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us stock market, trend trading stock
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5/29/02 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
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SUMMARY:
- Post-holiday blues continue as indexes drop further on rising volume.
- Everyone talking about the selling so be ready for a bit of a bounce.
- Housing market parallels in history.
- Indexes testing old lows once again.
- Subscriber Questions
Of exploding manhole covers and other reasons to sell.
You know things are tough when an exploding manhole cover in New York gets the blame for market selling. That is exactly what happened today as fears of terrorism were fanned when a few manhole covers were blown off their seats. It is somewhat terrifying that so much gas build up under the streets of New York that it could cause such a discharge, but that hardly is terrorism. If it was terrorism I would suggest we are doing a pretty good job in closing off the possible targets.
There were also more Enron-esque stories that hurt. HAL accounting measures were called under question, but the method used was totally legal. The SEC is looking into it to see if everything was on the up and up, but as with most government agencies it is way late, it is fighting the last war, and it is trying to salvage its image. After all, where was the SEC during this entire time? It was taking in its fees from all of the IPO's and other stock-related activity, loving every minute of it. It had its money and it was happy. The former SEC chief saw it coming at the bitter end and started testifying to Congress, claiming it was underfunded and undermanned to do its job; with the government collecting 50% of everything we all make (income taxes, excise taxes on gas, etc.), one wonders how there could be underfunding of anything the Feds do. There have been more investigations in the last year than there were in the years of the heyday. At this juncture it is merely fighting to save its image and keep the natives from getting restless and engaging in tax revolt. In that regard things are status quo.
In short, investors were ready to sell once more and used any excuse to do so. This is similar to strong markets when they rally in the face of what should be bad news. Investors are either buying or selling. When they are buying they overlook bad news and find reasons to buy (or not; sometimes they just buy); when they are nervous and ready to sell, anything will be good enough to trigger the sell response just as the bell triggered Pavlov's dog's salivation. Manhole cover jumps out of its seating, sell. SEC reviewing HAL's legal use of an accounting method, sell. Markets are said to be rational. In the long run they are; in the short term they can make you wonder.
Selling, selling, selling. . . watch for a bounce.
All they are talking about on the financial stations is how the selling has set back in and the Nasdaq is going to test the recent lows. For a multitude of reasons from a weak dollar to better prospects overseas to a weaker than hoped recovery, etc., the gloom is back. After three straight sessions of selling, such gloom usually means that we will be due for a bounce of some sort.
It is not just contrarian sentiment guessing either. The Nasdaq is just about at its April 2001 low of 1619, the Dow just above its 200 day MVA at 9893.25. After a couple of weak sessions late last week, the indexes have continued their downtrend after the follow through session. Being a bit oversold they will more than likely attempt to hold near where the rally started for one last attempt at salvaging that action. As we noted Tuesday, it is never a straight run up or down, and there are always hitches along the way. When playing the overall trend we just have to give our trend plays enough room to work for us and not get stopped out prematurely. We did that on a couple of plays last week that we had to get right back in; a not so gentle reminder that we need to let the plays work for us as well as be diligent with protecting gains and keeping losses at a minimum in this market.
THE ECONOMY
No major economic releases today, but economics had a major impact on the action with concerns regarding HAL's accounting practices and El Paso lowering its profit target for the future. Continuing accounting concerns peel value from shares, particularly in those energy trading companies.
Housing market gets a bit frothier.
Tuesday we discussed our outlook for the housing market in detail. Today we note two more pieces of information that came to light. The first is the weekly mortgage barometer that increased 2.8% last week. That means new applications, refinancing, etc. rose an aggregate 2.8%. After a three week slide, the past two weeks have shown gains as the most active season of the year gets underway. No real froth there.
TOL announced its earnings today and they were up a very respectable 15%. This luxury homebuilder had its CEO on CNBC before the open discussing the past quarter and more importantly the next quarter and on out to the next 15 years. The CEO was adamant about the future of the market. Despite the immense building and buying boom the past year or more, the CEO continues to see strong sales about as far down the road that you can see. When questioned about a slowdown after such a strong run the CEO responded with a very bullish statement about aging boomers wanting bigger homes, empty nesters wanting golf course retirement homes, and how he literally could not see a slowdown for the next 15 years.
Now there is some real truth to what he is saying and it is firmly rooted in history. What has driven the economy post-WWII? Baby boomers. This massive group of consumers drove each level of the housing market: starter homes, family homes, second homes, etc. After it left each market, there was excess capacity and lower prices as the next generation did not have the size to fill those big shoes. Boomers have led the massive consumption in the economy. Boomers have put their money into the stock market and helped rally it higher (and they will do this again when this cleansing period is over). When they move as a group the results are dramatic.
Thus there is real truth in what Mr. Toll was saying. His bullishness bordered on cockiness, however, and sounded much like the mutual fund managers and stock analysts back in late 1999 and early 2000 when they boldly pronounced the new age of the economy and investing. Another CEO that sees no end to the flow just as Chambers at Cisco and countless other tech CEO's saw unending demand back in the tech heyday. Notice how each financial program talks about how Americans are investing in their homes and real estate as opposed to the stock market. Very, very similar to 1981 and 1982: just when everyone was talking about how investors were focusing on other forms of investment besides equities those started to top and the smart money was moving back into the values they found in the stock market.
