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us stock market, stock trading seminar
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1/22/01 Technical Traders Report
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Technical Traders Subscribers:
TONIGHT:
- The expected pullback on lighter volume.
- Leading stocks look good as DELL's warning does not tank the market.
- Earnings mixed after the bell, and the reactions seem even-handed.
- Leading economic indicators show third decline in a row.
- Looking for more Fed help.
- Subscriber Questions
- Team Trades
Market pauses as expected.
Today gave us the light volume pullback we were looking for after Friday's action. One thing we wanted to see was continued stinginess from the Nasdaq in giving up recent gains. Whenever an index or a stock makes good headway and needs to take a breather, you like to see it do so moderately with low volume, subdued action, and minimal selling. This is in contrast to what the markets gave us in the summer, fall, and early winter: short rallies that quickly rolled over and started selling in large chunks.
Today's action more or less fit the mold. The Dow and Nasdaq pulled back on a sharp volume drop while the S&P 500 was flat on lower volume. Key stocks pulled back on lower volume. Moreover, we saw a lot of these stocks and the indexes as well tap support (often in the form of recently broken down trendlines) and close with doji's on their candlestick charts. What that means is that after breaking over these levels on strong volume (indicating strong buying on the move), they are taking some profits, but the profit-takers are in the minority and that buyers came in when the support levels were tapped. The buyers drove the price back up to the opening price, giving the doji on the day. Now a doji on a candlestick chart indicates that buyers and sellers were even on the day; after a tap of support it often means a stock is ready to move up again. There has not been a lot of selling on this pullback, but then again, we like to see stocks and indexes hang onto most of their gains as they rest as that indicates strength in the overall move. Indeed, advancing issues, after yielding to decliners on Friday, took the lead once again on the Nasdaq and the NYSE.
Even DELL's pre-market fourth-quarter profit warning (its second for that quarter) did not knock the legs out from under the market. It acted as a drag at the open, but the stock itself held up well, another indication that the Nasdaq and other indexes are used to bad news (at least bad news they more or less expect). If we continue to see specific leaders expected to perform well continue to do so, it appears we can weather this earnings season in good shape, putting the indexes in good position for the FOMC rate cut next week.
FOMC and rate cuts.
Speaking of the FOMC, we said debate would start in earnest this week about how big of a rate cut the Fed will deliver next week. Incredible as it seems, some are even saying the Fed does not have to cut rates, but that is the fringe element.
Then you have the Tom Costello's (CNBC) out there who are stirring the pot saying that the Nasdaq has already priced in a 50 basis point cut next week, and if one does not come there is going to be trouble. Besides being wrong, his statement is simply irresponsible. On January 3 when the Fed cut rates the Nasdaq closed at 2616. It sold back immediately after that gain and is now at 2758, a 142-point advance from that close. We do not believe that constitutes 'pricing in' 50 basis points. Indeed, just last week many on CNBC were saying the most likely cut (ignoring what the bond market was saying) was 25 basis points, yet the market has really gone nowhere since then. How does that get you to the point where another 25 basis points has been priced into the mix today? The point: just part of the emotional hyperbole we said we would all be hearing this week. It started a lot faster than we even anticipated.
So what do the Fed Futures Contracts say about a rate cut? They have indeed priced in a 50 basis point cut on 1-31 close to a 100% certainty. Today's February contract held steady showing well over a 90% certainty of such a cut. The April contract shows another 25 basis points and the May another 25 basis points. That is another 100 basis points in cuts or a total of 150 basis points in cuts by the end of April. The closer to the event, the more accurate the prediction; right now it is showing a very high probability of a 50 basis point cut as it factors in all of the economic data to date. All eye will be on the ECI on Thursday and Greenspan's speech to Congress on debt reduction the same day, and that will tell much of the story. Still, that will not change the mountain of economic data thus far indicating another rate cut of 50 points is warranted.
Earnings.
TXN missed its earnings and revenue number and is getting hit for over $2.50 after hours. You cannot totally stink up the place and be forgiven. VTSS beat the street and grew sales by 85%, but that was not pleasing either, and it was hit for $6.50. CA beat the street and it was rewarded $3.50 (10%). ENE beat the street handily (5 cents) and gained $4.62; it had been roughed up lately and got a very nice run on the news.
