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us stock market, top stock pick
Begin Part 2 of 2
So, when the market is showing us that institutions are buying stocks as indicated by the higher volume on the rises and lower volume on the down sessions, do we just sit back and refuse to invest because there might be a downturn? There will always be downturns. It is up to us to protect ourselves with stop losses, mental or mechanical, and to avoid trying to step in front of a falling market with long term positions. As in the summer and fall, we had to look to the short term upside because the market was trending down; when it gave us an indication of a short term pop, we moved in, got a gain, and got out. Right now we are seeing good buying by institutions, and we are taking advantage of that. If it stops, we have to be ready to get out of the way. The rule: the market tells you what it is doing now, and there is no need to guess about what it might do in a month, at least when things look good for now.
Given that we need to keep an eye on the market here and now, what about the inevitable third leg that is being discussed? Looking at history, it is arguable whether every bear market has that 'third' leg down. Looking at the Dow, in 1981-1982, there were two. In 1974, you can argue if it was two or three. In 1984 it looks like two with a re-test of the low as the 'third' leg. In 1987: 2. 1998: 2. You could argue there were three, but the third was a test of the second low; it did not set a new low before rebounding. In 1987 it crashed, then tested that low twice before taking off again. A third leg down should be a final, new low, not a bear rally and test of a previous low. What some call a third leg occurs after a choppy period where the index hits lows rapidly, then runs up and rolls over for one more test. That looks more like two to us, not three; it is in the eyes of the beholder. The point is, the pattern is not consistent. You can cherry pick your bear markets and support your theory, but looking at several bear markets, there are different looks. By some of the past bear markets that supposedly had three legs, the current bear market on the Nasdaq would qualify: a plunge to the April low, a lower low in May, a rally up and then a plunge to the December low.
The overall point: we have to keep our eyes on what the market is telling us here and now. It was telling us it was time to buy starting at the Fed rate cut. So far it still looks good, but we are still in a bear market on the Nasdaq, and that means this could be a bear market rally. There is not a wealth of stocks in great patterns ready to head to breakout to new highs and lead things higher and higher; many still have to recover to their old highs first and bases are sloppy in some sectors (financials are not bad and semiconductors are forming the right side of their bases, and they are much better as their selling started earlier). Things could go wrong and we could get another test of the December low if this turns out to be a bear market rally.
The volume action we are seeing in the Nasdaq right now does not indicate a bear market rally as they usually occur on lighter volume. Still, that could dry up and send us down again. That is why we watch volume versus price action like hawks to see the telltale signs of institutions starting to dump stocks as opposed to buy them. If we see stocks start to fall back below trendlines or other support they just broke on rising volume, that is a sign the big money is leaving. On the indexes, if we see them breaking back below support on rising volume, that shows us the overall market is involved in dumping again and could lead to that fall back to test the December lows. At this point it is not doing that, and we can make good money by following the signs of the market and taking what it gives us. We have been making great money in this run; we look to make more as long as the move continues to show us the right kind of price/volume action. If we see that, we know big money is buying and that drives market higher.
For a review of frequently asked questions, please use the link below:
http://www.investmenthouse.com/1questions.htm
THE PLAYS:
All prices reflect prices at the close on Friday.
SOME LEADERS TO WATCH: Several of the leading tech stocks are ready for a pullback after some strong moves over the last week. We are looking to pick them back up after a rest.
Continued Plays:
JNPR (Juniper Networks--$134.31; -2.32; optionable (JUY)): Computer hardware
http://biz.yahoo.com/p/j/jnpr.html
STATUS: Tried to move higher but after opening at the 50 day MVA (140.44), turned down from the resistance on lower volume (15.5 million; avg. 15.6 million). The move put the stock back under its down trendline at 138. JNPR is in an ascending wedge pattern and we are looking for support at the 132-133 level until the stock turns back up. Otherwise, lower support is at 130, at the short term moving averages (10 day MVA at 129.49).
BUY POINT: Aggressive: Up from 130 (or better) after a continued pullback to that level, on stronger volume. Breakout: 145.13, on volume of 21 million or better.
POSITION: Aggressive: Stock and/or April $125 or $130 calls to buy (JUY DE or DF). Breakout: Stock and/or April $145 calls to buy (JUY DI).
