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Visa and MasterCard Deserve Some Credit

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Consider long positions with these staples in domestic economy.

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Summary of Yesterday's Notable Technical Developments

Stocks
were down about 1.25% yesterday on big volume as the US dollar carry trade unwound further. There was something in the news for everyone Thursday: concerns about credit ratings in Greece, Spain, and UK; US leading economic indicators rose 0.9%; a disappointing forecast from FedEx (FDX). Markets were decidedly negative from the start and never attempted to rally, closing at the low of the session on volume nearly 50% above average. The S&P is back in the middle of its trading range.

Bonds were the beneficiary of a rotation of risk assets; the buying pushed the 10-year Treasury yield below short-term support, but well within its recent trading range.

Commodities
fell more than 1.5% as a group as gold and the agricultural commodities weighed heavily; oil actually bucked the trend by treading water Thursday. Gold closed right at its uptrend line, a good entry point for new longs.

The US Dollar Index
ripped higher Thursday -- conquering short-term resistance at 77.47 -- as the dollar shorts continued to frantically cover their positions and as global money flowed into the "safe" currencies (dollar and yen).

Overnight and early morning: Asian markets were mostly lower overnight in reaction to the weakness in the US yesterday; meanwhile European markets are bucking that trend and trading uniformly higher so far this morning. S&P futures are indicating a stronger open for US equities. The US Dollar Index is trading very slightly lower early this morning. Oil is very strong this morning while gold tries to get on solid footing once again.

Market Internals:
(Figures are rounded)

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Critical Market Components:

S&P 500: support for the S&P is at its ascending 75-day moving average (currently at 1073.85); resistance remains at 1139, which is a convergence of Fibonacci levels; the market remains in a trading range and is likely to stay in this range until the beginning of the new year.

NASDAQ: the critical level on a weekly closing basis is 2211.95; the NASDAQ traded below both that level as well as a secondary support provided by the lower edge of a rising wedge pattern at 2188.40 yesterday; the next significant support level is 2150; the NASDAQ will likely get a boost at today's open by good earnings reports last night from Research in Motion (RIMM) and Oracle (ORCL).

Dow Jones Industrials: yesterday, the Dow approached support at the rising trend line at around 10,304; resistance for the Dow on a weekly closing basis is 10,507.59; next target is 9,712 on the downside on any break of support; as mentioned above, equities will get a boost this morning -- at least in technology; let's see if it holds up going into the weekend.

10-Year US Treasury Yield: bonds rallied yesterday pushing yields down through short-term support; the next serious support level is further down at 3.382%; first resistance will be at 3.617% while our intermediate-term target remains in the 3.78% to 3.88% range -- the wave iii of 5 yield projection.

Commodity ETF (DBC): support at the 80-day moving average at 23.31; substantial resistance at 25; commodities fell hard Thursday as the dollar shot higher -- with the notable exception being the resilient crude oil market; gold came all the way down to its uptrend line and is now at a favorable level for new long positions after testing $1,100 per ounce.

US Dollar Index (DXY): the DXY blew through resistance at 77.47 yesterday and is holding above that level so far this morning even as it pulls back; short-term support is at previous resistance of 77.47 with 76.58 the next support level below that; the next short-term upside resistance will be at 78 while our the intermediate-term target is the 80 to 81 area.

Semiconductor Index (SOX): the 339 level (which is where the SOX closed Thursday) will be key going into the weekend; support below that exists at the weekly uptrend line at around 320; a breakout above the 339 weekly resistance would lead to an upside target of 379 to 385.

Bank Index (BKX): the banks closed right above critical support at 41.62 Thursday -- the market bulls need to rally around the banks right here or there could be a stampede for the exits; staunch resistance at 44.82.

Crude Oil: crude has rallied nicely over the last few sessions but now will begin to face stiff resistance levels beginning at 76; very minor support exists at 74; significant support is down at 66.06.

Gold:
short-term support is at the uptrend line, which currently comes in at around 1102; gold turned and started to bounce in the after-hours session Thursday night; short-term resistance at 1143.40 (the December 11 high). I'm bullish on gold here and would advocate getting long with a stop in place on any weekly close below $1,095.

Charts of the Day: Visa and MasterCard



Click to enlarge

  • Revisiting the holiday theme, my firm, ThirdWave, examined Visa (V) and MasterCard (MA) today. Their products/services are staples in the domestic economy and are increasingly important in the global economy.

  • The first chart is that of Visa. I experimented with different moving averages in an attempt to find those that have shown the greatest recent reliability as support or resistance. With Visa, the 30- and 110-day moving averages seem to work best as support levels for mild and more substantial pullbacks, respectively.

  • Currently, the 30-day moving average comes in at $81.43, about 6.5% below Thursday's closing price. That level approximately corresponds with the lower end of an upside gap that was created five sessions ago. That should provide the first good entry point for new longs.

  • Those currently long of Visa should use the nearest horizontal line support at $84.67 (June 2008 peak) as a trailing stop with the idea of re-entering the stock at $81.43 or at even lower support.


Strategy: I'd wait for a pullback in Visa shares to buy; I'd look first to the 30-day moving average at $81.43 as a good entry point for new buys with a stop loss in place on any close below that level.


Click to enlarge

  • The chart of MasterCard isn't quite as bullish as Visa's chart, but it's still a market-leading stock. Both MasterCard and Visa are plugged into the growth of global consumption and the ever-increasing amount of e-commerce activity.

  • Again, experimenting with the moving averages yielded non-traditional lines. This time the 65- and 140-day moving averages proved most reliable as recent support and resistance.

  • The 65-day moving average comes in as the closest support at $226.98, which is 8.6% below Thursday's closing price. That level approximately corresponds with the first of two uptrend lines that show up on MasterCard's chart.

  • The reason MasterCard's chart isn't as bullish as Visa's chart is that masterCard is sitting right below its horizontal line resistance at $248 (unlike Visa, which is just above horizontal line support).

  • Additionally, MasterCard's RSI indicator is in a consolidation pattern of its own -- which is neither bullish nor bearish presently. Once the RSI breaks out of that pattern, it will serve as either a confirmation or divergence signal. For now, though, all it does is cast a bit of doubt on whether MasterCard will break through its immediate resistance at $248.


Strategy: Like Visa, I'd advocate a long position in MasterCard -- but at lower prices. Look for a first entry into the stock at its 65-day moving average which currently comes in at $226.68. It's a rising average, though, so be sure to adjust your entries higher as the average rises.

Inter-Market Observations:

Bond Prices (falling): Our long-term view is that inflation is going to be a problem and that rates will continue to trend higher. However, based on the action Thursday, Treasuries are still being viewed as a safe harbor by global investors. One has to wonder when that perception might change given the current state of US financial affairs and the long-standing fiscal trends. When will US debt no longer be considered "relatively" safe?

Stocks (faltering): A big down day combined with a big pickup in volume and weakening internals gives us more reason to believe stocks are vulnerable here. Be very selective in adding exposure in equities right now and most of all -- honor stops.

Commodities (pausing): Dollar rises, commodities fall -- that's the way it's been and will likely continue to be for a while. Commodities may catch a rally soon, though, if the greenback takes a rest after its recent run. Additionally, I'd point out that at some point, there may be a change in the linkage between the US dollar and commodities -- especially in an inflationary environment (for the entire globe, not just us).

US Dollar Index (rising): Despite any pullbacks that may occur (at any point), our intermediate-term target for the dollar is the 80 to 81 area.

No positions in stocks mentioned.

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