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Wednesday - May 31, 2006

ADI Nears Long-term Support

Analog Devices (ADI) has been range bound since August 2004 and is currently closing in on the lower end of this range. The stock bounced between 31 and 33 four times over the last two years. I will be watching for a reversal as the stock nears the support zone. This may come in the form of a hammer, harami, bullish engulfing of a gap up on big volume. Failure to hold support and a break below the 2005 lows would signal a continuation of the 2004 decline and this would be bearish for the Semiconductor group.

By Arthur B. Hill - Wed 31-May-06 at 07:47AM in Stocks
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AT&T Attempts to Buck the Market

AT&T tried to buck the market trend with a gap and trendline breakout last Friday, but the stock fell back with the rest of the market on Tuesday. The gap is still holding and this is positive. The stock needs to move above 26.5 to complete the breakout and turn fully bullish again. Notice that T firmed near the 200-day SMA and the Dec-Jan resistance zone (gray box). In addition, the decline formed a falling wedge and retraced 50-62% of the prior advance. The pieces for a continuation breakout are there. Now, show me the breakout at 26.5.

By Arthur B. Hill - Wed 31-May-06 at 07:47AM in Stocks
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Merck Breaks Down

Merck (MRK) was holding up better than the rest of the HealthCare sector in early May, but the recent breakdown on high volume signals a continuation lower and this will weigh on the group. The stock gapped down in April and then formed a rising wedge. This is a bearish consolidation and the stock broke the lower trendline last week. There was a brief attempt to undo this breakout on Friday, but the stock totally fell apart on Tuesday with a close below 33.5 on high volume. As a continuation of the prior decline, I expect a move to around 30 or another 10% down.

By Arthur B. Hill - Wed 31-May-06 at 07:46AM in Stocks
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Tuesday - May 30, 2006

Consumer Staple Stocks Heating Up

Consumer Staples Heating Up

Consumer Staples stocks were strong last week with Alberto Culver (ACV) leading the way higher. ACV is a consumer good conglomerate that makes everything from furniture polish to artificial sweeteners. Maybe those two things have similar ingredients. Regardless, the company makes things we need in good times and bad. The stock surged in February, consolidated in March-April and broke resistance last week. Volume was a bit light on Friday, but the stock shows good relative strength. Moreover, strength in Consumer Staples reflects a defensive risk-averse market environment.

A 52-week high for Pepsico (PEP) further confirms the rotation of money into Consumer Staples stocks. PEP has been outperforming Coke (KO) the last few years and continues to lead the way higher. The stock consolidated between 56 and 60.5 the last few months and surged off support with expanding volume the last few weeks (blue box). The move was strong enough to break resistance and forge a 52-week high. While I would not buy the breakout, I would put this stock on my radar for a pullback that could result in a buying opp.

Elsewhere within the sector, I found a double bottom breakout in Coca Cola Bottling (COKE). The stock declined the last three years and formed a base in 2006. There was some high volume surges earlier in the year (blue box) and a resistance breakout this month. The move above 48 broke the November high and exceeded the Dec-04 trendline. Keep in mind that this breakout is occurring at the S&P 500 broke down over the last few weeks. COKE shows relative strength and the breakout is bullish.

By Arthur B. Hill - Tue 30-May-06 at 08:23AM in Stocks
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Wednesday - May 24, 2006

KOMG, QLGC, T and SNDK

AT&T Testing Support

AT&T continues to test support around 25. This support level stems from the 200-day SMA and the prior consolidation (gray box). In addition, the recent decline marks a 50-62% retracement of the prior advance. The bears have the upper hand as long as the falling price channel holds. Look for a move above the upper trendline and May high (26.5) to signal a breakout and turn bullish again.
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SNDK Breaks Support

Sandisk (SNDK) had been holding up a lot better than the Nasdaq over the last few weeks, but finally broke down with a support break at 60 yesterday. This move signals a continuation of the prior decline and targets further weakness below the March low. Needless to say, this bodes ill for the Semiconductors and Nasdaq.
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Komag Breakout Fails

