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THE SHORT-TERM CONSENSUS HOTLINE (SAMPLE)
Overnight Report – for Monday, July 24, 2006

As for last week’s Forecast – nailed it, especially in the S&P Futures.

It was the S&P Futures that called the market’s turns last week and it was here that the Forecast hit pay dirt, first calling for “a retest of its June 14 low for the year at the 1229.70 level.” This level was cited as important support and as the S&P bottomed on Tuesday at 1231.00 just 1.3 points above this level, it lived up to expectations. Then on the upside a couple of levels were cited:

First resistance was given as 1247-1250 which was quickly exceeded on Wednesday, but the more important target was above at the July 13 gap at 1268.30. “If the S&P Futures can pop above the 1250 level and stay above it for more than a few minutes, it’s got a shot at heading up to the big gap from last Thursday 1263.70-1268.30. For this week, unless peace breaks out in the Middle East, that’s probably best case, and it’s a bit of a long shot.” Sure enough, in the wake of Wednesday’s scorching rally carrying over 23 points in the S&P and 212 points in the Dow, that level, 1268.30 in the Futures marked the high for the week within a fraction of a point. On Thursday the futures made a slightly lower high by 1 tick and turned back down, so as expected this level did mark the high for the week. From Wednesday’s highs at 1269.00, the S&P retraced the entire advance by Friday, pulling back to fill Wednesday’s gap at 1245.70 and bottoming at 1243.50 late Friday. A drop of 25½ points in 2 sessions.

In the NDX we were calling for a minimum rebound to the 1484 level. On Wednesday the NDX topped out just 14 points higher, at the 1498 level, and from there dropped 48 points into Friday’s lows.

POSITIONS

MUTUAL FUND SIGNALS: We remain on our Buy Signals across the board.

FUTURES TRADING: A frustrating week for us as we had every high and low within our sights and on our recommended list. But officially we didn’t manage to accomplish anything. Going into Monday’s close I noted we were watching the prior lows in the major averages as representing a buying zone, frist in the S&P Futures highlighting the “1228-1230 area of the S&P Futures as a possible spot to buy,” as well as possibly the 2025 level in the Nasdaq Composite and 10,700 in the Dow. On Tuesday as the S&P bottomed at 1231.00 we had instructions in place to buy at 1228.50 but missed our price by 2.5 points. On Wednesday the S&P gapped up and shot up to a high of 1269.00, rebounding 38 points off of Tuesday’s lows. Our instructions on Wednesday were to sell at 1268.00, just in front of the gap at 1268.30, so our price was hit within a point of the highs, but our instructions were officially cancelled after 1:00 eastern. Then it was back down again to the gap from Wednesday, retracing the entire rally by Friday afternoon. This time, on Friday, as the Nasdaq 100 Futures probed its prior lows we gave parameters to buy a dip to 1459.50. But after a 12 point rebound off of the 1461 level these instructions were cancelled. Then late in the day the Naz bottomed at 1459.00, just ½ point below our recommended entry, and bounced into the close. Now, Monday, the Naz Futures have traded 30 points higher.

INDEX OPTIONS: Here, we were at least able to benefit from the sharp midweek rebound. We took profits in bullish short puts and put spreads in the OEX and the July QQQQ puts. Also hedged some of our bullish bets in the DJV and SPY calls where we ended up with modest losses. Unfortunately didn’t accomplish anything with our bullish put spreads in the expiring DJV puts. Now with the July options out of the way we are left with bullish short puts and call spreads in the August QQQQ options.

METALS: Still flat here.

BONDS: No positions here.

THE BIG PICTURE – in the Nasdaq 100 (updated June 18)

The recent (June 8) break of the May 24 low of 1554.76 was expected to trigger a further decline toward the October lows (previously cited as the 1520 level – an approximation of the average of the October 13 and October 19 lows). In fact, the NDX bottomed on Tuesday, June 13 at 1511.53 which was less than 4 points below the October 13 low (1515.42). That area, call it 1511.50-1515.50 is now important near term support, and any break below this level will point to a drop to the July lows at 1484 (see our 1-year chart below).

