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us stock market, understanding the stock market
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4/20/02 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERT SERVICE
Target hit alerts issued last week: NBTY (+$3.48; +22.4%); LOOK (+$1.01; +34%); WLP (+$6.90; +10%- - bounce play); HET (+$7.55; +18%); COHU (+$5.80; +23%); VSEA (+$7.75; +18%); AGMP (+$5.25; +17.5%); ICBC (+$5.55; +21%); ICUI (+$6.18; +18%); UCI (+$3.34; +20%); HRLY (+$4.45; +22%); OEX put ($8.55 per option); JH (+$4.05; +21%); SLGN (+$5.62; +17%).
EMBT hit a trailing stop for a modest gain. LTXX and SYK never got out of the blocks and we cut those plays off with stop alerts Friday.
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertdly.htm
Emails: We love your emails. We receive hundreds of emails a week, but we don't mind. We respond to them all as fast as we can, so bear with us.
SUMMARY:
- Nasdaq finishes week positive, but it was no breakthrough.
- Interesting crosscurrents in the market and economy.
- Market
- Subscriber Questions
Market hangs on to support despite tribulations late in the week.
The stock market certainly had reason to sell last week. Two terror scares, one Thursday and one Friday, had the potential to really sink things, but the major indexes held onto support. Now that may sound good, but just barely hanging onto support when the Nasdaq and OEX are in head and shoulders patterns is not exactly a great endorsement. It is an improvement over the depths of the bear market when such news would have ignited heavy selling, but there is still a lot to overcome.
For one thing, earnings. Earnings have been interesting. Tech earnings have not lived up to expectations, and for the overall economy, Q1 profits have fallen 12%. That means companies are beating expectations by 2.8% on average which is the historical norm. In other words, expectations were for earnings to fall more than 12%. It is also better than what they have been showing in the last four earnings quarters. It is an improvement, but it is not a dramatic jump.
Still, turns usually do not occur on a dime for the economy as a whole. Technology is still lagging. MSFT's earnings, after all the analysts looked them over, were heralded despite the revenue miss and the warnings for the current and following quarter. Seems analysts were impressed that MSFT was going to rising R&D and marketing spending in order to further underwrite the Xbox, MSN networks, and mobile and security software. That was seen as a commitment to the success of these ventures and some took it as an indication that MSFT may see things improving later in the year and wanted to be well-positioned ahead of the competition for when things do turn for the better.
So MSFT is spending more in anticipation of improvements, and the remainder of earnings have either been a bit above expectations or a bit below. Outlooks have been better, outlooks have been noncommittal or just not given. The recovery is apparently occurring, but no one really wants to say so. Accordingly, the market reflects this as it held on through the week. Nothing more, nothing less.
Checking the market barometer.
Economically sensitive sectors showing some cracks.
Running through many sectors and many charts late in the week and this weekend, we see some of the sectors that have been performing well based on the early indications of an economic improvement starting to stumble. Some machinery, some chemicals, some food, some restaurants, some retail. From solid performances across the board we are seeing some of the stocks in these sectors breaking down on stronger volume than the last highs they hit. That is a sign that are starting to run out of steam. Just a breather, a blow after a hard run? Some of the breakdowns are on pretty strong volume after a double top. Maybe it will be a rotation to other sectors now that the recovery seems to be underway and other sectors may start to move? Could be. Earnings did not cause a selloff, and MSFT's revenue miss was read with rosy glasses. Or is it something more nefarious as the earnings have come out and are not showing a strong surge?
Retail index looks weaker.
