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Morning Cup of Jo: Bulls vs. Bears, Core PPI, OPEC, Corporate Earnings, North Korea


Adding this all together, what does it mean?


"You can't be asleep in business – at the ends of the arms of Morpheus are the hands of the receiver."
--Frank Romer

Key Points:

  • Bears – "How parabolic will this move go…?"
  • Core PPI shows Oil Prices trickling into economy.
  • Resistance levels on SPX ST and LT.
  • OPEC.
  • Corporate Earnings.
  • North Korea.
  • Consolidations are healthy.

Market Commentary:

"Stretched & Tired" or "Fast & Explosive," this is the question many are asking themselves about the technical condition of the market. As paradoxical as it may seem, it is the only way to describe the Four Sisters' current position. The Bears, who lie awake at night asking the question "How parabolic will this move go before consolidating?" awoke yesterday morning with smiles on their faces as they uttered the words from little Carol Anne in Poltergeist; "They're Back." The PPI numbers came out at 8:30 AM and at first glance the economic data looked promising for the Bulls as it reported a much bigger drop than expected due to a 22.2% decline in gasoline prices. However, the core PPI registered up three times the expected (0.6% vs. 0.2%) as the increase in Oil prices have finally started to trickle down through the economy. The return of inflation fears was the catalyst that began the Dow Jones Industrials (DJIA) nearly 100 point watershed in the early hours of trading. Interesting enough, by 11:30 AM the DJIA attempted to reverse its negative course and almost registered positive by 3:00 in the afternoon.

In the last 'Jo' I outlined several different potential resistance points on the Sisters, all of which have been cracked; in other words, a continuation of good news for the bulls. That being said I need to point out a few other technical, economical, geopolitical and corporate issues on the horizon. Sticking with tradition, we'll start with the ST technicals.

When looking at the following graph it is important to notice the upward move the S&P 500 (SPX) has made since the September 12th retest of the three plus month Two Headed Monster base (an inverted Head & Shoulders with two heads) it built from May to August. During its extremely volatile base building period the SPX hit a low of 1219 and didn't breakout until 1294; a difference of 75 points give or take. This difference is used by many technicians to calculate the next possible "measured move."

Defining a measured move is relatively simple. It is the next logical point for the first consolidation from a base breakout. By using this calculation and adding 75 points onto the neckline of the base you come up with 1369. On Friday of last week the SPX hit 1370.

Click on chart for larger image.

Believe it or not, this is good. The last thing the bulls want is a continued parabolic move because parabolic moves can be a technical sign of exhaustion and can put an end to any sort of upward continuation. A 20 to 30 point consolidation lasting one to two weeks could be just what the doctor ordered and would be very healthy.

Moving onto the LT chart of the SPX there is a marginal tilt to the bearish camp. As you can see illustrated below, the SPX has now hit the slightly upward sloping resistance line we've been talking about for the last two plus years. "If the ST technicals play out with a brief consolidation here, will number seven be a charm and finally allow the SPX to break free?"

Click on chart for larger image.

Moving on from the technicals I should note a few other metrics which could affect the market in the shorter term and possibly start this consolidation period. On the geopolitical front there is more news involving North Korea. Yesterday they accused the United Nations of declaring war against it by imposing sanctions as punishment for testing its first nuclear bomb. Currently U.S. Secretary of State Condoleezza Rice is headed to Japan to discuss U.N. sanctions imposed just as the White House warned North Korea against staging a second nuclear test; a volatile situation to say the least.

Adding kindling to a potentially smoldering fire is OPEC (Organization of Petroleum Exporting Countries). They will be meeting today to try and stem a three-month slide in Oil prices. The U.S. has seen an inventory build-up in the past few months which most likely led to the decline in prices. Therefore the expectation is for a cut in supply, hence a possible increase in price. (Refer to the 'Jo' here and here.)

Lastly, but certainly not least, we are again in the midst of earning season. So far so good, but it doesn't mean we're out of the woods yet. So far the consumers are still holding up the economy, as seen in earnings coming from McDonalds (MCD), Costco Wholesale (COST), PepsiCo (PEP) and Yum Brands (YUM). However, don't look now but Motorola (MOT) is trading down 8% overseas on last night's earnings report. Please don't forget to pull TAM's OTC (On the Calendar) every Monday morning to follow along with all the news and earnings for the week.

Adding this all together, what does it mean? As stated previously, the best thing that could possibly transpire for the bulls is a consolidation now. No one wants to see the markets go straight up because that traditionally converts into coming straight down. Once the two eldest sisters successfully retested the base breakout on September 12th the technical risk was lessened substantially for the bulls. If an orderly consolidative move was to transpire here it could provide ample opportunity for investors to position into fundamentally and technically sound companies for the remainder of the year.

Stay tuned & good luck!

Until next time...


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