I reported a breakout in KOMG last Friday and the stock was showing good relative strength. However, not many tech stocks can withstand a broad decline in the Nasdaq. The stock opened strong on Tuesday and closed weak to form a long black candlestick on high volume. Weakness on low volume would have been tolerable, but weakness on high volume is not and this breakout is likely to fail.
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Qlogic Forms Flat Flag

I reported relative strength in QLGC last Friday as well, but the stock failed to follow through. The pattern over the last few weeks now looks like a sharp decline and flat flag. Downside volume remains relatively tame and I will be watching recent boundaries for a signal. A break above 18.6 would be bullish and a break below 17.7 bearish.

By Arthur B. Hill - Wed 24-May-06 at 07:32AM in Stocks
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Tuesday - May 23, 2006

1987 All Over Again

The Times.co.uk reports:

”A report by Barclays Capital says the run-up to the 1987 crash was characterised by a widening US current-account deficit, weak dollar, fears of rising inflation, a fading boom in American house prices, and the appointment of a new chairman of the Federal Reserve Board. ”

There was not much time to get out in 1987 as the index dropped from 450 to 300 in two months. The big gap on 19-Oct is known as black Monday and selling continued the next seven days.

Prior to black Monday, there was a bearish chart signal as the index formed a weekly bearish engulfing on 9-Oct and gapped down the very next week with another black candlestick (16-Oct). This gap broke support from the September low and confirmed the bearish engulfing. Notice that the index never filled the gap and the inability to recovered shows just how weak the bulls were. The window from 9-16 October was small, but provided a chance to either reduce exposure or hedge positions.

What about now? The Nasdaq broke 2200 in November and worked its way high in 2006. The index moved from 2200 to 2380 from January to May and then lost it in two short weeks. That is a lot of work going down the drain and this is not the stuff bulls are made of. I consider this decline excessive for just a bull market pullback, but prefer to refrain from predicting a crash. Right now the November breakout at 2200 has failed and this is enough to be bearish on the Nasdaq.

By Arthur B. Hill - Tue 23-May-06 at 08:56AM in Indices
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A 30% Drop in the CRB?

CHANYAPORN CHANJAROEN and CAROL MASSAR of Bloomberg report:

”Marc Faber, the money manager who told investors to bail out of American stocks a week before the 1987 Black Monday crash, said commodity prices may fall as much as 30% in three to six months.”

By Arthur B. Hill - Tue 23-May-06 at 08:55AM in Commodities
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Monday - May 22, 2006

Capex Not Providing A Boost

The Wall Street Journal Reports:

“Capital spending by energy companies soared 65.9% in the first quarter, prompted by high energy prices and, perhaps, political pressure, according to the research firm Thomson Financial. For the entire S&P 500, capital spending rose 26.8% in the first quarter, well ahead of the year-ago pace of 12.9%, according to Thomson.”

The Consumer Discretionary and HealthCare sectors are not investing. However, I doubt if these figures includes R&D for the HealthCare. This is where HealthCare invests its money. The Information Technology and Consumer Staples sectors are investing. It is good to see investment in Information Technology picking up and I wonder where the investment in Consumer Staples comes from (goes to).

By Arthur B. Hill - Mon 22-May-06 at 10:39AM in Economy
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Joe Rosenberg in Barron’s

Joe Rosenberg in Barron’s

Barron’s Interviewed Joe Rosenberg over the weekend and three paragraphs stood out.

