What Dow Theory is Telling Us

By Danny Riley

The Pit Bull told me yesterday that he has been trading oil like crazy. We both agreed that after all the news out of the EU the S&P should be going down harder, but it isn't. At 11:20 CT the ESZ was down 2.4 handles at 1449.50. Our call for the day was to sell the rally. The problem? All the selling was done overnight and after the initial selloff the ESZ just started drifting higher.

As of yesterday 9 of the last 11 Mondays have closed lower. What has happened is Mutual Fund Monday has been turned into a down day. After years of buying on Friday and holding into Monday, the whole pattern has disappeared. The current price action is for a low-volume Monday with some sideways to lower trade in the middle of the week, then rally late Thursday into Friday. Thus Friday is taking over as our favorite buy day.

How long can the markets hold like they are? Most people we talk to think the S&P should have already sold off. During my conversation with the Pit Bull (aka Marty Schwartz), we both agreed the markets are holding, but he was quick to point out a very big negative that's staring us in the face: the Dow Theory. According to the Dow Theory, the market is in an an upward trend if the Dow industrials (DJI) or the Dow transportation average (DJT) advances above a previous important high and is accompanied or followed by a similar advance in the other. When both averages dip below previous important lows, it's regarded as a downtrend indicator. The Dow Theory looks at directional divergences between the two and how they are significant right now. While there are six basic tenets behind the theory, the one we will focus on is that market averages must line up correctly or confirm each other. While the Dow Jones Industrial Average is primarily focused on the production of goods, the Dow transportation average deals with the shipping of those goods to market. The theory is very basic: If the economy is improving, then economic production should be growing, which would be good for both the industrials and the transports (goods being shipped). In reverse, less production should mean less demand for shipping. The two are generally linked together and should move in the same direction.

As you can see by the MrTopStep chart, the DJT has been lagging the DJI. Generally this is considered a warning that the markets may be forming a top.

MrTopStep Closing Print Video: http://www.mrtopstep.com/28973/

Our view:
Statistically the last week of September is negative. The first part is that the week after the Sept quad witch has the Dow down 16 of the last 21 occasions, with an average loss of 1%. The second part is the end of September is prone to weakness from end-of -Q3 institutional portfolio restructuring. The third part is the last day of Q3 has the Dow down 10 of the last 14 occasions and the first trading day of October has the Dow down 4 of the last 6 occasions and down 2.1% in 2009. It looks like T+3 could be headed for troubled waters. Additionally, this week's economic calendar starts to pick up today. In all honesty we are a bit torn. On one side of the coin the S&P is acting fine and is still “back and filling” and on the other we have all the negative statistics. Our view is to look to sell the early rally and then buy the pullback, using tight stops. As always, please keep an eye on the 10-handle rule.

It's 6:00 a.m. and the ESZ is unchanged at 1451.50, crude is up 47 cents at 92.40 and the EC is trading 1.2940, down 7 ticks.
In Asia 5 out of 10 markets quoted closed modestly higher.
In Europe 9 out of 12 markets are trading modestly lower (CAC -0.19%, DAX -0.16%).
Today's headline: “European Markets Mixed Ahead of Merkel, Draghi Meeting”
Economic calendar: Today: S&P Case-Shiller home price index, USDA food prices outlook, consumer confidence, FHFA home price index, Richmond Fed mfg index, 2-yr note auction, RIM developers conf. WEDNESDAY: Weekly mortgage apps, new home sales, oil inventories, 5-yr note auction. THURSDAY: Durable goods orders, GDP, jobless claims, pending home sales, 7-yr note auction, farm prices; earnings from Discover Financial, Nike, Accenture, Research In Motion, Micron. FRIDAY: Personal income & outlays, Chicago PMI, consumer sentiment; earnings from Walgreens

VOLUME: 1.25mil ESZ and 6k SPZ traded
SPREADS: No SPU/Z spreads traded
FAIR VALUE: S&P +2.00, NASDAQ +4.00

_____________________________________________________________________________

Over the weekend the global economies took a hit on weaker growth and debt concerns as the IMF reduced its outlook for global GDP growth for 2012 and 2013 and were followed by today's comments from the IMF Chief: Intl Community Must Help Finance Euro Bailouts. Today continued this year's trend of starting the week on soft footing as continued weakness in China, slowing German economy, concerns in the sovereign bailouts of Greece and Spain continue to play on as the clock counts down. Tick tock… Reports of a $26 billion Greek budget shortfall and the country's leaders / populace continued inactions are running neck and neck with “when” will Spain's leaders risk their reelection by requesting aid and accepting austerity measures. As we say goodbye to summer, crude futures added to last week's 8% plunge, testing the August lows while Chicago area gas prices remain at elevated levels. Maybe we will get some relief at the pump this week as the overnight temps dip to the low 40's to upper 30's as many thought about turning on the heat already, then thought about paying that bill too.

