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us stock market, trading strategy
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1/24/01 Technical Traders Report
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Technical Traders Subscribers:
TONIGHT:
- More or less as expected: a run up and then reversal in the indexes. Looks like selling unless something happens.
- Reaction to earnings after hours delivers another signal that selling is to come.
- Will Greenspan tip his hand tomorrow? He will say the same things he said before.
- Subscriber Questions
- Team Trades
Markets look ready for selling back.
The past week we were talking about how earnings would start to be treated like trash no matter how strong they came out. Last night we questioned whether everything was just peachy given that so many were saying this was the real thing and investors were rushing to get in lest they 'miss' the move up. Today the market showed us that it was ready to reverse as did the action after hours. The only thing that will stop it now is a surprise announcement from Greenspan that the Fed is going to cut rates 50 basis points; the odds of that are very, very long.
Lots of reversal signals.
Like Monday, the indexes showed doji's on the candlestick chart. Unlike Monday, these are not particularly bullish, especially on the Nasdaq. The Nasdaq ran higher and then sold back as the sellers caught up with the buyers. The A/D line narrowed and the up and down volume moved closer. Volume was higher on the run up and then turn back down. That indicates churning, i.e., the inability to make headway on higher volume. In other words, investors were buying and selling with almost equal fervor. Thus, even though the Nasdaq showed a gain on higher volume, it is also showing that it is weakening.
This action showed up in many individual stock patterns as well. We ran through some leaders and through many sectors and found doji's with, in many cases, closes right below resistance. They forayed above the resistance early in the session, but gave it up late in the session. They did so on higher volume as well. You recognize many of the names: GLW, PMCS, ADBE, CIEN, JNPR, NEWP (a 'tombstone' doji), SDLI, JDSU, VRTS. Not all closed below resistance, but they showed that doji on higher volume after a run up; classic selling signs.
After hours action underscores the mood change.
Despite the television faces continuing to say everyone wants to be in this market right now, the treatment of great earnings shows otherwise. We have been talking about the change from "honey, these earnings are GREAT, let's buy now" to "we don't care what the news is, we are going to interpret it in the worst light possible and sell." It appears to have started this morning with BRCM all because one analyst decided to pan the biggest and best in the sector (after, of course rising to $142 after hours Tuesday on the earnings), and it has really shown itself after hours. SDLI crushes earnings by 4 cents and shows 200% revenue growth but is hammered because the JDSU merger vote had to be slid back. VRSN utterly blows out earnings (21 cents versus 11 cents expected) and says the future is outstanding, and it loses its entire $7 gain on the session. VRTS beats by 2 cents and is carved up.
It was not just the earnings announcers either. JNPR, AMCC, NEWP and a host of others were dragged lower on the earnings selling as well. SEBL, earnings still hot off the presses from Tuesday, was up all day, dove heading into the close and after hours after VRTS announced its earnings. Why on earth would other companies' failure to show a positive outlook impact SEBL who just last night demonstrated business was booming and projected a continued boom? There is no reason when this kind of mindset takes hold. You see it coming, you know it is coming, but it still mystifies when you see it happen. You had to basically be a no-name or low-profile stock to avoid being sold off after reporting earnings. When it takes hold, it is hard to beat the lemmings.
And yet, a caveat.
We also noted just over a week ago, however, that when the market starts a bull leg it can appear that it is running out of steam just to continue to chug on and then take off again. It seems to use the apparent reversal days as its resting points, and launches anew. It did that in October 1999 as it showed doji after doji, separated by big runs higher. It can sell lower in the morning to shake out sellers and find support, and then firm up and run higher; indeed, that is our favorite type of session. It can happen. But is this 1999 with the massive infusion of cash from the Fed? Hardly. Thus far all the Fed has done is ease off on the pressure as it still keeps its jackboot pressed firmly on the market's throat.
If Greenspan does what he normally does not do, i.e., expressly say the Fed is going to lower rates another 50 basis points, the markets could scream right back up. Otherwise, they most likely won't be too excited. Sure Greenspan reads more or less like a cheap novel when he talks; in December he said the Fed was going to cut rates, he just didn't say when. That is the problem tomorrow. Everyone knows the Fed is going to cut rates. They even know the day this time. The missing ingredient is the amount. Controversy is swirling about the magnitude of the cut with most commentators saying 50 basis points is needed but the Fed will drop the ball and cut just 25 basis points, preferring to see the economy and U.S. citizens suffer longer as if crashing the stock market in the worst bear in a few decades in 2000 was not enough (Sound bitter? Perhaps. We loathe inefficiency and stupidity). Then there are those who say a 25 basis point cut shows that the economy is not that bad; the other side says that is just the Fed being foolish and that will only slow any future recovery. Tennis match.
