Market WrapUp (01-27-04)

Financial Sense Online ^ | 1/27/04 | Ike Iossif

[arete]

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Today's WrapUp by Ike Iossif 01.27.2004  Mon   Tue   Wed   Thu   Fri   Archive

"Weekly Report for Week Ending 1/23/04"

Last week--in the monthly report--we articulated our reasons for expecting a pullback between current levels and perhaps 3% higher. All of the indicators have turned down after making contact with the top of their range indicating a temporary exhaustion. However, markets with such a strong momentum and liquidity behind them usually do not pullback along with the indicators. In most cases they continue higher for another 1%-3% while the divergences between price and indicators become more pronounced.  Of course, nothing is guaranteed in this business, and that is why we need to pay attention to the resistance and support levels shown in the charts below, which should serve as a warning sign of what may be developing.

Notice that short-term, NASDAQ is in a well defined steep and narrow channel as indicated by the two green lines. The top of this channel coincides with the top of the red channel that has controlled price on an intermediate term basis. Ideally, we would like to see price moving up to 2180-2190 level which represents both short and intermediate term resistance on a daily and a weekly basis while the indicators continue to weaken. As of Friday's close, NASDAQ stopped just above  channel support--at 2105. If during next week it holds above 2105 and moves higher, that should be confirmation that on a short-term basis price are still controlled by the green channel, and the odds for making it to the 2180-2190 level are still good. If it closes above 2155, the odds will increase significantly. On the other hand, if NASDAQ closes below 2105, it would confirm that price is no longer controlled on a short-term basis by the green channel, and we would expect a further decline to 2070. If 2070 doesn't hold, the next downside target should be 2000. At that point we should have enough of an oversold condition to warrant entering long positions. So, if the 2105 (-/+5 points) level continues to hold, the odds favor higher prices; if it doesn't, the odds favor lower prices.

In the case of the SP the picture is quite similar. Notice that the SP has already made it to the top of its intermediate term rising channel (red channel). This top also coincides with another intermediate term  resistance (blue line). However, these resistance lines control price on a daily basis. On a weekly basis, there is no resistance (as we pointed out on page 1) until the SP reaches 1178. Thus, for next week if the SP was to close above 1150 then we know that daily resistance couldn't hold the index back, and it should be headed to the 1175-1178 level. On the other hand, if it continues lower the next level to pay attention to is 1122. If 1122 doesn't hold then the next support comes at 1095, which is the intersection of the previous resistance line (red) and of the support line (blue) going back to the March '03 lows.

To put it all together, if NASDAQ holds above 2105 and the SP closes above 1150, the odds would favor higher prices, targeting 2180/90 and 1175/78 respectively. If NASDAQ closes below 2105, and the SP not only fails to close above 1150, but it closes below 1122, then the odds would favor lower prices, targeting at least the first downside targets listed in the table below.

Support and resistance levels for this week:

		DJIA	SP500	NASDAQ
2nd Upside target
1st Upside target		10800	1175	2190
Resistance		10650	1150	2150
Support		10350	1122	2105
1st Downside Target		10000	1092	2070
2nd Downside Target		9585	1060	2000

MARKET  TIMING INDICATORS:
INDICATOR	FOCUS	SIGNAL	POSITION
Thrust Oscillator	MKT. DIRECTION	(NASDAQ, SP): NEUTRAL	CASH
10/20 day TI	MKT. DIRECTION	(NASDAQ, SP): BUY	50% LONG
Quantifier	MKT. DIRECTION	(SP,NASDAQ): BUY	50% LONG

See "extra030606" on the guidelines regarding entering/exiting position based on these timing indicators)

TRADING IDEAS

QQQ: If the 37.5 level holds, go long for a rally up to 39.1, set the sell stop on the long position at 37.5.

SPY: Long on a pullback to 112.5 with a tight stop at 111.5.

LSS: Buy limit at 15.35, with a stop at 14.0. Add above 17.

RCG: Buy on a print above 2.05, with a stop at 1.75.

PHM: Sell short between 47 and 47.5, with a stop at 48.25.

Ike Iossif

All Rights Reserved, Reproduction without written permission, is strictly prohibited.

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[arete]

This market is making me seasick as traders run from one side of the boat to the other.

Richard W.

[arete]

Market WrapUp is Delivered!

Roger Arnold talks about gold prices, currencies, interest rates and the latest from Dr. Frank Shostak.

The Roger Arnold Show

Richard W.

[Orangedog]

Looks like the monkies over at tfnn screwed up again. They only got 19 minutes of Roger's show archived.

