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4/29/02 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERT SERVICE
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SUMMARY:
- Early hope yields same result: continued selling in the downtrend.
- Big names bucking up and closing flat to positive.
- Personal income and spending up again, but no surge.
- Earnings report card: earnings up but not helping.
- Small cap and mid-cap indexes still holding on but not making any bounce today.
- Team Trades
Similar story: early rally attempt snuffed by a bit of selling and then lack of buying.
After the worst week since September, optimism was up for the open. The indexes were all positive early on, but that did not hold for long. After the indexes set up an intraday downtrend matching their downtrends this year: a series of lower highs, each followed by a corresponding drop to a lower low. It was a classic downtrend all session as the indexes bounced down the 15 minute MVA all session. This is typical bearish activity: early hope and a bounce gives way to sellers and a lower close.
Software, chips, and other big names hold the line.
It could have been much worse but at late bounce on the Nasdaq put a prettier mask on the session. Semiconductors were higher most all session and even managed a slight gain on the close. They were buoyed by UMC (a Taiwan chip foundry) that reported its first profit in a year and said capacity was up to 50% from 40%. Further, it expected 70% capacity in the period April to June (Q2). That is an indication that the chip sector is improving still; it is usually the first of any tech sector to show signs of recovery and it has been holding up better than the overall tech market (the chip equipment makers, that is). UMC is pretty much standing alone with its forecast. It is interesting that while the SOX finished higher on the session UMC could not muster a gain on this news. No one is really interested in purveyors of good news; heard it before is the common theme we hear.
After the steep selling last week the fact that software, semiconductors, and other big names held the line and moved up toward the close to post slight gains indicates that the Nasdaq is ready for some form of oversold bounce. On the low the index hit the bottom of the downtrend channel and closed well off that level. Again, indicative of a bounce, but the sellers and dearth of buyers have a firm foot on the index' throat. It hits the down trendline just below 1700, and that does not give it much room to maneuver upside before more selling initiates. We look to use any bounce to set up more downside action.
THE ECONOMY
Personal income up 0.4%, and consumers spent what they made as personal spending rose 0.4% as well. The one constant in the economy: consumers continue to consume just as consumers always do. Back in the boom the Fed was all worried about no savings and a runaway consumer; now the Fed is doing all it can to keep consumers doing what they do best. This is hardly a fair rap hung on them. First, the government method of accounting for savings does not include any investment other than in a savings account. Everyone with a plain Jane savings account raise your hand. There are not many. The government ignores stocks, bonds, mutual funds, real estate, wine, art, etc. If it is not in a savings account, it is not savings. Baloney.
Second, if you get too much savings you have trouble. That really sounds weird, but it is true. Look at Japan. No one in Japan (business or individual) will invest in anything. All of the money is in very liquid cash accounts, i.e., money market equivalents. There is no investing in stocks, bonds, real estate, etc. Everything consumers are spending and investing in here in the U.S., our Japanese counterparts are not. They are not even consuming ordinary goods in Japan, fearing that they will run out of savings if the economy does not recover. Japan has been in a depression for over a decade. It is a vicious cycle.
Thus, it is good that consumers consume. They should consume. That is what happens in a healthy or improving economy. Today's numbers indicate that income is up and that gives more buying power. What is equally important is that consumers are willing to spend that additional income, thus helping the continued economic recovery. The numbers were just not good enough for investors, however. Even though up, they were up less than last months +0.6% reading in both categories.
Increased income does not mean necessarily that more workers out there are making more money. What it means is that those that are left with jobs are working more (overtime) and getting paid more either in overtime or in raises for handling more responsibilities given the smaller workforce. This is the usual progression in a recovery: hours worked increase and that leads to an increase in earnings. At some point business reaches a critical level where it is necessary to bring on additional personnel. That finally leads to more jobs.
Housing market revisited.