“There's an estimated $120 billion to $140 billion invested in commodity funds by institutions, including $40 billion at hedge funds. This compares to $6 billion in 1999. One of the Street firms did a study that showed a record 35% price spread between commodities that had a listed futures contract and therefore were investable by hedge funds and commodities that didn't have a readily investable product. So in other words, much of the rise in the commodities that you see around the world today is a result of speculation on paper. “

“China will keep the cost of goods low, because they've got a great money machine going and they have a need to employ people. As long as they have to employ people, they are not going to worry about how they are losing money by owning U.S. government securities. China and Hong Kong together own almost a $1 trillion of U.S. government securities and people keep telling me, "Aren't the Chinese worried that they are going to lose money in their holdings of Treasuries?" My answer is that they are worried, but there is nothing they are going to do about it because they have a much more important problem, which is to keep people in China employed.”

“We now have a situation where some of the largest companies, that were overvalued six years ago but have continued to grow earnings at 10% to 15% a year, are completely unloved on Wall Street. These companies are all household names. I never in a million years thought that I would be recommending stocks like Microsoft, Pfizer, Johnson & Johnson [JNJ] or Wal-Mart. These are some of the best values anywhere in the world. “

By Arthur B. Hill - Mon 22-May-06 at 10:31AM in Economy
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Friday - May 19, 2006

Three Techs That Held Firm This Week

Komag (KOMG) has been bucking the trend over the last five days and is moving higher on good volume today. The stock formed a falling price channel and is breaking resistance on Friday. The combination of good relative strength and an oversold Nasdaq could extend this bounce next week.
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Qlogic (QLGC) also held firm over the last few days and shows less weakness. The stock gapped down in early May and found support around 18. While the Nasdaq tanked the last six days, QLGC held support and is moving above resistance at 18.5 today.
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Cisco (CSCO) is the third stock that held firm over the last 5-6 days. The stock fell sharply 10-11 May and then firmed around 20. A large hammer formed on Monday and an inverted hammer on Thursday. The stock is moving higher on respectable volume today and shows good relative strength. If the Nasdaq rebounds, look for CSCO to lead.

By Arthur B. Hill - Fri 19-May-06 at 03:12PM in Stocks
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Thursday - May 18, 2006

First Data, Merck and Energizer

First Data (FDC) firms near trendline support and broken resistance (gray oval). The broader market was weak the last two days, but FDC held firm and this shows relative strength. Also notice that upside volume was strong yesterday (blue oval)
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Merck looks in trouble with a rising wedge and high volume decline. The stock broke support with a gap down and high volume decline in April. The current advance traced out a bearish rising wedge and is meeting resistance in the gap zone. A move below 33.8 would signal a continuation lower.
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Energizer (ENR) is bucking the trend with three straight advances. The stock declined to support around 49 and firmed over the last few weeks. There was a high volume advance in late April, but the stock pulled back to support in May. The stock is once again bouncing on good volume. This is pretty impressive in the face of broad market weakness.

By Arthur B. Hill - Thu 18-May-06 at 07:50AM in Stocks
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Wednesday - May 17, 2006

Cable Stocks Remain Hot

I featured Comcast (CMCSA) has it broke double bottom resistance in late April. The stock then gapped higher and looks headed for a bout with its 2005 high around 34.5.

TimeWarner (TWX) has lagged CMCSA lately, but appears to be playing a bit of catch up. The stock surged above 17.2 on good volume in late April and help 17 on the early May pullback. While the broader market tanked last week, TWX held firm and advanced over the last five days with above average volume. Money is moving into TWX and I am looking for a resistance test around 19.

By Arthur B. Hill - Wed 17-May-06 at 07:50AM in Stocks
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Monday - May 15, 2006

IBM Holds Range Support

The Nasdaq and tech stocks bore the brunt of recent selling pressure and led the way lower over the last few days. Even though IBM is not part of the Nasdaq, I consider it a key tech stock and am impressed with its ability to hold firm last week. The stock formed a triangle over the last few months and remains above support at 80.5. I still find this chart bearish overall become of the large gap and resistance around 85-86. However, continued firmness and a nice breakout at 84.5 could not be ignored and I would then turn bullish. A break below 81 would signal a continuation lower and this would be bearish for the stock, the Nasdaq and techs.