Interestingly, the decline from the January highs to the June 13 lows has covered an almost exact 250 points on an intraday basis (see long term chart below). Now, we can reasonably expect a pretty good retracement of that drop. At a minimum, one might expect a standard Fibonacci .382 retracement of the decline, which carries back up to the 1606 level. That should be a minimum expectation for a rebound. On the other hand, if the lows are first taken out, then the NDX will likely have to drop some more – presumably to the 1484 vicinity – prior to the expected rebound.

Of course the big number overhead remains the area of the prior lows for 2006 at the 1633-1634 level which already turned the market back on its recent (June 2) failed attempt to bust through. The failure at this level makes the 1633 level even more significant as resistance, so this is clearly the level to beat, in order to breathe a little life back into the bullish case. Until then, selling and shorting against this level makes sense, as we cannot assume that any rallies are sustainable until or unless this area is breached on a closing basis.

NDX Cash Longer Term

The Dow – (updated July 9)

Below you will note that at last Thursday’s [July 6] multi-week highs in the Dow, it came close (just 42 points shy) of its .618 retracement of the drop from its May highs at the 11,299 level (as shown in our most recent charts). The Dow made a high of 11,257 prior to a drop of almost 200 points from there into Friday’s lows. The implication is that for now, maybe that was close enough to complete that pattern, suggesting a near term top in the Dow. Any move back above last week’s high – and especially a move back above the 11,300 level – would breathe new (bullish) life into the outlook for the Dow. But on the flip side, a break back below the 11,000 level would be another near term negative, signaling further weakness. However, only a break below the June 13 lows of 10,699 would be a serious negative, and below that it would still require a break of the January 20 low of 10,661 to trigger a more serious decline. For now, we are not expecting that.

The Dow
Narrowly holding above the January lows

chart: courtesy of Lind Waldock updated 7/21/2006

MARKET INTERNALS – after a stellar Wednesday, the lack of follow through last Thursday and Friday was ugly.

You don’t have to look too far to see how bad it was. The A/D line last Thursday and Friday was pretty grim, especially when you consider that Wednesday’s rally was one of the strongest up days in months, with up volume swamping down volume by better than a 10 to 1 margin and advances leading decliners by 6 to 1. But then, for both of the following 2 sessions, on the NYSE, declines exceeded advances by a 2 to 1 ratio and on the Nasdaq it was worse, as decliners beat advancers by 3:1 both days.

Making the picture look even worse, not only was there no follow through to Wednesday’s rally but the selloff returned some of the broader averages to their recent lows for the year. Notably the Russell 2000 got clobbered, collapsing over 30 points (over 4%) from Wednesday’s close to Friday’s new low close for the year. In fact, on Friday, the Russell 2000 not only scored a new closing low, but a new intraday low for the year as well. The Nasdaq indices didn’t fare much better as the Nasdaq Composite pulled back on Friday to within 1 ½ points of Tuesday’s (July 18) new lows for ’06 while the NDX pulled back to within just 3 ½ points of its equivalent new lows for 2006.

A bigger picture bearish review from Helene Meisler who points out (see below) that the number of stocks making new highs peaked in January. She explains that this “tells us that as the market averages kept rallying in the first half of this year, fewer and fewer stocks participated. When market leadership keeps narrowing as it did, it's a sign of a weak market.”

But a positive comment from Bob Carver who notes that “as we are in the timeframe of the 39-week low, we are seeing signs that money flow into the market is beginning to exceed the flow out of the market. This is subtle at this time and we may have some more work to do in putting in a bottom.”

Steven Hochberg notes that on Friday as the Russell 2000 and Value Line fell to new lows, there were “no significant tick or breadth divergences” at the lows and “total Big Board volume surged to over 1.8 billion shares today (CQG data) in today’s decline, eclipsing the volume of Wednesday’s big rally day.” This is not the kind of thing you want to see if you are bullish. But Steven notes that adding to the uncertain analysis, Friday was options expiration.

