Published on 06/27/2006

Peter Reznicek notes that the market continues to create the "russian doll setup," which indicates a contraction in volatility ahead of the Fed. Also a bullish call on 2005's stock of the year, Titanium Metals (TIE).

ShadowTrader Big Picture Market Analysis for June 27

Good Morning, Traders. The Russian Doll setup described in Monday's Big Picture continues as the market had its third inside day in a row. This is rather rare but given that the market is awaiting an FOMC announcement on rates later in the week its not too surprising that volatility is contracting. We are seeing confirmation in overall volume patterns as total turnover keeps trending lower over the past 5-6 trading sessions showing that bigger traders are hesitant to commit to positions ahead of the Fed. Markets were up mildly on Monday on so so internals. Breadth was around 2:1 positive on both exchanges and advance decline lines were decent at best with winners beating losers by 829 and 660 on the NYSE and Nasdaq, respectively. Overall volume dropped by 5% on the Big Board and by 12% at the OTC exchange, meaning that the market was not able to score an accumulation day even with all averages in the green. My core sector list closed all green, but very few sectors up more than 1% on the day. Homebuilders, driven by a better than expected New Home Sales number being somewhat oversold, led the pack along with Oils and Gold Miners. The chart below shows how little is happening technically and how the market continues to trade inside the prior day's range for three days now. The same technical pivots that we have been descrbing in this space that should ignite the next meaningful move are still in place. The most important in the S&P being 1261 (at the blue 200ma and prior support and trendline resistance) to the upside, or sub 1240 to the downside. As you can see from the snapshot below, a test of either of these levels would mean a breakout of the ever tightening wedge formation. Institutions seem to be on the sidelines currently ahead of Thursday at 2:15pm and more than likely so should you. Readers may consider holding off on entering new swing positions until after the Fed makes its decision.

Focus List

TIE - Titaneum Metals Corporation
Industry - Metals & Mining (Industrial)
Side - Long
Trigger - 34.05
Stop - 31.20
Target - 40.00+
Timeframe - multiweek

SCHL - Scholastic Corporation
Industry - Publishing (Books)
Side - Short
Trigger - 25.19
Stop - 26.45 or high of weekly breakdown bar
Target - 22.75
Timeframe - multiweek to multimonth

Peter Reznicek is the Chief Equity Strategist and a principal of the Prana Fund, a domestic hedge fund, and ShadowTrader, a subsidiary of thinkorswim which provides coaching and education to its clients on both intraday and swing trading of equities. For a free trial to the full version of The Big Picture or to learn about ShadowTrader's other services, visit shadowtrader.net or send an email to preznicek@shadowtrader.net.