AMCC (Applied Micro Circuits--$86.50; +2.12; optionable (AZV)): Semiconductor
http://biz.yahoo.com/p/a/amcc.html
STATUS: Has moved up the last two days on lower, below average volume (13.9 million; avg. 16.4 million), showing a doji Friday at the peak of its price run. After the run up from the January low of 55.81 (due in part to its earnings), AMCC is ready for a pullback before continuing up to complete its base (prior high of 109.75). Look for support at the 80 level should the stock pull back that far; however, support can emerge as well at the 84 level (hit 83.97 twice in July, and tested near that level on the intraday low).
BUY POINT: On a move back up after a pullback to 80 (or better), on stronger volume.
POSITION: Stock and/or May $80 or $85 calls to buy (AZV EP or EQ).
EMLX (Emulex Corp--$101.13; +4.00; optionable (UEL)):
http://biz.yahoo.com/p/e/emlx.html
STATUS: Posted another gain but pulled well off the high of 108.63 before ending the day. Volume was stronger at 9.9 million (avg. 4.3 million). Look for a pullback from here; after the 7-day run, the stock is ready to regroup. Support at 92.25 on an extended pullback; otherwise, can catch possible support at the 97 level. Strong money flow and buying, and decent buying.
BUY POINT: On a move back up after a pullback to 92 or better, on strong volume.
POSITION: Stock and/or April $90 or $95 calls to buy (UEL DR or DS)
Best Plays:
1) ASD: Moving up after a test of the breakout.
2) SUB: Dojis at support, on low volume.
3) HBC: A breakout move from an ascending wedge.
4) MFLO: At support on low volume.
5) BSC: Ready to move up in the handle.
6) TXN: Another good looking wedge.
7) PLT: Looks ready to keep moving up.
8) VRTY: Ready to break resistance.
9) C: Continues to look good in this pennant handle.
10) MER: Ready to break out on stronger volume.
TESTS OF THE BREAKOUT: Some of these stocks are moving back on low volume to test the breakout. We often take profits on option plays when they start to pullback on the breakout move and then get back in when the stock bounces up off of the breakout point. This second ove is where some of the biggest gains are made.
New Play:
ASD (American Standard--$51.69; +1.38; optionable (ASD)): Material and construction
http://biz.yahoo.com/p/a/asd.html
STATUS: Starting to move up after testing its recent breakout from a base. Volume was stronger as the stock moved up from support (10 day MVA at 50.62). Breakout high is 53.69. The stock shows good money flow and buying. Trying to flush up some more gains.
BUY POINT: Aggressive: On a move up on continued strong volume.
POSITION: Aggressive: Stock and/or April $50 calls to buy (ASD DJ).
Continued Plays:
SUB (Summit Bancorp--$41.44; +0.13; optionable (SUB)): Regional banks
http://biz.yahoo.com/p/s/sub.html
STATUS: Still looks good in the test of the breakout (pennant), showing the second consecutive doji on even lower, below average volume (355,600; avg. 773,318). Look for a move up from here (10 day MVA at 41.26) on stronger volume. Pattern high is 43.56. Excellent money flow and buying.
BUY POINT: Aggressive: Up from here on stronger volume. Breakout: 43.69, on volume of 1 million or better.
POSITION: Stock and/or April $40 calls to buy (SUB DH).
WEDGES, PENNANTS, and FLYING PLATEAUS (AND FLAGS): These are some of our favorite patterns as the moves can be explosive. In this market, however, we need to see the move on the breakout on strong volume.
Wedges:
New Plays:
HBC (Hsbc Holdings Plc--$76.88; +1.88; optionable (HBC)):
http://biz.yahoo.com/p/h/hbc.html
STATUS: Making a breakout move from a massive ascending wedge on strong volume (356,600; avg. 85,454). The stock is just under the buy point of 77.33 (pattern high 77.20), but the strong volume can push it into a solid breakout. Money flow shot to new high levels on the move as buying picked up nicely.
BUY POINT: 77.33; on continued strong volume. Remains a buy on the breakout to 81.20.
POSITION: Stock and/or March $75 calls to buy (HBC CO). March $80 options had insufficient open interests at 82 (HBC CP).
AMAT (Applied Materials Inc--$49.94; -0.12; optionable (ANQ)): Semiconductor
http://biz.yahoo.com/p/a/amat.html
STATUS: In an ascending wedge at the bottom of its base (December low 34.13). Volume is above average since the start of the month, though down the last two days (24.5 million by Friday; avg. 19 million). Pattern high is 51.25; the stock opened at 50.88 but dropped back slightly, the low tapping 48.88 on a test of support (48.75, hit four times since October). Lower support is at the 10 day MVA (46.62) on a more extended pullback in the pattern. Positive buying.
BUY POINT: Aggressive: On a move back up from the 46-48 range on rising volume. Breakout: 51.38, on volume of 25 million or better.
