MAJOR INDICES BACK OFF RESISTANCE -- VOLUME PICKS UP - SURGING OIL WEIGHS ON TRANSPORTS AND BUOYS GOLD -- ANALYZING TRIPLE TOP ALERTS AND TRIPLE BOTTOM ALERTS
STOCK MARKET WEAKNESS CONTINUES... Today's Market Message was written by Arthur Hill. John Murphy will return tomorrow. - Editor
Stocks pulled back on low volume after Christmas, but volume and the decline picked up steam on Wednesday. Both the Nasdaq Composite and the NY Composite fell sharply on Wednesday and broke back below their 200-day moving averages. Volume was strong on 21 Dec (Friday) when the NY Composite broke above 9800 and the Nasdaq broke above 2650. Holiday trading kicked in on 24 Dec (Monday) and remained light the rest of the year as the market declined the last three days of 2007. The pullback continued on the first trading day of 2008 and volume was the highest since 21 Dec. We pointed out resistance levels in the prior two market messages and the pullback over the last few days reinforces resistance.
Chart 1
Chart 1 shows the Nasdaq hitting resistance around 2700-2740. This area acted as resistance in July and then support in October. A break above the December highs would provide the follow-through breakout needed to energize the bulls. Conversely, a move below 2550 would signal a continuation of the November decline. Chart 2 shows the NY Composite gyrating around its 200-day moving average. While the Nasdaq reached its early December high around Christmas, the NY Composite fell well short of its early December high. This shows relative weakness in the NY Composite, for which we can blame the Consumer Discretionary and Finance sectors.
Chart 2
STRONG OIL GREETS 2008... In addition to stubborn resistance levels, the stock market must also deal with strength in West Texas Intermediate Crude ($WTIC). In particular, the Dow Transports remains under pressure from continued strength in oil prices. Energy costs feature prominently in transport-related stocks. Chart 3 shows West Texas Intermediate Crude (red) and the Dow Transports (green). Oil surged back above $95 in December while the Dow Transports dropped below 4550. Since early December, oil is up almost 11% and the Dow Transports is down over 3%. The Transports are likely to remain under pressure as long as oil holds above $90.
Chart 3
Chart 4
While not as directly affected, retail stocks could also be feeling the brunt of high oil prices. Retail stores depend on consumer spending, especially discretionary spending. Higher energy costs can siphon money from discretionary spending. Chart 5 shows West Texas Intermediate Crude ($WTIC) with the Retail SPDR (XRT). Oil (red) moved from the low 70s to the mid 90s over the last few months while XRT (green) declined from the low 40s to the mid 30s. XRT broke to new lows recently and remains weak. Oil is challenging its November highs and remains strong. There is clearly an inverse relationship between these two.
Chart 5
GOLD FOLLOWS OIL HIGHER... John Murphy featured Gold ($GOLD) just before Christmas as it bounced off Symmetrical Triangle support for the third time. The bounce gathered steam over the last few weeks as Gold broke above $840. This is a new high for the move and gold remains strong. Chart 6 shows Gold (green) and West Texas Intermediate Crude (red) together. Both bottomed in August and then shot higher. After some choppy trading in November-December, the advance resumed and both are trading near their highs in early January.
Chart 6
Chart 7
TRIPLE TOP BREAKOUTS ... StockCharts.com users can scan for stocks with recent Point & Figure breakouts from the Stock Scans page. The link to this page can be found on the left navigation bar under Tools & Charts. The P&F patterns are at the bottom of the page. P&F Triple Top Alerts is the first scan. The image below (labeled Chart 8) shows a complete list of the available P&F scans. There is also a great tutorial on using P&F charts in the Chart School. Look under the section entitled How to Use Our Charting Tools. Print it out and keep it close by when looking at P&F charts.
Chart 8
The P&F Patterns come in pairs: one bullish and one bearish. The Triple Top Alert is bullish while the Triple Bottom Alert is bearish. The former signals an upside breakout while the latter signals a downside support break. Chart 9 shows Sony (SNE) with a recent triple top breakout (green oval). The stock met resistance at 52 twice (red arrows) and then broke through this resistance level with a surge in December. (Letter A marks October, letter B marks November and letter C marks December.) Also notice that the stock broke the red trend line or resistance line. Chart 10 shows Sherwin Williams (SHW) with a triple bottom alert that was triggered with a long column of O's (red oval). Sony is showing relative strength with the upside breakout and Sherwin Williams is showing relative weakness with the support break.
Chart 9
Chart 10
In addition to looking through the P&F charts, we can also use these scan results to assess broad market strength or weakness. Think of these results like breadth statistics or a version of the Bullish Percent Index (BPI). The market shows strength when more stocks forge Triple Top Alerts than Triple Bottom Alerts. Conversely, the market shows weakness when Triple Bottom Alerts outpace Triple Top Alerts. For the NYSE, Triple Bottom Alerts (78) outpaced Triple Top Alerts (40) by almost 2 to 1. The numbers were worse for the Nasdaq as Triple Bottom Alerts (121) outpaced Triple Top Alerts (39) by over 3 to 1. These ratios make it clear that more stocks are breaking down than up.
