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us stock market, trend trading stock
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6/18/02 Technical Traders Report Update
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Technical Traders Report Subscribers:
MARKET ALERTS:
Targets hit Tuesday: None issued
Buy alerts issued: ERTS; AET; SSNC; FTEK; ACF
Trailing stops issued: None issued
Stop alerts issued: AIRM; CAO
You can sign up for Technical Trader alerts at the following link:
http://www.investmenthouse.com/alertttr.htm
Emails: We love your emails. We receive hundreds of emails a week, but we don't mind. We respond to them all as fast as we can, so bear with us.
SUMMARY:
- Low volume rally to resistance ready to run out of gas. Will ORCL or AMD sway the trade?
- Housing starts and permits continue to soar while consumer prices remain flat.
- Market avoids a selloff but cannot crack resistance: a victory and a defeat.
- Team Trades
Market rests for the session, but where it rested and how it got there are a concern.
Two big gains (counting the Friday reversal) required a bit of rest Tuesday. The market started softer and then recovered to positive territory. That is considered healthy action for bullish moves: an early weeding out of the ready sellers after some big gains and then a resumption of the rise as demand takes over supply after the weaker sellers are gone. That is exactly what happened Tuesday.
At least until mid-morning. Then the market started to get a bit squeamish as the indexes and big name stocks approached the next resistance levels at the 18 day MVA and higher down trendlines. Then they started waffling. The techs rolled over back into negative territory while the Dow and S&P clung to very narrow gains. Even the small and mid caps ran into trouble with the Russell 2000 showing a doji at the 200 day MVA and the S&P 400 and 600 closing at their 18 day MVA with doji's. A doji at resistance indicates that the sellers caught up with the buyers on the run higher, and the momentum could be ready to swing the other way as there was not enough power to push the index and it stocks up through that resistance.
So you have two competing interpretations: a lower volume day of rest after a big point move versus another light volume rally running out of gas at resistance. As the markets are in a continuing downtrend and the sentiment indicators did not hit historical levels of pessimism, our view is it is most likely running out of gas. It may try another push, but it will have trouble unless there is an outside force.
ORCL a catalyst or does the PC rule?
Are ORCL's earnings enough to be a catalyst? 14 cents versus 12 cents and revenues in line. It was a cost-cutting victory much as was Cisco's from earlier in the year. It was enough to shoot ORCL and software firms higher as well as the QQQ. At least it was enough until AMD warned it would miss revenues by a good $200 million no matter how you sliced it and said its Q2 loss would be 'substantial' (a 9 cent loss was expected). Enough until AAPL warned that its earnings would be 8 to 10 cents versus the 11 cents expected, and revenues would drop to $1.145 billion from expectations at $1.6 billion.
Who will win? Software or hardware? Positive news or negative news? ORCL's software is not really what a retail user or even a smaller business would use. If AMD and AAPL are warning, that follows what INTC said earlier and shows that the hardware market is not rallying. Lower hardware sales would seem to imply lower application software sales in the circle of life in technology. In that light it would appear that the ORCL 'win' based on cost cutting would be trumped by the continued sloth in sales and demand in technology. Again we see cost cutting helping companies make the bottom line, not sales growth. You can only cut costs so far; demand has to pick up at some point, and in technology it is not doing it yet. In this market of negative sentiment and slack demand, we anticipate the negative news to win out.
THE ECONOMY
Economic numbers continue to impress.
Housing starts soar.
Up 11.6% to a 6+ year high with 1.733 million annualized units (1.6 million expected), up from a revised 1.553 million units in April. The gain was the best monthly move since July 1995 (+14%), and it will continue to fuel other areas of the economy for a few months such as durable goods orders (washing machines, refrigerators, furniture) and other household furnishings as those new homes are built, sold and then furnished. This is particularly true as single family housing was up 9.6%. The housing market has yet to slow down. Permits jumped 2.6% to 1..674 million annualized from 1.631 million after they were expected to fall to 1.615 million. Permits are more of a leading indicator; they don't guarantee houses will be built, but it shows there are plans in the work to do just that. With lower mortgage rates the housing market is squeezing out the last buyers in the market. It is hard to pass up a 30 year fixed well under 7%.
The theory out there is that people are investing in their homes as opposed to investing in the stock market or other areas. This is helping to drive the housing market. Look at remodeling jobs as well and you get that sense. If there is a sustained rally in the market and interest rates bump up, you can expect housing to cool rather rapidly as we are getting to the last part of the move in the run. It won't be a precipitous drop and prices won't tank, it is just that the market will have to cool. We are already getting some reports from around the country that some of the speculative subdivisions are having trouble getting sales going. That may be more of a blip than a trend for now, however, as the best season of the year is upon us.
