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Morning Cup of Jo: The Charts To Be Loved


The question market participants were asking all weekend was, "Long in the tooth or just another support level tested?"


"We should measure love, not like youngsters by the ardor of its passion, but by its strength and constancy."

Key Points:

  • Monetary Policy Report
  • Charts to be loved
  • Long in the tooth or just another support retest?
  • Market channels
  • RUS is most attractive technically
  • NDX – not so pretty
  • Dow Theorists love the transports
  • Gold shining
  • XBD toeing the line
  • KNOT or NOT?

Market Commentary

Good morning and happy Valentine's Day. The quote above is for my loving wife April who after nine years just surprised me last week with the fact we are going to have our second child! How exciting!

Now, onto business; the two day sell off ending last week's trading brought back the sound of bears rumbling throughout the weekend. As typical with this market over the last six months, they were put to bed yesterday as the "Four Sisters" found support initiated by speculation of Alcoa's (AA) potential takeover, Three M Co.'s (MMM) $7 billion buyback of its own shares; the largest in its history – (about 12.5% of market cap) and a Mother Merrill upgrade of General Motors (GM) which put the stock at an 18 month high.

As seen in TAM's OTC this week, today will begin what was once known as the semi-annual Humphrey-Hawkins Testimony – now plainly called the Monetary Policy Report – in which the chairman of the Federal Reserve delivers a report of the current status of the U.S. economy and monetary policy to Congress. Today and tomorrow the bulls are hoping for more dovish verbiage and outcome considering the recent hawkish comments from several Fed officials.

This, along with the other economic data listed to be released this week, will certainly set the market's tone until Friday's close going into a three day weekend. In view of the fact it is Valentine's Day I thought it fitting to spend time covering "the charts to be loved."

I'll begin by mapping the traditional "Sisters." The question market participants were asking all weekend was, "Long in the tooth or just another support level tested?" The answer is easy; yes. As you can see above I changed the ST support and resistance levels in the Eye on the Ball. What should be noticed is the spread has considerably shrunk for the two eldest. The DJIA and SPX are both trading in ascending channels, hence the tight range. Below you can plainly see if these tight ranges are broken, a different market tone will be afoot.

If the DJIA and SPX bust their respective 50-DMA's, which correspond to the support of their upward sloping channels, the following IT (Intermediate Term) support, reported in the previous Eye on the Ball (12,340 and 1,404), will be the next level to contend with. As you may remember these equate to a horizontal Floors & Ceilings support.

Skipping the NDX for a moment, the RUS is what I'd have to call the prettiest sister of all four and can be included in the "Charts to be Loved." On January 9th I discussed this index and how it broke out of a cup and handle base and continued to hold support around the pivot point (neckline). Since November it has built another base (Flat Base) atop. It broke out on January 31st and over the last few days has thus far successfully retested. This is an extremely good sign for the small cap arena.

If the RUS does penetrate back through the ST support, the following level would be at the bottom of the flat base (around 760).

Not involved with today's theme is the most unattractive sister – the NDX. This chart is somewhat of a conundrum considering the action in the other sisters. It just can't seem to get out of its own way. One can contend this is the thorn in the lion's paw and if not removed could lead the other sisters into the first correction since May of last year. The NDX is the only index which my firm hasn't changed the ST levels for in the Eye on the Ball. The bad news here is its attempt to breakout in early January and its retracement back into its base three days later. This is not a good sign and shows a major divergence for the markets. Here is where you'll want to keep your eyes on. If this fails, in all likelihood, the other markets will follow.

Onto the aforementioned "Charts to be Loved" Valentine's Day special edition.

The first is what all the bullish Dow Theorists have been waiting for, the transports, which was covered in detail in my firm's last quarterly report. Just over two weeks ago the Dow Transportation Average broke out from a slightly downward sloping Head & Shoulders base. Furthering the good news is a successful retest within the last week. Many believe that if the markets advance without the transports it is a sign of a market top. Even now some bears contend that it is still not at an all time high and until accomplished the tape is still divergent. Nevertheless, the rails, airlines and shipping sectors – which make up about 65% of the sector – are all technically sound.

Another "Loved" chart is one we spoke about in the January 24th Jo. Just after putting the Gold index out as a potential breakout it did just that. Currently it looks as if it is holding the January 25th breakout with a successful retest a few days later. Although extremely choppy the chart seems to be technically the most attractive in the precious metal marketplace.

Continuing the theme is the Powershares Water Res. ETF (PHO). The Powershares Portfolio really hits the sweet spots of the water industry. They seek companies involved in every angle of water purification. This can be a very "green" concept in that pollution is a major detriment to clean water. The technical action in this ETF is certainly something to be desired. It recently broke out of a Cup & Handle base with large volume and has since retested on light volume; something winners are made of.

Another technically sound chart is the Ishares DJ Basic Materials ETF (IYM). This index is comprised of a wide range of commodity-related manufacturing industries. Included in this sector are companies that manufacture chemical, construction materials, glass, paper, forest products and related packaging products, and metals, minerals and mining companies, including producers of steel. Similar to the last chart the IYM has broken out of a beautiful base and followed through yesterday with the news on AA.

The last chart in my special today is the AMEX Broker/Dealer Index (XBD).

This index broke out last November and seemed as if it was false because of its retracement right back into the base not more than six trading days later. However, it toed the line right at its 50-DMA, which corresponds to the ST trend, and has held ever since. Yesterday's low is another line in the sand for this index because of a neckline that would complete a double top formation.

Now that I've shown the "Charts to be Loved" I thought I'd add an oxymoron. The following chart is of Knot Inc. (KNOT). This is an internet wedding planning and database service provider, bridal registry and shopping service. How ironic is it that it crashes the day before Valentine's Day. Actually, all kidding aside, the reason I point this out is to accentuate the disasters happening every day which is why I've been discussing the unquestionable split tape and what is starting to happen in the technology laden NDX. In other words, keep your wits about you.

The previous charts are not to be construed to be recommendations and are solely technical observations of breakouts from sound patterns.

We at TAM truly hope everyone has a great Valentine's Day!

Stay tuned & good luck!

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Positions in Gold, Transports, Water and Basic Materials.

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