TECHS AND SMALL-CAPS EKE OUT GAINS -- APPLE LEADS TECHS HIGHER -- CPI REPORT WEIGHS ON BONDS -- GOLD AND OIL HAVE BIG DAYS -- S&P EXTENDS PNF STRING
TECHS AND SMALL-CAPS HOLD UP... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor
The market ended mixed on Wednesday. The S&P 500 and Dow edged lower, but the Nasdaq and Russell 2000 closed slightly higher. Techs and small-caps showed some immunity to rising oil prices and an uptick in interest rates. February has been a good month for small-caps as the Russell 2000 broke consolidation resistance and that breakout is holding. Not only is the breakout holding, but the index is also extending its gains. Broken resistance turns into support and it would take a move back below 800 to question this breakout.
Chart 1
The Nasdaq broke above 2500 on Tuesday and added to its gains on Wednesday. In the process, the index forged its second consolidation breakout in the last few months. Trading has been quite choppy since late November, but the index managed to forge ahead with higher highs in January and February. The advance may not be pretty and straight, but it is an uptrend and the breakout over the last two days affirms this uptrend. The 50-day moving average and 12-Feb low now mark support at 2440 and the bulls are in good shape as long as this level holds.
Chart 2
APPLE POPS ON UPGRADE... On the heels of positive comments from analysts, Apple Inc (AAPL) surged back above its 50-day moving average with good volume. Analysts see strong MAC sales and lower component costs (DRAM and Flash Memory) boosting the bottom line. On the price chart, the stock declined to support around 82.5 and firmed in early February. Notice that broken resistance turned into support and the late December drop looks like an overshoot. The move back above the 50-day reasserts the uptrend for Apple and reinforces support at 82.5.
Chart 3
CPI TICKS HIGHER AND BONDS TICK LOWER... The Labor Department reported that the Consumer Price Index (CPI) rose 0.2%. The expectations were for a 0.1% increase and bonds felt the heat as the CPI rose more than expected. The Fed uses interest rates to battle inflation and this up-tick in inflation puts pressure on the Fed to tighten monetary policy. This in turn puts upward pressure on interest rates and bonds fell accordingly. Bonds fall when interest rates rise. The 10-year T-Note Yield ($TNX) found support around its 50-day simple moving average and moved higher today. Even so, today's bounce is not enough to reverse the February downtrend in interest rates. This decline formed a falling flag and I would look for at least a move above the upper trendline to signal a breakout in interest rates.
Chart 4
OIL AND GOLD MAKE MOVES... In separate, but possibly related, inter-market action, the U.S. Oil Fund ETF (USO) surged back above its 50-day moving average and StreetTracks Gold ETF (GLD) jumped above $67. The oil ETF met resistance around 50 and consolidated over the last few weeks. This resistance level stems from broken support and the 50-day SMA. Look for a move above the early February high (51) to break free of this range and target further strength towards 55. Energy prices were not to blame for the jump in the CPI today, but further strength in oil could shift this blame in the future. Gold may also have an eye on future inflation as the yellow metal posted its biggest advance of the year on Wednesday.
Chart 5
Chart 6
FILTERING NOISE WITH PNF CHARTS ... John Murphy uses Point & Figure charts on a regular basis and I also find these helpful to filter out the day-to-day noise. In the examples below, I used the 20-day Average True Range indicator to set the "scaling method" or box size. This is a volatility type indicator that was developed by Welles Wilder. The box size adjusts automatically based on the price range.
Most of us are aware that RSI and MACD show negative divergences on the daily bar chart for the S&P 500. Upside momentum may indeed be less than before, but the S&P 500 has yet to actually reverse its uptrend and move lower. As this PnF chart shows, the index has been moving straight up since August (red 8). Each month since August, the index managed to add another "X" or another month marker (A = October, B = November and C = December). The advance may be slowing, but it has yet to reverse as long as this column of X's extends. Moreover, there is no sense considering a trend change on this PnF chart until we see the first column of O's appear. SPX would have to break 1422 to start a column of O's.
Chart 7
On the Nasdaq Point & Figure chart, the index advanced from August to January and then met resistance just above 2500. The Nasdaq even pulled back enough to warrant a column of O's this year and the index is not as strong as the S&P 500. The Nasdaq would have to move below 2425 to warrant another column of O's and below 2400 to trigger a double bottom break down. See the PnF signals for further details. Until such a signal, the Nasdaq remains in bull mode on this Point & Figure chart and turning bearish looks premature.
Chart 8