In sum, the market could really be a lot stronger than most give it credit for and just use some morning selling as another chance to get into stocks at lower prices and follow up with an afternoon rally. Or it could get news from Greenspan that sends it higher. Most likely it won't.
So what the fat do you do?
First, crack open a cold one or uncork your favorite and then see what is on the tube. Then look at those stocks you want to buy when they hit support levels tomorrow or over the course of the next few days and start to rebound. We are starting the list with those stocks that blew out earnings tonight but were sold down: VRSN, VRTS, GLW, SDLI, EXDS, JDSU (reports tomorrow, but hit along with SDLI), SEBL (guilt by association, i.e., being a successful stock). What we have seen is this: stocks report blowout earnings and were rewarded. Those reporting 'okay' earnings get roughed up a bit, e.g., SUNW and EXTR. Then after a session or two of shunning they start right back up. As long as the market stays 'healthy,' this should continue to happen.
For the next list we go out to those other strong stocks that are looking decent but got whipsawed today: JNPR, PMCS, XLNX, etc. And we hang tough with stocks that showed they were tough today, e.g., MANU, NUAN. We also keep those that are holding solid patterns under review as well as pre-announcements and pre-splits, ready to get on board if they make the anticipated moves. We have to adjust to fit the market and take what it is giving us right now.
After we get our stocks that we want to play, we watch the market and how they perform. We are expecting a pullback based on the move up, the action we saw the past two sessions, and the sentiment. As long as the pullbacks occur on lighter volume and thus the market keeps that 'healthy' look, we get ready to take positions. We watch for when they hit target support. If they hold there and start to rebound we can open some positions. If they go up from there we can then add when the stock gains momentum and when it breaks resistance on stronger volume. That gets us into strong positions on strong stocks at a good cost basis. If it breaks support, we keep an eye on the volume, and if still light look for the next level to hold, and then take a few more positions. We like to call this target shooting at support levels, but there are a lot of names for it.
We usually do not do this unless things are strong. Right now things look solid and we are comfortable taking positions this way. If volume starts to creep higher on the selling, however, we need to exercise our stop rules and wait until the real bottom appears. For now the Nasdaq has acted just as it should as far as price and volume action. That could change tomorrow after today's reversal, but we don't see a pernicious shift in attitude and history really is on our side with the Fed in an easing mode. It is not a straight shot up as 1981 showed us, but if the Fed stays with it and the elected officials do the right thing, time is on the market's side.
THE MARKETS
Overall market stats:
VIX: 24.56; +0.70. Spiked to 25.54 on the high, but still below levels that sparked selling in recent times. The market is a bit of a different cat right now, showing solid price/volume action and acting much better than it was. Still, it is not bulletproof. Still a caution signal.
Put/Call ratio: 0.53; -0.07. Put buyers fell back today even with some weakness after the morning surge. Still low levels, but more normal after the market has attempted to form a bottom and move higher. After the several spikes close to 1.0 in late December, it gave us a pretty good contrarian indicator as it turned out.
NASDAQ: We covered most of our thoughts on the index. It maintained its positive price/volume action for the entire month of January today, but we have to be careful of an index that continues to try and reverse on us. That keeps us on edge, but if it never really reverses or the selling does not turn nasty, that shows strength. It did not give us the strong follow through we were looking for; if it had closed near its high (2892.96), that would have been different. We still feel it needs something positive to get it going higher, especially as it approaches resistance at 3000. It needs assurance that the rally started on the Fed rate cut is warranted by further needed Fed cuts.
Stats: Up 18.76 points (0.7%) to close at 2859.15.
Volume: 2.568 billion shares (+12.9%). 1.528 billion upside, 974 million downside. The downside volume gained momentum even though the index maintained healthy price/volume action.
A/D and Hi/Lo: Advancing issues led again, but just 1.19 to 1 versus Tuesday's solid 1.64 to 1. New highs rose to 93 (+1) while new lows fell to 13 (-5).
