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us stock market, trade stock
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1/27/01 Technical Traders Report
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Technical Traders Subscribers:
TONIGHT:
- Stocks rally while waiting around for the Fed.
- Rising on low volume and no news is better than selling.
- Big techs and little techs lead the move despite CSCO.
- Keeping an eye on this pre-FOMC run: if we hit over 2900 on low volume before the announcement will it sell or run?
- A lot more layoffs announced, and consumer confidence could be a bit weaker than expected despite a better market in January.
- Subscriber Questions
- Team Trades
Low-volume rally ahead of the Fed.
There was some negative news as usual on a Monday as Cisco CEO Chambers again talked of the 'challenge' of the first quarter. Most took that to mean that things were not totally rosy with the company and one would have to start getting the idea that perhaps for the first time in a long time the Cisco leadership does not have everything exactly as they want it. Cisco is always cautious, but we keep getting these statements out of the company. That is never a good sign. Then Daimler Chrysler, already the bearer of bad news back in late October, announced 26,000 layoffs (20% of its workforce) and other slash and burn tactics related to the sorry domestic auto market. Another day that had to deal with some bad news early.
The market was able to overcome that news and rally nonetheless, albeit on lower, below average volume. That marks the second straight session the Nasdaq has rallied higher on weaker volume, and while we could overlook Friday's action to a certain extent, today's continued weak volume is not welcome news. Now many were saying that the lower volume was the result of investors watching and waiting for the Fed. If that is the case that is not all that bad as the theory would go that if most are sitting and watching from the sidelines, when the positive news hits the will jump in and buy like mad. Indeed, given the choice between rising on negative news and selling on no news, we prefer that the market would rise, indicating buyers were out there ready to pick up stocks. That is indeed what happened today after a weak open: buyers came in and pushed stocks higher all session.
The Nasdaq rally was pretty much the Nasdaq 100 and smaller tech stocks. The Nasdaq 100 was up 62.75 points versus the 57.04 on the index overall. Also, breadth expanded nicely on the session, showing that some of the smaller issues were doing well also.
What happens when all of the FOMC hype is over and the news is actually out?
We knew it was coming and was going to drive us insane, but as it is the only real story in town, we just have to endure the rate cut craze. The speculation, or at least the stories and interviews about what the Fed will do, was brought up about every half hour. As we said, it is the biggest story in town. The market expects a 50 basis point move though it has not built it into the equation just yet.
And that is where it gets interesting. So we get a 50 basis point cut; what happens next? History says that bodes well for the market in the long run, but that does not mean we get off scott free with the second rate cut. There could still be some pretty sharp retrenchments as the market works through the continuing parade of economic data. Remember, it is one thing to cut rates and get things rolling; after that, the economy has to perform. If we continue to slide into a nasty recession, the recovery in the financial markets could be protracted.
So, if we drift higher on lower volume into the actual announcement, does the market run higher from there, sell off, or continue to drift? If the Nasdaq drifts above 2900 on lower volume, that puts it in a ticklish position on the announcement. Sure there may be a flood of money coming in off of the sidelines, and that should push it over 3000 on strong volume. That would be great. But, is that really how the market works? Sure the January 3 cut shot the market higher on huge volume, but it was totally unexpected. By 2:15 ET on Wednesday even the neighbor's dog will be convinced of a 50 basis point rate cut. When news is widely anticipated markets tend to discount that news ahead of time. Don't be surprised to see the market rise even more Tuesday after some possible early weakness, and then again on Wednesday (barring a calamity with the first quarter GDP numbers). The market could be very close to that resistance at 3000 by the time the Fed announces the rate cut.
A low volume rise into the news would not be a great thing short term in our opinion. That would give it an 11% move from Thursday's low (2686), and if investors were factoring in a 50 basis point cut, the low volume would mean there were not a lot of buyers who felt the news was going to push the market very high over that 3000 level in the near term. 3000 is an important level to us; the December high, a November low, and the October low all danced at that level. It is not the last resistance point for the Nasdaq, just the next major one up at the plate. It needs to be broken and broken hard. A light drift up to that point may not build the foundation needed for a sustained pushed over it.
