Dark Knight, A Joker or the Beginning of a Market Bottom

DJIA + 49.91, +0.44% SP500 + 0.36, +0.03% NASDAQ Comp. - 29.52, - 1.28% Russell 2000 - 3.55, - 0.51% Oil closed at $128.88 down 41 cents The markets are potentially in the process of forming a bottom. Due to the significance of this point in the market, this commentary will have more depth. Congratulations for checking back, this is the complete story… We are going to look at the market technically. One of the core tenets of technical analysis is; Market Action Discounts Everything. If this tenet is correct then all the economic, structural, political and fundamental news is in the price action. In essence by looking at the price action, one is looking at the effect of “everything else”, whether they are directly aware of the “everything else” or not. Next we will look at some of the “everything else” that took place this week. Some of which we’ve posted on already, some we haven’t; earnings, structural developments and fundamentals. Finally, like we did last Monday morning, in our obscenely early fist post of the week, we will share the list of notable stocks with earnings next week. This will be a significant post worth the time it takes to read when it is complete. So stay tuned and enjoy…. Dark Knight opened yesterday, Friday, July 18, to rave reviews from fans and critics, some are projecting the biggest box office hit ever…time will tell on that forecast…however, due to timing of its release, the metaphor for the market over the past eight weeks and this week seems appropriate… For the past nine months the market has been in an intermediate term down trend. During the past eight weeks, since the double top in the DJIA in May, the market has been falling with such tenacity, that bulls have been drowning and have had very few days in which they have been able to gasp for air. For traders that have had bullish positions in down trending stocks it has truly been a Dark Knight. The question, of course, is; Is the rally of the past three days, a for real rally that is the Beginning of a Market Bottom and ultimate reversal of the intermediate term trend or is it The Joker, that is just here to lull you into a sense of false security, with its pleasing clown-like face, before unleashing its chaos and destruction upon every bullish trader? Index Commentary The DJIA was up for the third day in a row for the first time since May 29. For the week the Dow was up 396 points it largest weekly gain since April 18. Since it was two large candles and a spinning top this was not technically a three white soldiers pattern. The Dow close above its 20 DMA for the first time since May 19. It also broke above its recent horizontal bear flag high and formed a slightly higher high. The weekly candle is a bullish engulfing pattern. The next major resistance test for the DJIA is the R1 level of the June 26 candle and the 30 DMA in the 11,650 area. Let’s be clear this is still a counter trend move, however it is the size of the move indicates that big money has been buying the past three days. This sets up the potential for an intermediate term trend reversal. Most intermediate term down trends don’t end by going straight up. They typically make a high then pull back to a double or triple bottom of some type or a higher low and then reverse to the upside. Review your DJIA chart for the bottoms in June/July of 2006, March 2007, August 2007 and January/March 2008. Strong components in the Dow this week were IBM, C, BA, BAC, AXP, GM, DD, INTC, MCD, HD, JPM and CAT. Review the individual charts and you’ll see some candle and price patterns that you should recognize. The SPX was up just over a third of a point, essentially unchanged for Friday. The small spinning top formed a bearish harami. Watch for confirmation or not on Monday. Three up days and the pattern was not even close to three white soldiers. A close look reveals a pattern that should be called “three bears…a papa bear, a mama bear and a baby bear.” The SPX did NOT make a higher high or close above its 20 DMA as did the Dow. The SPX ran into sellers in the 1,260 area and note that the last high is in the 1,275 area. Notice also that the 1,260 area is the R1 level of the July 9 large black candle. This was the first positive week for the SPX since May 30. Also when you look at the weekly chart you will notice that the weekly candle is a hammer. The Nasdaq dropped more on Friday than it rose on Thursday. The candle gapped down and formed a lower high and lower low. However, it did not close below the low of the high day. Thursday’s close was above its 20 DMA and Friday’s close was back below the 20 DMA. Thursday was a slightly higher high than its recent high on July 8. Watch to see if the current pullback forms a higher low, especially watch the S1 level of Wednesday’s large white candle. The Nasdaq fell on Friday due largely to disappointing earnings Thursday evening from GOOG, MSFT and GILD. AAPL was also down even though it does not report earning until Monday July 21. RIMM was up although it did pull back from its high going into the close. The reaction to AAPL earnings on Monday after the close will play a big part in whether the index finds support and forms a higher low or whether it does a full retracement to perhaps form a double bottom. This was the first up week for the Nasdaq Composite since May 30. The weekly candle is a hammer pattern with an upper shadow. The RUT formed a bearish harami, a hanging man if the shadow were longer, on Friday after two large white candles. The RUT has already formed a double bottom on July 7 and 15 and Wednesday’s close was confirmation of the pattern as it broke above the high resistance of the two bottoms. The RUT did stay above its 20 DMA even though it closed slightly lower than on Thursday. The current price target from the double bottom breakout is the 720 area. This was the second week in a row that the RUT closed higher. The last two weeks had formed a bullish harami and this week is a hammer pattern that confirms the bullish harami. This is the largest weekly gain since May 30. The SOX formed a hanging man and bearish harami on Friday, while staying above its 20 DMA. Thursday’s move formed a higher high. It’s weekly candle formed a bullish harami.