The Chart: http://www.investmenthouse.com/cd/$ndx.html
Showing more indications of stalling just as it makes its approach to 3000. Not surprising as that is another solid level of resistance just beyond the down trendline it just broke. It takes work to clear downtrends as buyers have to overcome all of the ready sellers. It needs a breather to get more buyers ready to take on 3000. A pullback, as long as it is healthy price/volume-wise, is not bad.
Again, it could power right back up on the right word from the Fed. The Fed Funds Futures contract for February has backed off of the 50 basis point cut. It is still in the hunt, but it is nowhere near the sure thing it was just 4 sessions ago. It is pretty darn accurate, darn it.
One subscriber describes the Nasdaq's pattern as a potential reverse head and shoulders with the left shoulder at late November/early December, the head at the January 3 intraday low, and the right shoulder as yet to be formed (it would start after a bounce down from 3000). Very possible, and that would fit the theory that the index needs to test the lows once again. That would put it down to the 2500 level to the downside (right where the down trendline is right now). A weaker right shoulder that did not make it to 2500 would show a stronger pattern. Head and shoulders patterns are not our favorite patterns because they can bee seen in many charts but don't necessarily pan out. That can be true of any pattern, however, and it is worth keeping this in mind if the Nasdaq rolls over and starts heading lower. The same rules apply as far as price/volume, however, and that will keep you out of trouble in most cases.
Dow/NYSE: The Dow showed a doji on the candlestick chart as well as it continues to tighten its consolidation in its trading range from 10,400 to 11,020. We like the fact that the index held above its 50 day moving average, but there was a lot of churning going on as well. We like tightening patterns, however, and the Dow looks promising. It also, however, has major resistance overhead, and it churned today on high volume.
Stats: Down 2.84 points (-0.03%) to close at 10,646.97.
Volume: NYSE volume was higher again at 1.285 billion shares (+4.2%), but without a gain, that is not the best thing for the index. Up volume continued to lead, however, 704 million to 543 million shares.
A/D and Hi/Lo: NYSE advancing issues clung to their lead by 25 stocks (1426 to 1411). That marks the A/D line's highest point in about a year. New highs fell to 133 (-7) and new lows fell to 6 (-1).
The Chart: http://www.investmenthouse.com/cd/$dja.html
Tightening trading range but major resistance. The 200 day moving average is at 10,705.30 and the down trendline at 10,690. While we like these tightening consolidations, they can break either way. Lots of overhead resistance that the Dow must clear. The pressure is definitely building.
S&P 500: The big caps turned in another good performance on rising NYSE volume, but they turned back from the intraday high as well as the index tries to take on resistance here at the 1360 level. Overall, however, it is looking solid though it still has to distance itself from that down trendline and clear this level.
Stats: Up 3.90 points (+0.29%) to close at 1364.30.
Volume: NYSE volume continued to climb at above average levels on the move up, coming in at 1.285 billion shares (+4.2%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
As stated above, we think the sellers are ready to take some profits from what the market is showing us, and we are preparing to take positions at support levels as long as the selling volume remains light on the move down. Again, a good place to check this is at the IBD site at:
http://www.investors.com/
That will give you the percentage of volume that session as compared to the volume of the previous session. It also shows you the average daily volume so you can see how the current session's volume stacks up.
The market appears to be transitioning to some selling but as noted, we have seen strong bull markets just keep on shaking off selling attempts. We do think there will be some softness early based on the after hours action. A weak ECI will help, but it won't do much until Greenspan has his say in the morning about his opinion on Bush's fiscal plans. There could be some electricity in the air; should be interesting if nothing else.
If Greenspan says the Fed is going to cut substantially or something to that effect and the market reacts favorably, we will use that as a point to take some positions. It won't be a done deal until the Fed acts, and there are those out there who always get cold feet and those who want to short any selling; they will try to whip things up once again before the actual event. If he does not give a clue, as the Fed Funds Contract is showing less likelihood of a 50 basis point cut, the market may just start to price any possibility of that out of the market (there is not that much priced in, but selling always overshoots the mark). That would give us our profit taking ahead of the meeting and allow for another move on the actual news.
Stay flexible, watch volumes, and if you hear Greenspan tip his hand and it gets things started, act. We are going to be watching, and if we see or hear something, we will let you know.