By Arthur B. Hill - Mon 15-May-06 at 03:16PM in Stocks
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SYMC Shows Some Relative Strength

Symantec (SYMC) has been beaten up over the last few 15 months and managed to firm over the last three months. The big trend is clearly down, but I was impressed with the ability of this stock to hold firm the last three days. Volume was above average three of the last four days and the stock is consolidating around resistance at 16.5 (gray oval). There have been a number of false breakouts in the past year and there is reason to be skeptical. However, the stock shows good relative strength the last few weeks and would likely break resistance with a tech turnaround. A move above 18 opens the door to the low 20s.

By Arthur B. Hill - Mon 15-May-06 at 03:15PM in Stocks
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Thursday - May 11, 2006

ICGE Making a Comeback

Remember those internet incubators? Internet Capital Group (ICGE) was one of the high flyers in 1999 and has been trading flat since 2002. The stock broke falling flag resistance with a surge in March and this breakout is holding. There is massive resistance around 10 and a break above this level would forge a multi-year high. I think price action is currently bullish and expect a breakout. This is a high risk stock and I would watch the April low for signs of trouble.

By Arthur B. Hill - Thu 11-May-06 at 08:56AM in Stocks
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The Noose Tightens for BMC

The trading range for BMC Software (BMC) has narrowed over the last few weeks and a triangle break is near. A nice sharp break on good volume (either way) would provide a clear signal. A move above 22.2 would be bullish and a move below 21 bearish.

By Arthur B. Hill - Thu 11-May-06 at 08:56AM in Stocks
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Wednesday - May 10, 2006

Radio Shack Rises from the Dead

While Best Buy (BBY) went from 44 to 59 this year, Radio Shack (RSH) went from 23 to 17. Even though BBY is winning the battle (and the war), RSH finally shows some signs of life with a long white candlestick on the highest volume since February. The stock established support around 17 in late April and early May. The move above 18 broke trendline resistance and reinforces support. Notice that Chaikin Money Flow moved close to positive territory in early April and remained near the zero line over the last six weeks. Despite the decline from 20 to 17, selling pressure was quite mild according to Chaikin and the indicator turned positive on Tuesday.

By Arthur B. Hill - Wed 10-May-06 at 07:06AM in Stocks
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Bearish Candlesticks For Sandisk

Sandisk rebounded after a sharp decline earlier this year, but bearish candlesticks over the last few months could foreshadow a reversal soon. The current advance retraced 50% of the prior decline and the stock met resistance around 60 four times in the last five weeks. A shooting star formed in early April (blue oval), a bearish engulfing in early May (gray oval) and another shooting star formed yesterday (red oval). There is clearly a lot of selling pressure just above 65, but the stock has yet to break down and confirm these bearish candlesticks. For confirmation, I would look for a move below the early March trendline (blue) and early May low (60). This is a volatile stock and trading is best suited for nimble players that can tolerate the risk.

By Arthur B. Hill - Wed 10-May-06 at 07:06AM in Stocks
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Tuesday - May 09, 2006

AT&T Forms Falling Wedge

AT&T (T) is also a big telco with a recent surge. The stock moved from 22 to 28 and broke the 200-day SMA last year. T corrected over the last few months with a falling wedge and returned to the 200-day SMA. In addition, the Dec-Jan consolidation turns into support and there is a nice support zone around 25. The stock bounced last week and is challenging the upper trendline of the falling wedge. A move above 26.5 would break this trendline and open the door to 30.

By Arthur B. Hill - Tue 09-May-06 at 11:07AM in Stocks
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Verizon Hits Support

Remember the big telecom rally a few months ago? These stocks have faded from the limelight, but traders should keep them on their radar. VZ surged above its 200-day SMA and broke resistance in February. Broken resistance turns into support and the stock is right back at its 200-day SMA, which also turns into support. In addition, there is the trendline extending up from the October low and it all converges on the 22-22.5 area. A bounce from here would likely turn the 200-day SMA up and start the next leg up.

