Sam Collins

Uncovering the Market's Power

by Sam Collins   04/08/08

It seems that ever since the market's 391-point Dow (DJI) run on April Fools' Day, investors would rather just take to the sidelines and avoid any further risk. The last three days following the market's April 1 shenanigans were flat, resulting in a weekly gain of 4.2% on the S&P 500 (SPX).

But yesterday morning started off well with The Wall Street Journal reporting that beleaguered financial firm Washington Mutual (WM) was close to a deal to inject $5 billion into the company.

However, M&A activity was the day's focus of attention as Novartis (NVS) said that it was paying Nestle (NSRGY) $11 billion for just under 25% of Alcon (ACL). Further, Microsoft (MSFT) threatened Yahoo! (YHOO) with a hostile takeover if it didn't agree to the giant's prior offer within three weeks.

Discover Financial (DFS) said that it would buy Diners Club International from Citigroup (C) for $165 million, and with all of that, by early afternoon on Monday, the bulls had taken the Dow Industrials (DJI) to a gain above 120 points.

Following the flurry of early morning deal chatter, however, the market turned south. And despite a spate of buying just before the close, the bulls failed to regain ground.

At the close yesterday, the Dow Jones Industrial Average (DJI) stood at 12,612, up three points. The S&P 500 (SPX) added two points to close at 1,373, and the Nasdaq (NASD) fell six points to end at 2,365.

The New York Stock Exchange traded 1.2 billion shares while 727 million crossed on the Nasdaq (NASD). Breadth was a positive 3-to-2 on The Big Board and a positive 15-to-14 on the Nasdaq.

May crude oil futures gained $2.86 to $109.09 a barrel, and the Amex Energy SPDR (XLE) closed at $77.72, up 41 cents. The June gold contract closed at $926.80 per troy ounce, up $13.60, and the PHLX Gold/Silver Index (XAU) added 3 cents, closing at $184.71.

What the Markets Are Saying

On Friday, I noted the Nasdaq's progress and that it was leading other indices in the current rally, as it had broken above both its 50-day moving average and the channel downtrend that had been in effect since January. Also its chart pattern, a "V" bottom, is something that most technicians view as very bullish.

But like the other indices, the Nasdaq (NASD) must break into the band of resistance just above the current chart patterns; this band sits at 2,400 to 2,500.

Yesterday, the index got to within just 10 points of entering that formidable zone before turning sides and closing lower by 6.15 points. The turn missed being a daily reversal by a fraction, and the slow stochastic indicator fell sharply and flashed a short-term sell signal.

This series of events, if not quickly erased, could turn out to be a pivotal point in the current rally since they represent a divergence from the other leading indices. And with more than a dozen internal indicators (the Relative Strength Index, Moving Average Convergence/Divergence, momentum, stochastics, etc.) all in very overbought zones and with volume contracting, it is likely that the next move for this index will be down.

Keep a focus on the Nasdaq (NASD) -- it could be signaling that the market is about to roll into another test of the January/March double-bottom.

Today's Trading Landscape

Earnings to be reported today include: Angelica (AGL), APT Satellite Holdings (ATS), Chattem (CHTT), Layne Christensen (LAYN), Mitcham Industries (MIND), MSC Industrial Direct (MSM), Sealy (ZZ) and Suffolk Bancorp (SUBK).

Economic reports due today are February pending home sales (the consensus expects negative 1.0%) and the minutes from the March 18 Federal Open Market Committee (FOMC) meeting.

Alcoa (AA) posted a 54% drop in Q1 earnings at 36 cents a share versus an expected 48 cents -- and Advanced Micro Devices (AMD) projects a sharp drop in Q1 revenue and announced job cuts. The focus today will be on the first group of Q1 earnings.

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