Support and Resistance Levels
Nasdaq:
Resistance: 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 (10,705.30). Down trendline at 10,690. 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 your write-up on credit spreads, I asked my broker about them. He said that I should examine the risk/reward of the purchase and then to hold them until expiration. When you buy spreads, do you always hold them until expiration?
A: With $5 to $10 spreads, you get your best return when you hold them until expiration unless the stock really races higher and the cost to repurchase the put you sold if small. It does not take much to hurt the percentage return. The reason you have to go into the spread thinking you will hold it until expiration is that even if a stock races higher, there will be time value in the put that you have to pay for when you buy the put back. It may be way out of the money, but there is still some time value in the option that increases its price. If you are just selling a put, no problem as you did not have to buy a put on the other end to limit your exposure and margin requirements.
Now there is another put spread strategy that we are getting ready to roll out for subscribers that helps eliminate this need to ride to expiration. Also, if the stock moves against you, you can still take home a gain. We have been field testing it this year as the market improved and we are going to give you the details when shortly. This will also be covered in the Options, Spreads, and Other Strategies seminar we will be giving in the spring.
TEAM TRADES
Another busy day as we made some bonehead plays and some decent plays. It happens that way sometimes, but we did not bet the farm on any position today as we were still looking for a pullback in the market. We wanted to take advantage of some of the moves up, but not get overexposed if the market turned. Here are two plays that didn't work out as planned to show you have to stick to the plan.
JNPR: We were watching this one to break its 50 day moving average, but as it shot up in the morning after its lower open, it could not take it out and dropped back in the early afternoon. It fell down to 133, its low 15 minutes into the session, and bounced from there. Aha, we thought as we pounced on some more shares, looking for a move up to 139 for a re-test. It got to 137, pulled back to 135, and then made another run at it. It hit 137.25 and turned. We though about selling but figured JNPR would hold over our buy point. It did on the day, but was clobbered after hours down to 129 before bouncing to around 131 to 132. Bonehead. Didn't break the 50 day moving average and we got overanxious to make the play when we felt the market was going to sell anyway. That was not the gameplan for this stock. We broke rule number one.
PMCS: In a cup with handle, and at support (50 day MVA simple at 98.82). Volume has been just below average for the last two days so we were interested to see if the stock was ready to move up or would hit the moving average first) for a move back up in the handle. Handle high is 111, but we would take positions before that if a move looked strong.
The stock moved up from an early low of 103.88 on good volume when the Nasdaq was at +9.23. PMCS had moved up in after hours trading and we were looking for a move up on the open; on a pullback and move back up we'd look at taking some positions. The stock ran to a high of 107.25 then pulled back (as expected) below the 5 and 15 minute MVAs by 9:25, but showed a doji and popped up from there to 106.13. That is what we were looking for and we were ready to jump in with some May $100 calls. They were trading with a little over a dollar spread and we tried to make it an even dollar. Didn't work. Volume was tapering off (the Nasdaq at +23.38) intraday, but the stock moved up anyway, running to 111.75. The options were up about three points, which was nice for the stock but not for us since we didn't get hit. Worrying about a quarter again when we saw the move we wanted. Stupid, stupid, stupid. Well, there was still the breakout to play. Volume had continued to taper off on the move up, though, and we were not convinced the move would hold just at that point.
PMCS dropped back to 105.63 by 1:44 pm, holding just above the 50 day MVA (105.47) and where it hit its first top of the session. The Nasdaq was at +15.43, and the stock was trading on 11.5 million volume (now above average). Pulled below the moving average to 105.31 and showing a doji on the intraday chart and volume was dropping off quite a bit on the pullback. The stock had crossed below the 5 and 15 minute MVAs but looked like it might get support at the 105 level, where it had tested three times in the previous hour, and earlier in the morning. The Nasdaq was still positive, but fading, and it now looked like the stock was going to test the day's low of 103.88; it had already dropped below the opening price of 104.81. As it turned out, the stock closed at 103.13. We waited and watched it close. If we had made the early play, we would have protected our downside in the event the breakout attempt failed (as it did). Nothing to show for the day except the order we cancelled after it ran away from us (did not want to catch it on the flip side).
Will continue to watch this good-looking pattern for a breakout in a strong rally though it did sell back on higher volume. Despite the move below the 50 day MVA, it is still holding the handle. May pull back below 100 (50 day MVA simple) before heading back up.
End Part 1 of 2
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