With the major indices teetering near the edge of support levels that would keep the intermediate uptrend intact, the negatives once again become accentuated.  Housing is slowing, earnings guidance is a concern, Iran fears, more rate hikes…. These are all real concerns that the market will have to digest, which it is doing now.  Overall, the selling hasn’t been particulary intense and I’ve been impressed with the way the market has held up despite earnings disappointments from Yahoo, Google, Intel, Amazon, etc and the subsequent breakdown in the charts of these bellweathers (I’d be willing to bet Google and Apple both have another 5 – 10% of correcting left to do).  It should be noted that after the bell today, Cisco reversed the trend of disappointing results by beating expectations (it’s up 5% after hours).

  Today was more concerning though with the first clear distribution day of February as market leaders in energy, metals, basic materials sold off hard.  One day of selling doesn’t signal a major rotation in the market, but it’s certainly something to keep an eye on.  Some key energy leaders appear to be on the verge of breaking down (see SWN, XTO and NBR). 

The 50 day moving averages have been taken out on the major indices, setting up a move to the next major levels of support, which happens to be around the multi year highs that were cleared back in late November.  Lets have a look at these levels.

Notice the drop below the 50DMA in the Nasdaq which now appears to be shaping up as a firm level of resistance.  The action in the market over the last several days indicates a move to the next major level of support is highly likely.  This is a very iimportant line of defense for the Nasdaq and holding up at that level would keep the uptrend that began last October intact.  How Cisco’s report will affect the market tomorrow will be very telling.  A gap up at the open is probable, but will the gains hold?  In a weak market, those gains will typically vanish by the close.  Tomorrow, the market will provide another clue to its strength.

The S&P is destined to test its next major level of support in the 1245 – 1250 range and it’s not far from there.  If it can’t hold that level, the S&P drops back into that multi year trading range
and likely falls further to support at the 200DMA around 1225.

The trend of lower lows in the Dow is a concern.  At this point, it’s highly possible that the Dow tests support around 10,600.  Should a bounce in the Dow occur, watch for further confirmation of a downward trend if the Dow peaks at a lower point than it did on Feb 1st.

I couldn’t think of a good title for this post, so I thought I’d just throw in my prediction for today’s NFC championship.  Go Seahawks! 

Friday’s surprising sell off was reminiscent of an annoying in law that drops by for an unexpected visit.  Muddy feet up on the coffee table, half drunk on Pabst blue ribbon shouting expletives at a Jerry Springer rerun loud enough for the neighbors to hear.  Just when you think it can’t get any worse it does.  I don’t think there was a trader out there who wasn’t surprised by the action on Friday, especially considering the way the market previously bounced back from the poor results released from Intel and Yahoo two days earlier and the subsequent follow through the day after with increasing volume.  The continuation of the rally was in place, or so it seemed.  Equally disappointing results out of Citigroup and GE proved to be the back breaker on Friday, as doubts about the strength of the economy crept into the minds of investors.  Add to that worries over Iran, oil supply disruption in Nigeria, the inverted yield curve and all of a sudden you have a market on shaky ground.  Amazing how fast sentiment can change isn’t it?  I suppose that’s what makes the markets so fascinating. 

I think it’s important to remain even keeled and realize that the market isn’t as in bad a shape as the drop on Friday would have you believe.  Some of that move was surely the result of options expiration which can magnify the move.  SOME support remains in place as well.  At the same time, the move on Friday should instill some concern and cause for caution.  The technical damage done was significant and it can’t be ignored.  I for one had plans of increasingly leveraging with margin provided the healthy consolidation continued.  It’s safe to say my strategy has changed in one day from aggressive buying to a more defensive approach.

So where do we go from here?  Nobody can be sure, but looking at the charts of the major indices may provide some clues.

The Nasdaq continues to be the healthiest of the major indices.  Important to note is that it closed right at support of the 50 day moving average on Friday and volume came in lighter than the day before, so no distribution for the Nasdaq.  More encouraging is that the buy volume during the advance in the first days of January clearly overshadows the amount of sell volume of last week.  However, with support at the 50 day moving average on shaky ground, you have to look at where the next level of support may be, which in the case of the Nasdaq lies in the area of 2200.  Another 50 point drop.

The DOW which sliced through 2 major levels of support on Friday, is another story.  The big blue chips have been lagging for years and they lead the decline once again.  Look at the difference in buy and sell volume in the Nasdaq and Dow since January 1^st.  That is quite a difference!  The DOW looks mighty sick right here and a drop to around 10550 looks inevitable.