The S&P retail index has run into trouble near 975, just above some interim highs in 1999 and 2000, and below the 1050 level where it double topped in early 2000. After racing up off of the September bottom, it broke the up trendline the index took after the initial sharp rise off the bottom. That trendline runs from the October highs to the December, January, February and March lows. After using that trendline and the 50 day MVA on the way up, it broke the trendline and 50 day MVA sharply in early April. It recovered above the 50 day MVA to make another run at 975, but it fell short and has been selling back toward the 50 day MVA on some very volatile, up one day, down the next, action. It is trying to hold at the 50 day, but the trendline break and the double top is a real concern. Many breakdowns start that way. WMT was one of the big stocks that cracked below the 50 day MVA, but as we said, there are also some restaurants and food providers doing the same. It is not across the board by any means, but it is something to take note of; when a leading index off the low shows a double top and breach of a trendline, it is time to exercise caution.
Healthcare leaps higher as other defensive sectors ready to breakout.
Late in the week it was healthcare that took over with the strong moves. Several stocks came to life, leaping up on strong volume (e.g., WLP, TGH, ESRX, HUM). These are defensive sectors. This is where investors ran when the bear market was eating every other sector alive.
The gold indexes look ready to break higher, though they are very volatile, taking a strong stomach to stay the course. Utilities are firming up as well, another area where investors take some shelter when they think things are weaker.
Dollar weakens as well.
Quietly, without much fanfare, the dollar has weakened in March and April. In January it rallied up through its upper channel, then fell back through in February. It sank to the up trendline from off of the September low, then broke it two weeks ago. Thursday and Friday it fell below the 200 day MVA, not doubt on the terror threats. That is typical action when there is a terror threat. The important thing to note, however, is that the dollar had already weakened substantially. The moves Thursday and Friday were small. The move, however, put the index at lows not hit since early January when the dollar was still on the rise.
If the U.S. economy is the strong economy in the world, money will flow into it as that is where the money will be made. There are reports that Japan is firming, that Europe may be doing better. That could pull some strength from the dollar. It could also just be the same realization that the stock market has been working through the past three months, i.e., the economic recovery is not as strong as thought.
These have not been major moves yet. The economically sensitive sectors have not broken down; indeed, many are still setting up what could be decent moves from good patterns. Earlier in the year the leading housing sector started to show some weakness when some of its main components started to crack. While several are still off of their highs, there has not been a total breakdown. What we have to be cognizant of, however, is that if the breakdown occurs, these stocks could breakout and then fall. Again, it is understanding what the market is showing you and adjusting your expectations accordingly. Being prepared is the key. Caution is always your best friend.
THE MARKET
The big three hung on, the small and mid-caps continued to move higher, though they stalled in the latter part of the week after hitting new highs. Of the big indexes, the Nasdaq 'led', posting slightly better than a 2% gain for the week. That gain kept it off the February low and at support, but the indexes are working hard just to hang on. They are trying to transition after the initial run off of the September bottom to an improving economy that is yet an unknown quantity.
The transition, as with most changes of season, is not easy. The action has been up and down on a daily basis for over two weeks. In addition, the indexes are suffering through varying levels of distribution. The Dow has shown 10 distribution sessions versus 6 accumulation sessions since its high in March. Many of these have been on below average volume. Those sessions can kind of sneak in the back door or lull you to sleep. Back in August 2001 the Dow showed 5 distribution days in 9 sessions, all on below average volume before it slid lower into August. The S&P has shown 7 distribution session s to 6 accumulation sessions in the same period of time. The Nasdaq has just 4 compared to 8 accumulation sessions. It has sold more than the other two indexes, but it has not shown the dumping. Again, it may simply be more sold out than the others, having taken the heavier beating all through the bear market. It is also worth noting that even on some of the down sessions where volume rose, up volume outpaced down volume. It is not a big silver lining, but it is an indication that the selling is not totally severe.
Even with the distribution the indexes have hung onto support. Is that because of the earnings or in spite of the earnings? At the same time the A/D line has been mostly positive, rising on the NYSE on a daily and weekly basis. The NYSE has logged several sessions of advances better than 2 to 1, some even as the Dow or S&P 500 sold lower. Even if the big indexes are showing some weakness, the broader market is still holding up. The question is whether the rest of the market will continue to hold up if the Nasdaq and S&P roll over and follow the head and shoulders patterns that are trying to complete on the Nasdaq and S&P 100. Some of the weakness we see in leading sectors suggests they could sell with them if there is a breakdown. The moves into healthcare and the firming of the gold stocks and utilities again indicates some are thinking along these lines.