[Beck_isright]

OK, my brain hurts now. But there is one thing being missed. The EU stock promoters are demanding a Fed rate increase. The ECB is refusing to lower rates and will press W at the G-7. If W blinks before the election and pushes Greenliarspan to increase rates, he loses. If the ECB blinks before the election and cuts their rates, Saudi Arabia loses. And the winner is:

Gold and China

[Orangedog]

This game is going to end up pretty twisted. Sort of like Old Maid or Musical Chairs, where there is no winner, but systematically one loser is singled out. In this case, the big loser will be the American who saved and kept their money in "safe" things like CD's or cash. There will be tens of millions of runner-up losers (we call them stock holders and "everyone else"), but the savers will feel the brunt of it.

[Beck_isright]

What is not hitting home are three key factors (one of which Pat Buchanan described beautifully on PMSNBC this afternoon):

1. This is a "capital" not broad recovery. All that has occurred is that the capital investments "on paper" that were lost from 1999-2002 have been recovered by eliminating the debt (by printing more money and refinancing corporate debt at a lower rate) for major corporations. The tax breaks also favored capital re-investment which basically was used to take out tax-incentive laden loans to export factories and personnel overseas instead of re-investing within our borders. This is the new third rail of politics and a demorat will win the election if he figures out how to ride the pent up anger of the American worker.

2. The banks are shuffling the deck. They are lowering their losses on the bad loans of the 90's by refinancing the protective debt issues with lower interest rates on the backs of the consumer with higher interest rates. Ignore the real estate market. The easiest loan with the most flexible rates are credit cards and Americans have fallen prey to this concept. People are willing to pay 21% to "have" the XYZ card and taking out risky second mortgages on their homes. This is the trap which will close in 2005.

3. The government has been continuing the practice of manufacturing economic statistics. This was started in the 90's and still continues. Every number is a politcial statement. And should be construed as such.

[AdamSelene235]

Good WSJ editorial today by Gary Stern, president and chief executive officer of the Federal Reserve Bank of Minneapolis and Ron Feldman, Senior Financial Analyst of the Federal Reserve Bank of Minneapolis.

Subject: Problems posed by failures of Fannie, Freddie or one of the major banks.

I wonder why they bring it up?

[arete]

Looks like the monkies over at tfnn screwed up again. They only got 19 minutes of Roger's show archived.

Darn, they been getting really bad about that stuff lately.

OT -- TO EVERYONE -- Since yesterday, I have received four regular e-mails containing an internet virus. All were caught by Norton. Don't open unknown attachments unless you are using an anti virus program.

Richard W.

[Soren]

The Fed is caught between Scylla and Charybdis. If they cut rates, the dollar tanks. If they raise rates, the economy tanks. Therefore, it seems likely they will stand pat and try to postpone the inevitable, hoping that the Japanese continue to help control the dollar's decline.

Despite low rates, it appears the refi game is drying up (per George Ure, "the mortgage banking business nationally is reportedly ready to axe 65-thousand jobs this year"). What will fuel the economy now other than federal deficit spending? And it is only the change in the federal deficit that creates growth, so we have a baseline deficit of $374B just to stay even. Looks like it may be time for The Bernanke Option (sounds like a Robert Ludlum title) in an attempt to continue the refi game by lowering long term rates directly while maintaining the status quo on the short end.

In related news, it was a hell of a day for silver. I thought we might see a pop today with option expiration.

[Orangedog]

Good points. Notice how the bankruptcy "reform" bill being batted about a few years ago has been swept right off the radar screen. If that had passed, the whole credit bubble would have popped thermo-nuclear style once people saw their neighbors turned into lifetime slaves to their credit card lenders at 24% interest, with no bankruptcy laws to shelter them. I wonder how long it will take for that bill surfaces again? It would have passed last time had the economy not taken a big steaming crap.

[Soren]

Interesting Wish I'd seen the article. Is it posted anywhere?

[arete]

In related news, it was a hell of a day for silver. I thought we might see a pop today with option expiration

Yes it was but I don't think that we are out of the woods yet with the PM's. I think that they are still vulnerable until they can clearly break their ties with the dollar.

Richard W.

[Beck_isright]

" Subject: Problems posed by failures of Fannie, Freddie or one of the major banks.

I wonder why they bring it up?"

It's called a "heads up". This just supports the "greater fool" theory. There is always someone dumber than you and I that will read this, dismiss it and take a position against you which will make you money.

[AdamSelene235]

Well, there is this quaint technology printed on dead trees that has the advantage that you can read it in a jacuzi full of beautiful women without risk of electric shock.

Or you can subscribe to the Wall Street Journal Online or bum off a friend who subscribes. There are several here, perhaps one will Freepmail you.

