CANSLIM SETUPS

Where We Are:

Taking a look at the broader market:

Severely beaten, but not dead, the Bull succumbs to a bout of heavy selling.

Some say it was the thrashing of China’s stock market that influenced the worst week on the Dow in more than four years. But a day prior, former Fed head Alan Greenspan suggested a recession for 2007.

The U.S. market serves as lead engine for the global economy. What’s bad for us would be worse for China.

As far as news and reactions are concerned, it’s not that volatility in China’s market spells trouble, it’s that the U.S. market appears to have wanted an excuse to sell off.

With major U.S. indexes hitting record highs for months we’ve been long due for heavy selling.

The technical picture of the market has been transformed from Bullish beauty to Bearish uncertainty. Markets hate uncertainty, and we suspect it will be some time until new highs are reclaimed,

How long and deep a correction might run is anyones guess. The last thing the average market player would expect at this juncture is a sharp rally. More than often after a heavy sell-off we get a rally to screw over newly taken short positions.

We’re on the watch for volume patterns. Signs of downside volume drying up will indicate a correction less severe. Continued heavy selling will pave the way for short setups.

With the majority of sectors cratering through their 50-day averages, we are now looking at 200-day averages as support.

The S&P 500’s P&F chart represents a climax turned pullback. Price-action for the week ended at the support of the upper trend-line of a channel breakout. In English this means we’re still alive above a key price level.

Technically speaking:

The Dow Industrial Average

($INDU), -4.2%, tears through its 50-day MA, next support at the 200-day MA.

The S&P 500

($SPX), -4.4%, tears through its 50-day MA, next support at the 200-day MA.

Nasdaq

($COMPQ), -5.8%, tears through its 50-day MA, next support at the 200-day MA.

Russell 2000

($RUT), -6.2%, tears through its 50-day MA, next support at the 200-day MA.

Volume indications flash bright red after massive distribution spreads across the broader market Tuesday.

Key chart action for the week:

Charts courtesy of Stockcharts.com

The U.S. Dollar Index slipped further below its major moving averages, though railed softly in the aftermath of Tuesday’s sell-off.

The Gold and Silver Miners Index took it on the chin with the rest of the market. Given the relative weakness of this sector we’re not surprised to see money leave. The bearish head-and-shoulder pattern remains ripe for a reversal. Should the Dollar continue to fall we suspect a rally will eventually happen, though should the Dollar gain upside footing – all bets are off.

The Consumer Index falls below its 50-day MA while the Cyclical Index finds support at its 50-day MA. If the Cyclical Index can hold above its 50-day it will bode well for the Bulls of the broader market.

The Semiconductor Index gets slammed after breaking north of a key trend line. The sudden reversal leaves a strong bearish statement.

Banks and Broker Dealers fall south of the 50-day MA and find support at the 40-week MA.

Retail slips below its 50-day MA.

In the tech sector, Internet, Software, Computer Tech and Hardware drop below their 50-day MA’s. Disk Drives fall further below this mark.

Telecoms show relative strength in finding support at the 50-day MA.

Healthcare, Pharmacetuticals and Biotechnology fall below their 50-day MA’s.

REITs close just below their 50-day average.

Transportation and Defense also finish the week just under their 50-day MAs.

Airlines find support at the 40-week average, and show bearishness as they sink into its two-year lower base.

Energy shows relative strength for the week, though declines to its 200-day MA. Like Gold and Silver Miners, the index traces out a bearish head-and-shoulders pattern. We love to see these technical patterns do the opposite of what they’re said to do.

What Was Important About Last Week

STOCKS:

