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1/31/01 Technical Traders Report
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Technical Traders Subscribers:

TONIGHT:
- And the verdict: sell on the news.
- Talk of 75 basis points contributed to some of the post-announcement selling.
- Higher volume on the selling raises a flag. Where from here?
- Weak GDP and Chicago NAPM sets the stage for another weak national NAPM tomorrow, not to mention another rate cut soon.
- Subscriber Questions
- Team Trades

Sellers get the jump on the Fed, tipping their hand before the announcement.

The Dow, S&P 500 and Nasdaq were all trading timidly higher, biding time before the FOMC announcement. Right at 2:00 ET, sellers took over, jumping in and selling shares. All indexes took a quick drop before last-second buyers came in. The news drove the indexes higher, at least for about 5 minutes. Then the sellers that had jumped the gun a bit roared back in and pushed the indexes down. The Dow clung to a narrow gain at the close on rising volume, but the Nasdaq and the S&P 500 broke to the downside, both on rising volume as sellers took control in the afternoon.

Why the negative response when the Fed is on the market's side? We don't really buy the argument that it was a sell on the news because the cut had been built in. As noted last night, the Nasdaq has not done anything the past week. Think about it; the Fed has cut rates 100 basis points in less than one month. That is a huge move and shows the Fed is very serious about reversing course fast. What happened was a very low consumer confidence number had some raise the issue of 75 basis points on Tuesday, and that raised expectations. The Fed Funds Futures contract gave it a 34% chance today for a 75 basis point cut; that means it is not going to happen. Still, the thought of that got traders thinking, and that is always trouble. You know the story: everyone is perfectly happy with their Christmas bonus until they hear what Bob got. When the best-case scenario (at least in their minds) did not appear, they decided to accept the popular theory and sell. As Greenspan is well aware with the plunging consumer confidence, expectations are a tricky thing to mess with.

Higher volume selling was chafing us all afternoon.

Ahead of the announcement volume was light and up volume was in a healthy lead over down volume. That started changing shortly after the announcement as we saw down volume steadily climb along with overall volume. We knew we were getting a higher volume sell off handed to us, and we did not like it. Some stocks sold on above average volume and look downright questionable right now (e.g., JNPR, SEBL, CHKP and EMLX). BRCD, NTAP and NEWP sold on rising but below average volume, and they too look like trouble. Overall, however, the stocks that sold, and there were many sectors that did so, sold on higher yet below average volume, holding at some near term support.

That gives us some comfort that perhaps this was just selling related to the announcement and that today's action was a cathartic move that cleared out those who were just itching to sell because that is what they were primed to do by all of the 'Wall Street insiders' who try their darnedest to influence the markets when they get their 2 minutes of airtime on the financial stations.

Some comfort; not a lot. The Nasdaq remains in its more or less flat consolidation it has formed after breaking over its down trendline and clearing additional resistance at 2700. Up until the past couple of days it has maintained excellent price/volume action during that consolidation. As noted Tuesday night, that is bullish action as it consolidates its recent moves without giving back a lot of ground and prepares to take on the next resistance level. What we have to watch is this higher volume selling. Many stocks did not even come close to making average volumes today, and that is fine. Others, and some important stocks, sold on higher, above average volume; that is not fine. Flat consolidations can give way to selling, and it is very important for this rally that the Nasdaq hold above or close to 2700. Right now it is forming a round top which looks like an arc. If it continues to do so and breaches 2700 on continued strong volume, it looks as if it test lower again before it can mount another attempt at 3000.

THE ECONOMY

Last night we warned that anyone expecting a 2% to 2.5% GDP growth rate in the fourth quarter would be shocked. Today's 1.4% rate was a bit higher than we predicted, so maybe not that much shock value. Still, 5.6% to 2.2% to 1.4% plunge is not for the weak of stomach. Greenspan thinks we are at zero growth now. That probably means we are negative given how much we can trust the one we now call the 'chameleon:' blend into whatever background you can and try to save your name for history.

Housing starts were up a sharp 13.4% (975,000 versus 895,000 expected). As we have been saying, this is the one sector that has single-handedly kept the economy out of negative territory. Without the low mortgage rates fueling new houses and the furniture, appliances, wallpaper, flooring, etc. that goes into them this economy would have chalked up its first quarter of negative GDP growth already.