POSITION: Aggressive: Stock and/or April $45 calls to buy (ANQ DI). Breakout: Stock and/or April $50 calls to buy (ANQ DJ).
Continued Wedge Plays:
SWBT (Southwest Bancorp of Texas--$42.38; -2.18; optionable (ZRQ)): Regional: Southwest
http://biz.yahoo.com/p/s/swbt.html
STATUS: Dropped back to close at support (18 day MVA) on lower but still high volume (335,00; avg. 247,000), after the stock rose the previous session on a good earnings report. Looking for a bounce back up in the ascending wedge on a hold of support; pattern high is 45.63. Money flow remains strong and buying positive.
BUY POINT: Aggressive: On a bounce on again rising volume. Breakout: 45.76, on continued strong and rising volume.
POSITION: Aggressive: Stock and/or May $40 calls to buy (ZRQ EH). Breakout: Stock and/or May $45 calls to buy (ZRQ EH).
ORCL (Oracle Corporation--$34.56; +0.75; optionable (ORY)): Software
http://biz.yahoo.com/p/o/orcl.html
STATUS: Got a decent shot of volume Friday (up to average at 50 million) but the stock managed only a small move, testing resistance on the high of 35. Still, it was a move up, and if volume can crest average levels, the stock can move up to the 200 day MVA at 35.91, the first of several levels of higher resistance to tackle. Look for support at 34 on any pullback. Buying remains positive.
BUY POINT: On further upward movement on above average volume.
POSITION: Stock and/or March $30 calls to buy (ORY CF).
TXN (Texas Instruments Inc--$50.31; -0.94; optionable (TNZ)):
http://biz.yahoo.com/p/t/txn.html
STATUS: Still looks good in the ascending wedge, pulling back slightly and testing support on the low of 49.75. Volume was higher (13.4 million; avg. 11 million), so the stock can pullback to the 10 day MVA (49.08) or 18 day MVA 48.42) before heading back up. Earnings are out after the bell Monday; we will see how those numbers affect stock price. Pattern high is 54.69. Positive buying and uptrending money flow.
BUY POINT: Aggressive: On a move up from the 48 range (or better) on rising volume. Breakout: 54.82, on volume of 14.9 million or better. A buy on the breakout up to 57.56.
POSITION: Aggressive: Stock and/or April $50 calls to buy (TNZ DJ). Breakout:
Stock and/or April $50 or $55 calls to buy (TNZ DJ or DK).
Pennant:
CSBI (Century South Banks Inc--$33.38; -0.68; no options):
http://biz.yahoo.com/p/c/csbi.html
STATUS: In a pennant above support (18 day MVA 33.04), on very low, below average volume (16,500; avg. 77,500). The stock tested the moving average on the low of 33.06, and looks ready to move up from here on a volume surge. Big money flow and good buying. Pattern high is 34.72.
BUY POINT: Breakout: 34.85, on volume of 105,000 or better. Remains a buy up to 36.59.
POSITION: Stock.
BASING/TRADING RANGES:
New Plays:
MFLO (Moldflow Corporation--$25.13; -0.62; no options): Software
http://biz.yahoo.com/p/m/mflo.html
STATUS: Pulling back in the handle to the stock's 20-week cup base (prior basing high of 31.06). Volume dropped below average to 52,200 (avg. 60,000). The stock can find support at 25 for a move back up on stronger volume for the breakout (handle high 27.25). Huge money flow and buying. Earnings out January 24.
BUY POINT: Breakout: 27.38, on volume of 90,000 or better.
POSITION: Stock.
BSC (Bear Stearns Companies--$57.69; +0.19; optionable (BSC)):
http://biz.yahoo.com/p/b/bsc.html
STATUS: In a cup with handle that formed at the bottom of the stock's 18-week base. The low tested support (10 day MVA 56.49) but price closed near the high of 57.75. Volume dropped below average to 799,200 (avg. 1.3 million), continuing its decline over the last several days, so the stock is looking ready to head back up in a rally as it holds at support. Handle high is 59.69. Strong money flow and good buying.
BUY POINT: Breakout: 59.82, on volume of 2 million or better. Remains a buy on the breakout up to 62.81.
POSITION: Stock and/or April $55 or $60 calls to buy (BCS DK or DL).
FBF (FleetBoston Financial Cp--$41.00; 0.00; optionable (FBF)):
http://biz.yahoo.com/p/f/fbf.html
STATUS: At support in the handle to its 18-week cup base (prior basing high of 43.75). The stock is sitting on the 10 day MVA for the second day, volume rising above average Friday to 4.4 million (avg. 3.6 million). Look for a move up in a rally (handle high is 43.19). Look for financials to benefit from further interest rate cuts. High money flow and good buying.