Don't get us wrong. A rate cut is what is needed for the longer term health of the market. We are just looking for the very near term here because there is so much hype over what will happen. Financial stocks should continue to do very well with a rate cut as should other traditional areas that rise on rate cuts, e.g. materials. But another 50 basis point cut will move the next cut out to March or April, and there will be a lack of market-moving news such as earnings. Our concern is technology overall in the shorter term. A rise to 3000 on low volume may just see profit takers come in after a quick pop higher on the news. That keeps the Nasdaq from cracking that 3000 level and keeps it in a trading range for now. The dilemma: if the Fed cuts rates 100 basis points within one month and it cannot break the Nasdaq out over resistance at 3000, when will the Nasdaq make the move?
Again, we don't want to sound gloomy, especially after we panned the 'panic' letters in the weekend report. The rate cut is exactly what is needed and needed now. While we liked today's action, we would prefer to see the market more stagnant tomorrow ahead of the news. If investors remain uncertain about the size of the move and don't drive the market up or down, we have a better chance of a strong move on the news and breaking resistance. Our key focus is seeing the Nasdaq break this resistance to clear out a move ahead. There are many who feel 3000 is very formidable resistance, and it would be damaging it the market is unable to take it out soundly. Obviously that is what we are going to be keying on. And indeed, we may be dead wrong about the reaction and the market may just race ahead regardless of what it does the next two sessions.
So, up to that time we are going to continue to make plays on those stocks that show us they are ready to move. While the Nasdaq looked less than impressive today, many individual stocks are setting up more as we would prefer the Nasdaq. CTXS, NUAN, and KLAC are examples of stocks that are consolidating on support on very low volume. Then we have stocks such as AEOS, FIC, LEH and CHBS blasting off on outstanding volume. Those get us very excited about what the near term is going to bring, but we have to also keep it in perspective and watch the action as it unfolds. We continue to take positions when they show themselves, but we are going to have to watch the market overall on top of the action in our individual issues. Remember, 3 out of 4 stocks follow the market, and if it starts to sell off on the news, most stocks will follow it.
THE MARKETS
Very slow trading overall, but that did not keep some stocks from just flying up out of nice bases on heavy, heavy volume. Those stocks continue to capture our attention. Also, pre-split plays continue to show good momentum, and when playing those we don't get all bent out of shape over volume: take some gain and take it to the house. Good cash generation. Again, we cannot complain. Would a high volume run up to 3000 ahead of the FOMC announcement insure a continued rise? No. Thus we have to keep our eyes on the market and see how it handles 3000 when it gets there. Hope we are making a big thing about nothing.
Have you noticed how the internet firms are just blowing out the earnings? VRSN, ARBA, EXDS, EGAN, EXTR, CTXS, EBAY and others have all posted really excellent earnings. They have been met with varied responses, but we think the future looks very good for these stocks.
Overall market stats:
VIX: 24.93; -0.21. Volatility continues to languish in the middle range, matching the market's action.
Put/Call ratio: 0.48; -0.11. Investors must be pretty complacent right now indeed. The put buyers are waning in number.
NASDAQ: What buyers there were used the early weakness as a buying opportunity as they continue to buy on weakness. That led to some great breakouts and some nice intraday turnarounds. Other than the breakouts, however, the moves were not on a lot of volume.
Stats: Up 57.04 points (2.1%) to close at 2838.34.
Volume: 1.971 billion shares (-13%). For the second straight session the Nasdaq shows improper price/volume action. Mostly to do with the FOMC meeting, but we still want to see buyers getting after it when there is buying going on. Up volume did swamp down volume 1.353 billion shares to just 579 million. What investors that were out there were buyers.
A/D and Hi/Lo: Advancing issues jumped back in front of decliners 1.48 to 1. New highs rose to 120 (28) while decliners rose to 22 (+1).
