Thursday Was Not That Bad

SUMMARY:
- Thursday was not that bad, but on top of Wednesday it was just piling on.
- SP500, NASDAQ break lower from their pennant patterns. Now any upside is in the Missouri mentality: show me
- US economic data continues its decent performance, but earnings guidance and debt issues in Europe overrun the buyers.
- Jobless claims below 400K again.
- Housing starts down, but just a fraction of what was expected.
- Philly Fed hangs onto positive in November though it missed its expectations.
- Expiration may be playing a role, but regardless, the indices now have to show us they can rebound and continue the upside move.
- Still some very good looking stocks, but will they hold and pull the rest higher or will they be dragged lower?

Not a horrid day in itself, but combined with Wednesday the action dropped SP500, NASDAQ out of their patterns.

It was not that Thursday was such a bad day to the downside. Granted, there were some significant losses of 1-2% on the indices, but we have had those before. Actually we have had much worse than that when there were European issues. We had a problem with the action on Thursday because it was on top of Wednesday’s decline. That one-two punch was enough to drop SP500 below its 50 day EMA, the top of its prior range, and the November 2010 peak of 1227. It also had an adverse impact on NASDAQ, dropping it below its June low.

These indices have been forming a nice pennant pattern, and this was a sharp break to the downside that took those two indices out of that pattern. It did not happen to all of the market, however. The Dow managed to hold its 50 day EMA. The SP600 managed to hold above its 50 day EMA as well, somewhat maintaining its pennant or triangle pattern. It was not across the board, but important sectors were taking hits such as technology and semiconductors. These are the very sectors that should be leading at this time of year. They were leading, no doubt, but they were leading to the downside on Thursday.

Looking at the intraday chart, things were lower from the get-go. We had a bit of trouble with the futures. They were lower, but the market started to claw its way back up after some better economic data. Europe was bad. There was a lot of nasty stuff going on. The Italian and Spanish bonds were both surging higher. Not good again. The Spanish bonds were moving toward 7%, hitting another high since the inception of the euro zone. French and German bond spreads were amazing. The spread between German and French bond yields went up 200 BP or 2%. Unbelievable action. That is another euro-era record.

These are very trying times in Europe. It seems as if the ECB will squeeze one part of the balloon and other parts stretch out. The ECB was definitely buying, and that was thought to help. It actually kept the dollar from surging against the euro, but come on. The ECB cannot buy that many bonds. Or maybe it will. We will see. Our Fed did quite the job coming up with alternative methods to finance our extra debt on top of debt. Maybe the ECB will take a number from the U.S. and follow suit now that Trichet has retired.

The U.S. data was not that bad. It was able to offset some of the euro nonsense and move futures up a bit. Initial Claims were below 400K for the second week, coming in at a nice 388K. That was 10K better than expected and better than the week before. Continuing Claims were better as well. That is what you would expect. Housing Starts were better also. They were down, but only 0.3% versus the 0.8% decline expected. With that good news, the markets should have been surging, right? We will see. The Philly Fed was not bad at 3.6. At least it did not turn negative. 7.5 was expected with 8.7 in October. Not great news. Earnings really hurt the U.S. markets on Thursday. SHLD missed and did not have a rosy outlook. AMAT’s outlook was a problem. It is down 7.5%. NTAP was down 12% as its outlook was crappy as well.

Weak guidance is not what the market wants to hear. Without the good strength coming from earnings, the U.S. indices lost their bid and fell UBS said it would cut 2K jobs. Typically a stock rallies when it makes this kind of announcement. That did not happen with UBS, and it was down 2.6%. It joined C in announcing job cuts this week. C said it would cut 3K jobs. The financial sector job-bleeding continues even at this late date in the… recovery? Interesting.

Futures were down, but they tried to rally. They just could not get out of the way of themselves. They bounced around early in the day and then plummeted into lunch. Looked like there could be an attempt to double bottom in the indices as the afternoon started. I was watching the possibilities as the market went into the afternoon session, and put in something of a double bottom. I said there was a possibility it could rally, but I noted it would have to be one heck of a rally to offset what happened. It did not. Indices basically moved laterally all afternoon into the close, unable to get up off the floor. That hurt the days’ action as well as the overall patterns.

SP500, -1.68%; NASDAQ, -1.96%; Dow, -1.13%; SP600, -1.26%; SOX, -3.99%

SOX was well over 4% to the downside intraday, so it made a comeback. Yee-haw. Don’t we all feel better about that? Not a good day for stocks, as noted. I will discuss the charts soon, and you will see that while the indices had held up against the tide from Europe, Europe looks to be dragging us down with it. What looked to be a good setup is under fire right now. The parallels to World War II are amazing.