Earnings are starting to give that strange result: you can meet, even beat the street (VTSS), but get roughed up anyway. If you have been a dog or lagging of late and beat the street you are golden. If you have run well and just meet or beat estimates, you could get sold. This is now the time to be careful around earnings. Leaders are being expected to perform after JNPR and AMCC announced good earnings. If they don't really hit the longer than expected drive, the fact that they were able to beat estimates in a tough economy may not be enough.
So, if we are in that strange time that always seems to occur, i.e., that was nice but I am selling anyway, be careful with short term trades and short term options. But, as we heard on Friday, there are those who want another shot at getting in on what they feel is a real bottom given the volumes on buying. So, those stocks that show good earnings and guidance for the future will most likely be bought up again once they sell back.
THE ECONOMY
Leading economic indicators tank. The LEI came in at -0.6% versus an anticipated 0.3% drop. That is the third drop in three months and the largest decline since December 1980. Usually a three month decline signals recession, but those who refuse to acknowledge or admit that the economy is teetering on recession said that the magnitude of the weakness was not at recession levels. As we noted two months ago, there are still those who refuse to acknowledge the economic numbers, instead clinging to the belief that there is nothing that can really stop this economy. Gee, just like the perpetual bullish analysts still putting 'strong buy' labels on internet stocks as they plunged 70%. "If they were a buy at $150, they are a steal at $50 . . .$40 . . .$30 . . .$20 . . ." They won't admit there is trouble until it is printed in the Federal Register.
We all know it. We have been saying it for six months. The economy is in trouble and it needs major help. Another 50 basis points next Wednesday would help. Accelerated introduction and passage of a meaningful tax cut would help. The economy is suffering from a chronic lack of money in the right places; sitting in stacks in the Treasury Department's coffers is not helping the economy. As President Bush aptly put it today, the surplus is "acting as an anchor" on the economy because it is not in the economy as it should be. That is EXACTLY the right idea. Spending the surplus on debt reduction does not lead to the lower interest rates that have fostered our economic health. History shows that lower taxes, not higher surpluses and lower debt, results in economic success.
What if the rate cuts don't do the trick and get the economy flying again? That was a question reporters were asking with respect to Goldman's upgrade of the retailers today. Well, hopefully there will be retroactive tax cuts to spur things along as well. But as we have said, even with rate cuts, the economy must start to perform for stocks to continue their gains. Markets factor in rate cuts as they discount future growth. If it turns out that the growth does not happen, then things sell back. But, the way these reporters and some market analysts were talking, you have to wait until you know for certain the economy is going to succeed before you invest. As we all know, once the news is fact, the big moves are done unless the market continues to factor in further economic gains in the future. If you wait until you see the results, you are too late. Rely on what price and volume are telling you. That got us in this rally that we have had this month right after the Nasdaq touched a new low for the year. Tough to do, but you have to follow what the market is telling you here and now.
THE MARKETS
Overall market stats:
VIX: 25.94; -0.35. Volatility hit 27.38 on its high, showing a relatively narrow range. We actually like to see volatility decline on this action as we want the indexes to consolidate quietly on low volume before they take back off (at least that is the plan) from support on stronger volume.
Put/Call ratio: 0.46; -0.02. Even with the selling, put buyers did not rise at all indicating that there is still a lot of confidence that the market will move up at this point. Not necessarily what we like to see, but with the low volatility in the market, low put buying is not unexpected.
NASDAQ: Good action on the Nasdaq today. It sold back on lower volume, held above support, advancing issues topped decliners, and generally acted as a healthier index should.
Stats: Down 12.47 points (-0.5%) to close at 2757.91.
Volume: 2.038 billion shares (-25.6%). 1.170 billion shares to the downside versus 807 million to the upside. The Nasdaq continues healthy price/volume action.
A/D and Hi/Lo: Advancing issues actually moved back over decliners on a 'down' day, 1.10 to 1 (1.03 to 1 Friday). New highs rose to 75 (+12) while new lows rose to 17 (+1).