According to Gerald Appel, the NYSE nh-nl indicator is at 34% and falling, rated neutral to negative.He adds that the NYSE Composite still leads the Nasdaq Composite in intermediate term relative strength. He reiterates that “historically, the overall stock market has done better when the Nasdaq is stronger.” Gerald adds that while the market bottomed on July 17 at about the same level as it bottomed on June 13, this appears to have set up a classic buying opportunity: specifically the double bottom in price with troughs spaced between 3 and 6 weeks apart, alongside a rising double bottom formation in the MACD which began from oversold territory. This he rates as bullish. However, the market’s inability to follow through on the upside is not bullish.

SENTIMENT –bearish sentiment evident again late last week

The weekly snapshot of the VIX suggests not much happened to this indicator last week – as the VIX lost a modest .65 from one Friday to the next – and for that matter that not much happened to the market. We know that isn’t accurate. Plenty happened to the market, and by association, a lot happened to the VIX. What was noteworthy was that on Tuesday as the market bottomed, the VIX made its high for the move (shown below) at 19.42, and then Wednesday as the S&P Futures topped out at 1269.00, the VIX made its low for the week at 14.47. So even though the S&P cash made a higher high early Thursday, the VIX low coincided with the futures (and the Nasdaq) as it should have. From there, as prices collapsed, bearishness heated up and so did the VIX, returning toward unchanged levels for the week. That close on Friday was a little below the previous Friday’s close of 18.05. But it was in the same vicinity and of course it suggested a rally was due.

But now, Monday morning, as we go to press and the market is rallying, the VIX is collapsing anew and that is not bullish. Currently the VIX is running at 15.57 (with the Dow back above 11,000), not anywhere near an outright sell signal, but moving in that direction. Once again, a move into the 13-14 area we would rate “bearish” with dips into the 12-13 area rated a high probability short.

In other words, as the market rebounds (back toward last week’s highs) and the bulls come out of hiding, it’s time for increased caution. This is not the time to buy stocks. The time for buying was late last Thursday and Friday with the market pulling back toward its recent lows. That time is past.

VIX vs. S&P
3-Year Chart

chart: courtesy of optionsXpress

Another minor downtick in the Nova/Ursa Switch Fund Ratio, reflective of considerable bearishness still evident here. Now, according to Steve Todd, as of Thursday’s close the ratio has contracted marginally to a muted .29 from the previous Thursday’s .30, though this is still well above the recent (June 23) extreme of .23. This negligible drop in the ratio has no significance. What does matter is the relatively low level of bullishness evident here. Now, at current levels, the .29 ratio tells us that for every $10 invested in the bearish Ursa Fund there is only $2.90 invested in the bullish Nova Fund. “Again, just a reminder, the Nova fund is leveraged by a factor of 1.5, and the ratio (above) does not adjust for this.”

Helene Meisler notes that for the near term, “some of the sentiment gauges are moving to the point of showing too many bears” She shows in the chart below that last week’s data from the American Association of Individual Investors reveals the most bears since February 2003, suggesting that “we now have an extreme amount of bearishness.”

Helene adds this morning that “the 10-day moving average of the put/call ratio is heading toward yet another peak this week, which typically corresponds with some sort of rally. Therefore, it is not out of the question to expect another rally sometime this week, especially given that Friday is the next-to-last trading session in July, and stocks tend to surge at month's end.”

Along these lines Bob Carver, noted last week that “OEX put buyers are back in force, pouring over twice as much money into puts as calls. Perhaps they're looking to get even with the market makers this month.”

Finally, among the top rated advisors, the Top 10 at Timer Digest remains narrowly on its recent Buy Signal, unchanged for the week, still (as of Friday’s close) at a relatively bearish sounding 3 Bulls, 5 Bears and 2 Neutrals. There have been no signal changes among the leaders since last week. And as previously noted, most of the recent changes in the numbers are the result of shifts in the rankings, as those on Sell Signals move up in the rankings and replace those on Buy Signals.

OVERBOUGHT/OVERSOLD – once again oversold or approaching oversold levels.

CYCLES & TARGETS

Gerald Appel said on Friday morning that stocks spent their ammunition on the July 19 midweek rally. He says that while the downside risk for blue chip stocks remains limited, it will likely be 2-4 weeks before another meaningful rally gets underway. He adds that while the near term chart pattern is encouraging with last week’s apparent double bottom low, the market’s inability to sustain the recent advance suggests near term caution.