CPI (Consumer Price Index) steady as a rock, but some are not buying it.
May consumer prices were flat compared to an expected 0.1% rise and a +0.5% move in April. The drop was primarily due to a 0.7% drop in energy costs (that lower pump price we talked about last week), taking the heat off of the consumer wallet (other than the smoking credit cards, that is). Taking out that energy component and food (ironic as we cannot live without either), the CPI rose 0.2% as expected (April was +0.3%).
The PPI last week and CPI numbers Tuesday will keep the Fed at bay. Some are even talking about a rate cut in the fall or winter as opposed to a rate hike. The fed futures funds contract is actually pricing in a small chance of such a move. Not just pricing out a rate hike, but pricing in a rate cut. Not much of a chance, but interesting. Jimmie Rogers, a very smart and insightful (and rich) investor says the government's inflation numbers are bogus. He says there is inflation (e.g., housing and food) and that the inflation numbers are kept artificially low because much compensation and other benefits are tied to inflation.
There is inflation in some parts of the economy; there is deflation in other parts of the economy (computers, electronics, tech services). On balance things are rising slow enough compared to historical norms to indicate no inflation, but Rogers is right about certain sectors showing inflation. Inflation where the demand is, deflation in technology and related areas. Long term rates were showing inflationary potential, but they are now backing off sharply. The bond market is the best predictor of inflation. It is pricing in that slower recovery as long rates decline again. Inflation can spread if excess demand in the housing market for instance cannot be sated. That money will want to find a home so to speak, and investors will look to other areas. The stock market is a possibility if it improves a bit; no inflation there, but if investors still don't want to put it in the market they will put it into something else. Art, wine, jewels, gold are old standbys.
THE MARKET
Just about any index you look at showed a doji of some sort right at the 18 day MVA, a typical resistance point in a continuing downtrend. After a month of strong selling the was contained below the 10 day MVA, the market delivered a bounce up to the next level of resistance. It was a low volume bounce both Monday and Tuesday. You have to discount the reversal session Friday because it was led by short covering. Still, it is early in the game to say this move is doomed to fail or is going to succeed. It has already cracked above the first resistance at the 10 day MVA as noted Monday. Now it has hit the next level where it can stall as it did in May, test lower, and then make another attempt at a run. That is very typical in follow through moves: the initial run, the stall at some resistance, a bit of a pullback as profits are taken and shorts try to reassert themselves, and then a rally up through that resistance.
At the earliest follow through from Friday's reversal could occur Wednesday, and it should occur before next Tuesday to be of the strongest variety. There is that good news/bad news tug of war after hours, but we think the bad news will win out in this climate. At least it will win out for the short term. Futures are lower and the indexes could push lower Wednesday and Thursday just to regroup and make another run at resistance. A lot will depend on the volume the market shows us tomorrow. If it reverses on higher volume than it rallied, that is usually the kiss of death to the rally attempt. Perhaps, just perhaps, another quick round of selling on fears stirred by AMD and AAPL will whip up anxiety to high levels in a short time. The market was already starting to build in fear; a quick plunge below the recent lows on the return to bad news could spike them higher as the anxiety is still in the short term investor memory.
SENTIMENT INDICATORS
VIX: 27.33; -0.27
VXN: 54.55; -0.43
Definitely not spiking today as needed. A lot more work to do here to get the VIX over 50 and the VXN over 70 and even 80.
Put/Call Ratio (CBOE): 0.96; +0.21. Right back up again. Four closes over 1.0 in the past 5 weeks has helped set the stage, but it needs help as well. A sharp sell off that undercuts the recent lows would really do the trick most likely.
Nasdaq
Stats: -10.33 points (-0.67%) to close at 1542.96
Volume: 1.581B (-0.46%). Continuing the volume decline as the index worked higher. Below average, declining volume does not indicate accumulation of stocks but more of a reflex bounce.
Up Volume: 689M (-521M)
Down Volume: 876M (+509M). Down volume jumped up as buying volume fell lower. Passing each other in opposite directions once again.
A/D and Hi/Lo: Decliners led 1.2 to 1
Previous Session: Advancers led 2.06 to 1
New Highs: 68 (-8)
New Lows: 82 (+17)
The Chart: http://www.investmenthouse.com/cd/$compq.html
The chart shows a high at 1567.99 that tapped just below the 18 day MVA (now at 1568.71) and then a close back down at the session lows. The Nasdaq started weak, rallied to the 18 day MVA, and then turned back over in the last half of the session. There were a few weak attempts to move up during the afternoon session, but in the end they were pushed down. Nothing serious just looking at the internals; it was a draw. After the gain that can be a positive if the gain was on stronger volume. This is a familiar pattern of action we have seen, and it makes us wary of any ability to hold the gains. Again, we anticipate some more weakness, particularly on the AMD and AAPL news. After that will it hold at 1500 and launch another attempt to follow through to Friday's reversal? 1500 is the point where it would most likely do it, but that does not give it the sentiment surge it needs. The better move is a sharp sell off below the recent low (1445.44) that spikes the sentiment higher.
