Earnings Don't Inspire the Bulls but the Bogart Does

A majority of the key earnings from last night and this morning are beating expectations. However, pre-market futures are still down and the SPY is set to gap down to a lower low around the 83.00 area. The DIA is set to gap down through the previous low that it breached yesterday and open at the second previous low in the upper 77's.

The fact that traders are taking profits on a number of earnings hits and not earnings misses (IBM is a good example of a company that beat earnings and beat guidance but is still down pre-market about 2.50%) indicates to me what I speculated last week and reported yesterday. I think traders overshot on the uptrend by quite a ways. Fund managers were pricing in a V-Bottom economic recovery that just wasn't there and now they're disappointed that earnings reports aren't "wildy beating expectations." I know, I know, you and I could have guessed it so why didn't the so called Smart Money? Well, like I commented yesterday, sometimes people reason with their emotions rather than their brains.

Look for a little pop sometime early this morning, possibly shortly after the open. It would be ideal to get a nice intra-day Bear Flag in order to enter some puts. Today might not see as much downward momentum as yesterday, especially if traders fight a bit around support levels. However, the mood is dampened a bit and I expect some more profit taking and consolidating.

Here is a re-cap of the key earnings at the open (these will fluctuate quite a bit, but you will get the general tone):

TXN +2.19%, AKS +1.07%, COH +10.15%, DAL +0.59%, LMT +0.60%, UTX +1.34%, UNH +1.38%

IBM -2.42%, CAT -5.35%, KO -1.15%, DD -2.92%, MRK -4.12%, NTRS -7.16%, SGP -0.41%, UAUA -0.17%, USB -0.60%

7:36 am MT: The market did pop a little right off the gap as I speculated. A test of the 83.25 - 83.50 area on the SPY would be somewhat ideal for a put entry, but this morning has the feel of a gyrating and popping market, so this isn't a grab bag entry type of morning like yesterday, it's a scale in and add if the patterns form up correctly type of morning.

7:40 am MT: This is getting close to a scale in area, but again, go very lightly, there's some consolidating and popping and gyrating off of yesterday's momentum day that has to go on. Traders are a little conflicted right now.

Many companies reported better than expected results, but too many Googly-Eyed fund managers were dreaming of amazing, spectacular V-Bottom recovery type of results. So the earnings weren't horrible, they just weren't deserving of a once in a lifetime type of trend. And there are still a huge amount of earnings to be reported. In general, though, I think fundies are speculating the earnings season will show the economy holding a bit and grinding along a bottom, but not a huge, snap-back recovery. I know all of this should be common sense to pretty much anyone who opens their eyes and actually looks around a bit, but fund managers got excited and away the market went, so it is what it is.....the market is set to compress a bit off the V-Bottom, and the compression is being caused by some reality coming from earnings season. Like I said, we still have a huge amount of reports to come out, so I'm still taking this day to day and short swing to short swing, but the general tone is a damper on the exuberance.

7:48 am MT: There's a Tweezer Top on the 5m charts of the SPY and it's trying to roll over. Normally this would be an easy put, but I still think there will be a bit of chop-fighting this morning. So I stand by the scale in lightly and see how this forms on higher time frames.

7:51 am MT: Yeah, I thought so, traders are chop-fighting and the SPY is pushing back through the Tweezer Top. I smelled a gap and pop, which is what we're getting. It's just as I stated a couple minutes ago and all morning, let this form up a bit on the higher time frames, at least the 10m - 15m charts. I think somewhere between 83.00 - 84.00 on the 15m charts is the first target formation for a little more robust entry, but it might overshoot a bit. Be a little patient with this one, when the fundies are conflicted and there is soooooo much data to process the chop-fighting can take a bit of energy.

It's like someone trying to get through the snow or mud. Some people, when they're driving in snow, realize they should gear down and ease into the momentum in order to keep from spinning out and fish-tailing. But many fundies aren't like that, they're like the people you watch pound on the gas and furiously spin the tires like they will somehow, through the sheer force of their will, zoom right over the slipper, icy snow with complete safety and traction. When you watch those people drive in those conditions you'll see them spin and gyrate and fishtail and rev their engines to about 6000 rpm's as they slosh and grind and swing and slowly push forward. It's like a cartoon, the legs are going at a million miles per hour, but the body is only going at about 2 miles per hour.

8:02 am MT: There's the first substantial rollover. The low 83's is the first scale in area, we'll see if the 83.00 - 84.00 area holds as resistance on the day.

8:26 am MT: The price action that is forming is acting like it wants to try and pop again. This dovetails right in to what I've been saying this morning. You want to scale in lightly to participate with puts in case we get another sell-off, but you want to step lightly on the gas because traders are still chop-fighting a bit and might try to push a couple of times. I think we will see some push and sell, push and sell, push and sell, until traders either toss in the towel and let the market drop to the next support or they hang around a bit by the end of the day "hoping" that the next round of earnings is "amazing" (which of course, is unlikely).

