In our Daily State of the Market reports, we've been talking an awful lot lately about the technical action of the market. As chartists everywhere are fond of saying, "The chart tells all." And in this case, it has been helpful to know what the technicians are watching.
For example, first, we got the 'breakout' above the recent resistance zone, which was a sign that the bulls had some oomph behind them this time. Then there was the move above the key 50-day moving average. Next, of course, it appeared that the breakout had turned into a 'fakeout' as the market retreated on Tuesday and Wednesday. But by the end of last week, the Dow, S&P 500, and NASDAQ had all moved back above their respective lines-in-the-sand, which indicated to the chart watchers out there that all is right with the world.
However, as long-time readers know; we don't make our decisions solely on the wiggles and giggles of lines on a chart. No, we believe that it is vital to understand 'why' moves are happening and to identify the driving forces behind the action.
So, in looking at the recent moves, it is fairly obvious that much of the improvement in the market's technical condition can be attributed to the substantial drop in oil prices and the impressive run higher in the greenback. Yet, while the bulls would seem to have a fairly decent grip on the ball at the moment, we feel there are several issues that need to be resolved before we can join in the chorus of "Happy Days are Here Again."
So, before the screens start blinking furiously again on Monday morning, we thought we'd spend just a moment looking at one of these issues from a big-picture perspective.
On Thursday, there was a report from the National Association of Realtors that, believe it or not, went straight to the heart of the problems in the stock market these days. However, the report went largely unnoticed.
The headline read, "US single-family home prices declined in 115 of 150 metro areas in Q2." This means that housing prices are continuing to fall in 77% of the metro areas. The report went on to state that the median price of an existing home had fallen -7.6% over the past year. That means that your $400,000 house is now only worth $369,600. Ouch.
The reason the report didn't get much play in the press is that everybody already knows that the housing market stinks. But, it is important to understand that it is the housing market that holds the key to resolving the credit crisis. And the bottom line is that until traders can feel comfortable that they have actually seen the worst in this mess, the upside in the stock market will be limited.
The cycle of destruction goes like this. As housing prices fall, more people default on their mortgages. This causes the value of not only the toxic subprime mortgage securities to fall, but also prime mortgages as well. In turn, this lowers the bottom line on bankers' balance sheets. Moving on, falling values causes more writedowns. And with more writedowns, comes the need to raise more capital, which, of course, creates more competition for cash.
But, unfortunately, the problems don't stop there. You see, as bankers become more focused on 'getting healthy' (via capital raising and selling off assets), they basically stop lending money.
According to the latest Senior Loan Officer Survey, banks have tightened their lending standards and terms on ALL major loan categories over the past three months. Next, in a special survey question, about one-half of the banks said they expect to continue to tighten credit standards on all loan categories in the second half of the year. And finally, about the same numbers of bankers are looking to tighten lending standards into the first half of '09.
In short, this is a problem. The fact that lending standards are rising means that liquidity will remain tight, which, in English, means that although the Fed has been busy dropping rates lately, mortgage rates haven't budged - and remain high. The problem here is that there is just too much demand for cash in the banking system and not enough supply to go around. As a result, rates stay high.
So, with mortgage rates remaining high and banks not looking to lend money, this means that it is tougher to get a mortgage. And when it is harder to get a mortgage, prices have a tendency to fall. And so it goes.
Another part of the problem is that falling home values are a drag on the consumers' psyche. If you are feeling poorer because your house is falling right alongside your IRA and 401(k) values, you are unlikely to plan that trip to the Bahamas, or redo your kitchen, etc. This also means that you probably aren't going to spend as much money at Christmas, which, well, you get the idea.
So, until housing stops falling, it is safe to say that the economy isn't likely to pick up. And until then, although stocks certainly have some room to move up from here, seeing a plus sign by the end of the year may be tough.
The goal here is not to depress you. Instead, the idea is to make sure that everyone understands the drivers behind the market. If we understand what is happening, it is easier to know how to play the game. In other words, while stocks have room to run, this is NOT a market where you should be chasing stocks. It's okay to play for 'a trade' but let's be careful out there.
