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Begin Part 2 of 2

No, the Fed won't cut 75 basis points tomorrow even if it needs to. There is simply no foundation for it, and we certain the Fed would not shock the financial world twice in one month. But it is instructive to look at what the market did with the talk out there about such a move: the Dow rallied and the techs did not. Even the thought of a possibly greater rate cut than expected did not ignite the techs higher. Was that because the rumor was not believable, because the Nasdaq is taking a wait and see approach, or because it is going to sell on the news no matter what happens? The latter is what is keeping us on edge as we approach 2:15 ET Wednesday, but it also has us expecting good things.

Indeed, even if the market decides to pullback on the news, history is on our side, at the very least for the short term, and further out if the proper actions are taken by our leaders. Look at the facts: the economy has slowed sharply, but the Fed will have cut 100 basis points in less than one month. It is clear Greenspan does not want to destroy his 'maestro' label and overblown legend status in his last few years on the Fed. He is going to do whatever it takes to salvage this economy, including doing a 180 on tax cuts now that he sees they are needed, not to absorb the surplus as he told Congress, but to help out of that recession he is sweating at night about. Moreover, on only one occasion in the past has the second rate cut not done the job for the stock market. That was back in 1929 when the Fed crashed the market and tried to reverse the damage with some quick rate cuts. It didn't work. Today the market is not totally crashed as the Dow and S&P 500 have held up pretty well. Thus, even if there is some selling on the news, we think that would provide a buying opportunity as the market rallies back just as it did after the first cut and the selling that ensued. Even if the later economic data show we are in a recession, we still have a nice rally in the short term. We always watch the market to see what it is telling us, and if it starts to get shaky, we will turn things around and make money to the downside.

THE MARKETS

The Dow surged ahead of the news as cyclicals gained and techs took it easy again. They are treating the impending news differently, and we think that will change when it becomes fact.

Overall market stats:

VIX: 25.20; +0.27. Volatility reflected the session as the Dow surged but the Nasdaq traded in a narrow range. That held things in check right in at the mid-point..

Put/Call ratio: 0.64; +0.16. Put buyers came back into the market, demonstrating some nervousness ahead of the meeting. Covering shorts and hedging most likely.

NASDAQ:

Another lackluster day, but not a bad day in our view. The action kept the Nasdaq within striking distance of 3000, and it traded in a pretty tight range as it has done for the past week or so. It is showing us this consolidation right on top of its 50 day MVA, taking a breather after breaking above its down trendline 10 sessions ago. Aside from all of the speculation about what it will do on the news, we have to look at the pattern, and it is not bad: it broke a very strong downtrend, rallied up from there, and is now consolidating that move below the next resistance level. There are a lot of analysts who have lost their nerve after the bear market, but you have to look at the picture being drawn. This is a bullish pattern.

Stats: Up 0.01 (0.0%) to close at 2838.35.
Volume: 2.074 billion shares (+5.8%). Rising volume (still below average) on virtually no gain in price. That is a sign of churning, i.e., lots of shares trading hands from sellers to buyers. It is a sign of some topping, but with the Fed announcement looming tomorrow it is not as big of a concern. Up volume still led 1.018 billion shares to 961 million to the downside.
A/D and Hi/Lo: Advancing issues continued to lead, but the gap narrowed 1.31 to 1 (1.48 to 1 Monday). New highs rose to 123 (+3) while new lows fell to 21 (-1).

The Chart: http://www.investmenthouse.com/cd/$ndx.html

As stated above, the Nasdaq is sitting over some support at the 50 day MVA (2782.22) and the 2720 range as it consolidates its breakout over its down trendline while it gets ready to take on resistance at 3000. Price/volume action remains good during the consolidation. This is what we expect from a healthy index. Thus, any talk of selling on the news of the rate cut must be factored into the pattern we see. There is no reason for heavy selling if the Fed cuts rates 100 basis points in a month. That counters what history tells us. So, if there is selling, we use that as a buying opportunity as long as it is clear that institutions are not engaged in wholesale dumping of shares, i.e., selling on noticeably higher volume. Thus, while we will look to play some downside on stocks that are primed to move down on the news, we are also looking for selling to get us in on some good positions just as it did after the January 3 rate cut.