Put/Call Ratio (CBOE): 0.79; -0.18. No major losses on the session, and the NYSE A/D line was positive. That kept the put buyers at bay though they are still maintaining a higher level of overall activity.
Nasdaq
Is it a double bottom trying to form or a head and shoulders? It looked to be a double bottom until the move up stalled at the 50 day MVA last week just below the February interim high that formed the left shoulder of the pattern. When it hit the 50 day MVA on Wednesday, it sold on the highest volume of the week. It backed off Thursday and Friday, but it is still in the pattern. It also could give us a confirmation of the move off of the bottom 6 sessions ago. It is 'in between' as are many stocks right now: they have broke out and are making a run or they are trying to form up for a move higher or a move lower. Time to be very patient.
Stats: -5.60 (-0.3%) to close at 1796.83.
Volume: 1.676 billion (-9.8%). Once again lower volume on the selling, indicating there was no distribution ongoing Thursday and Friday. Given the pattern, that is about the best the bulls could hope for other than a powerful rally on sharply higher volume, i.e., a follow through session.
Up volume: 808 million (+145 million)
Down volume: 858 million (-327 million). Much as with Wednesday's action where up volume outpaced down volume on a down session, Friday's action was not vicious as the up and down volume was evenly matched. There really was no net selling.
A/D and Hi/Lo: Decliners did capture the lead at 1.10 to 1, the exact lead advancing issues held Thursday. There is not a lot of commitment on either side of the ledger.
New highs: 190 (-23)
New lows: 37 (+5)
The Chart: http://www.investmenthouse.com/cd/$compq.html
The stage is once again getting set for something more definitive. Will the key point be a grand show stopper or will it just slip in quietly? With this index, quietly has been the key. It has fitfully sold off since January with a brief March run. It formed a double top to start the current downtrend from January, it subsequently bottomed twice near 1700, thus working to form a decent double bottom for the year. Last week it threw another wrinkle in with an interim top at the 50 day MVA (1825.47) and is setting up a head and shoulders pattern with a breakdown point at 1700. At the same time Monday will the seventh session since it turned up from that second bottom in the double bottom. That keeps us looking for a follow through session as well as a breakdown. Problem with a follow through is, there are not many good patterns to lead the index higher right now. A follow through would set the stage for another building period where the stocks making up the majority of the index could try to put together winning patterns. That could take time and as we have seen before, it may not happen. Earnings expectations would have to improve dramatically once more.
In short, the Nasdaq epitomizes the indecision and the attempted transition in the market. With some of the stronger sectors flagging a bit, that makes us extremely cautious and requires extreme patience. While we don't necessarily like what we are seeing in the retail sector, there has not been a breakdown yet. The head and shoulders trying to complete after a double top, however, is a bearish combination of patterns, and we are not looking to play any big techs to the upside right now. Indeed, we are looking at some to the downside.
Dow/NYSE
Something of a broken record at this point. The Dow is moving laterally above support at 10,100 and 10,250, right at the breakout point from the cup formed in January and February. The distribution sessions continue to be a concern.
Stats: +51.83 (+0.5%) to close at 10,257.11.
NYSE Volume: 1.193 billion (-13.0%). Volume did not rally on the up session, something not uncommon over the past two months. Seven distribution sessions out of 15. Almost half have been distribution. Not all on heavy volume, but they don't have to be.=
Up volume: 608 million (+23 million)
Down volume: 555 (-186 million).
A/D and Hi/Lo: Advancing issues move back ahead at 1.25 to 1 (decliners led 1.02 to 1 Thursday). Obviously not a strong day.