By Arthur B. Hill - Tue 09-May-06 at 11:06AM in Stocks
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Thursday - May 04, 2006

Breadth Oversold for IGN

The McClellan Volume Oscillator for the Networking iShares (IGN) has become oversold and traders should watch for a move into positive territory to trigger a bullish signal. The McClellan Volume Oscillator became oversold in August and October with a move below –100 (green ovals). Bullish signals were subsequently triggered when the McClellan Volume Oscillator moved from oversold to positive territory (blue ovals). The September signal was short-lived, but the October signal preceded a sharp advance. The McClellan Volume Oscillator moved below –100 in April more than once. This is why it is important to wait for bullish confirmation with a move into positive territory. Thus far the oscillator has yet to move into positive territory, but such a move would trigger a bullish signal. Also notice that IGN is trading at support from the April-05 trendline and Jan-Feb consolidation. ETFInvestmentOutlook.com

By Arthur B. Hill - Thu 04-May-06 at 10:45AM in Breadth
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The Unemployment Rate and the S&P 500

In addition to Non-Farm Payrolls, Friday’s employment situation report includes the Unemployment Rate. This is also a lagging indicator for both the economy and the stock market. Notice that the S&P 500 peaked over 6 months ahead of the reversal in the Unemployment Rate (black box). Similarly, SPX bottomed well ahead of the peak in the Unemployment rate in 2003 (blue box). The most important thing here is the general direction of the Unemployment Rate and it is down (green trendline).

By Arthur B. Hill - Thu 04-May-06 at 10:45AM in
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Waiting for Non-Farm Payrolls

There are a few items worth noting on this chart. First, notice that employment growth was stronger from 1996 to 1999 than it has been over the last three years. This is not necessarily bearish because the economy is still creating jobs and it implies that companies are growing profits with fewer employees (lower expenses). Second, the 12-month Rate-of-Change has been trending higher since 2002 and there is little reason for concern as long as this indicator holds above 1%. Third, notice the week numbers in September and October (red oval). This may have contributed to the sharp decline in stocks from August to mid October. Non-Farm Payrolls jumped sharply in November and this put the bulls back on track.

I am not about to try and predict this number. Even economists with massive data sets and complicated models have a hard time predicting this number. As long as it stays above +150K (magenta line), I would view job growth as sufficiently strong and this would be generally bullish for stocks.

By Arthur B. Hill - Thu 04-May-06 at 10:44AM in Economy
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Wednesday - May 03, 2006

RTH Breadth Turns Negative

I featured the Retail HOLDRS (RTH) yesterday as the ETF challenged resistance and its AD Volume Line remained in a downtrend. The McClellan Oscillator for the Retail HOLDRS (RTH) moved into positive territory on Monday, but slipped back into negative territory on Tuesday. This move is enough to keep RTH on the defensive and breadth in bear mode. The McClellan Oscillator would have to break above Monday’s high (10) for short-term breadth to turn bullish and to expect a resistance breakout. Right now, I am more inclined to expect further weakness.

This chart was take from ETFInvestmentOutlook.com (click here)

By Arthur B. Hill - Wed 03-May-06 at 07:23AM in
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Large Caps Starting to Lead

It is only for two weeks, but large-caps are starting to lead. This table shows the major indices sorted according to the McClellan Oscillator. Notice that the Dow, S&P 500 and S&P 100 all have positive McClellan Oscillator readings. In addition, the McClellan Oscillator moved into positive territory yesterday for all three. Meanwhile the S&P SmallCap Index, S&P MidCap Index and Russell 2000 remain with negative McClellan Oscillator readings and failed to forge bullish crossovers. This shows that breadth for the small and madcap indices is weaker than breadth for the large-cap dominated indices. Also notice that the Dow Averages have four of the top five spots.