Here is a daily chart of the SPY showing the potential support target if we get there today:
(click on image to enlarge)

Here is a daily chart of the DIA showing the stock at the second previous low already:
(click on image to enlarge)

The DIA (and Dow) are driving the floor on the market this morning because it's already at a support level. But the SPY (where more sectors and a broader market is represented) is driving the resistance because it's still floating above support. So traders are trying to decide if they will hold support on the DIA, or if the SPY hanging in no-man's land is too precarious and the market needs to sell until the SPY (SPX) finds support. That's the battle today, we'll see how it goes. Overall, as I stated earlier, the exuberance for the market has been dampened quite a bit.

11:57 am MT: The SPY (market) did pop again as I speculated on the last posting. At this point, the weight of the move is starting to slow and round a bit. The price action is easier to spot on the 15m or 30m charts, it may topple over now from the weight of the intra-day move.

Here is a 15m chart of the SPY showing the pop I speculated and now the toppling/rounding action I'm anticipating:
(click on image to enlarge)

Here is a 30m chart of the SPY showing a bit of grinding and Bull Flagging with the toppling:
(click on image to enlarge)

Just like this morning's battle between the DIA support and the SPY no-man's land (that the DIA support won, which was part of the pop), there is a battle between a Bull Flag on the 30m charts and a Rounding Top on the 15m charts. I speculated the market would pop or push a bit more this morning, now I speculate the pushing will topple a bit with some selling. However, this isn't a momentum day like yesterday, so expect more chop-fighting and spinning. There is way too much elbowing to get in position for the next round of earnings for any group of traders to completely toss in the towel. Today will probably end as more of a consolidation day or even pushback day against the momentum day yesterday.

12:14 pm MT: If the topple is going to happen (on the SPY 15m charts) then it's starting right here.

12:18 pm MT: Price action continues to act like a chop-fight. A drop down from about 84.00 to 83.60 or so in a straight line on a 15m candle would probably send the market on a journey down to the 83.00 - 83.25 area, which would give a trader more than a dollar on a SPY put from the Rouding Top. If it hangs around and chop fights and holds flat in the 83.75 - 84.00 area than this is headed for more pushing and elbowing between 84.00 - 84.50. The next battle is on.....

12:32 pm MT: The market did pop back into a chop-fight between 84.00 - 84.50. Eventually I speculate this will run out of gas a bit and topple, but it may not come until the last hour or so, and there will still be elbowing at the end of the day. This is most likely not going to be a strong continuation of yesterday's move. The bullish fundies want more "evidence" during the next 1-2 days of earnings.

I was just checking my updates and it looks like the White House played a tit-for-tat game with the market a short while ago. So we got a news bogey, which is pushing financials more than they should be moving right now, nothing like a little news manipulation of the markets, and I guess enough fund managers keep buying into this.....stuff.....

I stated yesterday that political "leaders" would most likely not bogart the market for cheap points and vote harvesting for several more days, but it looks like Jim Owens, CEO of CAT baited them into a response. Owens was critical of the president and the "stimulus" plan, stating that the U.S. plan was taking less effective measures than approved in China (they have a zero capital gains tax). Of course, CAT does a huge amount of business in China now, so Owens would have a clear view of the actions being taken in that country to prop up the sagging economy.

Well....criticism like Owens dished out is always going to be met with an immediate and defensive response by the current government, it's part of their M.O. So Treasury Secretary Geithner was marched to the podium to announce that the "vast majority of U.S. banks have more capital than needed." That was like a warm peach cobbler with fresh vanilla ice cream to the souls of the Googly-Eyes, and up went the financials, and up went the market.

Now, I don't need to tell you that capital is not the key issue with the banks right now. Go back to the review on C and BAC I did. It's not about whether or not we may have found an economic bottom, it's about whether we may be sitting on the bottom like flounder sucking up dirt for the next 5 years - that's the issue! So what if the banks have capital, if we don't have an energy policy, if we don't have a job creation policy based on strengthening small business owners through lower taxes, and strengthening large businesses through lowering capital gains taxes (which China has already done). So what if the banks have money but they still have to write off bad loans because the unemployment rate is projected to go to 10% by the end of the year. So what if the banks have capital and they keep taking ownership of homes that people walk away from because they're losing their jobs. So what if the banks have money while the rest of the country sucks up dirt along the economic ditch and then the government pulls out a giant bulldozer and piles so much dirty debt on top of the ditch that not only will we be sucking dirt but our kids and grand kids will be sucking dirt for years to come. And the bulldozer was probably a Caterpillar paid for by taxpayer money.....

Ok, I'm done ranting.....

