Major Indices Follow Breadth Down To Key Zones

• May 10, 2004
• Kevin Haggerty

What Friday’s Action Tells
You

In Thursday’s commentary, I said the market
action of the past three up days for the SPX
(
$SPX.X |
Quote |
Chart |
News |
PowerRating) indicated that
the
1080 – 1065 zone is in play until shown otherwise, and Friday’s price action
didn’t change that outlook. The SPX closed at 1098.69, -1.4%, a new low
close
for the past 30 days. The Dow
(
$INDU |
Quote |
Chart |
News |
PowerRating) went out at 10,117, -1.2%. For
the
week, the SPX was -0.8% and the Dow -1.3%. The
(
QQQ |
Quote |
Chart |
News |
PowerRating) acted better and
declined -0.8% on Friday and +0.6% on the week. The Nasdaq
(
$COMPQ |
Quote |
Chart |
News |
PowerRating)
was
-1.0% and flat for the week, closing at 1918, just above its 200-day EMA at
1915. You know my thoughts from the May 5 commentary that the take out of
the
1897 low would shake the tree, and therefore, a trading opportunity other
than a
daytrade.

NYSE volume expanded to 1.65 billion on
Friday.
The volume ratio was 11 with the 4 MA now 37, while breadth, bolstered by
all of
the declining financials, was a whopping -2925 and the 4 MA now -1128. The 5
RSI
is getting down there and went out at 23. The narrow participation in
big-cap
defensive stocks has been holding up the volume ratio, but certainly not
breadth, and as I have said, that is never good. A little air pocket from
here
would take the 4 MA down to a more short-term oversold condition and maybe
to
the next SPX price zone that has any meaning, 1080 – 1065.

In the sectors, the
(
SMH |
Quote |
Chart |
News |
PowerRating)s have diverged
for
the last four days from the SPX and Dow and went out +3.6% for this period
and
+3.2% on the week, with a +1.2% gain on Friday going against the grain. They
have been a primary focus because of level and the short-term oversold
condition. The SMH led the major indices down, hitting a 34.50 low on 05/03
with
a 5 RSI of just 12. The .382 retracement to the 17.32 October 2002 low is
34.91
with an extension down of the last leg up from 36.85 to 41.97 at 34.73. This
and
the volume participation that came in at that level is why I made it a
primary
focus.

Â	Monday 5/3	Tuesday 5/4	Wednesday 5/5	Thursday 5/6	Friday 5/7	Net
IndexÂ
SPX Â
HighÂ	1118.72	1127.74	1125.07	1121.53	1117.33	1127.74
LowÂ	1107.30	1112.89	1117.86	1106.20	1098.63	1098.63
CloseÂ	1117.56	1119.51	1121.58	1113.96	1098.69	1098.69
%Â	+0.9	+0.2	+0.2	-0.7	-1.4	-0.8
RangeÂ	11.4	14.8	7.2	15.3	18.7	29.1
% RangeÂ	90	45	52	51	0	0
INDUÂ	10314	10317	10311	10241	10117
%Â	+0.9	+.03	-.06	-0.7	-1.2	-1.3
Nasdaq Â	1939	1950	1957	1937	1918
%Â	+1.0	+0.6	+0.4	-1.0	-1.0	0
QQQÂ	35.10	35.25	35.53	35.26	34.97
%Â	+1.0	+0.4	+0.8	-0.8	-0.8	+0.6
NYSEÂ
T. VOLÂ	1.57	1.67	1.47	1.51	1.65	1.57
U. VOLÂ	1.01	1.04	811	297	182	668
D. VOLÂ	537	603	635	1.20	1.45	885
VRÂ	65	63	56	20	11
4 MAÂ	32	45	53	51	37
5 RSIÂ	42	45	49	37	23
ADVÂ	1997	1904	1638	635	259	1608
DECÂ	1312	1398	1647	2720	3184	2052
A-DÂ	+685	+506	-9	-2085	-2925	-3828
4 MAÂ	-796	-235	+157	-226	-1128
SECTORSÂ
SMHÂ	-0.4	+1.7	+0.4	+0.3	+1.2	+3.2
BKXÂ	+0.8	+0.6	+.06	-1.3	-2.4	-2.2
XBDÂ	+0.8	+0.8	-0.5	-1.9	-2.7	-3.5
RTHÂ	+0.6	-0.5	+0.3	-1.9	-2.1	-2.6
CYCÂ	+0.7	+0.7	-.05	-1.6	-2.5	-2.7
PPHÂ	+1.3	+0.4	+0.3	+0.2	-0.6	+1.6
OIHÂ	+2.3	-0.9	-1.4	-1.8	-2.9	-4.7
BBHÂ	+0.4	-1.1	+1.9	-2.0	-1.8	-3.4
TLTÂ	+0.1	-0.7	-0.3	-0.3	-1.3	-2.5
XAUÂ	+0.	+5.3	-2.2	-2.6	-4.3	-3.6