The Chart: http://www.investmenthouse.com/cd/$ndx.html
The Nasdaq started weak and gained strength all day just as we like. It was not on spectacular volume and that is the fly in the ointment. We could overlook it and say it was pre-FOMC nervousness, but when we have two sessions of gains on lower volume we cannot ignore them. We would not be surprised to see more buying volume come into the market tomorrow in anticipation of the meeting results. We will play that move of course, but we have to be very careful when the announcement is made. 3,000 plus or minus a bit is a serious level to take out. We need to see it broken on strong volume and then see it hold. The wildcard is the Fed announcement that will either be built into the market or not by Wednesday afternoon.
Dow/NYSE: The Dow fought off early weakness as the Nasdaq led the way higher, but it too could not find any real volume supporting the move. It is remains in its fairly tight trading range, setting it up for potentially a good move on the announcement.
Stats: Up 42.21 points (+0.4%) to close at 10,702.19.
Volume: NYSE volume was down and below average once again at 1.033 billion shares (-5.9%). Not the proper price/volume action, but the Dow has not been a textbook case as of late. Up volume doubled up down volume 666 million to 360 million shares.
A/D and Hi/Lo: NYSE advancing issues topped decliners 1.68 to 1. New highs climbed to 199 (+51) while new lows held steady at 8.
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow continues to trade in its trading range that has tightened over the past week. It once again broke over its 200 day MVA (10,697.76) and the down trendline connecting the September and early December highs. That is not much of a revelation as it has been alternating above and below these levels the past four sessions. The Dow is pounding out a pretty good trading range here, and as it is not racing up ahead of the FOMC it may get a nice run out of the financial stocks to lead it out of the trading range and take out 11,020.
S&P 500: The big caps moved up off of Friday's doji that tapped the 50 day MVA on its low and put together a nice move up, though again on low, below average volume. The index is still working on resistance at the 1360 to 1375 level, but the low-volume move today is not the type of move that will carry it over that level for good. The big caps continue to have one of the better patterns, but as with the Nasdaq we have to see how far and on what volume it rises or falls ahead of the FOMC meeting to get an idea if it will surge ahead on the news or suffer some profit-taking.
Stats: Up 9.22 points (+0.7%) to close at 1364.17.
Volume: NYSE volume was below average for the second straight session, coming in at 1.033 billion shares (-5.9%). This is the first session in quite some time the S&P 500 has not demonstrated solid price/volume action.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Again we are going to watch closely how the indexes perform in anticipation of Wednesday's FOMC announcement. We almost wish they would come out tomorrow unexpectedly during the first day of the session and announced a 50 basis point cut. That would be a surprise to the markets and we think it would be a positive one, though there would be those who would read something nefarious into it.
With the low volume rise today, divining tomorrow's action is more difficult. We could see more of the same action, i.e., a drift higher on low volume. Or investors could actually start to do what they always do, i.e., discount the move ahead of time and buy heavily now instead of later. What we would like to see would be just a day of flat, low-volume trade. That would show that investors are not building the move in ahead of the meeting, and it may give the market a better chance to rally on the news and gives a more sustainable move.
Again, while we keep an eye on what is happening, regardless of the move we get we are going to continue to take advantage of those plays that give us the moves that we are looking for whether breakouts from solid patterns, momentum runs on pre-split plays, entry points off of support for target shooting at some of our favorite stocks we want to hold long term or take some shorter term option plays on. If the low volume move continues on up toward Wednesday's announcement, we will be looking at some downside plays for you on the Tuesday reports and also consider some covered calls on our stocks that we are holding long term to pick up some cash on a bounce down from resistance. Stay focused, stay flexible, and take what the market gives you.
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. The 18 day MVA at 2685. Then 2640 to 2650.
S&P 500:
Resistance: 1360 to 1375.
Support: 1335 to 1340. Then 1325. After that we look to where it turned up last time at 1313.65.
Dow:
Resistance: 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.
1-30-01
Consumer Confidence, January (10:00): 125.0 versus 128.3 prior.
FOMC Meeting, Day 1
1-31-01
GDP Fourth Quarter (8:30): 2.3% versus 2.2% prior.
Chain Deflator-Adv., Fourth Quarter (8:30): 2.1% versus 1.6% prior.
Chicago PMI, January (10:00): 43.0% versus 45.2% prior.
New Home Sales, December (10:00): 895,000 versus 909,000 prior
FOMC Announcement (2:15)
2-1-01
Auto Sales, January: 5.8 million versus 5.8 million prior.