US STOCKS VIEW: Adam Parker of Morgan Stanley says “QE3 will likely be insufficient to significantly boost equity markets,” and maintains that MS would not be surprised to see “the Fed dramatically augment this program (i.e. QE4) before year-end, particularly if economic and corporate news continue to deteriorate as they have over the past few months.” Parker says QE3 related gains for the S&P 500 “could cumulate to 3-4% return by year-end,” but warns of headwinds in the form of negative earnings revisions and a “reappearance of tail risks,” that could eat into these gains. imcyrus0: Adam Parker is a permabear – has been since he launched at Morgan Stanley – he was a semiconductor analyst at Bernstein before becoming a strategist. Note: PMs will have bonus risk and career risk if they lag the market by 10 ppt this year – because folks will ask… “if you can't make money in a good year … when CAN you make money???”

Rogerbgc DJTA bleeds through the July low of 4975 next up 4864 from May and 4795 from June (tgt daily OS) now see if bounce retest can form…Dow Theorists coming out of the woodwork. Dow Theorists on business press this morning chatting negative DJTA effect lifting contrarian viewpoint….so far a broad consolidation range in play 5250-4800 awaiting resolution….a rebound should catch resistance at 5000-5045 and make a retest of current low if a base is to form. DJTA has seasonals coming forward with holidays. Note: the “death cross” as the 50-day MA traded below the 200-day MA.

Expiration play posted Friday EUBIE (11:02:10): I WOULD START TO GET UNCOMFORTABLE 1458.50+ / there are 7 HANDLES OF THE SPY DIVIDEND & ADD TO THAT the free additional $.50 cents. Closed Monday for a +13 Handle winner!
SPY error Boneheaded Dividend Bungle Costs Trader $20M $Options - http://tinyurl.com/9jxqog7

Monday started with 230k ESZ and 700 SPZ traded on Globex, trading range 1453.75 – 1444.75 / Friday's RTH's, pit range was 1461.50 – 1451.00 and settled at 1451.90 down 1.9 handles. Today's RTH's gapped 6 handles lower to 1445.50 – 1446.00, traded 1445.00 and up to 1448.00. EUBIE (08:33:48): anyone SWING please cover a leg 1445. After holding the opening range on the retest the spoos traded up to 1449 at 9:05 while the DJT bounced 30 points following last week's dismal performance and were up 46 points, 4956 high by 9:35 as the XLF was testing unch. JPM WFC FAS were firming as the spoos pushed through 1449.50 and on to 1451.70 high in below average volume as the sideways trade set in. mts2 (13:37:51): chatter seeing lots of upside October call blocks hit individual names right at their session lows…ANN, SYMC to name a few… = something setting up? felixwun: rally setting up = t+3??? Small stops took the spoos up to a new high of 1454 at 1:51, but the bulls could not push the market any higher. The closing imbalance showed 28 of the DOW 30 for sale size with the broader market showing another large sell imbalance, an overall $204Mil vs. 1,167Bil. On the 3:00 cash close the SPZ traded 1450.70 before settling at 1451.40, down .5 handles on the day. Looking at 1447 area first support to 1457 area first resistance.

MTS video: http://www.mrtopstep.com/9-24-2012-mark-sebastian-covering-otions/

________________________________________________________________________

CONTRIBUTORS' CORNER

SPX CHARTS

Roger Volz, BGC Partners

SP 500 Futures 60 min Chart and Indicator
2x bottom set in globex session at 1444.80-1444.90 on retest of the 9/20 low at 1443.80 moves into ST relief above 1448.50; still seeing a concentrated ledge at 1453.00-1453.75 and again at 1455.00 for ST repair.
ST OB > 1475.00 /// ST OS < 1432.50
Additional intraday readings
VST 5 min ……VST 5min OB > 1453.50 from 1459.25 /// VST OS < 1445.00 at 6:00am globex session next for stair step down to 1442.50
VST 15 min …VST 15 min OB > 1465.00 from 1467.25 /// VST OS < 1445.25 in globex session next stair stop lowered to 1441.75

Daily Chart Focus Levels….chart view leaving another try at a lower high following the spike into the opening (1467.50 / 1461.50)
SP1 Daily Resists ….1453.00.…..1460.00-1461.00……1467.00….1475.00…..1478.00…………1492.00……………1506
SP1 Daily Supports….……1444-1442.00.………1430.00-1427.00…..1421.00-1420.00 ….. 1413.00 …. 1405….1401.00/ 1399…..1390.00…….1382.00
SP1 Daily OB > 1475.00-1478.00 /// SP1 Daily OS < 1343.00 from 1325.00

Weekly Chart Technical Stance and Focus Levels….strong positive > 1441.50 ; some momentum loss < 1453.50….inside range 1470.50. 1441.50…outside range 1485.75 / 1406.50
Monthly Chart Technical Stance and Focus Levels …..positive > 1373.00 but short of strong positive > 1481….inside range 1481 / 1373….outside range 1533/ 1273

____________________________________________________

YOU WANT A LOOK AT WHAT OUR TRADERS SEE EVERY DAY? SIGN UP FOR THE IM TRIAL AT http://mrtopstep.com/free/ IT'S THE REAL DEAL!

_____________________________________________________

DISCLAIMER: The information and data in the following report(s) were obtained from sources considered reliable. Opinions, market data, and recommendations are subject to change at any time. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any commodities or securities. MrTopStep, its officers, directors and its contributors may. in the normal course of business, have position(s) which may or may not agree with the opinions expressed in this report.

Market News and Data brought to you by Benzinga APIs