HOME DEPOT AND WAL MART BOOST RETAIL SECTOR -- SO DOES FALLING OIL PRICES -- NASDAQ FAILS TEST OF JANUARY HIGH -- PEPSI BOTTLING BREAKS OUT

RETAIL HOLDERS RESOLVE BULLISH TRIANGLE ... Near the end of February, I wrote a positive piece on the retail sector (February 27, 2006). At the time the Retail Holders (RTH) were testing the upper line in a triangular-shaped pattern which favored an eventual move to the upside. Chart 1 shows that the RTH has broken through that resistance line in pretty decisive fashion. The RTH is now testing its fourth quarter peak at 100. Technical odds favor an eventual test of last summer's high. The relative strength ratio turned up earlier in the year and is now testing an eight-month down trendline. That suggests that retailers are starting to show some leadership. Two of the main reasons for the recent strength have been Home Depot and Wal Mart.

Chart 1

HOME DEPOT TESTS OVERHEAD RESISTANCE... After bouncing off a rising support line in mid-February, Home Depot is now challenging resistance near 43. Its relative strength line is also turning up from chart support shown by the blue arrows. Today's modest pullback isn't too surprising given the presence of that overhead resistance barrier. The chart, however, has a bullish look to it and an eventual move to new highs appears likely. What happens to Home Depot is important because it's the second biggest stock in the RTH. The biggest is Wal Mart.

Chart 2

WAL MART TURNS UP ... The daily bars in the next chart show Wal Mart rising back above its 200-day moving average to reach the highest level in 2006. Its relative strength also shows signs of turning higher. Although WMT has been a laggard in the retail groups, its recent rebound carries a lot of weight in the sector. In a mid-February article (February 14, 2006), I explained that falling oil prices were a driving force behind the retail rally. I showed that new buying in retailers coincided with new selling in energy shares. Chart 4 applies that comparison to Wal Mart.

Chart 3

WAL MART BENEFITS FROM WEAKER OIL ... Chart 4 compares the price of Wal Mart (price bars) with the price of crude oil (black line) over the last sixteen months. The inverse relationship between the two markets is clearly seen. Upturns in crude oil at the start of 2005, the summer of 2005, and the fourth quarter of 2005 coincided with downturns in Wal Mart (see arrows). The first peak in crude in September coincided with an upturn in WMT (first green arrow). The February 2006 peak in crude helped launch the latest WMT rebound (second green arrow). The reasons for that are relatively simple. Falling oil prices increase disposable income. Secondly, falling gasoline prices make it cheaper to drive to shopping malls. The above comparison simply suggests that the direction of energy prices could play an important role in the direction of Wal Mart and other retailers.

Chart 4

BOND YIELDS BOUNCE AGAIN ... The next two charts show long-term rates continuing to creep higher. Chart 5 shows the 10-year T-note yield closing over 4.7% which puts it back over its November peak. The TNX is trading at the highest level in two years. Chart 6 shows the 30-year T-bond yield also moving higher. The TYX is now testing its late-January peak at 4.73%. The new Fed chairman's speech last evening suggested that a flat yield curve wouldn't deter the Fed from continuing to raise short-term rates. Bond traders didn't like that. They were also worried about today's report that the core PPI for February rose 0.3%. Although the February PPI fell -1.4%, most of that came from falling energy prices. The higher core inflation number suggested that price increases might be spreading into other areas. Hence traders sold bonds which boosted yields. That accounted for some of today's profit-taking in stocks. That and some short-term technical factors.

Chart 5

Chart 6

S&P PULLS FROM FROM OVERBOUGHT CONDITION ... Today's pullback in the S&P 500 SPDRs shouldn't be too surprising. The recent runup has put it and the rest of the market indexes in a short-term overbought condition. That can be seen by the daily stochastic lines in the next chart turning down from over 80. The SPY is also pulling back from its upper Bollinger band as it's been doing since the start of the year. The only worrisome point is the pickup in trading volume. Today's profit-taking in the market may also be partially due to the Nasdaq's failure to hit a new high and a downside reversal day.

Chart 7

NASDAQ SUFFERS DOWNSIDE REVERSAL ... The market is only as strong as its weakest link. And the weakest link so far this year has been the Nasdaq market. The next chart shows that the Nasdaq Composite Index tried unsuccessfully to break through its mid-January peak at 2332 (today's exact high price). The Nasdaq then suffered a downside reversal day on rising volume. That may not have long-term significance. But it is enough to suggest some short-term profit-taking. Chart 9 shows an even weaker picture for the Nasdaq 100 Shares (QQQQ). It fell back below its 50-day line on rising volume as well. Two of the biggest reasons were Apple and Google.

Chart 8

Chart 9

APPLE AND GOOGLE FALL FURTHER ... Both large stocks weighed heavily on the Nasdaq 100 today. Chart 10 shows Apple falling to the lowest level in fourth months and on heavy volume. The stock is bearing down on its 200-day average near 57. Chart 11 shows Google meeting overhead resistance at its 200-day line. Biomet was the biggest percentage loser in the QQQQ. Chart 12 shows a bearish combination of falling prices and rising volume.

Chart 10

Chart 11

Chart 12

PEPSI BOTTLING BREAKS OUT ... With the market on the defensive, consumer staple stocks held up better than most others. One stock in that group that had a good chart day was Pepsi Bottling. The stock closed at a new 52-week high on rising volume. The weekly bars in the final chart below show that PBG is nearing a challenge of its mid 2004 high at 30.95. A close above that level would put the stock at the highest level since 2002. Its relative strength line is also starting to rise. If you look at John's Latest Performance Chart posted earlier today, you'll see recent leadership in consumer staples, industrials, and financials. That's usually a sign of a more defensive market.

Chart 13