LATE SURGE PUSHES DOW HIGHER -- FINANCIALS LEAD THE CHARGE -- 10% SWINGS FOR THE S&P 500 -- TELCOS SHOW RELATIVE STRENGTH -- VERIZON AND AT&T SURGE - LOW INTEREST RATES HELP HOME BUILDERS -- PULTE AND DR HORTON SCORE BIG
FINANCIALS LEAD LATE SURGE ... Today's Market Message was written by Arthur Hill. John Murphy will return tomorrow. - Editor
Stocks traded mixed most of the day, but a late surge lifted the major indices to their highest levels of the day and financials led the way. The Dow Industrials traded as low as 8234 (-185) in early trading, but rallied in the final two hours to close with a 173 point gain. This amounts to a 358-point swing. Chart 1 shows the Dow with the On Balance Volume (OBV) indicator. On the price chart, the Dow broke triangle support, but recovered with a strong surge last week. This failed support break looks like a bear trap. Despite a big advance the last two days, the Dow has yet to recoup Monday's losses and some follow through is needed for a breakout. As such, I am marking resistance at 9000. The second window shows the Dow with closing prices only. Although a bit out of place, a broadening formation evolved over the last two months. Resistance is also at 9000 and a close above this level would be quite positive. Speaking of positive, On Balance Volume (OBV) broke trend line resistance and exceeded its November high. Joe Granville noted that volume precedes price and this OBV breakout favors a breakout at 9000 for the Dow.
Chart 1
XLF JUMPS OVER 5% ... John Murphy and I have been talking about the importance of big financial stocks and they rose to the occasion today. The Financials SPDR (XLF) led all sectors on Wednesday with a nice recovery. XLK opened weak with a gap down, but closed strong to form a long white candlestick. Even though the overall trend remains down, XLF is showing some promise the last two weeks and this oversold bounce could extend further. The ETF forged a hammer on 21 Nov and gapped up on 24 Nov with a long white candlestick. After a sharp pullback on Monday, the ETF recovered over the last two days. Broken support around 13 turns into resistance and XLF looks poised for a resistance challenge. Notice that this resistance level held last week. The bulls are looking resilient and a breakout would be quite positive.
Chart 2
ON A ROAD TO NOWHERE ... I can hear David Byrne singing it now: We're on a Road to Nowhere. Indeed, the stock market has gone nowhere since mid October. Chart 3 shows 30-minute prices for the S&P 500 over the last two months. The magenta lines represent the ZigZag indicator, which is set at 10%. Only moves equal to or greater than 10% are shown. The last move down is less than 10% so the last magenta line does not count. After plunging in early October, the S&P 500 found support around 850 on October 13. Here we are in early December and the index has been trading on either side of 850 the last few days. Even though there is little change since mid October, the index has been quite active the last few weeks. Including the early-October decline, there have been 10 moves greater than 10% over the last nine weeks. On average, the S&P 500 is moving 10% per week. This is some serious volatility.
Chart 3
SPRINGING THE BEAR TRAP... Another look at this 30-minute chart reveals a potential bear trap. The S&P 500 broke support at 850 in mid November and plunged below 750. The index was teetering on the abyss two weeks ago, but recovered last week with a surge back above broken support at 850. A support break that fails to hold smacks of a bear trap. With the 1-2 week swings dominating price action, I have drawn two trend lines to capture the current swings. The red trend line shows the November downswing. SPX broke this trend line with last week's surge and the current swing is up. The green trend line extending up from the November lows defines the current upswing. Look for a move below 825 to reverse this upswing and reinstate the downtrend.
Chart 4
TELECOMS SHOW LEADERSHIP... Leadership has been difficult to find in this market, but the big telecom stocks are showing relative strength. Chart 5 shows the Telecom HOLDRS (TTH) with the relative strength comparative over the last six months. TTH declined with the rest of the market in July, August and September. The ETF started showing relative strength in October as the relative strength comparative turned up and started moving higher. While the S&P 500 moved to a new low in November, TTH held above its October low and the relative strength comparative moved to a new high this month. The uptrend and new high show relative strength in the TTH. On the price chart, TTH broke above its 50-day moving average over the last few days. The ETF surged over 3% today with the highest volume since September. Chart 6 shows Verizon (VZ) closing in on its 200-day moving average. Not many stocks can make that claim. Chart 7 shows AT&T breaking above its 50-day moving average last week and triangle resistance this week.
Chart 5
Chart 6
Chart 7
HOME BUILDERS GET OVERSOLD BOUNCE... Home building stocks surged on Wednesday as the Mortgage Bankers Association reported a big jump in mortgage applications. Low interest rates entice borrowers to refinance and make housing more affordable. The HomeBuilders SPDR (XHB) broke back above its September trend line by surging over 8% on Wednesday. Even though the bigger trend is down, XHB could certainly retrace 38-62% of the Sep-Nov decline. XHB has resistance around 15 from the early-November high and a move to this area would retrace 38-50% of the prior decline. Within the group, Chart 9 shows Pulte Home (PHM) breaking the September trend line last week and surging over 13% today. The relative strength comparative broke its September trend line and moved above its November high. Chart 10 shows DR Horton (DHI) breaking its September trend line last week and surging over 9% today. The relative strength comparative is also turning up as DHI attracts the bulls.
Chart 8
Chart 9
Chart 10