Today's action showed some churning and the candlestick chart gave us a tight doji. That means we could again see some downward action in the morning, especially given AMAT's and ADBE's warnings. That is okay as the Nasdaq has been able to rally up from setbacks in the morning, and that is the action of a healthy index. Again, weakness in the morning is a buying opportunity to us. We are not going to take the whole enchilada, but we will continue to add to positions and start building some new ones.

Dow/NYSE: The Dow surged out of its recent range and looks ready to challenge 11,020. We would love to see all indexes, cyclicals and techs, rally together. Might not happen, so we need to be careful if the rotation starts again.

Stats: Up 179.01 points (+1.7%) to close at 10,881.20.
Volume: NYSE volume was below average, but it rose on the move to 1.144 billion shares (+8.6%). This is the kind of action we want to see on a breakout move, though above average volume would have been better. Still, with the Fed announcement tomorrow, some pensiveness is understandable. Up volume was 742 million shares to 379 million to the downside.
A/D and Hi/Lo: NYSE advancing issues continued to lead, but fell to 1.5 to 1 versus 1.68 to 1 on Monday. New highs climbed to 201 (+2) while new lows fell to 4 (-4).

The Chart: http://www.investmenthouse.com/cd/$dja.html

A great move up out of the recent consolidation on rising volume. It tapped interim resistance at 10,900 on its high (10,900.77), and pulled back just a bit to close. 10,900 won't stop it, but 11,020 is the immediate roadblock. The Dow is rallying into expected news. That is usually not a good sign for a continued move up in the short term. Watch for a test of 11,020 on the news or before, and if it cannot break it, get ready for some interim selling.

S&P 500: The big caps did some kicking and scrapping themselves today as they rose on the high to test resistance at 1375 (1375.56 on the high) before pulling back a hair to close. Volume was up but not above average. Again, as this move precedes the FOMC announcement, that can be understood. The S&P 500 looks the best positioned to move higher on the news. While the Dow may sell, we think that the technology components of the S&P could give it a push higher over resistance on strong volume. That breakout would portend good things for the market overall.

Stats: Up 9.56 points (+0.7%) to close at 1373.73.
Volume: NYSE volume rose but was below average at 1.144 billion (+8.6%). The price/volume action moved right back to favorable after Monday's gain on lighter volume.

The Chart: http://www.investmenthouse.com/cd/$spx.html

TOMORROW

As you probably gleaned from our tirade earlier, the market is still in a touchy position with all indexes residing just below significant resistance right before the release of news that everyone expects. That often leads to disappointing results. This time around the issue is confused by the bear market and the Fed's actions of hamstringing and then trying to save the economy. Looking at the index chart patterns, normally one would say things look good for the immediate future.

Still we have to worry about rotation out of the winning sectors once the news is out and even rotation out of techs that have been holding more or less steady for over a week. Again, however, 100 basis points in rate cuts in almost every situation helps the markets short term and longer term. If there is selling on light volume, we use that to take positions. We also use it to play some stocks to the downside that are set up to fall, and even sell some covered calls on our long term holdings to pick up some quick cash for any move back up.

If we see stocks breaking out on big volume on the news, we go with the flow that way. Still, we have to be careful about a surge and then some selling. Kind of a microcosm of what we saw last time where stocks surged and then started selling that day (the defensive stocks) while others pulled back over the next few sessions on low volume. We might see that all in one session tomorrow.

First thing out of the box, we expect the Nasdaq to be weaker at the open. It has done that of late and the news after the bell needs to be swallowed. Moreover, GDP is out, and we think it will be shockingly low for many people expecting a 2.3% to 2.5% gain. Again, that will all be part of the equation Greenspan tipped us off to last week, and will give us the chance to take some additional positions for upside moves. As for downside plays, we think we will reserve those until after the announcement to see how stocks react. Primarily, however, we view another rate cut as a historical positive for the market, and even if we get some interim selling on the news, we believe it will be right back up in the near term. What happens longer term depends upon what the economy does and how our leaders handle this downturn.

