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Dr. Joe Duarte's Market I.Q.
The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors
Is A Nasdaq Top In Place? Oil & Commodities: Technical Divergence Develops. Stocks: Advance Decline Line Weakens. | | | | | | |
Dallas, TX, December 26, 2006, 08:00 EST
Pre-Market Summary:
Traders, those few that may show up to work this week, will have some serious decisions to make.
Today's Economic Calendar: 10:00a.m. Dec Richmond Fed Mfg Business Index. Previous: 7. 10:30a.m. Dec Dallas Fed Mfg Production Index. Previous: 8.5. 5:00p.m. ABC/Wash Post Consumer Conf. For Dec 24. Previous: +1. Sources: Wall Street Journal.com, Marketwatch.com.
Is A Nasdaq Top In Place?
Technology Roundup
The pundits are tripping over themselves, spouting opinions and making forecasts of future gains in the future. Yet, the market is clearly spinning a negative tale.
Indeed, a systematic look at the charts suggests that one or two more days of selling could push the market into a 5-10% correction, which could turn into a more negative wave of selling if geopolitical or economic events spin out of control.
The technology sector is the weakest area of the market, making the Nasdaq the most vulnerable of the major indexes.
Chart Courtesy of StockCharts.com
The Nasdaq Composite (COMPQ, above) is testing the 2400 area. The index has had significant problems closing above the 2450-2500 trading range, as former leaders, such as Apple Computers (Nasdaq: AAPL, below) have been aggressively sold by profit taking traders.
Apple has lost over 10% since late November. But it's not alone. Other big tech stocks, such as Microsoft (Nasdaq: MSFT), another recent leader, have also rolled over, while chip stocks, such as Intel (Nasdaq: INTC) never really joined the rally.
Chart Courtesy of StockCharts.com
The Amex Computer Technology Index (XCI, below) is a great way to look at the large cap technology sector. And it's not spinning a very positive tale either.
XCI, where Apple, Microsoft, Intel, and other Nasdaq heavyweights do their work, topped out in late November, and has lost nearly 4% of its value since then. The index closed below its 50 day moving average on 12-22, the last trading day before the Christmas break.
Chart Courtesy of StockCharts.com
More Weakness Ahead
Orders for semiconductors remain weak, according to the North American semiconductor manufacturers, as the SEMI book to bill ratio for November was 0.97.
The Semiconductor Industry's book to bill ratio is the industry benchmark for measuring orders for semiconductor chips. A book to bill ratio of 0.97 means that $97 worth of orders were received for every $100 worth of orders that were shipped.
There are good news and bad news here. For one thing, the November 2006 number is 25% higher than the October 2005 number, but below the October 2006 number, a fact that suggests that the recovery in the semiconductor industry has slowed.
And that's exactly what the charts are suggesting. The Philadelphia Semiconductor Index (SOX, below) has been weakening, and closed last week just above its 200 day moving average.
A break below this key support level could lead to an acceleration of selling on the Nasdaq, and throughout the technology sector.
Conclusion
The technology sector is flashing danger signals that could affect the Nasdaq, and could start spreading throughout the market.
The semiconductor industry's benchmark for sales is showing signs of weakness, and orders for this cycle might have topped out.
The Federal Reserve is still talking about higher interest rates as a future possibility.
The geopolitical situation is starting to tighten up, and the Presidential political season is just around the corner.
In other words, the end of 2006 might mark the beginning of a very volatile period for the financial markets.
Oil And Commodity Summary:
Energy Sector Remains Mixed
The Amex Oil Index (XOI) and the Philadelphia Oil Service Index (OSX), both below, remained week on 12-22, with the lack of a major outbreak of cold weather holding prices in check.
Crude prices, though, have remained above $60, a key technical support level, although natural gas, gasoline, and heating oil prices have eased.
Indeed, this is becoming purely a weather market.
Warm weather, to be sure, is not prevalent. But, warmer than usual cold weather seems to be the norm, with more rain and violent weather than usual also appearing in the Northeast.
In the minds of energy traders, this is not the norm, so uncertainty is the overriding factor, making trading very hazardous.
The best approach at this point is to be very selective, and to take only small positions if any.
See our energy trading section for new recommendations.
The metals markets are still in play and should be watched carefully, as gold could again shine, due to the potential for global instability as well as a potential for more inflation at the producer level.
Visit our gold section for more on metal stocks. New stocks have been added to the list along with recommendations on the Gold ETF.
Gold is starting to rally after holding at the $600 area. But the steel sector has been increasingly volatile.
Natural gas remained the $7-$8 range, and gasoline futures have risen well above $1.50. Heating oil may test the $2 area in the next few days.
Chart Courtesy of StockCharts.com
The Wilderhill Clean Energy Index looks increasingly weak, although it has remained above 180.
Chart Courtesy of StockCharts.com
Crude oil prices are still above the $58-$60 area. The situation is fluid here, though.
Chart Courtesy of StockCharts.com
The Philadelphia Oil Service Index (OSX) looks set to test the support near the 200 area.