As the stock market the past three years has shown us, even with the powerful demographics of the baby boomers driving investment in 401k's and in discretionary individual accounts, there can be a top. The market top was in large part driven by the inept policies of the Fed in chasing non-existent inflation with its attack on prosperity while at the same time fanning the massive investment with its equally massive Y2K blunder. The housing market has been driven by many factors, one being the mass relocation of America after the tech boom ended. Now there is investment in the household through new purchases and renovations. Yet, even in such a boom market you see Home Depot and several mortgage companies all of the sudden under stress (e.g., AGM). Cockiness by the industry spokespersons juxtaposed with some stock patterns in distress. There is a warning sign there for the future.
THE MARKET
Started lower, tried to build an intraday bottom to rally late, but then broke down to close at session lows. Nothing the market tried worked for the bulls as the indexes continued their renewed downtrends. It was nondiscriminatory with the small caps suffering more than the Dow or the S&P 500, but all taking a back seat to the techs and the SOX. The S&P 500 broke below what had held as decent support at 1074 and it has a clear shot toward its recent lows. The Dow and Nasdaq as noted are just above near term support. As we often see in this market, just as soon as it looks as if the market has broken down we most often see a rebound. The S&P's breakdown makes it look as if there is more selling ahead, but the Dow and Nasdaq are at levels they could bounce from after they test a bit lower. That has been the pattern of this market.
VIX: 23.1; +0.67
VXN: 45.7; +0.59
Put/Call Ratio (CBOE): 0.89; -0.19
Nasdaq
Selling further but above some potential support at the April 2001 lows of 1619. After a test lower that could lead to a relief bounce.
Stats: -27.78 points (-1.68%) to close at 1624.39
Volume: 1.418B (+7.52%). Volume was still below average but was again higher. Sellers are outnumbering the buyers of late though they still are far outnumbered by the buyers on the recent rally. That seems to matter little, however, as those buyers have disappeared and appear willing to let the market slide lower.
Up Volume: 213M (-445M)
Down Volume: 1.171B (+532M)
A/D and Hi/Lo: Decliners led 1.64 to 1
Previous Session: Decliners led 1.2 to 1
New Highs: 73 (-7)
New Lows: 106 (+43)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Made a game try at holding at Tuesday's low of 1632, but a late bounce attempt failed and sent the index to close on the session lows. It is now firmly back in its downtrend though not in the crushing downtrend of March and early April. It is back below the 18 day MVA, however, as well as the second March to April down trendline. What we may see develop here is what we saw in March and April: a new downtrend under the 18 day MVA after a brief lateral hiatus as it tried another rally. That rally is not totally dead, however, as the Nasdaq has not undercut the reversal session low. Moreover, it is just above the April 2001 low of 1619, and 1619 to 1600 may inspire some support and an oversold relief move after more than a week of pretty steady selling. That could bounce it back up toward that 18 day MVA (1677.19) and the second March down trendline at roughly 1665 before it resumes its downtrend.
Dow/NYSE
Continued its move lower on rising volume, but it still has the 200 day MVA below that has held it up in the recent past and 9800 below that. It is getting ready for a bounce, but it may not come Thursday.
Stats: -58.54 points (-0.59%) to close at 9923.04
Volume: 1.074B (+11.42%). Still below average volume, but getting closer to average. Sellers are still relatively fewer than the buyers on the rebound and follow through, but they are in charge right now as those buyers are either converted to sellers and/or have decided to stay away.
Up Volume: 349M (+51M)
Down Volume: 712M (+66M)
A/D and Hi/Lo: Decliners led 1.28 to 1
Previous Session: Decliners led 1.29 to 1. The decliners are not getting out of hand for the market, something to note as it indicates the selling is not too pernicious.
New Highs: 72 (-10)
New Lows: 53 (+24). NYSE new lows topped 40 again. We will keep an eye on this as last time it was a good portent to more severe selling.
The Chart: http://www.investmenthouse.com/cd/$indu.html
The Dow continued its 3-session selling trend, falling on heavier volume. Though it closed on its low, we note that the candlestick chart shows a smaller overall body size than the prior two selling sessions, and that is an indication that the downside move is running out of some steam. It still has plenty of downside momentum as it has closed at or close to the low each of the past three sessions, but the intensity of the selling is lower. It also has the 200 day MVA at 9893.25 and then the April/May small double bottoms at 9811 as support. After this level of selling and most likely some more selling Thursday to test the 200 day MVA or below, the Dow will be primed for a relief bounce back up. We still believe it will test one or both of these levels before a real bounce attempt. That bounce should carry it up to near 10,100 right where the 18 day MVA resides.