BUY POINT: Aggressive: Up from here on stronger volume. Breakout: 43.32, on volume of 5.4 million or better.
POSITION: Stock and/or April $40 calls to buy (FBF DH).
PLT (Plantronics Inc--$52.56; -1.69; optionable (PLT)): Telecom
http://biz.yahoo.com/p/p/plt.html
STATUS: In a 19-week base, and pulling back from Thursday's high of 54.81 (prior basing high is 55.75). The stock hit a low of 49.50 but on strong volume (709,500; avg. 375,227) closed near the high of 53. Look for a continued move up from here on the momentum for a breakout from the base; looks like a short handle. High money flow and relative strength.
BUY POINT: 55, on volume of 563,000 or better.
POSITION: Stock. May $50 calls have 24 open interests, too illiquid for the stock (PLT EJ).
VRTY (Verity Inc--$30.94; +2.75; optionable (YQV)): Internet software
http://biz.yahoo.com/p/v/vrty.html
STATUS: Moving up from a test of the breakout (from a recent trading range) on good volume (1.2 million; avg. 606,181). The stock has moved from a December low of 13.13, and is ready to break resistance of the 200 day MVA (32.74). Look for resistance at that level, as the stock continues up on the momentum. Huge money flow and decent buying.
BUY POINT: Aggressive: On further upward movement on continued strong volume. Watch resistance at 32.74.
POSITION: Aggressive: Stock and/or (YQV CF).
SRNA (Serena Software Inc--$44.63; +6.19; optionable (NHU)): Software
http://biz.yahoo.com/p/s/srna.html
STATUS: Moving up toward resistance on outstanding volume (1.8 million; avg. 400,000). The stock just beat the December top at 44.44 and now needs to eliminate overhead supply up to 47. Prior high in the 10-week base (the stock is running up the right side now) is 58.31. Relative strength broke out ahead of price (bullish) along with money flow, and buying looks good.
BUY POINT: Aggressive: On further upward movement on continued strong volume. Safer: Over 47, on continued strong volume.
POSITION: Aggressive: Stock. May $40 options (NHU EH).had insufficient open interests (25).
Continued Basing Plays:
TGP (Georgia-Pacific--$30.94; -0.12; no options): Materials and construction
http://biz.yahoo.com/p/t/tgp.html
STATUS: Pulled back to support (10 day MVA) on continued lower volume (84,300; avg. 168,772) after pulling off the breakout high of 31.88. The stock failed its attempt to break out of the 6-month base (prior high at 32), but looks good on this pullback. Look for another try. Excellent money flow and high relative strength. Earnings January 26.
Basic materials usually perform well when the Fed cuts rates.
BUY POINT: Aggressive: Up from here on stronger volume. Breakout: Over 32, on volume of 253,000 or better.
POSITION: Stock.
AZO (Autozone Inc--$28.56; -0.25; optionable (AZO)): Auto Parts
http://biz.yahoo.com/p/a/azo.html
STATUS: Tried to break out of the 9-month base Wednesday, showing good volume, but pulled back to the 18 day MVA (28.30) by Friday, where the stock opened on a gap down. The company will miss second quarter earnings estimates, though has a positive outlook for the 2001 revenues. Volume was higher (586,600; avg. 433,363), pushing the stock up a few cents despite the loss on the day (intraday high tapped resistance at 28.75-28.88). Recovering from a low of 27.81, we will see if the momentum carries AZO back up to breakout levels. Strong money flow and positive buying.
BUY POINT: A continued move on solid volume.
POSITION: Stock and/or March $25 calls to buy (AZO CE).
XOXO (Xo Communications--$27.81; +0.37; optionable (QNF)): Domestic Telecom
http://biz.yahoo.com/p/x/xoxo.html
STATUS: Reached a breakout high of 29.94, but pulled back down (still holding above Thursday's high of 27.63) on much stronger volume (12.6 million; avg. 6.3 million). Look for a pullback to test the 25 range. Broke from an ascending wedge formed at the bottom of its base, and is pulling back from a move up after testing that breakout. The 200 day MVA is at 32.04. Excellent buying and huge money flow.
BUY POINT: On a move back up from the 25 range, on continued strong volume.
POSITION: Stock and/or April $20 or $25 calls to buy (QNF DD or DE).