Chart Courtesy of StockCharts.com
The Amex Oil Index (XOI) broke below 1200 on 12-22, but could regain some lost ground if cold weather returns.
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Technical Summary:
Chart Courtesy of StockCharts.com
Market Breadth Spins A Negative Tale
Low volume has masked what in retrospect may be an intermediate top in the financial markets. For several days, we've been writing about weakness in the Nasdaq, which has continued.
But at the end of trading last week, just before the Christmas break, the NYSE advance decline line started to show some of the same action, as the key indicator might have made a top.
Chart Courtesy of StockCharts.com
For now, the number of stocks making new highs has not confirmed the weakness in the market's breadth. And love volume declines are easier to reverse than those that come with high volume. So the top isn't fully formed.
But there are other indicators that suggest that weakness is spreading. The S & P 500 had been acting better than the Nasdaq, but it is also starting to show signs of weakness.
In other words, it's time to be very careful in this market.
Caution is always part of a successful investment plan. And after six months of aggressive rallying, any market becomes vulnerable, with one or two more days of heavy selling often signaling the end of the bull run.
Our long term forecast remains upbeat, unless the major indexes fall convincingly below their 200 day moving averages.
What To Do Now
It's time to be very careful. Aggressive traders should start looking for short sale candidates, as less aggressive traders look to take profits and wait to see what happens.
We have several open short positions now. Visit all our pages for more details.
Our bond, energy, gold, and dollar timing models are likely to become handy if the stock market turns south. All these sections have now been updated.
Visit our individual sections,bot our ETF and individual stock picks daily for new ideas, and changes to open positions.
Be very methodical about monitoring portfolios, adhering to trading rules, and ratcheting up sell stops is clearly still here.
If the rally turns south, your chances of preserving your profits by following a sound trading plan, such as outlined above will increase.
Second guessing decisions, and hoping that things will turn out o.k. in the long haul, is the recipe for disaster at a time like this in the market.
Check all our sections daily. See tech, biotech, Fallen Angels, and timing systems for the latest adjustments. Our ETF trading systems for energy, Spyders, Small Caps, and technology have also been updated.
Chart Courtesy of StockCharts.com
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Sentiment Summary:
Pre-Holiday Insurance
Option traders took out some insurance on 12-22. That means that Wall Street could get a higher opening. But, the key is how the market finishes. We've had lots of early rallies die lately. If this is once again the case on 12-26, it would be yet another sign of a tired market.
The CBOE Put/Call ratio checked in at 1.10. A consistent string of low readings can be a sign of excessive optimism and often signals a top in the markets. Readings below 0.5 are of concern, but not as serious as readings below 0.40. Readings above 1.0 are bullish. The numbers cited here are meant to be evaluated on a closing basis.
The CBOE P/C ratio for indexes rose to 2.25. Numbers above 2.0 as the market sells off, often lead to rallies. Readings below 0.9 suggest too much bullish sentiment, just as readings above 2 are usually required to mark major bottoms.
The VIX and VXN had readings of 10.27 and 16.07. Recent numbers have been increasingly low and signal too much complancency. A fall near or below 20 on VIX and 30-40 on VXN is considered negative, a fact that is usually confirmed when the volatility indexes begin to rise. Readings above 40 and 50, respectively, are often signs that a bottom may be close to developing.
NYSE specialists were mild sellers of stock for the week ending December 8, 2006. Specialist short selling remained at very low levels, though. Rising short selling from specialists is usually a very bearish sign.
Market Vane's Bullish Consensus remained at sell signal levels, checking in at 72% on 12-22. The UBS sentiment index also delivered a very cautionary reading of 93 for the month of November, and followed it with a reading of 90 for December.
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Market Moves
Nasdaq 100 Trust Broke Key Support
The Nasdaq 100 Trust (Nasdaq: QQQQ) broke below key support on 12-22.
Chart Courtesy of StockCharts.com
The large cap technolgy bellwether closed below its 50 day moving average before the Christmas break, suggesting that further weakness might lie ahead.
The 50 day moving average is the line between a rising and a falling intermediate term trend, and is often breached only temporarily, as contrarian traders often add to positions when stocks break slightly below this key benchmark.
For that reason, it's important to watch the Cubes over the next couple of days.
If there is a recovery, it would be a very positive sign for the market. If the negative action continues, though, the next support level is near 40, a 5.25% decline from the 12-22 close.
A sustained break below 40 would be a very negative development, and could be the prelude to a bear market.
Indeed, it's pins and needles time for traders.
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Chart Courtesy of StockCharts.com
The Amex Biotech Index (BTK) has held above 750. The 780-800 area is important resistance.
Chart Courtesy of StockCharts.com
The Amex Pharmaceuticals Index (DRG) is looking increasingly weak with the 340 area becoming key support.
Chart Courtesy of StockCharts.com
The Philadelphia Semiconductor Index (SOX) seems to have faltered in its bid to rise above 480, a key pivot point.
Chart Courtesy of StockCharts.com
Small stocks are increasingly weak.
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