An abbreviated workweek turns into a “Good Friday” in more than one way for many bulls. For the 4-day period the Naz’100 (QQQQ) and “SPYder” (SPY) are up 1.91% to 1.99% on increased activity related to index changes, expiration-related mechanics and directionally-motivated maneuverings to be certain.

THE WEEKLY NUTSHELL

Highlights for nibbling on a double bottom or nascent bull rally:

• Monday finds the Fed acting as necessary, cutting discount rate by .25% in front of FOMC and opening lending facility to broader range of institutions.
• Financials lift up anchor on market as much-better-than feared results from Lehman (LEH) and Goldie (GS) spearhead sea of equity green in front of Fed announcement. .75% basis point cut misses consensus 1.00%, but statement leaves door open to “act as necessary” despite uncertainty about inflation. After quick and hard retreat, bulls reload and push indexes to best gains in five years. Separately, regulators may ease cap requirements on Fannie (FNM) and Freddie (FRE) inspires bulls.Financial relief from Morgan Stanley (MS) and confirmation of OFHEO capital reduction for Fannie and Freddie goose opening extensions out of the market Wednesday. Adobe (ADBE) and General Mills (GIS) provide secondary catalyst, as does a well-received Visa (V) IPO. Thursday’s trio of bullish heavyweights with Nike’s (NKE) profit vault, a “Buy” at General Electric (GE) brightens day and 10% dividend increase at Intel (INTC). Freddie and Fannie well-received upgrades to “Outperform” at 2^nd Tier broker. Philly Fed equates to better-than-feared results. 2^nd day of commodity weakness finds sentiment change towards benefits / impact of lower prices for businesses and consumers. NY Fed lending TSLF auctions are loosened to provide further liquidity.

Highlights for keeping it volatile with the bears still in the mix:

• Financial and credit-related bull buster Monday morning. Bear Stearns (BSC) announces take-under for one-fifteenth of Friday’s shareholder value in order to avoid bankruptcy. JP Morgan (JPM) with $30B in funding from the Fed is behind the rescue. Financials (XLF) hit as traders question what a Fed-backed bailout implies. Separately, Empire Index and industrial production both miss estimates and fall sharply. Profit-taking in crude turns into bearish event as investors opt to see the move as harbinger of economic weakness. Fresh lows in US Dollar and flight-to-safety in Comex Gold.
• Core PPI runs hot on Tuesday with .5% increase versus estimates of .2%. Building permits slump 7.8%, takes away from stabilization reading of February housing starts.
• Commodity profit-taking on Wednesday turns ugly. From early “unwinding of safe haven position” reassurances, a percentage swoon of -6.5% in Comex Gold (GLD) has bulls and bears worrying over economic weakness and slackening demand for commodities. Warning out of Nokia (NOK) acts as weight throughout session. Flight-to-safety bid in treasuries sparks trader talk of hedge fund liquidations / de-leveraging. Late report of Merrill (MER) suing over $3B of default protection on CDO’s.
• Thursday’s bearish but contained reasons for worry include FedEx (FDX) reduced outlook, Credit Suisse (CS) warning and worse-than-expected jump in weekly claims.

ON TAP THIS WEEK

Last week was a very good run for bulls as investors managed to shake off bad news and drive prices higher by accentuating the positive, as well as climbing a wall of worry in still-volatile conditions. Entering Monday, with hard-won profits in tote, bulls are in position to profit-take. However, housing and price data, a slug of addresses from Fed officials, credit-related wildcards, shifting sentiment regarding commodity prices, as well as  a light but broad range of earnings reports, may continue to provide volatile swings worthy of keeping bulls and bears guessing.

On the officially-sanctioned economic front, Monday kicks off with data on existing home sales, while new homes figures are released Wednesday. Bulls will be looking for further signs of stabilization, like those provided by last week’s housing starts. For the homebuilder’s proxy (XHB), gains of nearly 13% are in place from last week. That of course could always provide a reason for profit-taking. Technically though, a seven-week “W” platform that’s broken a yearly downtrend might just as easily result in an upside extension given additional positive sentiment and / or upside surprises from those reports.

