows when fear -- in fact, terror -- gives way to hopelessness. And most importantly, sell programs may still be at the Dow 9,300/S&P 500 985 price lines and continue to offer resistance to a trading breakout.

This is a trading alert, not an alert for a major market turn but for a strong tradable rally in the current bear market.

Today's Trading Landscape

Earnings to be reported include: A.H. Belo Corp (AHC), Abington Bancorp (ABBC), Advanced Medical Optics (EYE), Advanced Semiconductor Engineering (ASX), Allete (ALE), Alliant Energy (LNT), American Axle & Manufacturing Holdings (AXL), American Electric Power (AEP), AmericanWest Bancorp (AWBC), Aon Corp (AOC), Apartment Investment & Management (AIV) and Appalachian Bancshares (APAB).

Bank of Granite (GRAN), Barnes Group (B), BioCryst Pharmaceuticals (BCRX), Calgon Carbon Corp (CCC), Capital Product Partners LP (CPLP), Chevron (CVX), Clorox (CLX), Coeur d'Alene Mines (CDE), Columbia Bancorp (CBBO) and Cummins (CMI).

Danaos Corp (DAC), Dresser-Rand Group (DRC), Eldorado Gold Corp (EGO), Emergency Medical Services Corp (EMS), EMS Technologies Eni S. p. A (ELMG), ev3 (EVVV), Evans & Sutherland Computer (ESCC), Goldcorp (GG), Harris Interactive (HPOL) and HealthSpring (HS).

KBR (KBR), Lance (LNCE), M.D.C. Holdings (MDC), MDU Resources (MDU), NTT DoCoMo (DCM), NYSE Euronext (NYX), OGE Energy (OGE), OneBeacon Insurance Group (OB), Progress Energy (PGN), PSEG (PEG) and Quality Systems (QSII).

Republic Services (RSG), Safeguard Scientifics (SFE), Tasty Baking Co (TSTY), TC PipeLines (TCLP), LP (LPX), The Scotts Miracle-Gro Co (SMG), The Washington Post Co (WPO), Trinity Biotech (TRIB) and Weyerhaeuser Co. (WY).

Several economic reports are due including: Third-quarter Employment Cost Index (the consensus expects 0.7%), September Personal Income (the consensus expects 0.1%), September Personal Spending (the consensus expects negative 0.3%), October Chicago PMI, and End-October Reuters/U. Michigan Sentiment Index (the consensus expects 57.5).

This morning, Burger King (BKC) reported Q1 earnings of 38 cents versus an expected 39 cents.

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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.