Bob Carver explains that “the last 50-day cycle in the NYSE extended to 55-days and the projection for a much deeper low did not come about,” but he points out that he considers time a more important target than price… He points out that “as we are in the timeframe of the 39-week low, we are seeing signs that money flow into the market is beginning to exceed the flow out of the market. This is subtle at this time and we may have some more work to do in putting in a bottom.” He adds, “If you're an investor, this is the time to start accumulating positions in the stronger indices and sectors. The bulk of the decline is clearly behind us now. We should have retests of the lows this week (Thursday morning could be one of the last tests of the lows on a very short term basis – use such periods of weakness to accumulate long positions.”

Peter Eliades points out that while most of the popular averages are holding above their recent June lows, there are other less visible unweighted averages which continue to break to new lows. He explains that not only has the Value Line Composite broken below its June 13 low, but now, even the S&P 500 unweighted index (symbol SPWY) made new lows for the year on Friday. He adds that the unweighted NDX index continues to collapse to new lows and has now dropped 10% in just the past 3 weeks. He figures that what we are witnessing in these unweighted indexes is a more accurate measure of what is really going on in the market and accordingly he believes that the break to new lows in these indexes is a precursor of what will be seen in the popular averages. Currently on the sidelines in the futures, Peter is recommending maintaining short positions in leveraged S&P funds.

Steven Hochberg remains quite bearish for the big picture and says that “none of our indicators suggest that a bottom is at hand. So our stance remains that another leg down in the bear market started at the May highs and should draw the market significantly lower until at least the 4-year cycle bottoms. Once the small shelf of support at 10,665 gives way, prices will likely start to accelerate lower.” Short term, however, he says to look for a rally to soon begin. “So starting sometime Monday morning, a rally will develop that retraces the decline from this week’s highs. This upward retracement may be deep, we’ll see, but I don’t think it will push above this week’s highs (11,038.50 in the DJIA on July 19 and 1262.56 in the S&P on July 20). Thereafter, the market will likely rollover and continue lower. Whether this upcoming decline is wave iii of 3…or wave (v) of i of 3… I don’t know at this point. We’ll have to analyze the move as it develops…. If the DJIA is able to break its support shelf at 10,665, prices should quickly decline to 10,470 (±), and then eventually to 10,200 (±). More bearish potential exists. The S&P should decline in conjunction, initially very quickly to 1200, and then working down toward 1175 (±), also with more bearish potential.”

Larry McMillan says that his indicators are mixed, but “price action was extremely poor over the past two days. This market is not out of the woods yet, as true buy signals have not been established and, most importantly, $SPX has been unable to overcome any important resistance level.” He adds that the SPX still faces resistance at 1260, 1280, and 1290 and might be headed for another test of the 1220-1228 support area.

Helene Meisler says in her column on thestreet.com this morning that “we still can get rallies, and may even see another this week, but until the selling subsides and real buying begins, the general direction is down.” But very short term, she is encouraged by some recent sentiment data reflecting a significant increase in bearishness. She says, that “the 10-day moving average of the put/call ratio is heading toward yet another peak this week, which typically corresponds with some sort of rally. Therefore, it is not out of the question to expect another rally sometime this week, especially given that Friday is the next-to-last trading session in July, and stocks tend to surge at month's end.”

Glenn Neely believes that the recent decline could be about to end – perhaps in the early August to late September time frame – and after that he looks for a powerful advance to begin. He adds that while he is convinced that a major advance is imminent, we may have to wait a few weeks for it to begin.

Steve Todd has returned to an Intermediate Term Sell Signal at last Friday’s (July 21) close after his recent Buy Signal as of July 3. He notes that “many important indices are making new lows. For instance, the Nasdaq Composite is at a new 14 month low. Ditto for a number of high tech indices. Over the years, we have held that a bull market isn't likely unless we have leadership from the high tech sector. Indeed, that will be one of the ways to spot an end to the selling, when we see relative strength from high techs. Many momentum indicators are again oversold so we could have a sharp bounce at any time, but the main trend looks lower.”