The homebuilders are trying to recovery, building bases the past several weeks. Tonight on CNBC the first in a segment about hot second home markets aired. Galveston, Texas was the first on the list, showing the massive houses built over the past 10 years where values have climbed double digits each year. One interviewee did not know if he wanted to live there, but had 'no doubt' he could sell it immediately and make money on it. The same claim was made again and again. Confidence, confidence. We know at least one builder in Galveston that has built homes for the past several years there due to the hot market. Each house was sold before or during construction. All of the sudden he has houses on his hands that are unsold. What to take from this: 1) it made the news as 'hot'; 2) the facts already show a slowing market that has boomed for 10 years; 3) expect the unexpected: no storm in Galveston since 1983. There is ALWAYS the wild card that can ruin things.
THE MARKET
Earnings continue to exceed expectations, but that is not the focus.
With 77% reporting, 62% have beaten estimates, 24% have met, and 14% have missed. Not a bad report card, but the quality of the earnings and the lack of definite improvement in the current quarter has left investors uninterested at best. As with personal income gains, however, you have to see the turn before you see stronger improvement. It is a step-by-step process, but investors have no patience for it. After a very strong economy was purposefully derailed and the market taken apart with it, the recovery is going to be slower overall and really lag in those sectors that were the target of the Fed action (i.e., technology).
Slower recovery has not hurt smaller issues.
As we have indicated over the past few weeks, it is normal in a historical sense for smaller, economically sensitive issues to lead out of a bear market and recession, particularly when they have been overlooked in favor of large caps for a number of years. That is what has been happening since the first of the year.
This weekend we said the small and mid-caps were at a point where they could give some direction for the market overall. After hitting new highs over a week ago, they have pulled back to support levels. Today they pretty much held right on those levels. Whether these indexes bounce higher after this rest of start further selling will give a strong indication of the overall market's chances of pulling out of the selling in the nearer term.
In this same theme, the action in the homebuilders will remain instructive. They have run long and hard, and now many have undergone recent corrections, forming decent bases. Some are late-stage bases, i.e., the fourth base and breakout, and as such they are a concern. Others are still in earlier stage bases. Can they move through this correction and then breakout again and lead higher? Again, how they act will be instructive as to the overall market. They are key to economic progress as home sales are typically accompanied by new furniture, appliances, televisions, etc. Stocks such as PHM are in cup with handle bases. Can they breakout on strong volume for another run? Accumulation and distribution in these stocks are pretty even. The breakouts if they occur will tell more.
VIX/VXN: After comatose behavior for 4 months, these volatility measures have rallied the past week. The VIX has jumped just over 3 points the past two sessions, rising to 26.11 and closing just below its 200 day MVA (26.36). This move gets the index back to its median range November - December, and again in February right before the indexes began the early March move higher. The Nasdaq volatility measure moved to 45.12, putting it at the lower end of the January and February range, and still below December's range. 30 or better on the VIX could trigger a short term bounce. It needs to spend a lot of time at 30 or better and then spike to near 60 to give any type of very extreme reading that can lead to more than just a temporary spike higher.
ARMS Index
Flashed a signal that a trading rally could occur in the next 1 to 2 weeks. Friday the index closed at 2.01 and today at 2.47. Consecutive closes over 2.0 have presaged a tradable rally, i.e., one you can buy into and ride up for more than a couple of sessions, every time since the early 1960's. The only time it did not happen was in 2001 when the signal was flashed August 29 and 30. The indexes looked as if they were ready to start higher the day before 9-11. 9-11 is the kind of event that has to be thrown out. So, we could see the bounce turn into a bit better rally, but the other indicators are not nearly extreme enough to say any rally will stick.
Put/Call Ratio (CBOE): 0.80; -0.07. The action did not scare many as put activity declined on further selling. An example of the lack of real concern over this nasty downtrend.
Nasdaq
Continued its assault on 1600 to 1620, hitting 1640 on the low. It managed to bounce 16 points from the late-session low as many big names finished flat to slightly positive. The index is oversold and needs to come up for air after such a steep plunge. It won't be much of a bounce at this point, however, unless there is some other catalyst.
Stats: -6.96 (-0.4%) to close at 1656.93.
Volume: 1.840 billion (-2.7%). Continued slide in volume, though still strong and above average.