• Dell (DELL) reported Q4 (Jan) GAAP EPS of $0.30 (EPS ex-items is $0.26), vs the Reuters Estimates consensus of $0.28. Revenues fell 5.1% year/year to $14.4 bln vs the $14.72 bln consensus.
• Marvell Technology (MRVL) reported Q4 (Jan) revs of $622.0 mln vs $624.3 mln consensus.
• Gap (GPS) reported Q4 (Jan) earnings of $0.27 per share, reflecting Forth & Towne’s expected net loss of $0.04 per diluted share through closure, $0.03 better than the Reuters Estimates consensus of $0.24.
• Nordstrom (JWN) reported Q4 (Jan) earnings of $0.89 per share, $0.01 worse than the Reuters Estimates consensus of $0.90. Revenues rose 14.6% year/year to $2.63 bln vs the $2.63 bln consensus.
• American International Group (AIG) reported Q4 (Dec) earnings of $1.50 per share, excluding non-recurring items, in-line with the Reuters Estimates consensus of $1.50.
• Wynn Resorts (WYNN) reported Q4 (Dec) earnings of $0.53 per share, $0.06 better than the Reuters Estimates consensus of $0.47. Revenues rose 109.2% year/year to $563.6 mln vs the $488.1 mln consensus.
• Kohl’s (KSS) reported Q4 (Jan) earnings of $1.48 per share, $0.05 better than the Reuters Estimates consensus of $1.43. Revenues rose 16.7% year/year to $5.43 bln vs the $5.4 bln consensus.
• Dress Barn (DBRN) reported Q2 (Jan) earnings of $0.24 per share, in-line with the Reuters Estimates consensus of $0.24. Revenues rose 9.5% year/year to $340.3 mln vs the $336.2 mln consensus.
• Petsmart (PETM) reported Q4 (Jan) earnings of $0.54 per share, excluding non-recurring items, $0.02 worse than the Reuters Estimates consensus of $0.56. Revenues rose 11.1% year/year to $1.17 bln vs the $1.17 bln consensus.

ECONOMY:

• Real GDP was revised to show a 2.2% growth rate in Q4 versus the originally reported 3.5% and the consensus forecast of 2.3%. The GDP chain-weighted price index was revised up to 1.7% from an original estimate of 1.5%. Nominal GDP (or aggregate demand) rose 3.9% at an annual rate in Q4 (originally +5.0%).
• New orders for durable goods declined 7.8% in January, a much larger drop than the consensus expected. New orders excluding transportation lost 3.1%, also a larger drop than the consensus forecast. New orders are up 2.1% versus a year ago, 0.2% excluding transportation.
• New single-family home sales declined 16.6% in January to an annual rate of 937,000, the lowest since February 2003. This was much weaker than the 1.08 million rate expected by the consensus and could be due to bad weather in January. The drop in home sales occurred across all four major regions but was most substantial in the West.
• The median price of a new home was $239,800 in January, a slight increase from December but down 2.1% versus a year ago.
• Existing home sales increased 3.0% in January to an annual rate of 6.46 million, much better than the consensus expected level of 6.24 million.
• The median price of an existing home fell to $210,600 in January, down 2.8% versus a year ago and the lowest level since April 2005.
• The ISM Manufacturing index rose to 52.3 in February from 49.3 in January. The consensus expected a smaller gain to 50.0.
• Personal income increased 1.0% in January, beating the consensus expectation of a 0.3% gain. Personal income is up 5.3% versus a year ago. Disposable income, which is income after taxes, increased 0.8% and is up 4.8% versus a year ago.
• Personal spending increased 0.5% in January, slightly more than the consensus expected. Spending was strong for both durable goods and services.

What We’re Looking For This Week

Key earnings releases:

• MONDAY: Interstate Hotels & Resorts, Inc. (IHR)
• TUESDAY: CEC Entertainment (CEC), Chico’s FAS, Inc. (CHS),
• WEDNESDAY: American Eagle Outfitters Inc (AEOS), Ashford Hospitality Trust, Inc. (AHT), BJ’s Wholesale Club (BJ), Men’s Wearhouse (MW)
• THURSDAY: Big 5 Sporting Goods Corporation (BGFV), Blue Coat Systems (BCSI), Goldcorp (GG), National Semiconductor (NSM), Urban Outfitters (URBN), Wind River Systems (WIND)
• FRIDAY: Big Lots, Inc. (BIG)

On the economic front we have potential market movers with:

• MONDAY: ISM Services
• TUESDAY: Productivity-Rev., Factory Orders
• WEDNESDAY: Crude Inventories, Fed’s Beige Book, Consumer Credit
• THURSDAY: Initial Claims
• FRIDAY: Average Workweek, Hourly Earnings, Nonfarm Payrolls, Trade Balance, Unemployment Rate

The Following Sections Are On Our Home Site:

• The Growth Stock Landscape
• What We Like – What We Have
• This Week’s Scans: • SETUPS • BREAKOUTS • BASE BUILDING • SHORTS

This Week’s Word On Discipline:

“It’s easy to have faith in yourself and have discipline when you’re a winner, when you’re number one. What you’ve got to have is faith and discipline when you’re not yet a winner.” – Vince Lombardi

CANSLIM SETUPS