The S&P in terms of price action is following a similar path to the Nasdaq, but with a more bearish tone in its buy/sell volume.  It’s also right at support of the 50 day moving average.  Next level of support is around 1250 if it can’t hold there.  I  think it’s safe to assume we will test that level in the coming days at least for a brief moment.  That may happen Monday.

I don’t think too many could have predicted the kind of results that Intel and Yahoo posted after the bell.  I know I was suprised.   At the very least I thought maybe they post average results.. but they were far from average.  Intel’s results were awful and Yahoo missed analyst estimates by a penny, but wasn’t even close to the whisper number of .19/share by posting .16/share.  IBM fared a bit better, but revenue numbers missed.  It was a good ‘ol fashioned after the bell tech wreck.  Obviously the market is going to get hit at the open tomorrow, but the important thing is how it closes.  The market will face some important tests of support in the coming days.  First levels of support in both the Nasdaq and S&P should provide us with clues as to the magnitude and duration of this pull back. Lets’ have a look…

The Nasdaq has led the way to start the year and there isn’t any reason for concern up through today’s action with orderly consolidation.  Today, the selling volume wasn’t particularly intense and much of the losses were erased by the end of the day.  It may be a different story tomorrow.  In the coming days, support levels around 2278-2280 could come into play, so it will be important to see how the Nasdaq responds at that level.  If it can’t hold that level, the likelihood of a drop to the 50 day moving average becomes more likely.   Let’s see how volume comes in tomorrow .. I have a feeling we’ll get the first day of institutional selling of the new year. 

It’s a similar scenario for the S&P as it nears the first level of support around 1275.  Bouncing from there would be considered a bullish move, but if it can’t hold chances are good it will test the 50 day moving average as well.  We shall see.

The area to watch now in the Dow is 10800 at the 50 day moving average.  However it could dip below and also test the previous area of consolidation around 10700. 

What a start to 2006.  It’s been about as good a start to 2006 as the start to 2005 was bad.. alleviating fears of another meltdown to start the new year and once again catching many off guard.  The breakout to multi year highs in the S&P and Nasdaq that occurred in November remains intact as price and volume movement in the first 4 trading days of ’06 indicate another leg up is in the works.  Clearly, the move on Friday with increasing volume indicated that the move after the releases of the Fed notes on Tuesday was much more than just a knee jerk reaction (which can often happen after Fed announcements).

All eyes will be on the Dow this week to see if it to too can join the party and maintain a breakout to multi year highs.  It will need to break above 10984 (high of the 2 year consolidation it reached in March of ’05) as well as psychological resistance of 11,000.  At this point that looks inevitable but some consolidation in the market should be expected at this point before moving higher. 

With a view of a multi year weekly chart of the Dow, you can see where a breakout needs to occur in the Dow.

The following charts illustrate the impressive moves off support following the release of the Fed notes on Tuesday.  There is no reason to believe at this point we can’t get another major move up (after a little consolidation)

Once again the market doesn’t deliver on expectations of the masses  .. not much of a surprise there.  Many market commentators had been wondering if we’d get the Christmas rally.  What was that we had in November?  The Christmas rally came it a bit early this year and another run up like that was possible but not probable.  The market was due for consolidation and that’s exactly what we’re seeing now.  No reason for concern as the market works off recent gains and consolidates quietly with holiday volume.  There seems to be some trepidation about January as the sell off of last January lingers in the minds of traders.  Perhaps the market will surpise the masses again and we’ll get a forceful rally and break to multi year highs once again.  We won’t get a true sense of direction until traders return from time off, but currently there is no reason to think that the run can’t continue after a bit more consolidation.  Support levels remain intact.  Here’s to a great 2006 – Happy New Year!

Once again the Fed spoke and once again (as far as what was said), I could care less.  What’s important is how the market responds to the often vague wording of the Fed, which for today was ultimately positive as the volume picked up on the buy side.  Let’s see if the move today carries over into tomorrow.  I have a feeling it won’t.  I think traders will ultimately wait for the upcoming CPI data on Thursday and the PPI data next week before placing large bets either way.  I personally will remain bullishly neutral (see also, cautiously optimistic) until the market breaks out of its current trading range (meaning that I’m using margin sparingly).  Looking at the charts of the major indices, they do look beautiful up to this point.  Tight consolidations after the big runup we saw in November is very bullish action and indicate that another big leg up in the market may be on the horizon.  What happens if the Dow breaks 11,000 and all that speculative real estate money gets put to work in the market?  Hmmm…

Support and resistance in the Nasdaq isn’t as pronounced as it is in the S&P and Dow, but I think you can currently draw a rough channel of support and resistance based on the previous break out point above 2200 (support) and the highs of the mild consolidation over the past few weeks (resistance).  Based on the magnitude of the leg up, it would seem that the market needs to continue to spend time consolidating.