Wishing you all the best for a profitable week ahead.
David Moenning
Editor Top Gun Trader Alert Service
Note: Mr. Moenning edits the "Top Gun Alert" Service with a 92% winning track record Learn More...
TOP GUN TRADE ALERTS -- by StreetAlerts.com Editor David Moenning 
Our "Top Gun Trader" Alert service is designed for active traders looking to trade "top gun" stocks (the market's top rated companies in terms of earnings strength). You'll receive real-time trading alerts detailing exactly what we're about to do and why.
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Top Gun Trade of the Week:
Illumina Inc ( ILMN)
Company Profile
Date Purchased: 7/7/08
Purchase Price:
Original price: $86.80. We'd be buyers on weakness down to $91 or a break over $95.50
Trading Strategy:
The key to this market is to understand that leadership has changed. One can no longer throw a dart at the energy and materials stocks and expect to make money. So, if you have been paying attention, you will recognize that health care is now the sector of choice. We've been in ILMN for a while now, but the stock, as well as the other companies in the industry (BIO, IVGN, PRXL, TECH, CRL, etc) continue to work in here. And if you want to up the ante a bit in terms or risk reward, be sure to check out the biotech arena where our favorites include ALXN, OSIP, DNA, and MATK.
Try the Top Gun Real-Time Alert Service!
Since April 27, 2004, the Top Gun Alert service has provided members with 436 winning trades (with just 34 losses) -- that's a 92.78% winning track record.
Details on how to get Mr. Moenning's trade alerts for 30 days here
SUCCESS TRADING GROUP -- by MarketFN.com Editor Eric Aafedt 52 Wins in 52 Weeks 
Our Success Trading service delivers quality trading ideas for the elite investor that has the financial wherewithal and market nimbleness to profit on small moves in a stock's price. Become a member and you will be provided with email and/or PDA alerts intended to provide you with the opportunity to make many, many profitable trades.
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PG (Procter & Gamble Co.)
Company Profile
Our Success Trading Group closed another winning trade this week. We closed our position in Procter & Gamble (Ticker: PG). We have lots of stocks on our radar, but we are looking for a pull back in most before our next entry.
Our Success Trading Group scored 52 Wins in 52 Weeks and has closed over 340 winning trades and only 9 losing trades on our Main Trade Table.
Details Here.
STOCK SPLIT REPORT -- by StockSplits.net Editor Jon Johnson 
For post-splits, we can play them as we would pre-splits (very short term), but we prefer to stretch our horizons, playing the trend. When playing options, we look further out, 2 or more months at least. We let the trend carry us along if there is one, but we will also take profits if the technical pattern degenerates, e.g., breaks a trendline. The main difference between post-splits and pre-splits plays is that we really have to like the pattern. Pre-splits can run right before their splits even with poor technical indicators. For post-splits, we are looking at the stocks from more of a longer term "would I buy this stock at this juncture?" position. Now there are times when a hot stock splits and investors pile in to get in while the stock is 'cheaper.' We play those, but with more of a short-term, pre-splits mentality in that we will be ready to get out fast if the momentum fades.
Remember, everything we do has to pass muster with the market that day ... don't fight the market on these plays.
Listen to Stock Split Report Editor Jon Johnson's
stock split interview on CNBC-TV [ Broadband | Dial-up ]
Here's a post-split play and our current analysis.
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Company Profile
EARNINGS: Announced 7-17-08
STATUS: Test breakout. Testing back a bit more to end the week, tapping below the 10 day EMA (55.95) and rebounding to close over that level. After this test it looks ready to go and continue the break higher. To recap: Gapped lower on its earnings and sold down close to the 50 day EMA now at 49.50. It stormed back and moved to a new high, then came back to test the 10 day EMA Thursday and bounce. This is the kind of base it puts in and then races higher once more. After this pullback we are looking for GILD to finish the test and start back up. Want a bit more volume as it does.