Some Freepers post pay material from the WSJ but I disapprove. The Moderators however, do not.

There is also, apparently, a book on the subject entitled Too Big to Fail: The Hazards of Bank Bailouts, by the aforementioned authors.

HTH.

[Beck_isright]

"The Fed is caught between Scylla and Charybdis. If they cut rates, the dollar tanks. If they raise rates, the economy tanks. Therefore, it seems likely they will stand pat and try to postpone the inevitable, hoping that the Japanese continue to help control the dollar's decline."

W will agree to raise rates after the election. However at the upcoming G-7 meeting he will force the ECB to cut rates (actually the Greeniespan boys will) then that will allow an early summer Fed cut to .75%. After that, the economy will go into theoretical hyperspeed and W will coast through re-election. Then in Q1 of 2005, rates will increase to 1.25 then 1.50 as inflation "suddenly" becomes a threat. Thus my spring 2005 disaster scenario takes hold.

"Despite low rates, it appears the refi game is drying up (per George Ure, "the mortgage banking business nationally is reportedly ready to axe 65-thousand jobs this year"). What will fuel the economy now other than federal deficit spending? And it is only the change in the federal deficit that creates growth, so we have a baseline deficit of $374B just to stay even. Looks like it may be time for The Bernanke Option (sounds like a Robert Ludlum title) in an attempt to continue the refi game by lowering long term rates directly while maintaining the status quo on the short end."

Refi is no longer the name of the game. Initial low rate financing of high risk applicants for first time homebuyers is what W is pushing. The real estate and construction industries (and associated durable industries) are also. So lets say the high risk government backed loan program goes through Congress this year (which it will). Banks which are under the threat of government action will be forced to share the risk on this loans. The disaster scenario for 2005 builds.

Lastly, keep this in mind: If a bank or major retirement fund gets squeezed, the hedge fund implications are a Tiatanic like disaster. There is a domino waiting to be knocked over. 2005 is when they start falling.

[Beck_isright]

Bankruptcy reform as structured in 2002 will pass in 2005. It is one of the dominoes which will trigger the greatest economic collapse since the Tulip bubble burst and the German Weimar Republic.

[Starwind]

China is having to import huge amounts of Oil and Grain, for which they pay an increasingly inflated price, until they unpeg the Yuan.

China will likely unpeg, and compete with the US for oil supplies, but also buy our grain.

ECB will hold out on lower rates because a) it is in fact the intelligent decision, b) it positions the Euro as a more stable currency in which to trade oil.

A Fed rate increase would double or triple the Federal Debt service from roughly 300B/yr to 700B-1T - pushing the budget deficits to 800B-1.5T, so this will be delayed as long as possible. But there are two interelated forces at work for and against this:

1) The bid-to-cover ratios on Treasury auctions have been dropping and the high rates rising - so some rate increase may be 'forced', or the rate of inflation will increase as the Fed monetizes more of Treasury's debt. (i.e. our debt is increasingly being scorned - duh!).

2) The dollar will continue to fall, supported by freshly minted Yen and the bought dollars recycled into Treasuries, somewhat offsetting the debt-monetization / dollar-inflation required by the Fed. How far the dollar can fall is unknown as normally it would until a rebalance of exports with imports is obtained. But with less and less to export and much of what we consume (70% of GDP) having to be imported, it difficult to see where this 'rebalance' will occur.

How's your headache now?

[Soren]

We have a bunch of copies lying around at my office, but I had zero spare time today. I asked because I often see the editorial page posted here. didn't realize it was paid portion of the site. I agree it is not right to post subscription articles in their entirety, but occasional excerpts are fine, IMO.

BTW, what does the 235 signify in your handle?

[AdamSelene235]

A Fed rate increase would double or triple the Federal Debt service from roughly 300B/yr to 700B-1T - pushing the budget deficits to 800B-1.5T, so this will be delayed as long as possible. But there are two interelated forces at work for and against this:

Do you think we could get all of this wrapped up by, say, Thursday, noonish.

I've tried to be a grown-up and all, but I'm flat out of patience. I'm trying to have a life here.

[Soren]

What happens to money market funds if the Fed cuts to .75%? At that point, after fees, you may as well just sock it under the bed, or buy PMs. Wouldn't withdrawals create a whole host of problems?

I have no doubt this insanity will come to an unhappy conclusion. What I am wondering now though is the odds they can keep it together thru the election. I think the answer is yes, but it's not a lock, IMO. And if one of Puplava's rogue waves hits, who knows what will happen. I am wary of armageddon scenarios, but I sure as hell don't see how this works out in the long run.