Up volume: 664 million (+374 million)
Down volume: 1.135 billion (-459 million). The gap narrowed but was still almost 2 to 1 down to up. Nothing strong on the upside.
A/D and Hi/Lo: Decliners pulled back to a 1.46 to 1 lead (1.93 to 1 Friday). Matched the session's selling.
New highs: 123 (-15)
New lows: 139 (+16). More new lows meaning no sold out condition yet. Again, not near the 400+ new lows seen in the bear market hey day, but a significant increase.
The Chart: http://www.investmenthouse.com/cd/$compq.html
185 points in 9 sessions with just one positive close that was hardly worth calling positive. Today's move took the index down to the lower channel of the downtrend at the low (1640.97). The index bounced 16 points in the last hour, a smart move off of that channel line. The last time it was hit the index moved up 100 points. We are not anticipating that on this move, but are looking at the tighter down trendline that is now at 1690 as well as the 10 day MVA (1723.09) and the 18 day MVA (1749.17). The short term moving averages tend to act as resistance in a continuing downtrend. They take on more significance given the breach of the February low. We could thus see the anticipated bounce begin, but as we have been saying, there is nothing thus far to give credence to a strong rally though the ARMS index is saying in a week or two one could start. For that to happen a quick jump up for a session or two, and then a real tanking would perhaps trigger extremes in sentiment to mount a more sustained rally. A move that hits or slightly undercuts the April 2001 low (1620) and reverses could set up the move as it would hold a potential reverse head and shoulders pattern dating back to that time.
Dow/NYSE
Continued down with no hint it was ready to reverse its losses. Undercutting the 200 day brought out some more sellers given the technical breach. It will test this breach soon as it too is quite oversold short term.
Stats: -90.85 (-0.9%) to close at 9819.87.
NYSE Volume: 1.252 billion (-9.6%). Volume slid to below average levels for the first time in 5 sessions. Little consolation there as volume fell Friday as well.
Up volume: 308 million (-28 million)
Down volume: 948 million (-81 million). No improvement from Friday.
A/D and Hi/Lo: Decliners decreased the lead to 1.24 to 1 (1.52 to 1 Friday). Decliners have not run away with the market even during this selling.
New highs: 105 (-42)
New lows: 84 (+24). Third consecutive session with greater than 40 new lows. Again, 5 consecutive sessions is a sign of further selling to come according to Dow theory.
The Chart: http://www.investmenthouse.com/cd/$indu.html
Extended its drop below the 200 day MVA (9930.91), the usual action after a breach of a key level. What happens is that the break triggers those wait to see if it could recover from the initial breach to sell their positions. That gives the breach a bit more of a push south. The push also moved it below the lower channel in the downtrend. It is still close enough so it cannot be labeled a real breach. It has suffered significant selling, but it did not bounce in the last hour as did the Nasdaq. The index will also have to stick its head above water soon with a relief bounce, but there was nothing in today's action that would indicate that is imminent. It has downside exposure to 9500 to 9600, but it most likely won't fall there on this move without first making that bounce. We would prefer it to fall down to that level without the bounce and flush the sewers so to speak We anticipate that move up to 10,050 to 10,100 before that, however.
S&P 500:
Now this is what you call knifing lower. The big caps did not have much of a chance with GE suffering heavily today. They blew through their March and April 2001 lows and the February lows as well. It undercut its bottom channel in the recent downtrend, giving rise to an argument that the Dow and Nasdaq should follow as well. For the large caps, 1050 is the last refuge where it tapped on the intraday lows in October on the move higher. After that there is nothing much before 1000. The large caps are leading the charge lower and don't look ready to make any bounce as of Monday's close.
Stats: -10.87 (-1.0%) to close at 1065.50.
Volume: NYSE volume fell again on the selling to 1.252 billion (-9.6%), but that is very little help for this index that has already suffered the distribution that set up this fall.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Consumer confidence and Chicago PMI are out 30 minutes into the session. Confidence will be of much more importance after the Michigan numbers disappointed investors last week. After earnings let investors down, we will see a shift back to looking at economic numbers with more scrutiny. If outlooks are blas , the only thing that can drive earnings is really strong economic numbers. They have been in a slump lately; solid, but not hitting line drives and home runs. Investors need some homeruns to view stocks as having a chance of increasing their earnings to match prior expectations.
