POWELL EFFECT FADES -- BUT INITIAL REACTIONS MAY BE DRESSED REHEARSAL FOR THE REAL THING
DOW RUNS INTO CHART RESISTANCE... The Dow rallied into midday following Mr. Powell's UN testimony before fading. The Dow ended with a 28 point loss. Chart 1 is a 30-minute bar chart of the Dow covering the last seven trading days. It clearly shows a minor trading range with resistance at 8150 and support near 7950. Today's failure suggests that the Dow will probably test the bottom of the range over the next couple of days. The intra-day stochastic lines (over the chart) pretty much match the price action -- with bounces starting from under the 20 level and bounces failing over the 80 level. Chart 2 shows the recent seven days to be a normal "rectangular" consolidation pattern, which we believe will be resolved on the downside shortly. The question is how far down will the current Dow decline go. Chart 3 shows at least one possibility. The overall Dow pattern since last July has the look of a possible "head and shoulders" bottom -- with prices now in a possible "right shoulder". Very often, the right shoulder will decline to the same level as the "left shoulder". That would put potential support in the 7500-7700 zone -- as shown by the two horizontal lines and the last circle to the right. That would be a logical spot for the market to attempt a rebound. It wouldn't surprise us if that rebound coincided with some action on Iraq. [For the record, the attack on Iraq in early 1991 also coincided with the Dow in a right shoulder]. We said yesterday we thought some action on Iraq could produce a stock market rally. We just don't think it will be start of a new bull market.
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ALUMINUM UP, STEEL DOWN... Alcoa was the Dow's biggest gainer today following a brokerage upgrade. Its chart shows that today's bounce came on heavier volume, which is encouraging. The fact that it closed beneath it's opening price is discouraging however. We'll need to see some upside follow-through. Steel stocks went in the opposite direction -- down. Nucor was one of the day's biggest losers. The steel loser tumbled to a four-month low on heavy volume -- and is now threatening its October low. US Steel is also falling on heavy volume -- not a good sign.
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EL PASO LEADS UTILITY DECLINE... Utility stocks were the weakest sector of the market today. A big reason was the fall in El Paso Energy Corp. The stock tumbled to a four-month low on monster volume. The next test will be the October low. While EP was the most actively stock on the NYSE, Cisco was the most active Nasdaq stock. That tech bellwether isn't faring so well either.
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CISCO THREATENING CHART SUPPORT... Cisco Systems is also in danger of breaking chart support along its December low. The stock has already broken its red 200-day moving average. Today's early bounce failed to clear that resistance line. Although the stock closed unchanged, the closing price (right tic) was lower than the opening price (left tic). That's usually negative action. The especially heavy trading over the past two days looks like distribution (selling) to us. The real concern is whether or not this big networker can stay over its December low.
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DRESSED REHEARSAL FOR THE REAL THING?... We thought that the financial markets' initial reactions to Mr. Powell's aggressive testimony today was instructive. Stocks jumped -- while bonds slumped; the dollar rose -- while gold and oil fell. We think that's probably what will happen when the real thing starts. As we said yesterday, however, we think those reactions will be interruptions of existing trends -- not major reversals. Crude oil prices closed higher, but mainly on reported shortages in the heating oil market. Oil stocks, however, closed lower. Gold and gold stocks saw some profit-taking today on fairly heavy volume -- as shown in the chart of Newmont Mining. [Last night we showed that stock testing major resistance in the low 30s]. Those of you who have been long-standing members of our site know that we've been bullish on gold and gold stocks for the past couple of years. We're still bullish on both over the long-term. However, as we listen to the media talk about the rally in gold day after day (and with some resolution of the Iraq situation drawing close), we think this is a time to be more cautious on gold. As we said last night, however, we think any sharp downside correction would represent another buying opportunity for gold and gold stocks. We don't think this is a time to be aggressive in any of the financial markets. If you're not already participating in exising trends, it might be a good idea to wait until the Iraq crisis is resolved before committing new funds.
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