Then came the Chicago NAPM and it was a pathetic 40.2 reading (over 50 is expansion), down from 45.2 last month. The Chicago NAPM is a very close foreshadow of the national NAPM out tomorrow. That is expected to be 43.8. So much for that expectation.

The Fed's role.

What does all of this mean? It means the Fed's role has not changed. It reiterated today Greenspan's statements about it standing ready to step in with "a rapid and forceful response" if the economic data continues to be weak. Along with its view that the risks to the economy are toward weakness and its bias is toward easing rates, it is clear that the Fed more than likely will cut another 25 basis points before the next meeting in early March. If the market does not respond this week and we see a very weak NAPM, a weak jobless claims number, and continued weakness in average hours worked, we may see yet another move by the second week in February (yes, next Friday). That is not a lock but something to be ready for.

THE MARKETS

Retailers were on a rampage today, signaling to us that investors do believe that the rates cuts are going to work. Moreover, there is more and more talk about the tax cut as being an absolute necessity (keep those cards and letters flowing to your Congressmen), and a big part of that necessity is making it retroactive to January 1. Then there is talk (serious talk) about it needing to be in the $2 trillion range. This is good news indeed.

What does this mean? Retailers are forecasting better economic times today and shot up. We cover several on the reports. Financials will be coming right back. Techs, yes and no. We may see a bit more weakness in technology before they start back up, but we feel they will give us a huge move up from wherever they stop this slide. Our point: 100 basis points in two cuts from the Fed; A Fed chairman who does not want to be known as the 'former maestro;' two rate cuts (historical importance); a bigger and faster tax cut that will be retroactive. These are huge positives for a market that discounts future economic times in the present. So, with any more selling we see buying opportunities provided things don't careen out of control on higher and higher volume. With all of the positives ahead for the market, that seems remote.

Overall market stats:

VIX: 24.29; -0.91. Even with the up and down swings volatility fell. Looks as if there could be some more short term weakness.

Put/Call ratio: 0.61; -0.03. Even with the selling there was not a lot of put buying. We would have preferred to see it spike higher on fear. Not there, however.

NASDAQ:

Disappointing sell off on higher volume. Volume and the selling increased all afternoon and never let up. At least it still held in its recent consolidation range and that gives it a shot at stopping the bleeding and turning back up once the fact that this is really, really good news for the markets soaks in.

Stats: Down 65.62 points (-2.3%) to close at 2772.73.
Volume: 2.378 billion shares (+14.8%). Volume was back above average on the selling and down volume swamped up volume 1.531 billion to 715 million shares. For reference, with 34 minutes left in trading up volume was at 854 million versus 1.049 billion shares to the downside. The selling really intensified once it got started.
A/D and Hi/Lo: Declining issues were way behind but then overtook advancers 1.16 to 1. New highs actually rose to 138 (+15) while new lows fell to 18 (-3).

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

The higher volume selling is not a good sign. It usually portends further selling ahead and that could spell the end of the recent consolidation. The bottom of the consolidation is at 2686. We really don't want to see that line broached as that is another 114 points from here. If saner heads can prevail on the Nasdaq before then, we could have a decent rally ahead.

Dow/NYSE: The Dow threatened 11,000 on the high, but that was gone by the close as it hung onto a slim gain on rising, above average volume. Could signal a bit of a pullback before it tries to tackle 11,020 again.

Stats: Up 6.16 points (+0.1%) to close at 10,887.36.
Volume: NYSE volume moved back above average to 1.264 billion shares (+9.9%). Down volume topped up volume 647 million to 602 million shares. Normally we like the rising volume on a gain, but this was a reversal off of the highs on increasing selling volume. Not the greatest action.
A/D and Hi/Lo: NYSE advancing issues maintained the lead 1.29 to 1 (1.5 to 1 Tuesday). New highs jumped to 256 (+55) while new lows continued to fall, dropping to 3 (-1).

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

A break to 10,957.50 on the high, but followed by a reversal on higher volume closing back under resistance at 10,900. The candlestick pattern is a pretty tight doji, and it looks as if it is going to pull back some before trying 11,020 again. We said to watch for a test of 11,020 that was unsuccessful. Again, we will look at selling as a chance for some good positions.

S&P 500: The big caps also gave a run at breaking resistance at 1375, climbing to 1383.37 on the high. Then they too reversed course after the FOMC announcement and sold on higher NYSE volume. It came to rest on some support at the 1360 level. As with the Nasdaq that gives us some comfort, but the higher volume reversal indicates some more selling before another shot at resistance.