The Chart: http://www.investmenthouse.com/cd/$ndx.html
The Nasdaq performed as we wanted it to. It was up and down in a 120 point range. That is not what we really liked, but it did move on lower volume. Equally important, it tested some key support in the form of the down trendline (tapped on the low at 2722.96) and lateral support at 2720 and moved right back up to close. The candlestick pattern showed a very tight doji. When we see a stock or index test support on lower volume and show us a doji, that looks positive. It still must perform, but it shows us that there is not much selling going on at this juncture. This action mirrors some key stocks in the index such as BRCM, PMCS, GLW, XLNX. So far so good.
Dow/NYSE: The Dow continues to sit right in the heart of its trading range as it continues to tighten up overall. Volume fell on the NYSE as well as it too showed a doji on the candlestick chart. It has been selling on lower volume of late, and it looks as if it is trying to hang on for a move up now that its tech components are pulling some of the weight.
Stats: Down 9.35 points to close at 10,578.24.
Volume: NYSE volume continued to slide, dropping to 1.133 billion shares (-19.5%) as price/volume action looks better. Up volume actually beat down volume 621 million to 476 million shares.
A/D and Hi/Lo: NYSE advancing issues jumped back out into the lead on a down day, 1.3 to 1 (1.27 to 1 decliners on Friday). New highs fell to 92 (-27) while new lows fell to 6 (-3).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow continues to struggle below the 200 day moving average, but today it did not continue its fall as we thought it might. Instead, it tapped 10,509.92 on its low and turned back up for the close. It too showed a doji on the candlestick chart as its trading range continues to tighten. We always like to see consolidations tighten up in narrower ranges; think of it as pressure building for a move. It still has to clear and hold over the 200 day moving average (10,709.94), but it looks as if it is going to make a run at it.
S&P 500: The action on the S&P mirrored that on the Nasdaq, rising early, selling off, tapping support on its low and marching higher to close with a doji on the candlestick chart. Volume was lower, and though the index finished fractionally higher, we view the overall action as positive. We like that it touched the down trendline and support at the 1335 level on the low (1333.55) and recovered to close just over the 50 day moving average (1342.14). The S&P is forming an ascending wedge of short, making higher lows and showing good price/volume action.
Stats: Up 0.35 points (+0.03%) to close at 1342.90.
Volume: NYSE volume throttled back again to 1.33 billion shares (-19.5%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
We really liked today's action on the indexes. As we saw the lower volume on the day, the indexes forming doji's over support as the close approached, and leading stocks doing the same, we started taking some positions. Again, we were not certain that the move would come tomorrow morning, afternoon or later in the week, but we liked what we saw enough to start taking new and adding to existing positions. We are big believers in taking positions when the opportunity presents itself when the market is looking healthy overall. That can always change, but we still like what we are seeing at this point with the price/volume action and the patterns that are developing.
There is still uncertainty out there with the Employment Cost Index on Thursday and Greenspan speaking to Congress on Thursday. He is most likely going to say that debt reduction is still key to the success of the economy, and that will most likely rattle some investors, thinking that Greenspan and Bush will be at odds over a tax cut and how to handle the economy. He may say more about rate cuts; he probably won't. He will most likely say something about the status of the economy as that is integral to the topic. We don't expect much more than a reiteration of what we heard in December about a slowing economy, the need for the Fed to be vigilant to step in if necessary, and the importance of continuing to pay down the debt and whether that will be impacted by a slowing economy.
That is supposedly keeping investors on the sideline. That is fine with us as it allows for an easy consolidation on low volume. It also helps stocks form better patterns to jump up out of. We still do not see a lot of great patterns in technology from the point of cup with handles and breaking to new highs, but there are great patterns in financial stocks and traditional areas that do well when the Fed cuts rates, i.e., retailers (clothing, car parts and the like), financials (again), and basic materials to name a few. Financials are good leaders to an extent, but the other areas tend to be less flashy. With technology, even though there is not a plethora of stocks forming bases ready to spring to new highs, they are forming up well to continue their moves up as they recover lost territory. Volumes are solid, and we feel that we will continue to see solid moves as long as overall price/volume action remains positive. For now, while trouble could arise from any arena, things look good.