The action intraday has been typical of a downtrend: early attempt at rallying and then selling all session. Even with today's recovery late in big techs we still cannot put much into that move. this typical up then down action is usually followed by just giving up on the open and taking stocks lower hard. That is what triggers the bounce, and it usually happens intraday. The hope that keeps springing up finally turns to despair and selling early. That helps reverse the action and start a bounce up to the nearest resistance level.
At this point we would prefer just to see the major indexes turn and plummet very hard on high volume. In reality it will most likely take more grinding to work the sentiment indicators higher and get the indexes at a point where they can sustain a rally beyond a day and a half. The futures were up after hours today; again hope springing to life. Does not look like the indexes are ready to start the day down and really clean the place out for a move back up. When we see that happen we will no doubt be at the point where our puts are hitting their targets and we will start taking that money off the table and then watch for the bounce that the ARMS index is indicating (after so much selling, some bounce is certainly coming). It might give us a head fake first with a mini rally to resistance and then more selling before the stage is set. For now the bias is still downside for the big stocks, and we will let our downside plays work for us while the stronger upside plays hold the line, waiting for the next rally to really jump back up.
Support and Resistance
Nasdaq: Closed at 1656.93
Resistance: The March down trendline at 1690 (February low at 1696). 1743 to 1750 may act as some resistance (the 18 day MVA is at 1749.17), then 1775. 1850 is next (200 day MVA at 1846.10), followed by 1875, the bottom of the November consolidation.
Support: Right at the lower channel line from the March downtrend (1640). Then not much until 1613 to 1626 (April 2001 low at 1619 intraday).
S&P 500: Closed at 1065.45
Resistance: 1075 is the February lows that did not hold. 1100 represents former price consolidations as well as the March down trendline at 1098. The 10 day MVA (1095.97) and the 18 day MVA (1107.03). After that is 1125 and the 200 day MVA (1129.46) is sitting right above that level. There is some resistance at 1150 as well. After that there is a lot more, but w will take one step at a time.
Support: Completed the 3-month head and shoulders pattern and broke lower. Not 1050 represents the October lows and the last price consolidation level before the September low.
Dow: Closed at 9819.87
Resistance: The 200 day MVA (9930.91), then 10,100 held for many tests before breaking. The March down trendline at 10,115, a key point on any relief bounce. The 18 day MVA is at 10,129.58, another point of resistance in downtrends. 10,300 blocked the move the last time it made to that level, and the up trendline from September is right there at 10,350. After that is 10,400, the barrier to the upper half of the March trading range. The top of the June, July, and August 2001 trading range at 10,600 (10,679 intraday high) marks the top half of the March trading range.
Support: 9500 to 9600 are next as the index has entered into that shelf of support from 9500 to 10,100.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
4-29-02
Personal Income, March (8:30): ): 0.4% actual versus 0.4% expected and 0.6% prior
Personal Spending, March (8:30): 0.4% actual versus 0.4% expected and 0.6% prior
4-30-02
Chicago PMI, April (10:00): 55.50 versus 55.7 prior
Consumer Confidence, April (10:00): 108.0 versus 110.2 prior
5-1-02
Auto Sales, April (00:00): 6.0M versus 6.0M prior
Truck Sales, April (00:00): 7.3M versus 7.3M prior
ISM Index, April (10:00): 54.6 versus 55.6
Construction Spending, March (10:00): -0.1% versus 1.1% prior
5-2-02
Initial Claims, 4/27 (8:30): NA versus 421K prior
Factory Orders, March (10:00): 0.7% versus 0.3% prior
5-3-02
Nonfarm Payrolls, April (8:30): 60K versus 58K prior
Unemployment Rate, April (8:30): 5.8% versus 5.7% prior
Hourly Earnings, April (8:30): 0.3% versus 0.3% prior
Average Workweek, April (8:30): 34.3 versus 34.2 prior
ISM Services, April (10:00): 57.5 versus 57.3 prior
End Part 1 of 2
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