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The Morning Cup of Jo: Don't Argue With The Market


Today brings the 5th trading day of the year.


"Do not argue with the market, for it is like the weather: Though not always kind, it is always right."

(Kenneth E. Walden)

Key Points:

  • TAM offers new website aimed at providing better information, transparency, and investor education.
  • Is volatility coiled in '07? The action in commodities suggests maybe…
  • DJIA shows high volume Doji pattern, divergence on the stochastic and RSI.
  • SPX has broken Sept trend line now sitting at the neckline (50-DMA).
  • NDX has managed to fare better holding major support at 1745.
  • RUS broke the short term trend line as well with a stochastic divergence.

Happy New Year to all. It's been quite some time since the Jo last appeared, but it's not without good reason. My firm has spent the last few months buttoning up TAM's new corporate website to start the year off right with its official launch. Greg Collins, our COO, has spent tremendous time and effort to ensure the site serves the needs of our clients by providing timely information, analysis and investor education that will evolve as readers demand.

Click here for news and updates on TAM's latest offerings.

There is much further to go on building my firm's site, but as previously stated, it will continue to remain a dynamic work in progress and I would appreciate any relevant feedback. I trust you'll find the new site full of pertinent information and very user friendly. Please take your time when perusing and take advantage of the wide range of useful information throughout your journey. There's a lot more in store for '07!

Onto the first market commentary of the year:

The first trading day of 2007 was wrought with excitement. In the first three hours the Dow edged up over 116 points to continue the end of 2006's rally. By 2:30 PM many of the pundits began clambering about a "key reversal day" for the markets as the Dow was down over 50 points following the release of the Federal Reserve minutes. Much to the bears' dismay, the "key" reversal day never transpired and all the "Sisters" closed around even for the session. But the volatility didn't stop there. Thursday brought a 50 point lower open and about an even close with Friday not being able to subside the selling; and down she came to the tune of 82 points. Yesterday was much of the same. The DJIA began the day by trading down just over 50 points, hitting the ST support level of 12,340, and then closed up just over 25 points – volatility, volatility, volatility.

Today brings the 5th trading day of the year. Not being statistically convinced about the ole' saying "So goes the first five days, so goes January; so goes January, so goes the year," I do however believe the volatility will remain extremely high throughout 2007. One of the major reasons for the continuation is the constant reallocation of fast institutional money. One of the easiest ways to visualize this is in the absolute debacle of commodities since January 3rd (a more than 6% sell off).

Texas Tea was the largest culprit of the downturn and registered a whopping 10% sell-off in the three-day slide. However, the precious metal market wasn't any help as they also took the long jump off a short pier. Fast money, it's like lemmings, gotta love it.

Click chart to view full screen.

Now, more than ever, it's important to review The Four Sisters. The "Eye on the Ball" section above outlines the current ST (short-term) closing resistance and support levels. It's important to note there have been quite a few "road signs" which have shown their ugly heads warning investors to begin tapping the brakes.

I'll begin with the eldest sister, The Dow Jones Industrial Average (DJIA). A lot of money has been reallocated into large-cap stocks over the last quarter, more than anyone could have anticipated, which as pushed the DJIA to new highs. The last Jo discussed the market bears and how they were wondering how high the markets could go without a correction. The DJIA is now working on the longest period without a 2% decline day, over 912 days. This is very unusual. Adding fuel to the bear's fire is the action over the first four trading days. This is not what we should expect out of a technically strong market environment.

Illustrated below are some of the technical signs of potential trouble. To begin, this is the first time since March of 2004 the DJIA has seen a completed stochastic divergence, declining MACD and divergent RSI. Combining that with the "High Volume Doji" (candlestick pattern indicating massive indecision) and neckline at yesterday's intraday low; probabilities lie with staying guarded.

Click chart to view full screen.

The S&P 500 (SPX) reflects much of the same. Yesterday's lower open, test of support and positive close was good news for the bulls, but was still lacking any inkling of volume. Nonetheless, the SPX has already broken the ST trend since the September breakout. Also noteworthy is how the neckline corresponds to the 50-DMA.

Click chart to view full screen.

The Nasdaq 100 (NDX) is a bird of a different color. Even though it's broken the ST trend since the September breakout, because of its lack of upward movement in comparison to the two eldest sisters, it has come to find major support on its latest horizontal breakout neckline (1,745). This by no means implies the 1,820 resistance is going to be an easy task to take down, but keep in mind – those lemmings have new found cash to invest somewhere.

Click chart to view full screen.

The youngest, Russell 2000 (RUS), is similar in fashion to the NDX. With the lowest upward movement since the September breakout, it also didn't have far to fall before finding support. However, it did flash a stochastic divergence before breaking the ST trend. The good news is it also held the closing support yesterday morning.

Click chart to view full screen.

The aforementioned road signs do not mean there will be a correction right now. With all the commodity lemmings running for the door, it pushes market liquidity to ever higher levels, which have to be reallocated somewhere. However, they must be respected as potential warning signs suggesting investors to remain cautious in light of the bullish headlines. Understanding the nature of the equity markets over the last several years, we know any sell-offs could be akin to my son's favorite X-box racing game; "Fast & Furious."

Stay tuned & good luck!

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No positions in stocks mentioned.

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