Volume: 5.485M Avg Volume: 8.178M
BUY POINT: $57.21 Volume=12M Target=$66.85 Stop=$55.69
POSITION: GDQ KK - Nov. $55c (64 delta) &/or Stock
Learn more about the Stock Split Report and how we have made gains of 321% with our powerful stock split plays!
Details Here.
$10 TRADER -- by MarketFN.com Editor Bill Kraft 
We really enjoy trading stocks that are $10 and under. Often they provide the chance to enjoy high percentage gains and, of course, at worst, the risk is limited to what we paid for the stock.
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NM (Navios Maritime Holdings Inc.)
Company Profile
I closed a one week trade for a 1.6% gain before commission during the past week. I exited the trade just ahead of an earnings announcement. The stock has been channeling since the beginning of the year and I am watching it to see whether it will retreat to support around $8.50 and turn back up as I suspect it may. If so, I will be considering a bullish entry once again.
Try our $10 Trader Real-Time Alert Service!
Details Here.
IH ALERTS -- by InvestmentHouse.com Editor Jon Johnson 
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Company Profile
EARNINGS: 8-28-08
STATUS: CUP. Super breakout in May and then rallying to a new high at 82 in late June. After that run it needed a break and fell into the current 8 week base. Nice fade to the 50 day EMA (64.25), holding that key level the past 6 weeks, using it as support. Started higher Wednesday and gapped further Friday, up to the mid-July and late July interim peaks within the base. Very strong money flow is leading higher. Good set up and with some volume on the next break higher it is a buy.
Volume: 1.885M Avg Volume: 2.89M
BUY POINT: $71.32 Volume=4M Target=$81.95 Stop=$68.11
POSITION: EQI LN - Dec. $70c (61 delta) &/or Stock
Learn more about the IH Alert Service!
Details Here.
OPTION TRADER -- by MarketFN.com Editor Bill Kraft 
Our Option Trading Service is for conservative traders that understand leverage principles. We focus on powerful option trading strategies that place volatility and momentum in your favor. And we pride ourselves on minimizing our losses. We always know our downside potential in a trade.
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XING (Qiao Xing Universal Telephone Inc.)
Company Profile
I was in and out of a 2 day play using LEAPS calls on XING and realized a 16.7% gain before commission in that short time. The stock is currently trading near a resistance and should shortly provide an option trade in one direction or the other. I'll look for a bullish trade if it breaks up through resistance or something bearish if it turns back down as it looks like it might.
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Achieve returns with us like 16.48% return in 5 days!
Details Here.
DIVIDEND INVESTOR -- by MarketFN.com Editor Eric Aafedt 
Perfect for your IRA! Our Dividend Investor service focuses solely on the "best of the best" dividend paying stocks. Many of the stocks that we will be buying in our Dividend Investor service raise their dividends almost every year. Year after year! This is powerful. We buy these stocks for their powerful dividend producing income; and we will also buy these with a purpose to make capital gains as the stock increases in value.
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ED (Consolidated Edison Inc.)
Company Profile
Our Dividend Investor members also closed a "trade" position this week for another win. We like Consolidated Edison (Ticker: ED) for new positions at $40.00 for either a "trade" or an "invest" position.
Feel free to sign-up for a free 30-day trial. During such time you can review our Trade Table and see the type of stocks we are buying. You will also receive all the new investing alerts we send during your trial period. Again, many of the stocks that we will be buying in our Dividend Investor service raise their dividends almost every year. Year after year! This is powerful. Don't miss out on this service!
While we titled this service an "investor" service, we also believe these stocks are solid for the "trader" in you. With these stocks, we believe an exit point of 3% above the buy price is generally appropriate for traders. And, in fact, we have put together a string of 61 positions in a row that have hit our 3% target subsequent to the buy alert!
Details Here.
WGOV - Woodward Governor Co. is currently trading at $46.73. The October $45 Calls (GUPJI) are trading at $4.80. That provides a return of about 7% if WGOV is above $45 on expiration Friday in October.
COVERED CALLS -- by the CoveredCall.com Research Team 
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