C (Citigroup--$54.38; +0.13; optionable (C)): Bank
http://biz.yahoo.com/p/c/c.html
STATUS: Remains in a good-looking pennant as volume remains at average or lower levels (12 million; avg. 13 million). The consolidation is the (volatile) handle to the stock's 20-week base, so look for a move up soon (prices squeezed into a doji Friday) on a volume surge. Pattern high is 57.38. Good buying.
BUY POINT: Aggressive: On a move up from here on rising volume. Breakout: 57.51, on volume of 19.5 million or better. Remains a buy on the breakout up to 60.39.
POSITION: Aggressive: Stock and/or March $50 (C CJ). Breakout: Stock and/or March $55 calls to buy (C CK).
LEH (Lehman Bros--$79.94; +2.44; optionable (LES)): Brokerage
http://biz.yahoo.com/p/l/leh.html
STATUS: Moved up nicely from the 10 day MVA (76.34) on strong, though decreased, volume (3.15 million; avg. 2.3 million), trying to break out of the 18-week base. Price closed below the prior basing high of 80.50, so needs stronger volume to boost it over that resistance; additionally, the stock hit a January top at 82. A pullback can test the 77 range until LEH rallies back. Continues with strong money flow and high relative strength.
BUY POINT: Aggressive: On a move up after a lower-volume pullback to the 77 level. Breakout: 82.13, on volume of 4.5 million or better.
POSITION: Aggressive: Stock and/or April $75 calls to buy (LES DO). Breakout: Stock and/or April $77.50 calls to buy (LES DW).
MER (Merrill Lynch & Co--$73.88; +0.32; optionable (MER)): Brokerage
http://biz.yahoo.com/p/m/mer.html
STATUS: Holding support at the 73.56 level (opening price) on lower, below average volume (4.3 million; avg. 4.5 million). The stock has not broken out of the 19-week base, though not for lack of trying. Prior basing high is 74.63; the stock's highest closing price in the effort is 74.56 (recent intraday highs have hit at and near 75.88). Look for stronger volume in a rally for the breakout. Excellent money flow and high relative strength. Earnings January 23 (Tuesday), before the bell.
BUY POINT: Breakout: 74.76, on volume of 6.7 million or better.
POSITION: Breakout: Stock and/or April $70 calls to buy (MER DN).
JPM (J.P. Morgan & Co--$50.56; -0.88; optionable (JPM)): Banking
http://biz.yahoo.com/p/j/jpm.html
STATUS: Continues to pull back a bit far in the handle, but remains above the 18 day MVA (50.60) and showed a tight doji after the 5-day price drop. Volume was lower at 10.8 million (avg. 10 million). We are looking for a move up from here, if the stock doesn't pull back to the moving average (tested on the low of 49.81) before the Fed moves in with a rate cut. Sooner than that, we'd like to see the stock rally with the market. Buying is looking good.
BUY POINT: Aggressive: Up from here (or the 18 day MVA at 50.60), on stronger volume. Breakout: 54.82, on volume of 15 million or better.
POSITION: Stock and/or March $45 calls to buy (JPM CI ).
KEI (Keithley Instruments Inc--$58.88; -0.93; optionable (KEI)): Electronics (scientific and technical instruments)
http://biz.yahoo.com/p/k/kei.html
STATUS: Broke out of the ascending wedge (at the bottom of its base) and pulled back from the breakout high (60.88) Friday on volume that dropped back to 560,700 (avg. 502,545). Price is now just under the down trendline (July, October and January highs), but can hold at 58.50 (hit three times since July) on further declining volume. The low tapped 57; below that, look for support in the 54 range. Buying continues to improve.
BUY POINT: On a move back up after pulling back to the 54 range (or higher), on rising volume.
POSITION: Stock. April $50 options (KEI DJ) have insufficient open interests for the stock (18).
PUT PLAYS: Still looking for defensive stocks for possible moves down as the techs rally.
Continued Play:
BMY (Bristol-Meyers Squibb Co--$66.06; -1.38; optionable (BMY)): Drug manufacturer
http://biz.yahoo.com/p/b/bmy.html
STATUS: Dropped back below the 50 day MVA (66.34) as volume pulled back below average to 4.5 million (avg. 4.8 million). The stock tapped again near the lower support level at the 65 as it has difficulty holding a move over the 50 day MVA. On a move below 64 on stronger volume, puts.
BUY POINT: A move below 64 on increased volume.
POSITION: February $70 puts to buy (BMY NN).
Good Investing!
Your Technical Traders Report Team
All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP. or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners in Online Investment Services, LP. or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.
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