What happened to the NASDAQ 100 on Friday? As the other indices, S&P 500, S&P MID CAP 400, and Russell 2000 were in rally mode this index, the NASDAQ 100, the leader in this six-week rally, pooped out leaving a doji candle in the Friday session. In defense of the NASDAQ 100, we must disclose that this index did make a higher high and a higher low on the day. The Friday rally could have, in part, been attributed to the expiration of the April options. If that is the case, we will see the unwinding of some of this in the early trade on Monday morning. We are deep into earnings season and, although expectations are really low, there will be some downside surprises. The market seems to be looking for an excuse to buy the dips. The media and the public are taking this opportunity to vote for a bull market, are we there? No, not so fast. We continue to believe that there will be some backing and filling if not a retreat in the indices. This retreat should be studied to learn whether the retreat is something serious or just a purging of our overbought condition. So far, the retreats, the few that have been seen, have been shallow and of short duration. Those retreats spoke volumes in support of the buy on the dips crowd.
We hear a lot of talk about deflation, and indeed there appears to be some of that in this current quarter. We wonder why deflation has not yet found its way to things like food, real estate taxes, or even clothing. We have found sporadic price cuts in things like transportation, and some electronics, but the utility company hasn’t sent any refunds or reduced their charges. For that matter, neither has the cable company or even the phone company. Our costs are rising but our incomes are not rising thus we are going into…..stagflation. Eventually, we will be facing rampant inflation but we are far away from that problem today. Today we worry about paying our ever rising bills and we don’t worry about eventual inflation. Remember that the Fed has been pumping money into the system and eventually, that money will find its way into stimulating inflation.
We wrote on March 22, “The “Stamp Act” was passed on March 22, 1765. Have we not learned anything from those events? We should not forget that taxpayers can and will revolt.” Indeed we saw taxpayers dumping tea into the waters on April 15th to remind the current administration that we are becoming more and more tax intolerant. There will be a further outcry from the public as their tax money is used for the “greater good” and that greater good has no apparent benefits for the individual tax payer.
The information being released this week will tell us volumes regarding this rally. This week we will have earnings from many of the large financials which were in trouble. We shall see how these earnings reports are spun and how a positive spin will impact the already overbought markets. We will hear from the likes DuPont, Honeywell, 3M, Coca-Cola, Boeing Lockheed Martin, US Bancorp, Bank of America, IBM etc. Not a dull week for earnings reports.
Monday: March leading indicators are released at 10:00 and we have earnings form IBM, Bank of America, Eli Lilly etc. Tuesday:
Canada releases its interest rate decision and Kansas City Fed President Hoenig speaks on the “Hill.” Wednesday: Continuation of bank earnings et al and the Bank of England releases its minutes from its last meeting. Thursday: March existing home sales are released at 10:00 and we have more earnings from financials. Friday: March durable goods are released at 8:30 and March new homes sales are released at 10:00.
The US Dollar index enjoyed a terrific rally in the Friday session taking the index up to almost the 50% retracement level and the downtrend line at 86.418. All the indicators that we follow herein, for the daily time-frame, continue to point higher. All continue to issue a buy-signal for the US Dollar index. When you look at the weekly time-frame and the monthly time-frame, things begin to change. We are bending over to the downside for both these time-frames. We have entered the Ichimuko clouds on the daily time-frame, but are above the clouds for the weekly time-frame and in the clouds for the monthly time-frame. The 5-day moving average is at 85.402. The top of the Bollinger band is at 86.663 and the lower edge is seen at 83.611. The Bollinger bands are beginning to expand telling us that the volatility is returning. We need to see a close above 86.615 to confirm a breakout from a coil to the upside. The uptrend line for the Monday session is 85.214 and 84.963.
The S&P 500 is grossly overbought but is not issuing a sell-signal. Although we seem to be loosing steam on the upside we can not argue against the continued bullish streak we are seeing. We believe that this rally will end within a day or so, however; we need to re-evaluate the chart as the downdraft unfolds. The downdraft will tell us volumes about the future of this rally. Further, this week we will see many companies report their earnings. How this information is digested by the market will also add to the information we need to study. We are at a time when good news is good for the market, bad news is good for the market and no news is good for the market. We see this happen in bull markets. This however; could be no more that a bullish bounce in the scope of a bear market. We still are in a bear market until moved out of this downtrend. The daily chart shows that we have moved above the downtrend line but on the weekly and the monthly chart we remain below the downtrend line. We are overbought on both the weekly and the daily charts. The 5-day moving average is at 854.20. The top of the Bollinger band is at 876.38 and the lower edge is seen at 768.47. We have managed to cross above the daily Ichimuko clouds, but we continue below the Ichimuko clouds for the weekly and the monthly time-frame. The heavy volume area for this index on the daily chart is at 862.87. We need to see a close above 876 to inspire the bulls further.