The 18 day MVA just crossed over the 50 day MVA, and that is a signal of further downside action. Usually what happens when this occurs is some additional selling and then a test of the crossover. That will most likely occur at the 18 day MVA somewhere below 10,100.
S&P 500:
The big caps broke below some support at 1074, doing so on rising though below average volume. The move pushed the large caps below the February lows and of course the next point to look at is the May low at 1048.96. Now right after such breaks we have seen the indexes turn and rally. Most of the sentiment is negative, everyone is talking about the recent slide in the market, and then boom, it turns up and tries to rally. This is exactly what happened back in early May when they broke to lows since September 2001 and then turned and rallied. With the Dow and Nasdaq right above some decent support levels, we again believe we will see a reflex move to take it back up to test resistance. As with the Nasdaq, that could take it up to the 18 day MVA near 1085. It will be closer to 1075 by the time that move takes place. At that point it can resume the downtrend along the 18 day MVA if there is not some dramatic change that saves the rally that started in early May.
Stats: -6.89 points (-0.64%) to close at 1067.66
NYSE Volume: 1.074B (+11.42%)
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Economic data begins again with weekly jobless claims out Thursday. Somehow we just do not think that is going to provide much of a catalyst as we heard of more layoff announcements from El Paso today and even Nortel. The layoffs have not stopped, so there will still be jobless claims and strong continuing jobless claims.
There is a lot of downside momentum out there and a lot of belief that it is going to continue lower. As we said, we anticipate the indexes will test lower but will find some support at near term levels for a rebound. It may not happen Thursday; the indexes may sell lower and close near those support levels or sell down to them and recover a bit. Then they will bounce but we do not think the bounce will be a roaring success and should find resistance at the near term down trendlines or the short term moving averages.
What we need to be aware of is that there could be a bounce coming after three sessions of pretty heavy price selling, and that means we do not want to get too stretched out on entering downside plays. We also need to give our downside plays some room on any bounce back up; let the trend work for us a bit.
That does not mean we are going to ignore downside plays where there is a technical breakdown, but we also need to be aware that the action in individual stocks can be just like the indexes: a breakdown that looks deadly, but then a quick recovery. Again, there has been a lot of selling the last three sessions; if a stock has fallen three sessions and broke support today, we need to let it test the breakdown and then start to fall again to make sure we are not caught entering right at the transition point for a relief rally. That is why our method of investing is one we like: we see the move, wait for the test, and then see the failed test as the best entry point.
At the same time there are some stocks and sectors that have held up very nicely on the selling, and they will use any rally to improve their gains after holding their own on the selling. We have several of those on the report and we are looking at more tonight.
Support and Resistance
Nasdaq: Closed at 1624.39
Resistance: The 18 day MVA is at 1677.19. The short March to April trendline now at 1697 and 1700 (February low). 1750 and the 50 day MVA (1724.54) are next. The January/March 2002 down trendline is at 1763 and the 200 day MVA at 1807.95.
Support: 1619 (April 2001 low) is some support on down to 1600. 1550 to 1560 are the October lows and could try to hold. Then 1500. After that is the September low at 1387.06.
S&P 500: Closed at 1067.66
Resistance: The March/April down trendline is now overhead again at 1076, right at the February lows at 1074. The 18 day MVA backs that up at 1084.63. After that 1100 and the 50 day MVA at 1098.65. The 200 day MVA at 1116.58, and price consolidations at 1125. September 2000/March 2002 down trendline at roughly 1124.
Support: The October lows at 1050 are the last price consolidation level before the September low. There is possible support at 1000, but it is not much. The September low is 944.75.
Dow: Closed at 9923.04
Resistance: 10,100 represents first resistance and the 18 day MVA is right there at 10,107.23. The September 2000/February 2001 down trendline is at roughly 9990. Then 10,250 to 10,300. Then there is 10,400, the level that has acted as 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: The 200 day MVA (9893.25). After that two lows at 9811. Then 9500 to 9600 in the shelf of support from 9500 to 10,100.
Economic Calendar
May 28
Personal Income, Apr (08:30): 0.3% actual versus 0.3% expected and 0.4% prior.
May 28
Personal Spending, Apr (08:30): 0.5% actual versus 0.7% expected and 0.3% prior. (revised from 0.4%)
May 28
Existing Home Sales, Apr (10:00): 5.79M actual versus 5.35M expected and 5.41M prior. (revised from 5.40M)
May 28
Consumer Confidence, May (10:00): 109.8 actual versus 110.0 expected and 108.5 prior. (revised from 108.8)
May 30
Initial Claims, 05/25 (08:30): 411K expected and 416K prior.
May 30
Help-Wanted Index, Apr (10:00): NA expected and 46 prior.
May 31
Productivity-Rev., Q1 (08:30): 8.6% expected and 8.6% prior.
May 31
Michigan Sentiment-Rev., May (09:45): 96.0 expected and 96.0 prior.
May 31
Chicago PMI, May (10:00): 55.0 expected and 54.7 prior.
May 31
Factory Orders, Apr (10:00): 0.7% expected and 0.8% prior.
End Part 1 of 2
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