QQQQ AND SPY HIT THE GAP -- COAL STOCKS SHINE -- CONSOL ENERGY BREAKS RESISTANCE - VOLUME PRECEDES PRICE -- GOLD JUMPS ON INFLATION OUTLOOK -- TIPS AND GOLD MOVING IN UNISON -- THQI RIDES THE WII WAVE
STALLING AT THE GAP... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor
The Nasdaq 100 ETF (QQQQ) and S&P 500 ETF (SPY) both reclaimed their 50-day moving averages yesterday and then edged higher today. The market was quite mixed today as the Technology sector pulled QQQQ higher, while weakness in the Consumer Discretionary sector weighted on SPY. I noted the late February gaps last week as these gaps remain in play. SPY and QQQQ were turned back at these gaps two weeks ago and both ETFs are back challenging resistance again today. This shows some serious resilience. Further strength above 144 in SPY and 44.5 in QQQQ would be positive and open the door to an assault on the February highs.
Chart 1
Chart 2
COAL INDEX LEADS THE WAY... The Dow Jones Coal Index ($DJUSCL) led the industry groups higher on Wednesday by jumping over 5%. The prospects of industry consolidation and the recent run up in oil prices contributed to the jump. Higher oil prices make other energy sources more attractive and everybody likes merger talk. In particular, Arch Coal (ACI) announced today that it would be looking for acquisitions over the next few years.
On the price chart, the DJ Coal Index recaptured the 40-week moving average with a surge above 270. The 40-week moving average is equivalent to the 200-day moving average (40 weeks x 5 days = 200 days). The index declined sharply in the middle of 2006 and then formed a rather large triangle over the last six months. Today's move broke above the upper triangle trendline and the upside target is north of 300. I derived this target by drawing a trendline parallel to the lower triangle trendline and extending out.
Chart 3
COAL STOCKS SURGE ON BIG VOLUME... Three coal stocks stand out today. Arch Coal (ACI) surged to its 200-day moving average on above average volume. The stock broke the 50-day moving average in February and this moving average turned into support in March. Today's high volume move reinforces support around 29-30. Peabody Energy (BTU) also surged to its 200-day moving average on above average volume. This stock also formed a triangle and broke above the upper trendline today. Consol Energy (CNX) shows the most strength of the three and perhaps within the whole group. The stock broke above resistance from its Nov-Dec-Feb highs two weeks ago and surged above 40 on big volume today.
Chart 4
Chart 5
Chart 6
VOLUME PRECEDES PRICE... Hindsight is of course 20/20, but we can learn what to look for in the future by analyzing today's big moves. Looking back at the Consol Energy (CNX) chart, strong upside volume jumps out as a key catalyst. Upside volume started picking up in early February and there was a big surge in late February. Upside volume remained consistently strong in March and the late March breakout occurred on big volume. Buying pressure never let up. I also overlaid the On Balance Volume indicator. This is a classic and simple indicator developed by Joe Granville and introduced in his 1960 book, Granville's New Strategy of Daily Stock Market Timing for Maximum Profit. OBV is a cumulative indicator formed by adding volume on up days and subtracting volume on down days. The indicator rises as volume on up days outpaces volume on down days. Granville theorized that volume precedes price and OBV can be used as a leading indicator. On the CNX chart, you can clearly see OBV leading price as the indicator broke above its December high in late February and never looked back.
Chart 7
GOLD JUMPS OVER 1% ... Despite news that Iran released the British sailors, gold surged over 1% today and is closing in on its February high. Gold appears to have something else on its mind and that something could just be inflation. The "prices paid" portion of the ISM Non-Manufacturing Survey rose to 63.3 (from 53.8) and this was the highest reading since August. The jump was attributed to rising energy costs. On the price chart, the StreetTracks Gold ETF (GLD) moved back above its 50-day moving average in mid March and this rising moving average is providing support. In addition, there is support form the October trendline, which has been touched at least three times. GLD is in good shape as long as the 50-day moving average and trendline hold.
Chart 8
GLD AND TIP... The iShares Lehman TIPS Bond Fund (TIP) also rose today as further signs of inflation surfaced. This bond ETF represents inflation-protected bonds and these should hold up better if inflationary pressures continue to mount. TIP surged to resistance in late February, consolidated in March and pulled back to the 50-day moving average yesterday. It has been a wild ride the last few days, but TIP is holding its uptrend and a break back above 102 would be most bullish. This would also signal rising inflation and I would look for gold to follow suit. The second chart shows the StreetTracks Gold ETF (GLD) and the iShares Lehman TIPS Bond Fund (TIP) together over the last six months. There is clearly a positive correlation here.
Chart 9
Chart 10
THQ INC HITS 52-WEEK HIGH... THQ Inc (THQI) is small cap stock involved in multimedia and graphics software, also known as video games. The company focuses on Nintendo platforms and rumor has it that Nintendo's Wii is flying off the shelves. On the price chart, THQI shows relative strength with a breakout and 52-week high on good volume. The pattern over the last few months looks like an inverse head-and-shoulders. Remember, the head-and-shoulders pattern can be inverted or normal and it can signal a trend reversal or a trend continuation. This one happens to be of the inverted-continuation variety. The neckline sits just above 34 and the breakout targets further strength to around 39. The distance from the head's low to the neckline is added to the neckline breakout for a target. The resistance zone around 34 becomes support and there is also support around 33 from the consolidation just prior to the breakout.
Chart 11