Stats: Down 7.72 points (-0.6%) to close at 1366.01.
Volume: NYSE volume rose to above average levels on the selling to 1.264 billion shares (+9.9%). Not good price/volume action, and look for some more pulling back.

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

TOMORROW

We had the selling scenario today, but as noted above, we think that will give way again to buying sooner than later. The right elements are in place. Again we remind you of the same naysayers after the first rate cut when the indexes consolidated their huge gain that day. They all said this time it was different, the market was not ready to move up, stay put, go home, lock the doors, etc. The Nasdaq rose 28% and the Dow almost broke out over major resistance. The cards are even better right now but the weak players are folding. We are going to let them clear off of the table and then we will start back in.

We are going to again look for good patterns and good stocks in several sectors including techs, financials, retail and other promising areas. Even though retailers and financials tend to lead with rate cuts, as we saw over the past three weeks, the techs can do mighty well at the same time. We are going to continue to target shoot at some positions when stocks hit resistance levels and look to move up. We are going to play the retail and financial breakouts and any others that show up (MFLO broke out today and held on all session; solid move).

We think we are going to see weakness tomorrow at the open. The Nasdaq futures are down about 10 points. What we would like to see (if we are in the wishing mood) is to see is the Nasdaq tap around 2750 and then reverse sharply on rising volume. Is that too remote a possibility? No. The Nasdaq has shown excellent resilience of late, and there is no real reason to sell given the news out today: rate cuts and tax cuts are powerful incentives to start discounting a future return to solid earnings. Back in 1990 and 1991 things looks pretty similar. After that second rate cut things got rolling. We think it behooves us to take weakness as an opportunity to get more involved with good stocks. We are going to watch for support levels to hold and start in. We are going to watch for breakouts and continue to get in.

Support and Resistance Levels

Nasdaq: Closed at 2772.73
Resistance: 2890 to 2900 is next before the 3000 level.
Support: 2750 would be great. 2700 is next. The 18 day MVA at 2726.77. Then 2640 to 2650.

S&P 500: Closed at 1366.01
Resistance: 1360 to 1375.
Support: 1360 would be a great place to bounce. The 50 day and 18 day MVA are at 1347.30. After that 1335 to 1340.

Dow: Closed at 10,877.36
Resistance: Then 10,900 and 11,020. After that, 11,400.
Support: 10,750. 200 day MVA is 10,700.45. Then 10,650.

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): 1.4% actual. 2.3% expected versus 2.2% prior.
Chain Deflator-Adv., Fourth Quarter (8:30): 2.1% versus 1.6% prior.
Chicago PMI, January (10:00): 40.2% actual. 43.0% expected versus 45.2% prior.
New Home Sales, December (10:00): 975,000 actual. 895,000 expected 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: With an interest rate cut today and history saying this is a good time to be in stocks at least in the short term, what has happened a little further out? Spring/summer? What has happened in the past when first quarter earnings come out below reduced estimates?

A: The rate cuts start the ball rolling as the thought is that rate cuts will increase the money supply and allow companies to borrow money, invest in new capacity, etc. That starts the markets moving higher. As we have said in previous reports, after that it is up to the economy and how those cuts actually work. The talk is that there are more and worse earnings to come from the first quarter, and that is probably right; if Greenspan is right and we are at zero growth, that will be less than the previous quarter when earnings were falling. The key will be if the other economic indicators are starting to look better, i.e., the numbers are bottoming out and maybe starting to rise. Also, if there are other good things going on such as a tax cut that some are saying can be passed by July 4. If Congress is on board, that will give investors and thus the market confidence moving forward and help keep things rolling. One step at a time. For now we are getting what we need, and we watch the market to show us what it is planning on doing.

TEAM TRADES

ADVNB: A Daily stock showing a pattern of pulling back into its 10 day MVA then launching a breakout move from there. Closed at $11.69 the previous session on below average volume (avg. 170,000).

Before the market opened, we set an alert on eSignal for 12.25, a high hit twice recently. The buy point of 12.36 was right above that, and we wanted to give ourselves time to get ready for it if the financials rallied on the rate cut. The stock was flat right out of the gates at 11.63, moving up to 11.69 then dropping down to test support, then down as far as 11.56 by 9:00, and held above the 10 day MVA (11.32). The Nasdaq was at +16.63 and volume on the stock was 13,100, pretty low (still early; closing volume previous day was 129,800).