Stock Commentary

RIMM formed an outside continuing its recent support bounce, sellers appeared at 200 DMA and horizontal resistance

IBM moved to horizontal resistance at 130, a new high close, watch for a breakout to new all time highs

SCHN formed a piercing line in what appears to be a pause in a new down trend, if buying runs out look for anothe move down

Coal stocks KOL, BTU, CNX, MEE broke to lower lows from lower highs along with the drop in oil prices, if oil prices move lower look for the next bearish entry on these stocks.

Ag-related stocks AGU, CF, MOS, POT fell from lower highs this week, watch to see if the stocks break support to form lower lows.

The Past Week - What Happened

This week is a valuable lesson on the transitory nature of opinions expressed in the media. On Monday and early Tuesday the markets were down and this was being attributed to Bernanke's comments before Congress on high energy prices, tighter credit conditions, weak housing and price inflation. He also said that FNM and FRE were not in danger of failing. On Tuesday PPI came in higher than expected while core PPI came in lower than expected. STT reported better than expected quarterly results as did JNJ. That day markets hit a low and rebounded. On Tuesday each of the major indices had a long lower shadow (as did XLF) that indicated that big money buyers came in that day and the markets rebounded from their intraday lows...and yet the market seemed pretty bleak to most of the commentators.

Oil fell over $16 or 11% this week beginning on Tuesday over concerns that slower economic growth would lead to lower demand for oil. During after-market hours INTC reported stronger than expected revenues and earnings and raised guidance for Q3.

On Wednesday morning the CPI report was 1.1% for June and 5% for the past 12 months, the highest 12 month percentage since 1991. Then something happened. WFC (see last Monday's Earnings Releases for notable stocks...now you know why certain stocks are listed) reported earnings that beat the street estimate and also raised their dividend and financial stocks began to rally. The combination of STT on Tuesday and WFC on Wednesday seemed to change the dire outlooks for financial stocks at least among big money buyers. FNM and FRE made large percentage moves and a report on higher than expected U.S. crude oil inventories helped oil prices fall.

On Thursday morning JPM reported higher than expected earnings and finaniclal stocks including FNM, FRE and XLF had large gains for the second day in a row. Oil dropped further. During after-market hours IBM reported better than expected numbers while GOOG, MSFT and GILD disappointed.

On Friday C reported better than expected numbers and combined with IBM helped lift the Dow, while GOOG, MSFT, GILD and AAPL contributed to a lower Nasdaq. SLB also reported better than expected numbers.

A combination of falling oil prices, the Fed's comments regarding FNM and FRE and better than expected earnings among key stocks and key financial stocks lifted stocks late Tuesday through Friday.

There was a structural change that also contributed to the rise in financial stocks when the SEC imposed a ban on naked short-selling of shares key banks, investment bank and mortgage companies including FNM and FRE. The ban takes effect on Monday.

This Coming Week - What to Watch For

Earnings and the price of oil are the key factors to watch fundamentally. On the charts watch if price action breaks out of important resistance levels on the indices and individual stocks. If prices pull back watch for important support levels hold.

Before the market opens on Monday earnings from BAC, UB, MRK and SGP will give us some early clues. After the market closes look for key releases from AAPL, AXP, STLD and TXN. Look for our Notable Earnings Posting in the wee hours on Monday morning long before the market opens. A week ago the weight of the evidence was overwhelmingly bearish. After Friday there is a lot of bullish evidence on the charts. We conclude that bullish factors have risen to as much as 40% from next to zero from just a week ago. We have taken the time to explain what motivated much of the buying that showed up on the charts this week. The buying was strong enough that it would be unwise to ignore it. It is absolutely critical to remember at this moment the intermediate term trend is down. For this to change to an uptrend the price action has to break through resistance levels and form both a higher high (which some charts have) and a higher low. That could happen this week or the market may pull back and need more time to consolidate before moving higher. If oil prices rebound to recent highs and earnings are disappointing this week especially among financial stocks, these counter trend moves could turn into bear flag patterns. If oil stays where it is or moves lower and there are more better than expected earnings especially from financial stocks, this may be the beginning of a trend reversal and an intermediate term up trend in the near future becomes evern more probable. Whether you pay attention to earnings and the price of oil or not, Market Action Discounts Everything and it will appear on the charts, so stay focused on the Chart Signals.

Friday's Action Moving Up: IBM, SCHN, RIMM, SOHU, GS, CLF, FSLR Moving Down: BIDU, AAPL, PCLN, DECK, MA, POT, MON, MTL, CF, AMZN, MEE, X, MOS, V, GRMN, BTU, ANR, MUE, ESRX, IPI, AGU, USO, GWLT, DRYS, EXPE Intermediate Term Market Trend: Down Short Term Market Trend: Up