Key Charts Ahead of Corporate Earnings

By: Mike_Paulenoff

Catalysts for the market this week are earnings, which begin to be released Monday evening, and reaction to the weekend's news about the China trade surplus. In addition, there’s a potential vote on financial regulation that could affect bank stocks and a vote on extending unemployment benefits.

China over the weekend announced its June trade surplus climbed to the highest level in six months. With China the world's big procurer of things such as building materials, markets tend to respond positively to headlines that mention improvement in growth. However, this particular report shows China’s imports slowing in relation to its imports, and so looking beyond the headline, this news may not be so bullish.

Industries affected by China procurement include steel, and looking at the chart on U.S. Steel (X), we see a massive double-top in the 65-70 range from January and April. A huge support plateau was violated as the stock broke down in the last few weeks from around 45. It held at the 37 level and has since turned up

I can see steel continue to rally to its key 45-45 1/2 resistance level, but after that there will need to be a catalyst in steel in order for it to move considerably. There will have to be an earnings situation, like Alcoa (AA) Monday evening saying demand looks fantastic and providing a positive surprise.

Cliffs Natural Resources (CLF), too, created a bit of a top in April, but right now is moving back towards testing key resistance. It is already starting to chip away at the low area, around 47-50, closing Friday at 51, and may be able to fill the gap at 54.30. This is a key area for CLF, with the 50-day moving average at 53.76 and the trendline off the topping area at 56.16.

So keep an eye on X and CLF -- if they can get through resistance, we will know there is more to this upmove than just a relief rally. Whether it is China growth or more optimistic earnings and guidance than expected, some kind of catalyst will be needed to transcend the oversold bounce into a more bullish situation and perhaps a bull leg.

Freeport-McMoRan Copper & Gold Inc. (FCX), also impacted by demand for industrial metals, had a big week last week, where, after hitting a low at 56.71, it closed at 66, or a huge 18% move. But it's now back up against a huge plateau of resistance which used to be support going back to September 2009, where this huge double top started forming.

From a measured chart perspective, with the highs around 88 and the low plateau at 66, you could make the case there's a 20 or so point decline coming based on this top. That would take the stock from 66 down to 46. With the low so far at 56, FCX is only half way to its objective off its top. Until this pattern of lower highs and lower lows is broken, I will be in the camp that says 46 is more likely than an upside breakout.

The prior rally peak was 69.79. If it breaks above, say, 70, then this series of lower highs and lower lows has been disrupted and you’ve neutralized the downtrend. Conversely, if FCX moves up to 68, and then rolls over, it will not have taken out the prior rally peak and probably will have to come down to 60 to retest.

FCX is definitely one to watch because of China and its relationship to copper and because of gold prices, which started to move up late last week.

Alcoa (AA) is another name that could take advantage of China. Alcoa fell apart off its top in January, forming a 12-month head and shoulder pattern. With the head at 17 and neckline somewhere around 12-12 1/2, or $5, that takes you to about 8, which hasn’t been met yet. But the chart pattern argues that those lower lows and lower highs are getting to where Alcoa is nearing a target.

Alcoa rallied strongly last week, too, and it will be very interesting to see what kind of reaction occurs Monday afternoon as it approaches its earnings announcement. The stock closed at 10.94 on Friday, after being as low as 9.80. Massive resistance starts at 11, the 50-day moving average is at 11.50 roughly, and the breakdown plateau is at 12. So if Alcoa is positive and the reaction is a 10-15% rally, it may not do any real damage to the top even with decent earnings.

The prior rally peak got up to 12.20 on June 21, when other markets made their highs before the big reversal. So it has to take out 12.12 to get me to recognize technically that the downtrend has been broken both from a chart perspective and psychologically.

On the other hand, if Alcoa issues guidance or any kind of macro news that suggests global demand is suspect, we'll know that this bounce was just a short covering rally that's over, and the stock should loop down, break 10 again and go into the 8 area next.

CSX Corp. (CSX) also announces after the close Monday. It had a big week last week, probably related to brokerage firms upgrading the rails, as there seems to be a lot of demand for transportation. From its late April top, the stock dropped below its 200 day and popped above it, so it’s no where near the magnitude of a top that we saw in the metals names. The question is: Is it a complex correction or just a simple correction that ended at the April highs, finished in July, and now is just going to take off?

I think CSX probably goes higher. The key is whether it can take out its prior peak at 56.64. If it can take out that 56.60-.65 area in the aftermath of earnings, CSX probably continues higher and it’ll be a good sign for the domestic economy. It might not mean much for the likes of X and CLF, but for the domestic economy it would be a good sign, especially if guidance says demand is picking up.

Where the Alcoa and CSX earnings announcements Monday evening will impact materials and transportation, Monday’s earnings report from Novellus (NVLS) and Tuesday’s report from Intel (INTC) will be a barometer for the tech sector.

Novellus has a very powerful chart. The only caveat is whether it has peaked off its enormous upmove that goes all the way back to March 2009. To tell me it's in a healthy condition, NVLS needs to take out the high around 29. Monday afternoon should tell us what its intentions are. As long as this trendline holds at 24.50, NVLS is in a very powerful uptrend. If NVLS breaks 24.50, then the powerful trendline will have been violated by a force that’s more powerful than the trendline itself. Depending on what kind of guidance it gives, we'll have an idea as whether the uptrend is healthy or is going into some sideways congestion until the next catalyst.

On Tuesday after the close we get Intel, whose chart doesn't look like NVLS. While NVLS held the trendline, INTC broke down and has some challenges ahead of it. Intel has major resistance at 20, which it popped above on Friday. It has a trendline off the April highs that comes in at 20.75, which will be the next challenge for INTC in the aftermath of earnings. If INTC takes off and closes at 21 on Monday night, and trades above 21 on Tuesday and earnings come out and are more positive, then chances are it will go up to next resistance plateau at 21.80-22. That's a 10% move from where we are now -- and probably the big challenge area for INTC. It will have to hurdle 22 and stay above it for me to get positive, at least for a test of the highs, which are up at 24 and change.

Conversely, if it can't get above 21 and forward looking guidance after earnings isn't so hot, INTC could loop back down to retest the low area around 18.95-19. But for now it looks like Intel it will try to get above 21 near-term, and earnings will probably be the make or break point as whether or not it can extend the rally to 22.

Also this week, we cover the financial stocks, impacted this week by the financial regulation reform vote and by earnings, which starts with JP Morgan (JPM) announcing before the market opens on Thursday. More on that in our video.

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By Mike Paulenoff

Mike Paulenoff is author of MPTrader.com (www.mptrader.com), a real-time diary of his technical analysis and trading alerts on ETFs covering metals, energy, equity indices, currencies, Treasuries, and specific industries and international regions.

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