The NASDAQ 100 has been the poster child for this rally, leading the way higher. On Friday, the rally came to an end when the bulls and the bears were evenly matched leaving a transitory doji on the chart, warning us of a change of direction. Is this a sure thing, certainly not but in combination with the grossly overbought condition, we respect this warning. We do have a 9 count which also is another warning flag for us to heed. None of the indicators that we follow herein are issuing a sell-signal. The stochastic indicator is curling over to the downside but has not issued a sell-signal. Our own indicator will issue a sell-signal in the next session. The 5-day moving average is at 1335.40. The top of the Bollinger band is at 1375.78 and the lower edge is seen at 1183.78. The good news for the NASDAQ 100 is that the Market Profile chart shows little resistance overhead, so if the market wants to rally, there will be little to stop it from doing so. The chart is forming a wedge. There are several lines you need to respect; they are the uptrend lines of 1310.57 and 1321.13 and the overhead uptrend lines at 1375.43 and 1382.29. If we break out above the overhead uptrend lines, we are going considerably higher; on the other hand if we fail to remain above the uptrend lines, we could retreat to 1267, 1210 and 1203. Naturally, we are above the Ichimuko clouds for the daily time-frame, but remain below the clouds for both the weekly and the monthly time-frame. We have not broken above the weekly and the monthly downtrend lines and thus, we remain cautious.
The Russell 2000 out-performed the S&P 500 in the Friday session, rallying 1.17% on the day. The Russell 2000 is grossly overbought and is not showing signs of fatigue. None of the indicators that we follow are issuing a sell-signal. The 5-day moving average is at 464.52. The top of the Bollinger band is at 481.32 and the lower edge is seen at 397.17. We are above the Ichimuko clouds for the daily time-frame, but remain below the clouds on the weekly time-frame. The VWAP area on the daily chart is at 474.35. That is the area with the highest volume. Market Profile shows that we have very little resistance above 475 and even less resistance above 503.50. When drawing trendlines on the weekly chart, we clearly see that a move above 485 will cause the bulls to rush in possibly pushing this index as high as 518. It is important for the Russell 2000 to stay above 440.11; this is based on the weekly chart which is also grossly overbought.
Crude Oil is really coiling and will break out from this pattern very soon. Actually we are forming a pennant which will resolve itself by Wednesday or, before. The uptrend line is at 49.31 and the downtrend line is at 51.14 so a close for a pair of days above the 51.14 or below 49.31 will be violent. If we break to the downside, look for 47.37, if we break to the upside, 53.90. These are shallow numbers with slight support and resistance. The indicators that we follow are all issuing a continued buy-signal. The 5-day moving average is at 49.80. The top of the Bollinger band is at 54.80 and the lower edge is seen at 47.46. We are above the Ichimuko clouds for the daily time-frame, below the clouds for the weekly time-frame and in the clouds for the monthly time-frame. Market Profile shows that we have plenty of resistance on the upside to the 54.00 level. Above 54, we will have room to run to the upside. On the downside, under 40.50 crude oil is in big trouble.
Gold closed near the lows of the day in the Friday session. We are going back to levels seen in January, which show us that gold can comfortably trade between 883.80 and 817.20. We also see that below 817.20 we have liability to 789.30 and below that, 718. The chart also warns that should we close below 865, gold will be in trouble. The indicators that we follow are getting oversold but continue to point to lower levels. The 5-day moving average is at 885.80. The top of the Bollinger band is at 967.95 and the lower edge is seen at 854.58. The volume value area is at 871.75. We are below the Ichimuko clouds for the daily time-frame, in the clouds for the weekly time-frame and above the clouds for the monthly time-frame. The downtrend line is at 892.65 on the daily chart and 896.73 on the weekly chart.