ADVNB continued to climb the rest of the day, reaching a high of 12.13. An aggressive play was not out of our experience, but the uncertainty on how the market was going to react on the rate cut news made us wait for the buy point this time. When the stock started to head back down after lunch (1:30 CT), crossing below the 5 and 15 minute moving averages, we were glad we did. Considered taking some option positions if the stock turned back up near the end of the day, which it did, just before 2:30. The April $10 options were trading at 2.81 by 2.75, just up from the morning (2.63 by 2.25), but we decided at the last minute to wait until Thursday morning. Volume was really strong by this time (closed at 643,000). The stock can either lose the pattern or explode. We will watch it tomorrow as the pattern does still look good, the low having tapped the 10 day moving average, that support level the stock has used to launch its upside moves.

EMLX: We were watching how it reacted to the rate cut. Before that we took a chance on some April 95 calls when it bounced for a second time off of the 10 day MVA. Perhaps we should have waited, but we liked the play and the strength the stock has shown. After the announcement it jumped up, but then rolled over and sold on higher volume. We don't like the roll top it is showing after today, and we may have to cut out fast tomorrow if 90 does not hold or if we get a bounce that does not hold.

For a review of frequently asked questions, please use the link below:

http://www.investmenthouse.com/1questions.htm

THE PLAYS:

All prices reflect prices at the close on Wednesday.

SOME LEADERS TO WATCH:

Continued Play:

EMLX (Emulex Corp--$93.00; -9.50; optionable (UEL)):
http://biz.yahoo.com/p/e/emlx.html
STATUS: Down to close just under the 18 day MVA (94.32) on stronger, average volume (6.7 million). Can move down to the 90 range (hit twice) to get support before moving back up. 50 day MVA is at 83.29. Shows good buying which improved just slightly. The stock was trading up a point and a half in after hours trading (at the time of this writing).
BUY POINT: Aggressive: On a move up from here or 90 on continued rising volume.
POSITION: Aggressive: Stock and/or April $90 calls to buy (UEL DR).

New (from the weekend):

BRCD (Brocade Communications--$90.31; -8.19; optionable (GUF)): Computer hardware
http://biz.yahoo.com/p/b/brcd.html
STATUS: An analyst's negative comments followed by an afternoon of tech selling was too much for the stock, sending it below the 200 day MVA (92.75). Never a good sign. Volume was down but still well above average (10.3 million; avg. 7.2 million). We are looking at positions with covered calls (on long-term stockholdings) on a move below 89.75, a price hit three times recently.
BUY POINT: Below 89.75 on continued strong (preferably rising) volume.
POSITION: February $85 calls to sell (GUF BQ).

Best Plays Part 1: Waiting for the financials to rally on the rate cut, and retail stocks had a good day today.
1) MAY: Breaking out of a wedge, and still a buy.
2) HBC: Testing the breakout.

BREAKOUTS:

New Play:

MAY (May Department Stores Co--$38.95; +2.06; optionable (MAY)): Retail
http://biz.yahoo.com/p/m/may.html
STATUS: Broke out of an ascending wedge (serving as a handle to a lengthy base) on strong volume as the retail sector had a good day (2.2 million; avg. 1.4 million). The stock remains a buy, just passing the buy point of 38.44. Great money flow and high relative strength.
BUY POINT: Remains a buy on the breakout up to 36.16 on continued strong volume.
POSITION: Stock and/or March or June $35 calls to buy (MAY CG or FG).

ACS has been moved to the next section.

TESTS OF THE BREAKOUT: Some of these stocks are moving back on low volume to test the breakout. We often take profits on option plays when they start to pullback on the breakout move and then get back in when the stock bounces up off of the breakout point. This second move is where some of the biggest gains are made.

HBC (Hsbc Holdings Plc--$77.70; -0.71; optionable (HBC)): Money Center Bank
http://biz.yahoo.com/p/h/hbc.html
STATUS: Still holding above the buy point of 77.33 (the stock broke out of an ascending wedge) but pulled back to close just under the 10 day MVA (77.78) after opening lower (just above the 18 day MVA, 76.77). Volume was lower but still above average at 121,500. Looking for a move back over the breakout high of 80 as the financials kick into a rally.
BUY POINT: Over 80, on volume of 164,000 or better.

End Part 1 of 2

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