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Investors Play the Waiting Game

By Sam Collins, InvestorPlace Chief Technical Analyst

Even though stocks gained on a broad front yesterday, the advances were modest and volume was the lowest of the year. The lack of interest may have had something to do with the “dog days of summer.” Uncertainty surrounding the upcoming Federal Reserve meeting, which investors hope will result in a new round of stimulus, was cited by many as the real reason for the current malaise.

The decision by the Fed should come this afternoon, and the consensus is that the governors will keep their target interest rate in the range of 0% to 0.25%. But, as usual, it will be the written directive following the rate announcement that will carry weight rather than just the numbers. Each word will be scrutinized for subtle changes that may indicate a change of direction for Fed policy. There appears to be more interest than usual (if that is possible) in the Fed’s report due to Chairman Ben Bernanke’s comment last month about the economy’s “unusually uncertain” progress.

Hewlett-Packard Company (NYSE: HPQ) provided the only interesting action yesterday following the resignation of its CEO following a sexual harassment claim. The stock fell 8% while rival Cisco Systems, Inc. (NASDAQ: CSCO) rose 2.9%. After a slow start, the technology group managed to attract buyers and the sector ended higher by 0.5%.

In other corporate news, McDonald’s Corporation (NYSE: MCD) rose 1.6% after announcing a 7% increase in global same-store sales for July, and DISH Network Corp. (NASDAQ: DISH) fell 10% after posting subscriber losses for the first time in more than a year. 

The euro fell to $1.3225 versus the U.S. dollar, and the greenback rose 0.4% versus a basket of six other currencies.

At the close, the Dow Jones Industrial Average rose 45 points to 10,699, the S&P 500 gained 6 points to 1,128, and the Nasdaq gained 17 points to 2,306.

The NYSE traded a paltry 790 million shares with advancers over decliners by 2.5-to-1. On the Nasdaq, advancers were ahead by 2-to-1 on volume of 454 million shares.

September crude oil rose 78 cents to $81.48 a barrel. The Energy Select Sector SPDR (NYSE: XLE) closed at $55.87, up 24 cents.  

Gold for December delivery fell $2.70 to settle at $1,202.60 an ounce, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU) fell 0.7 points to 175.42.

What the Markets Are Saying

Yesterday’s close, which registered gains of less than 1% on each of the major indices, again strengthened the case for the bulls. By moving ahead, albeit on the lowest volume of the year, the S&P 500 moved deeper into the important resistance zone of 1,115 to 1,150. Friday’s bullish reversal, which came in the face of bad news from the jobs sector, can only be interpreted one way: Bad news has been ignored, so the bears are on the defensive. 

But the market is still very volatile, and if sellers decide that “enough is enough,” they could flood the markets with liquidations. Pullbacks should first run into the shallow support at Friday’s lows at S&P 1,107, Dow 10,515, and Nasdaq 2,254. And since those support areas are so close at hand, it wouldn’t take a lot of selling to penetrate the zones and flip power back to the bulls. 

There is nothing more maddening to traders than the current low-volume, inch-by-inch movement of prices. They want answers and direction when there is little in the way of either. The only answers lie in the future, and the market will only tell us its hidden agenda when it is good and ready. We just need to be patient and let the story unfold.

With volume now at the lowest of the year and the markets in an odd state of bullish lethargy, many are resorting to withdrawing from trading until either a new trend develops or the old downtrend reasserts itself. 

While we play the waiting game, let’s continue our study of the most widely followed technical analysis study ever devised: The Dow Theory.

Yesterday, we very briefly considered the theory as a tool used to determine the general market trend, the discounting of future happenings by the movement of stock prices, the three market trends, and the terms “bull” and “bear” and their specific meaning.

Over the years, I’ve had clients question the use of a 125-year-old theory on current markets. Despite the fact that there is no single technique that investors should rely on at the exclusion of all others, this theory has stood the test of time. All modern technical analysis had its beginnings with Dow’s theory, so it is important for you as an investor or trader to understand its basics if you are to make intelligent investment decisions. 

Before we go on with another tenet of the theory, it may be helpful to clarify the concept of three trends: primary, secondary and minor. 

The major (primary) trends in stock prices are like the tides. A primary bull market is like an incoming or flood tide that runs farther and farther up the beach until it finally reaches a high-water mark and begins to return.

But while the tide is coming in there are waves breaking on the beach and receding. While the tide is rising, each succeeding wave pushes a little farther up onto the shore and when it recedes it never quite reaches as far back as its predecessor. The waves are the intermediate trends. 

Meanwhile the surface of the water is in constant agitation as wavelets and ripples move along with and against the major trend. The wavelets and ripples are analogous to the market’s minor trends and are unimportant day-to-day fluctuations to the long-term investor.

The tide, waves and ripples represent the primary (major), the secondary (intermediate), and the minor trends of the market.

Tomorrow we’ll talk about the phases of a bull market.

Today’s Trading Landscape

Earnings to be reported before the opening include: AC Moore, Aircastle, Allot Communications, Applied Industrial, Convergys, Delta Petroleum, Fossil, JA Solar, NeuroMetrix, Northgate Minerals, Scotts Miracle-Gro, Techne, Transdigm Group, Xinyuan Real Estate, Yucheng Technologies and Zhongpin.

Earnings to be reported after the close include: A123 Systems, Alpha and Omega Semiconductor, Apollo Commercial Real Estate, CareFusion, Cree, Financial Engines, Home Inns, Jazz Pharmaceuticals, LDK Solar, Learning Tree, Myriad Genetics, STR Holdings, Sunpower, Symmetricom, Team Health Holdings, URS and Walt Disney.

Economic reports due: NFIB Small Business Optimism Index, ICSC-Goldman Sachs store sales, productivity and costs (the consensus expects no change in non-farm productivity, 1.5% for unit labor costs), Redbook, wholesale trade, and an FOMC meeting announcement (the consensus expects 0% to 0.25%).

If you have questions or comments for Sam Collins, please e-mail him at [email protected].

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