For earnings hounds, the schedule is light but runs the gamut, including a handful of heavyweights. Bar none, Wednesday night’s release from database management giant and NASDAQ 100 component, Oracle (ORCL), will be the highlight of the week. The company is expected to earn .30 per share versus last year’s .25 per share on sales of $5.42B for its Q3 results. Per Briefing, analysts at Lehman Bros. see the company reporting in-line or better and are maintaining their “Overweight” rating in front of the release. In part, their research suggests Oracle is well-positioned despite the “macro storm” due to its broad product range and should find a solid pipeline entering the quarter.

Weekly Calendar of Key Reports

Monday
Economic Existing Home Sales (4.86M)

Earnings Tiffany (TIF), China Fire & Security (CSFG), Walgreen (WAG), Sonic (SONC)

Tuesday
Economic Consumer Confidence (75.0)

Earnings Commercial Metals (CMC), Qiao Mobile (QXM), Jabil (JBL), Pep Boys (PBY), SAIC (SAI)

Events CS Leveraged Finance Conference

Wednesday
Economic Weekly Crude, Durable Orders (1.0%), New Home Sales (580K)

Earnings DSW (DSW), Solarfun (SOLF), Citi Trends (CTRN), Oracle (ORCL), Paychex (PAYX), Robbins & Myers (RBN)

Events Chicago & Dallas Fed speeches

Thursday

Economic GDP & Chain Deflator (.6%, 2.7%), Weekly Claims (350K)

Earnings ConAgra (CAG), Lennar (LEN), Texas Ind (TXI), Accenture (ACN), Apollo (APOL), Global Payment (GPN), Red Hat (RHT), Steelcase (SCS), Xyratex (XRTX)

Events Minneapolis & Cleveland Fed speeches

Friday
Economic Income & Spending (.3%, .2%), Core PCE (.2%), Michigan (71.0)

Earnings Iamgold (IAG), CKE Restaurants (CKR)

TECHNICAL PICTURE

Figure 1: NASDAQ 100 (QQQQ) Daily

What’s next? Nobody knows for certain, but if bottoms are made to shake out all but the most stubborn, the framework for an intermediate low remains in place. Adding confirmation to the factors shown below, which continue to emphasize a bullish edge, a follow-through day or FTD was scored by the Dow Jones (DIA) on Thursday. The S&P 500 and NASDAQ 100 (shown above) each put in similarly impressive technical gains, although fell one day short in their respective counts to qualify as follow-through days.

On one level, it might be appreciated the volume necessary to produce Thursday’s FTD is at least partially the result of expiration and index rebalancing. However, attempting to label volume “good” or “bad” based on market mechanics are thought a tricky business. Personally, I’ve grown appreciative of the market simply being able to “do what it’s going to do” and refrain from complicating an on-the-surface reading of a strong percentage thrust confirmed by equally strong volume.

On a short-term basis and entering Monday’s session, a modestly overbought condition exists per findings at sentimentrader.com. However, the market isn’t at extremes that warrant fading the market’s current bullish incarnation. That said, the biggest test for this strategist isn’t a technical level to commit longs or shorts too. Rather, it should be appreciated that while Thursday’s dose of volatility netted a FTD, cooperative and consistent triggers that inspire the bulls to participate and go on to capture mad money gains for more than one session is the key for seeing a directional edge once more.

MARKET LAB

Bullish Technicals

• FTD in place.
• Long-term indicators unilaterally point higher per sentimentrader.com with Smart / Dumb $$ indicator at historic extreme.
• VIX sees 15% plus stretch, highest close in more than five years at 31.16%.
• Ultra-high volatility / whipsaws typically associated with bottoms.
• 20-week bull phase until late April.
• Super Bowl indicator: NFC win = +13% yearly gainer on robust 86% historical tendency.
• Jan / Feb +15 / 21 sessions with 1% or greater range in SPX historically points at gainers across all time frames, with 89% track record of yearly 16% gainer.
• AAII, Investors Intelligence, Market Vane & Consensus readings.

Bearish Technicals

• Five year up cycle since October 2002 lows.
• Weekly H & S Top DIA with daily MA “Death Cross”
• Beaucoup W4 sell set ups vs W4 buys per PS Elliott.

Chris Tyler
Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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