You can also see this table sorted by sector, industry or ETF family at ETFInvestmentOutlook.com (click here)

By Arthur B. Hill - Wed 03-May-06 at 07:22AM in Indices
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ISM on Deck

Wednesday we have the ISM Non-Manufacturing Survey and Factory Orders at 10AM ET. Durable Goods Orders came in strong last week and the industrial sector has been very strong lately. This implies that Factory Orders will also be strong. The Non-Manufacturing Survey is considered bullish above 50 and bearish below 50. The above chart compares the survey to the S&P 500. Both declined from mid 2000 to late 2001 (red box). The Survey turned up sharply in late 2001, but the market took another 9-12 months to bottom. The Survey has been largely above 50 since 2002 and anything above 50 is considered bullish. Taking this a step further, I consider anything above 54 to be bullish for stocks and the economy (green box). The consensus forecast is for 59.7 with a range from 58 to 62. As long as it comes in above 59, the market should not be affected negatively.

By Arthur B. Hill - Wed 03-May-06 at 07:22AM in Economy
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Tuesday - May 02, 2006

RTH Challenges Resistance

Can Retail recover? The Retail HOLDRS (RTH) got a lift from Wal-Mart yesterday and gapped up for the second time in two weeks. The move off support is positive and allows for the third fan line to be drawn. For now, I view this as a consolidation (gray oval) after the support break at 97.5 in mid April. The stock established resistance at 98 and needs to close above this level for this bounce to be taken seriously.

By Arthur B. Hill - Tue 02-May-06 at 07:34AM in Industries
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RTH Breadth Still Trending Lower

Despite a bounce in RTH, the AD Volume Line is still trending lower and has yet to break above the trendline extending down from the March high. The AD Volume Line represents the large-caps within the ETF (WMT, HD, LOW, TGT and WAG). These five stocks make up over 60% of the Retail HOLDRS (RTH). This leaves less than 40% for the other 13 stocks. The top five are often the volume leaders and this drives the AD Volume Line. The indicator peaked in March and moved lower the last six weeks. I would look for a break above the upper trendline and late April high before turning bullish on breadth and the stock. This chart is updated every day at ETFInvestmentOutlook.com (click here)

By Arthur B. Hill - Tue 02-May-06 at 07:34AM in Industries
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XLV Forms a Pair of Harami

The HealthCare SPDR (XLV) remains down in the dumps and formed two harami over the last two weeks (long white candlestick followed by a smaller black candlestick nestled inside). These are potential bullish reversal candlestick patterns and the stock firmed over the last 3-4 weeks. A break above 31.1 would be the first positive sign and a break above 31.5 would be bullish. This sector would benefit if the market turns defensive.

By Arthur B. Hill - Tue 02-May-06 at 07:33AM in
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Breadth Oversold for XLV

It is also worth noting that the McClellan Summation Index for the HealthCare SPDR (XLV) has become oversold for the third time in two years. The McClellan Summation Index moved below –1000 in August 2004 and October 2005. The August 2005 oversold did not mark the final low, but it did preceded a nice bounce and the McClellan Summation Index then formed a positive divergence. A positive divergence forms when the indicator makes a higher low (green line), but the ETF makes a lower high (red line). The October 2005 oversold reading marked an important low and the bull signal came with a move back above –1000. The McClellan Summation Index is currently below –1000 and it would take a move above this level to trigger a bull signal. This chart is updated every day at ETFInvestmentOutlook.com (click here)

By Arthur B. Hill - Tue 02-May-06 at 07:32AM in Sectors
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XLF Forms a Bearish Engulfing

The Finance SPDR (XLF) opened strong on the day and closed weak to form a bearish engulfing pattern. Such a sharp decline after the breakout is negative, but this is not enough to negate the breakout. Broken resistance around 33.3 turns into support and the stock remains within a rising price channel. A move below the late April lows (32.7) would confirm the bearish engulfing pattern and I would then become concerned because Finance is the largest sector in the S&P 500.

By Arthur B. Hill - Tue 02-May-06 at 07:31AM in Sectors
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