FORECAST – a near term low appears to be in place

Last week offered lots of opportunities to the speculator and/or investor. Opportunities to buy near the lows for the year, to sell at the top of a big gap, to buy the retest of the lows or the bottom of a gap (depending upon the index of choice). Now it gets a little tricky as those levels have been left behind in both directions. More to the point, we have now had a retest of the June lows and in the case of the Nasdaq and other broad indices, those levels have been tested again (late last week) and in some cases broken.

In the S&P Futures, downside gaps have been filled – except for today’s. And that now marks support, in just about the same spot as last Wednesday’s (July 19) gap which was filled on Friday (see S&P chart below).

Though the chart below doesn’t show today’s action, the new (7/24) gap runs from Friday’s close of 1244.70 (though the chart shows 1244.80) all the way up to 1249.50, this morning’s early low. So this is just a point below Wednesday’s gap that was filled at 1245.70 and accordingly the multiple gaps at this level make the 1244-1245 level more significant as short term support. Also note that it’s a big gap. The kind of gap that will get the market’s attention on any pullback near the 1250 area. Of course, no coincidence, 1250-1251 is a support level in its own right, so we’ll watch to see if a pullback holds at this level. If not, you know where it’s headed: to the replacement gap at 1244.70.

Below that there is the 1235 level and then 1231.00. While we don’t look for a retest of the lows this week, if it were to occur only a break of 1229.70 would be really negative and below that, the last bastion is 1226 or so which is equivalent to the June 14 low in the cash at 1219.29, which still stands as the low for the year.

On the upside, the numbers are again pretty clear. First is last week’s short term double top at 1269.00. If it can get above and hold above this level for more than a few minutes (especially on a closing basis) then it’s got a shot – albeit a minor shot – at running up to the July 12 gap at 1282.30. For this week, that’s probably best case.

September S&P Futures
Bouncing off last Wednesday's (filled) gap

chart from 7/08/06

In the Nasdaq, the picture is still pretty ugly as the Composite and NDX keep making new lows. But there is some good news: notably, that last Friday, the recent lows narrowly held. So those are the new lines in the sand for the near term bullish case.

First, in the NDX, it’s the 1450 level and then just below that it’s the 1446.77 low. Below that and it’s on down to lower levels. Eventually looking like 1395-1400 (see long term chart above). But if these recent lows hold, and if the NDX can pop back above last week’s highs (a big “if”) then it’s got a shot at a sustainable advance that could carry further than most expect (maybe back to the prior support at the 1633 level, though not right away).

But first things first. Of course last Friday’s gap shown on the chart below at the 1467 level was filled this morning. For now, the 1484 level is initial resistance to a further pop, and above that is last Wednesday’s high just shy of 1500. If it clears 1500, then it can run for a bit, though will require confirmation by the Composite taking out its comparable high at the 2086 level (see chart below). Of course, making things a little tricky for the near term is that this morning’s pop left a gap in the NDX as well. And that gap beckons below at 1452, perilously close to the recent lows.

NDX
Collapsing to new lows

chart from 7/21/06

Finally, a look at the Nasdaq Composite again offers some hope for the near term bullish case in the Nasdaq (including the NDX). That is, again there is the support at the October 13 low (for 2005) at 2025.58, and now add to this, Friday’s low of 2014, just above Tuesday’s new low at 2012.78. That support is now critical to the bullish case. A break below it at this stage should be quite negative at least short term. However, a pullback to the 2020 level wouldn’t be too bad, and should even be expected, as this morning’s pop left a big 10 point gap from Friday’s close of 2020.39 up to today’s low at the 2030.49 level. If that gap is filled and the lows hold, we would view that as quite bullish.

Otherwise, the 2000 level is the next stop and we should be there in a hurry.

Nasdaq Composite
Finding Support again at the October 13 Lows

7/21/06 chart: courtesy of optionsXpress and Prophet Financial Systems, Inc.

H. Schiller
Released Monday, July 24, 2:42 P.M Eastern

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