by Sam Collins 08/27/08
Energy stocks moved higher yesterday as a result of Hurricane Gustav's move into the Gulf of Mexico and the resulting increase in the price of crude oil. That and the minutes of the last Federal Open Market Committee (FOMC) meeting were the most exciting things that happened in yesterday's session.
The FOMC minutes showed that the members voiced concerns about weak economic growth and said that "labor markets had softened further -- in conjunction with still-elevated energy prices and the ongoing housing contraction -- would likely weigh on economic growth in coming quarters."
Translating the Fed speak, the impact of this statement is that the Fed is concerned about slowing growth and is therefore reluctant to raise interest rates.
Chart Pattern Recognition
John Lansing always says, "The charts never lie." Find out why.
There were a lot of economic reports, as well: The Case Shiller 20-city composite report showed a 15.9% drop in home prices in June -- the largest decline ever. And the Office of Federal Housing Enterprise Oversight said that home prices fell a seasonally adjusted 1.4% in Q2.
The Conference Board reported that U.S consumer confidence rose in August for the second straight month of gains at 56.9 from a July reading of 51.9. Economists expected a reading of 53.
At the close, the Dow Jones Industrial Average (DJI) rose 27 points to 11,413, the S&P 500 (SPX) rose five points to 1,272 and the Nasdaq (NASD) fell four points to 2,362.
Volume was the lowest of the year, at just 856 million shares traded on the New York Stock Exchange, and 591 million on the Nasdaq. On both exchanges advancers were ahead of decliners by about 5-to-4.
What the Markets Are Saying
In low-volume weeks like this, I like to digress a bit and look at relationships in technical data that could reveal something more that's going on beyond our usual internal indicators, sentiment numbers, etc. One of those is the relationship between the Dow indices -- the Dow Theory, which states that a major trend must be confirmed by at least two of the three Dow indices, the Industrials (DJI), Transportation Average (DJT) and the Utility Average (DJU).
Both the Industrials and the Utilities are most certainly in a bear market. But the Transports are still in an uptrend, however, with an uncertain outlook resulting from a double top at about 5,500 and support at the 200-day moving average at 4,845.
The DJT is currently giving a Collins Bollinger Reversal (or CBR, our internal indicator) sell signal with an intermediate support line at about 4,800. Therefore, a thrust below the 200-day moving average and the support line at 4,765 would not only be bad news for transportation stocks but for the broader market, too.
The other Dow index to watch is the Utility Average (DJU), which is in a downtrend but has yet to have a big downside thrust. A close under 460 would confirm a head-and-shoulders break with a target of no less than 360 -- a further decline from current prices of over 20%.
But please don't anticipate this break since you will have plenty of time to act on it if it occurs. One of the most common errors of novice traders (because the formation is so visual) is to call a head-and-shoulders break before it actually occurs, which often results in a devastating whipsaw.
For now, enjoy your vacation along with all of the other traders who are crowding the beaches. Volume will likely pick up after Labor Day and with that the future direction of the market will be revealed.
Use Head-and-Shoulders to Find Bottoms
When is your favorite stock is going to recover? Learn more about what the head-and-shoulders pattern can tell you.
Today's Trading Landscape
Earnings to be reported include: Angeion Corp (ANGN), Benihana (BNHN), Canadian Imperial Bank of Commerce (CM), Charming Shoppes (CHRS), China Nepstar Chain Drugstore Ltd (NPD), Coldwater Creek (CWTR) and Dollar Tree Stores (DLTR).
eLong (LONG), FuelCell Energy (FCEL), Gander Mountain Co (GMTN), Genetic Technologies (GENE), Giant Interactive Group (GA), Heico (HEI), Jo-Ann Stores (JAS), Men's Wearhouse (MW) and OSI Systems (OSIS).
Solarfun Power Holdings Co Ltd (SOLF), Solera Holdings (SLH), Sport Supply Group (RBI), Standex Int'l Corp (SXI), SWS Group (SWS), Synovis Life Technologies (SYNO), Talbots (TLB), TIVO (TIVO) and Xeta Technologies (XETA).
In terms of economic reports, the July Durable Goods Orders figures and weekly crude oil inventories are due.
The Federal Deposit Insurance Corporation (FDIC) said its "problem list" continues to grow -- 117 banks now appear on the list, up from 90 at the end of March.
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FAST is now consolidating and recently flashed a buy signal from our internal indicator.
Options Expiration Adds Volatility
The opening looks to be higher but today is options expiration day, and anything could happen.
Chances are high stocks will sell off further, but be alert for a dead-cat bounce after such a dramatic breakdown.
Traders and longer-term investors should sell any new positions at the first opportunity and short ETFs on a temporary recovery in the market.
CAT, the blue-chip of its industry, is the first to attract attention when it's time to dress up a portfolio.