Thus we will continue to take positions as they arise in those plays we love: pre-announcement splits, pre-splits, solid bases, and leading stocks that are appear poised to spring higher (BRCM, XLNX, GLW, and PMCS). Indeed, many of the semiconductor stocks were down after hours on the VTSS and TXN earnings announcements, and we might get good entry points in the morning, though we have to be aware that BRCM announced earnings Tuesday after the close and PMCS does so Thursday. That could upset them short term if they don't knock the ball out of the park, but note that XLNX missed its estimates just on 1-17, and it looks solid in this ascending wedge consolidation. We continue to mine for the gems in a market that is improving but that many are afraid to enter. We have to trust what we are seeing now, but be ready to get out if things turn negative, i.e., selling on higher volume.
Support and Resistance Levels
Nasdaq:
Resistance: Slipped below the 50 day moving average (2772.37). 2890 to 2900 is next before the 3000 level.
Support: 2700 is what we are looking for as the first round. Then 2640 to 2650.
S&P 500:
Resistance: 1360.
Support: 1335 to 1340. Then 1325. After that we look to where it turned up last time at 1313.65.
Dow:
Resistance: 200 day moving average (10,709.94). Down trendline at 10,710. Then 10,900 and 11,020. After that, 11,400.
Support: 10,300 to 10,400. After that, 10,000.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
1-22-01
Leading Economic Indicators for December (10:00): -0.3% versus -0.2% prior.
Treasury budget for December (2:00): $32.0 billion versus $33.1 billion prior.
1-25-01
Initial jobless claims (8:30): 330,000 versus 306,000 prior.
Employment Cost Index, fourth quarter (8:30): 1.1% versus 0.9% prior.
Existing home sales for December (10:00): 5.05 million versus 5.22 million prior.
Greenspan speech
1-26-01
Durable goods orders for December (8:30): -1.5% versus 2.5% prior.
Help wanted index for December (10:00): 75 prior.
SUBSCRIBER QUESTIONS
Q: After having my head handed to me over the last 9 months, I am trying to develop a daily routine whereby I examine various indicators, stock sectors, indices and volume to help me get a better handle on market sentiment. Do you have such a routine, and if so are you willing to share it? I am a real rookie at this game and need all the education I can get. I just seem to be wallowing in a sea of information that I don't know how to use or how much importance to attach to it. I have read each and every report that you have sent for the last several weeks and am impressed with your ability to analyze what's happening. You're far more accurate than your competition.
A: Yes. First, we look at the overall price and volume action on several indexes, e.g., Dow, S&P 500, S&P Mid-cap, Nasdaq, Russell 2000. We look at the A/D line and the candlestick chart as well to determine the overall health and action of the market. We have several sectors we look at each day after the close: semiconductor, networking, optical, software, computer peripherals, financial, drugs, biotechs, retail, scientific and technical, and others that may show up with unusual volumes on market scans. We also have a list of stocks with leading earnings and revenue growth that we take an individual look at each close. Those give us valuable insight into where the 'big' or 'smart' money is or is not going. That helps develop a picture.
When we look at each area we look at price and volume and any patterns that are forming. That takes a practiced eye to do quickly, but there is nothing like looking at the chart to get the feel. While doing this we look at relative strength (compared to the S&P 500) and some momentum indicators (MACD, stochastics, though these are way down our list). If we find a stock we do not know but looks good, we have to check the details; boring and hard, but necessary. Those include money flow, earnings growth, revenue growth, relative strength, institutional buying or selling. That tells us if this is just a pretty face or if there is something more substantial there that can get us involved in the stock. If it passes muster at this point, it is a definite candidate, and we then start ranking it in relation to all of the patterns we see that we like. Then we cull and come up with the best plays. All in a few hours after the market closes.
We are preparing a seminar series covering our philosophy of investing, our method of technical analysis, stock splits, covered calls, spreads, options, and a host of other investment strategies we incorporate. These should be ready to go in March or April. We will let you know when we get set dates.
End Part 1 of 2
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