FRIDAY

What if they had an economic report and nobody cared? That might be the case on Friday with the Leading Economic Indicators. They are expected to rise 0.6% versus the 0.2% rise in September. Okay. They have said that and they mean nothing. We will move on from there. I know a lot of people think it holds a lot of weight, but it is really a bogus indicator. It does not indicate anything. Its basket is outdated, and it tends to lag the markets versus leading them. It proved that in the downturn. Why do we even bother? Why have I spent this much time talking about it?

SP500 and NASDAQ had a problem on Thursday. They broke their near-term positive pennants and now have taken on a bearish tone. Maybe they turn right back up. They could do that. We have expiration, and expiration is known for its volatile moves. Perhaps that is happening now. Or perhaps SP500 will form something of an ABCD pattern. It broke below that early-November low, and that puts it in the ballpark to make the ABC pattern that we are familiar with. A lower high, a lower low, it looks like it will sell off, and then it reverses. We will see if that happens. Or we will “D” if that happens. The humor may be flowing slowly this time of night.

The action was not a positive. We are in a Missouri market again, and that means “show me.” If it is going to set up an ABCD pattern, then okay. Show me. It can still move. They can still reverse and break to the upside. Maybe it is just an expiration phenomenon, but it is at the point where they have to prove it. The SP500 and NASDAQ are no longer dealing from a position of strength with the pennant pattern sitting on top of the August-October range. Now we are back down in the range. They have thrown themselves down into the mud, and they have to dig themselves out once again if they will have that run toward the year end. This action definitely dampened the prospects for that move.

Where does this leave us heading into Friday? A lot of stocks held their ground, and I noted several of them. UA was down, but it has formed up a nice pattern. Other stocks are performing very well. CELG sold off, but it tapped the 50 day EMA and bounced right back up. ADSK sold back, but it is still holding a breakout over its little pennant pattern. JBHT broke higher on strong volume. What do you know? SHAW is forming something of an ABCD consolidation. That is a nice consolidation of a solid move to the upside. TRV is setting up something of an ABCD pattern as well. Those are positives. Even though they were down, those can be positive patterns. With a little pullback everyone thinks things are going to hell in a handbasket. Next thing you know, they are moving back up. Why could that be? The U.S. economic data continues to improve. As long as it improves, that suggests that stocks should do the same.

The problem we have had over the last couple of days is that earnings guidance has not been as good as hoped. Therefore stocks are not making those moves that we had hoped. We will see. The data continues to improve. Earnings are very important, but we are in the middle of a little flux with expiration. We will see if they can shake out and resume their move back to the upside. Certainly these ABCD patterns allow for that. That is the beauty of them; they look as if they are falling just to turn and rally because there is a lot of momentum. Looking at SP500, there is good momentum here from this rally off of the late-September low.

What do we do for Friday? It is expiration, so we will probably not do a lot. But we will have some new plays. We have some upside and we have some downside. We picked up some downside on Thursday, obviously. We pared positions that were unable to hold support on Thursday. A lot of our plays did hold support, however, so we maintained them. We will see what breaks. There are still a lot of good patterns that can lead to the upside and keep the idea of a year-end rally in place. Unfortunately NASDAQ and the SP500 charts did not want to go along with that on Thursday. Again, we will see if they can recover. They have to show us. This was not a good day for the market with those two breaking lower, but I remain open to being shown that it was a one-day affair.

We will continue to look for some upside plays that are holding the line and still look really good. There are still those out there that look really good, but they have to hold the line. There is not a presumption that they will make the move   they have to make that move and make it stick. That is fine. Show me the move, make it stick, and then I will be more of a believer. The market has been trying to yank the carpet out from under us. There are some ugly things coming in 2012 I think. Frankly, I was worried today that it might be showing up early and coming to end 2011   the Grim Reaper showing up before the year that the Mayan calendar ended. We will see. Maybe the Mayans were off a year after all.

In any event, we will take it easy on Friday and protect positions. If we see great buys, we will take them. Otherwise we will let expiration work its way through, see what happens over the weekend in Europe, and see what Monday brings. We will take it from there. Not a great prognosis, I know. I wish I could say that the thesis that we would move right up into the New Year (at least until the end of the year) was still in place. It still could be, but it just has to show us at this point.

Jon Johnson
Stock Splits & IH Alerts, Editor
InvestmentHouse.com