Truck Sales, January: 6.7 million versus 6.7 million prior.
Initial jobless claims for prior week (8:30): 316K prior.
Personal Income, December (8:30): 0.2% versus 0.4% prior.
PCE, December (8:30): 0.2% versus 0.4% prior.
Construction Spending, December (10:00): -0.5% versus -0.6% prior.
NAPM Index, January (10:00): 43.8% versus 44.3% prior.
2-2-01
Non-farm Payrolls, January (8:30): 80,000 versus 105,000 prior.
Unemployment Rate, January (8:30): 4.1% versus 4.0% prior.
Hourly Earnings, January (8:30): 0.3% versus 0.4% prior.
Average Workweek, January (8:30): 34.1 versus 34.1 prior.
Factory Orders, December (10:00): -0.5% versus 1.7% prior.
Michigan Sentiment Review, January (10:00): 94.0 versus 93.6 prior.
SUBSCRIBER QUESTIONS
Q & A: Several questions about brokers once again now that we have a new year going. To receive a list of brokers we use and know, send an email to brokers@investmenthouse.com. You will receive an email back with the information. All are very good and Jeff Miller is currently taking new clients. A good broker does not want to take too many new clients at one time, at least clients who actively invest their dollars. This is important so the broker needs to get to know the new clients and their trading styles.
TEAM TRADES
AEOS: A pre-split in the right sector for a rate cut environment (retail apparel). AEOS has moved laterally for the last three weeks, but showed some life Friday on a solid move to the top of its trading range. Today it gapped up over that rang eon strong volume and we wanted to get in. The stock ran to 52.50 on the opening run, but then pulled right back over the next hour to 51.50, the high trade on Friday. As you know, the previous session's high or close often acts as support on a gap higher and subsequent test of the move. This is what we were looking for from AEOS, but it was not an immediate jump up. It bounced at 9:55 CT to 52.25 and we were ready to pounce, but it started moving sideways. We decided to wait until it took out 52.50, the first top of the session. The March $50 options had a delta of about 72 and were trading 6.12 by 6.75. When we saw AEOS cross 52.50 we but in a limit order at 7 as the options jumped on the move. We thought we had missed another play but turns out the fill was made. About a half hour later, volume poured into the stock and it surged higher. We tried to take some more positions, but the ask ran away from us and we were not ready to chase it. Turned out to be a great day and the stock finished up over $7.
CTXS: This stock is looking great in a low volume test of the 10 day MVA and 32 after a $10 move this month. We really like the look of the pattern and we were going to open some positions today in anticipation of the move, if we could the price we wanted. Thus began our day of frustration. The stock ran up to 34.50 early on in the session, but that was after opening down for the day. It turned down and tested 33.62, bounced a bit and then went down to 33.50. That was close to the previous low, and the stock turned and started up from there. In addition, that point was above the session low of 33.44. The June $30 calls were trading at 7.75 by 8.12. The stock jumped up to 33.81 and the options were asking 8 by 8.38. We put a bid in at 8.25, wanting our price for the option. The stock then began to trade in a narrow range for most of the rest of the session. After watching the bid get moved to 8.25 on us, we said to heck with it and modified the order to 8.38. Well, the bid went to 8.38 while the ask went to 8.50. It stayed that way for hours as the stock rose (the ask went to 8.75 on the high) and then fell (dropping it to 8.50). All the while the stock traded in a half point range. Regardless of where the price went the market maker would not lower the ask to 8.38, even though it had been lower earlier in the session when the stock was at lows hit later in the session when our order was in. As it turned out, one measly contract was taken on our order; we felt for sure with the large open interest we would not have to put an all or nothing order in, but they only filled one contract. Frustrated, right at the close the options were trading 8.38 by 8.62 (the bid at our buy price); we raised the price to 8.50. True to form, they raised the bid to 8.50. That is how it closed: 1 contract traded, the spread 8.50 by 8.625. We will try again tomorrow.
For a review of frequently asked questions, please use the link below:
http://www.investmenthouse.com/1questions.htm
End Part 1 of 2
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