^next^

You know, too much bad is good, then the
abnormal
is normal. If you don’t comprehend that, then you shouldn’t play in the
casino,
which this entire game has become, more so than I have ever seen it. There
are
over 7,000 hedge funds, more than the existing mutual funds, and they are
all
trying to game price in one way or another. The move to pennies was a major
mistake, as it enables much more gaming that I won’t elaborate on. They
eliminated bullets, which was better for the market overall, but it was a
loss
for daytraders. It now leaves that game for the pros. The artificial
front-running now taking stocks down is left to the hedge funds and mutual
funds
that have existing long positions and the major OTC market makers that can
sell
short on a minus tick under various conditions.

Add to that the dismal failure of fair
disclosure
which just created more volatility and confusion, and you’re left with a
casino
that traders have to be very careful in. Longer-term position traders will
have
to become more educated in options strategies to survive all of the noise
and
air pockets both ways that we have in the markets now, and will going
forward.
Adding to that volatility is the useless media component, and I will refrain
from mentioning the name. 

During this bull run since October 2002,
which
has been straight up with not even a -6.0% closing retracement, we have run
the
gamut of deflation fears, jobs growth/earnings doubts, and of course, now
the
jobs have had a couple of highly visible months to the upside, it is
inflation
front and center. If you relied on that kind of information, you would never
pull the trigger. Watch the numbers yourself.

For example, take the monthly 13-week rate of
change and the total non-farm payrolls. For example, they had peaked in the
second quarter of 2000 and declined, hitting a bottom in the fourth quarter
of
2001. Yes, you read it right. They have been in a steady uptrend every
since,
with higher highs and lows just like the SPX. If you shut out the political
rhetoric/lies, the growth uptrend was and is obvious across the board, so
interest rates at 40-year lows couldn’t sustain those levels for much
longer.
The Fed cut back on the M2 money supply starting in August of 2003 when it
was
running between +8.0% and +9.0%. By December 1, it was down to just +0.24%,
then
went negative from December 8 to February 23, 2004. Such a surprise that we
want
to short
(
TLT |
Quote |
Chart |
News |
PowerRating)s into strength? It turned up the week of March 1, 2004 at
+0.57% and has since increased to +6.19% as of April 26, 2004.

The point is watch what is actually happening
in
the business cycle, not the political rhetoric you are getting from the
media
and politicians. I will cover some of this at the seminar on the best
sources of
this information and some simple but effective guidelines to watch for at
different stages of the business cycle which helps your longer-term market
anticipation immensely.

For Active
Traders

Friday was down on the opening with the
“good is
bad” jobs report, as the bonds sold off. (The TLTs ended the day at
81.32,
almost to the August 80.91 low that it should take out before a quick reflex
up.) I said on Friday that it was amateur day, and if it was a down opening
and
you played the contra move, to be ready for the reversal in the direction of
the
open due to the recent market action. That is what happened. The
(
SPY |
Quote |
Chart |
News |
PowerRating)
opening at 111.22, down from the 111.81 previous close. It hit a low of
111.18
on the first bar, then the contra move ran to 112.23 on just the third bar
(9:40
a.m. ET) which was right at the 20-period EMA on your 120-minute chart. It
traded between these levels until the afternoon knife down starting on the
1:40
p.m. bar, which saw the SPY close at 109.96. I hope you caught some of that
action.

The
(
IWM |
Quote |
Chart |
News |
PowerRating) — the Russell 2000 — broke
111.50
again on Friday and slid to a 108.85 close vs. the 108 200-day EMA that was
the
expected level on a breakdown of 111.50. Regardless of what you did on
Friday,
there were continuation shorts in all of the major indices, and of course,
many
individual stocks except the semis.

Today’s
Action

This is being done on Sunday for Monday, so I
don’t know the carryover in the futures, but your focus should be on the
Nasdaq
which closed at 1918 with the 200-day EMA at 1915, and then the 1897 low
with
the key price zone below that (05/05 commentary). The QQQs are back to the
200-day EMA of 34.73, closing at 34.97, so it’s in play early on Monday.
Taking
out Friday’s 34.86 low puts the QQQs into a possible RST setup (five-minute
chart), in addition to the 34.73 200-day EMA.

Another major index in a key price action
zone is
the IWM (Russell 2000). Having taken out the 110.72 low, the last RST point
can
now form. The 200-day EMA is 108.11, and 107.88 is the 1.272 extension of
the
110.72 – 121.15 leg. Also, the 3.0 standard deviation band for a three-month
period is at 108. The IWM is a primary focus this week.

The
(
DIA |
Quote |
Chart |
News |
PowerRating) closed at 101.15 with the
200-day
EMA at 100.22 and previous retracement low at 100.12. A range support level
is
about 99.35.

Have a good trading day,

Kevin Haggerty