New highs: 178 (-1)
New lows: 22 (+3). Not big moves either way again.
The Chart: http://www.investmenthouse.com/cd/$indu.html
Still holding at the breakout point of the January and February cup pattern with support at 10,100 and some at 10,250. That also places it right at the down trendline from March and just below the up trendline connecting the September bottom and the January and February lows (10,330). As it moves laterally, it is also hugging the 50 day MVA (10,253.64 simple). Instead of hurting, MSFT actually helped the index hold up on Friday. As with the Nasdaq, it has not broken down nor has it been able to mount a move off of this level. The distribution sessions are the overriding concern: if the cyclical stocks that helped power the move higher start to fold on higher volume (e.g., CAT), the index will have a hard time moving higher.
S&P 500:
The S&P 500 continues to struggle between 1100 and 1125. It rallied back up to 1125 late in the week, but ran into the 50 and 200 day MVA (1129.02 and 1133.44, respectively). The head and shoulders pattern is not as clear on the 500 as it is the S&P 100 as it did not sell down to the neckline at 1075 on the last round of selling. Instead it recovered to the middle of the February double bottom at 1125. The index has suffered six distribution sessions in 15. Not as bad as the Dow, but there are enough of them to send it lower. It too, however, can still give a follow through this week after the big move up on Tuesday. We would not bet on that, but we will let the move develop. We are still interested in put positions on the OEX down to 548.
Stats: +0.70 (+0.1%) to close at 1125.17.
Volume: NYSE volume fell again, this time on a gain (1.193 billion; -13.0%). Back and forth action, but significant even if low volume distribution.
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
No economic news until Wednesday, but it will be important: durable goods, new and used home sales, GDP, and Michigan sentiment (the latter Friday). Until then, more earnings will try to provide some direction. Monday before the open MMM, LU, and BEBE announce. This is a good cross-section: industrial products, telecom products that no one wants to buy right now, and apparel. UTX and BA were real disappointments for the blue chips last week, NOK showed the usual problems in telecom, and retail is a big issue for us now.
Even with MSFT helping hold up the Dow Friday, there was still a move into some of the defensive sectors that we predicted would happen if there was selling. Again, there are some out there moving out of the winning sectors of the past few months and into 'safety.'
Thus, we are looking at more downside plays this week. Again, the breakdown has not occurred but we do not like the distribution nor some of the action we saw late in the week. That makes us very cautious both to the upside and the downside. We may be overreacting, but some of the weakness we saw at the end of the week is worth caution. The indexes have been doing a good job of recovering, and as noted, the Nasdaq could give us follow through of a fall down. The economic recovery continues and ultimately the market will move higher on that recovery. In the interim there is some weakness beyond just profit taking appearing, and we want to be ready to take advantage of it.
Support and Resistance
Nasdaq: Closed at 1796.83
Resistance: Still fighting with 1800 and the 50 day MVA (1825.47). Then there is 1850, followed by 1875, the bottom of the November consolidation and the 200 day MVA (1858.21). The top of the November consolidation at 1934 to 1941. After that is 1980 (the December gap up point) and some minor resistance at 2000. Then the January top at 2098.88.
Support: 1775 is the next support level, and it was tested intraday Thursday. After that is 1700 (February low at 1696.55). Then 1613 to 1626.
S&P 500: Closed at 1125.17
Resistance: 1125 is acting as a holding point for the index. The 200 day MVA (1133.44) is sitting right on top of that level, acting as another layer of ice. There is some resistance at 1150 as well; any bounce on low volume might find that level trouble. After that the December high (1173.62) and the January high (1176.97) are the real key to any longer term move higher. Those points also mark roughly the lows of summer 2001 consolidation that runs up to 1240. Before that point there is some resistance at 1183 from March 2000.
Support: Again, 1125 is key for any move higher near term. 1100 held on the last round of selling. Then 1075, the February low. After that 1050.
End Part 1 of 2
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us stock market
understanding the stock market
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