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): 114.4 actual versus 125.0 expected and 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: In [Monday's] edition of the "Daily" you present 19 different stocks for consideration for [Tuesday]. I am a subscriber to e-signal and wonder if you would shed some light on how to best keep watch on these stocks. Do you set alarms, and if so, are they at a price point or % changes? Do you create a new quotes screen each night for the following days' selected stocks? I find if I have more than four charts up at one time, it's too difficult to follow well. I would appreciate any tips as surely as I'm watching one, I'm missing another.

A: First, the Daily was larger than we like, but there were many good-looking plays out there. The Tech Traders Report and the Stock Split Report cover a lot more plays, and keeping track can be overwhelming. But that is one of the dilemmas of an improving market. We focus on our 'best plays,' but we know that any of these good-looking stocks could break out.

That is where a good realtime service or brokerage service comes in handy. When we are on the go, we know what stocks we are interested in and where we are interested in them. We carry a cheat sheet with the basics in the event we cannot keep it all in our heads. Then we use eSignal to carry the load for us. We really like using alarms and the new 6.0 version is very good for setting alarms when a stock hits the price you want. Mostly we use the alarms on a price basis as we know ahead of time where we want the stock to be. If it is a pullback to support, we set the alarm a bit above the support level so we get an alert before it hits that level. If it is a breakout over a specific resistance, we set the alarm just ahead of that resistance so we can pull up the chart and see how it looks. We can do this at the computer or with the handheld when on the go. Very handy, and this way we can monitor many plays without our heads spinning. It requires some input ahead of time, but it vastly reduces the strain. Moreover, you can set the alert for volumes, but we also just make a note on the alarm as to what we want volume to be so when it pops up we don't have to go digging for the details. Keep it simple. Technology is supposed to help us do that.

We create quote screens for the plays, but we do so in more of a continuing fashion. We have stocks that we always monitor just to see how the sectors are performing, but the top of our main quote window is devoted to plays that we are looking to get in on. These include plays from the previous night's reports as well as holdover plays we are still waiting on making a move such as stock split pre-announcements, pre-splits, breakouts and the like. They don't always pop off the next day, but we still want to get in on them if the move is good.

As for charts, we keep a couple running, but as they are easy to call up and can be done in an instant, we are not big on seeing a bunch. We have the Dow, S&P 500, Nasdaq, Nasdaq 100 at the top of our quote window, so we always know where they are. Then we keep the Nasdaq on one chart and have the other one to jump to various charts that we get an alert on or whether we want to monitor what is happening on other plays. In addition we have Nasdaq Level II running if we want to see the buy and sell pressure, and we keep time and sales running for the same reason. This keeps things simple and uncluttered, and it helps us retain focus. We are not getting overwhelmed by a number of charts and data; we let the machine do the filtering for us by using alerts and keeping track of the market overall.

TEAM TRADES

CTXS: Got the better of us Monday, but we liked the pattern so we were watching it from the open, looking for the move. It was up early just a bit and we were biding our time waiting for a definitive move. During the first hour it was hugging flat line between 34.25 and 34.50. The options were slightly higher than on Monday where we got all of one contract filled. An hour into the session it broke over 34.50 and that touched off an alarm we had set. It promptly fell back to 34.25 and held. We were ready for action and jumped in with some June $30 calls. They were trading at 8.50 by 8.88 as the stock flirted with 34.25 again, and we put in a limit order at 8.75 as the spread was a bit wider than Monday. Of course the bid was moved up to 8.75 by 8.88. These guys are good. We decided to play chicken again, maybe being more foolish than smart. The stock then tanked down to 34.125, and low and behold we were filled on all contracts. That second test of 34 seemed to be the trick as CTXS jumped up after about 20 more minutes and ran up to almost 37.25 before it sold down to 36.62 on the close. The options closed at 10.125 by 10.50. The news from ADBE after hours sent the stock to 35.25 before it moved back up for a last trade at 36.25. Volume was excellent, so we will look at some weakness in the morning as a chance to add some more contracts. Oh, we also sold some February puts as well on the move. The February $30 were sold for $2.62 and closed at 1.31 by 1.56. We set a GTC to buy them back at 0.62.

Good Investing!
Jon Johnson and the Tech Traders Report Staff.

All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners of Online Investment Services, LP or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.

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