Support and resistance is much more clear in the Dow, with support just above 10,700 and resistance at the all so elusive Dow 11,000.  Nice bounce from support today with volume.

The S&P looks similar to the Nasdaq with a tight consolidation over the past couple weeks.  Support at 1250 with resistance at around 1270.  A break from this trading range, could indicate another sizable leg up. 

.. I think my math is correct there.  Let’s see, 5 pictures.  One picture is worth a thousand words. So… I knew that math degree would come in handy at some point.  Yep, the market is ripe for some consolidation as major resistance comes into play after a steep run up in the past few weeks.  But a big move up may be on the horizon.  The Q’s are breaking out of a 2 year consolidation and sitting at multi year highs.  Very bullish indeed.

I know when my real time watchlist is a sea of green and the prices are flickering rapidly it’s a big day with volume.  However, it wasn’t until I took a look at the chart of the Nasdaq over the past year and a half that I realized how big the move was.  You have to back to the big rally of August ’04 to see the kind of price/volume move made today in the Nasdaq.  It’s certainly the kind of move that can propel the market past the next level of resistance and set up a showdown at multi year highs. 

While today’s move was big, the Nasdaq still faces an important test before making a run at multi year highs.  The downward trend line – an area it had been unable to clear on two previous occasions.  However, just as resistance at the 200 day moving average, 2100 and the 50 day moving average have proven insignificant, I believe the Nasdaq will have no trouble clearing this resistance level in time.  It may happen tomorrow, it may happen in two weeks.  But it will happen.

The S&P has shoved resistance levels aside as buy volume picks up substantially.  In addition, the market has been getting stronger as the trading day goes on and closing near the high.  All signs of a very healthy market.  The S&P may also face some resistance at the downward trend line.

..last and certainly least are the dogs of the Dow, which continue to lag its smaller, faster growing brethren.  I still hear people talking about a big blue chip rally, just as they have for the past few years.  I suppose if they just keep talking about it, they will eventually be right!!  How much money has Microsoft made you in the last 5 years?  Answer: zero, zilch.  Maybe the avalanche of new products can make their shareholders a little money in the next year.. we shall see. How about for IBM over the last 6 years?  You’re down about 40% and haven’t made a dime during the bull market that began in ’03. Wow!   Anyway, you can see the dismal Dow, where the 50 day conintues to lag under the 200 day moving average and strong resistance remains at 10,500.  On Monday the Dow closed in the lower half of the trading range and today, it lagged the Nasdaq and S&P significantly with much lighter volume. 

Falling crude prices, strong consumer spending, a little M&A… it all led to a decent follow through following Friday’s rally.  The resiliency that the market has shown in the past 2 days following the distribution at resistance of last Wednesday is impressive.  It appeared that the market would need more time and come closer to testing the lows of the correction, but true to form over the course of October, it whipsawed back the other way. .. essentially putting us right back in the same position we were in last week.   While the market is much healthier than a week ago and gaining strength, strong resistance remains in all indices.  On any pullback from here, watch to see if old resistance acts as new support, which would provide further clues of a strengthening market.

Looking to tomorrow, the Fed meeting probably won’t be much of a catalyst for movement considering they have laid out their intentions over and over.. and over in the last few weeks.  Further rate hikes are already priced in and no suprises are expected tomorrow.  Negative comments from Dell will most likely lead to a lower open, at least initially.. keep an eye on those resistance levels. 

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Once again, the Nasdaq had no trouble with resistance around 2100 but much stronger resistance at the 50 day moving average (where it closed today) as well as the downward trend line are on the horizon.

The S&P made a significant move today by clearing the first hurdle of resistance at 1200.  However, it also faces resistance of the 50 day moving average and possibly a downward trend line above that.

The move in the Dow today could almost be called distribution in that it closed in the lower half of the trading range.  It has been the weakest of the indices for some time and faces significant resistance at 10500 and then again at 10700, if it can clear that level.