BROAD RALLY LIFTS WALL STREET -- FINANCE ETF REBOUNDS SHARPLY -- WAL-MART INSPIRES RETAILERS -- RETAIL HOLDRS CONFIRM INVERTED HAMMER -- GAP INC HITS NEW HIGH -- BEST BUY BOUNCES -- OIL FALLS SHARPLY
STOCKS REBOUND WITH BROAD RALLY... Today's Market Message was written by Arthur Hill. John Murphy will be back next week. - Editor
Turnaround Tuesday lived up to its name today as the market surged with a broad rally. All of the major indices were up over 2%. The Nasdaq gained over 3.46% with strength in Technology, while the NY Composite gained over 3% with strength in Finance. Today's sudden reversal may seem arbitrary, but a couple of key indicators show good reason for support. On the Nasdaq chart below, the index became short-term oversold after a 9.7% decline below 2600. We do not need momentum oscillators to figure this one out. For support, the rising 200-day moving average marked support at 2580. In addition, a 50-62% retracement of the August-October advance marked support around 2568-2623. The combination proved valuable as the Nasdaq abruptly reversed today and shot higher. The second chart below shows the NY Composite bouncing off support from the 200-day moving average. Notice that the index also found support after a 50-62% retracement of the August-October advance.
Chart 1
Chart 2
XLF LEADS ALL SECTORS ... Relative weakness in the finance sector has been a major drag on the overall market. Even though today is just one day, the Finance SPDR (XLF) led all sectors with a whopping 5.26% gain. The ETF tumbled over 18% from early October to early November. In the process, the Commodity Channel Index (CCI) became oversold twice and the ETF was ripe for a bounce. At this point, I still consider the advance as an oversold bounce within a larger downtrend. XLF remains below the 200-day moving average. The falling 50-day moving average is also below the falling 200-day moving average. Securities rarely go straight down and counter trend rallies should be expected. I would expect resistance around 33-34 on this oversold bounce.
Chart 3
WAL-MART PUSHES RETAIL HIGHER... As the single biggest retailer in the country, Wall Street pays attention to earnings and projections from Wal-Mart (WMT). Not only did the company beat estimates, but it also raised its outlook for the full year. Much of the gains came from overseas sales growth as Wal-Mart derives some 30% of its revenue outside of the U.S. Good earnings news and a sharp decline in oil pushed the shares sharply higher on Tuesday.
Ok, enough of the fundamentals. What about the chart? The chart below shows weekly prices over the last 2 and a half years. WMT has been locked in a trading range with support at 41-42 and resistance at 49-51. Today's surge reaffirms the support zone. Even though the surge off support is impressive, Wal-Mart is in the middle of its trading range with resistance about 10% higher. Another 10% is about the best we can expect before this stock runs into overhead resistance. The lower indicator box shows Wal-Mart (blue line) and the S&P 500 ETF (red line). While SPY has risen steadily the last 2 and a half years, Wal-Mart has been flat and has badly underperformed the market overall. This relative weakness is a negative that WMT must also overcome.
Chart 4
MIND THE GAP... Wal-Mart is no stranger to gaps as I count four clear gaps since mid August. With the latest gap, WMT broke trend line resistance with a big surge on good volume. A strong stock should hold its gap and trend line break. As such, I will be watching Monday's high at 44.57. A move below this level would fill the gap and question bullish resolve.
Chart 5
RETAIL HOLDRS GET A BOUNCE... At 16.7%, Wal-Mart is the single biggest component of the Retail HOLDRS (RTH). With such a hefty weight, it is not surprising that the Retail HOLDRS also surged on Tuesday. RTH formed an inverted hammer on Monday. This is a bullish candlestick reversal pattern that requires confirmation with further gains. The candlestick itself looks like an upside-down square lollypop. Maybe this is a sucker rally (pardon the pun), but today's surge confirms the inverted hammer. The next resistance zone is around 100-102 from the 50-day moving average, late October high and 200-day moving average.
Chart 6
GAP SHOOTS TO NEW HIGH ... Gap Inc (GPS) is one of the leaders in the retail group. The stock surged through resistance at 19.5 over the last four days. Volume was high initially, but tapered off as the stock moved above 20. With an intraday high at 20.74 today, the stock also recorded a new 52-week high. There are not many retail stocks making new 52-week highs and this makes Gap a clear leader.
Chart 7
BEST BUY BOUNCES OFF SUPPORT... Electronic retailer Best Buy (BBY) bounced off support with a big move today. The stock surged in September with a big gap and move above 50. BBY then corrected back to around 45 with a 62% retracement of the prior advance. The gap and the Fibonacci retracement both pointed to support around 45. The stock obliged the technical analysis tea leaves with today's surge and this reinforces support at 45.
Chart 8
OIL FALLS SHARPLY ... The International Energy Agency cut its forecast for global demand, and oil futures tumbled over $3. The agency cited rising energy costs for the decline in demand. The old elasticity of demand argument is about as basic as economics gets (demand falls as costs rise). I am not sure about the decreased demand argument, but oil was clearly overbought after the big surge from mid August to early November. The United States Oil Fund ETF (USO) surged over 45% from the August low to the November high. A pullback or consolidation is quite normal under such circumstances. I am marking a support zone around 68-69 from the August trend line and the mid October high. Let's see how this first support test unfolds before considering a deeper decline.
Chart 9
Chart 10