12:57 pm MT: I'm still standing by my speculation that this topples a bit towards the end of the day, but the news bogey put a little bit of a whammy in there. The price action is still what it is, and it accounted for the bogart even when I didn't know the bogart was there. So probably a bit of gassing out soon, some toppling, and then some more pushing and chop-fighting into the close. Wow, this just gets crazy some days! There was way too much data to process with earnings today anyway, and then Geithner had to go and tit-for-tat bogart the market with more news. These are strange days.....

1:12 pm MT: This is done, the news bogey worked, the Googly-Eyes are drinking the kool-aid. So I'm standing back off this day and watching for the next reaction to earnings. This bogart is enough to take all the downward momentum out of the market, even if we get mediocre to bad earnings the next couple of days. We may see some moody, volatile day to day action as the economic reality fund managers sell and the hope and change fund managers buy. Today will now probably end as a strong pushback day, we are already within breathing distance of the gap from yesterday, as incredible as that sounds. The whipsaw action is indicative of a very newsy market condition.

Just so everyone out there understands, I'm all for a bullish economy, and a bullish market. But I want it to be from real, long-term, viable solutions and fundamentals, and not because of news manipulation. I don't want to load up on a bunch of bullish plays only to see the market come crashing to the ground because the foundation was built on sand.....

3:00 pm MT: Market Wrap: When things get really newsy and complicated, it becomes even more critical to stand back and simplify from the madness. I am going to reference the SPX and not the SPY. I would prefer the latter, but the SPY has a data error yesterday on the Prophet charts, and data errors bother my analysis. I want the SPX over the Dow because the news madness is going on in financials, and the SPX is more representational and therefore likely to be the market driver whether we like it or not.

The market closed strong, probably on short-term short covering, googly-eye buying, and some real buying. The move today is not reflective of a strong change in economic fundamentals. It's pure speculation and reaction to the tit-for-tat news bogey. When you get a day like this juxtapositioned right in the middle of earnings season, you might as well toss it out. Volume wasn't even average on the SPY or the DIA today. Earnings are coming in hot and heavy this afternoon, and will continue hot and heavy tomorrow morning. When the market digests all the real (and not manufactured) news, traders will pick a direction.

Here is a chart of the SPX:
(click on image to enlarge)

If traders gap or push the SPX (market) up through 850 - 855 tomorrow morning in reaction to the numerous earnings reports, then the price action is probably headed back towards a test of the 865 - 870 area, and perhaps as far as 875 although it would take terrific news to get it that far.

If traders gap or push the SPX down through the 840 - 845 area tomorrow morning in reaction to earnings, then price action is probably headed back towards a test of the 825 - 830 area. If the market heads down that far, then eventually the price action will probably take it down to the 810 - 815 area.

The SPX is still in a Rounding Top formation, but the more news bogeys we get the more "complex" the topping action will be. Eventually the trend will consolidate.....Even once-in-a-lifetime, strongest in over 70 years, V-Bottom Bottle Rocket, news-manipulated trends need to consolidate. So the rounding consolidation fits the theme for the aggregate market and news environment. If earnings come out disappointing (and that's a relative term because it's based on expectation - logical or not), and there are no news bogeys, then the consolidation will happen quicker and sharper. If earnings are mediocre to decent, and there are lots of news bogeys, then the price action will be more complex.

However, like I said, simplify. Tomorrow can be pretty straightforward. Either we go through to the upside and test that direction, or we go through to the downside and we test that direction. And there's plenty enough movement in there to do a nice short swing.

Here is a list of the key earnings after the close: ALTR, COF, GILD, NSC, SNDK, YHOO. In addition, the aggregate of AMD, ALTR, CREE, CYMI, SNDK, and STX will move semiconductor stocks and to an extent the computer boxes. YHOO will be a big mover in internets, and GILD and ILMN (and GENZ tomorrow before the open) will be movers in biotechs. So tomorrow will have a chips and tech theme, among other things.

Here is a list of the key earnings tomorrow, before the open: ATI, MO, T, BA, CAL, FCX, GENZ, IR, KMB, MCD, MS, NOC, WLP, WFC. There are a number of Dow/Cyclical stocks in this group as well as metals, which will be looked at in the cyclical context. So you will probably hear the words tech and cyclicals thrown around alot tomorrow.

I speculate that MS and WFC (banks/used-to-be-brokers) will probably hog too much of the headlines, especially in our current environment, and especially after today's news bogey. Expect WFC to say something that really gets the hearts of the Googly-Eyes palpitating and twitterpated. So financials shouldn't be the headline tomorrow, but I won't be surprised if the media fixates on MS and WFC in order to peddle as much news as possible. Whatever the sum total of the earnings reports, we'll have an idea about 20m - 30m before the open, just like today, and then it's a simply a matter of picking either the bullish or bearish targets.