Dow/NYSE
Stats: +18.70 points (+0.19%) to close at 9706.12
Volume: 1.189B (-3.37%). Lower volume, not crashing, but still lower and below average on the move higher.
Up Volume: 636M (-456M)
Down Volume: 531M (+398M)
A/D and Hi/Lo: Advancers led 1.07 to 1
Previous Session: Advancers led 2.93 to 1. Advancers held the day, but on a gain on the session it was not impressive.
New Highs: 97 (+6)
New Lows: 38 (+10)
The Chart: http://www.investmenthouse.com/cd/$indu.html
Not a tight doji on the candlestick chart, but a much smaller intraday range than the prior two sessions, indicating that the momentum was waning as the volume waned. The Dow also hit right at the 18 day MVA (9738.38) on the high (9721.75) and stopped there. 9500 (and the reach down intraday to 9250) helped spark this move. 9500 is pretty solid support and after trading at the level for a week one might expect a strong move. There is a lot of resistance right here, however. There is that 18 day MVA, then there is 9750 that represents prior highs and lows and a congested trading area. That is right below 9800 to 9811, the April and May lows. Then the 200 day MVA (9846.75) is right there. Lots of overhead, and the Dow will most likely need to pull back if it is either going to take a rest and then rally or just goes ahead and rolls over. Again the key will be the volume on the pullback: rising volume means the big money is dumping shares after the rally.
S&P 500:
Very similar to the Dow: a modest move higher with very little intraday range, tapping near the 18 day MVA (1040.98) on the high (1040.83). Very quiet action after two tumultuous sessions to the upside. It was a breather after a big move up. It has tapped at near term resistance, and again, tomorrow's action will tell more. We see it moving lower even without the ORCL, AMD, AAPL triumvirate of news, but it will most likely have more oomph to the downside with the warnings in key tech areas after the Tuesday close.
Stats: +0.97 points (+0.09%) to close at 1037.14
NYSE Volume: 1.189B (-3.37%)
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
No major economic news out Wednesday, so the market will be guided by its internals. Earnings upside surprises (ORCL, JBL) and earnings warnings (AMD, AAPL) will dominate the action on the Nasdaq. The CPI and housing starts did not help push the market higher; perhaps it kept it from selling worse, but it did not give that good push. Good news tends to lose out in this environment even with the oversold condition.
S&P futures are down 5.50 and Nasdaq futures down 32 at this writing, indicating that softer open as bad news does in fact have more clout than Larry Ellison's good news. We say good news; last night we noted it would not be cake and ice cream at the earnings call, and ORCL did say it was still a very challenging environment. Again, the gains were on cost cutting, not improving business. Very Cisco-like, and we saw what happened after the initial 'home run' quarter soaked in.
The jury is out on this reversal attempt. It changed a bit of character breaking the 10 day MVA, but it maintained the low volume stature. We don't anticipate any rally to be the rally that sets the bottom because it did not measure up to historical parameters of negative sentiment. That does not mean we don't get another pullback and then follow through as in May that ultimately failed at the 50 day MVA for the Nasdaq and S&P 500. Thus as the market pulls back tomorrow we are going to keep an eye on the volume to clue us into whether there is renewed selling to spike things higher on an undercut of the recent lows or a lazy pullback to test near support and then rebound with a follow through. The latter scenario gets us little; poor patterns and no spike in sentiment to put that bottom in some stone.
Many stocks are set up to fall again after rallying to resistance on low levels. We were eyeing KLAC, AMAT and the like until the AMD and AAPL news hit and pushed them lower after hours. We will still look them over and pick out the best downside plays of the group as those stocks were ready to roll over with the market. Whether it is on high or low volume, a $5 to $6 drop in those stocks can deliver a nice gain on some put option action.
We also continue to see some bright stars in the small and mid-cap areas that are giving continued solid upside action. We were in on a few more of these today even as the continuing plays continued to move well. We will look at a few more of these as well along with a good-looking batch of pre-splits.
Support and Resistance
Nasdaq: Closed at 1542.96
Resistance: 18 day MVA (1568.71). May low is at 1560.20, combining with resistance at 1550, a level not totally cleared. 1600 combines with the second March down trendline at 1600. Then the following March to April trendline now at 1635, the 50 day MVA (1648.24), and the February low at 1700.
Support: 1500 is the next logical support level. 1460 is some support. 1420is the bottom channel of the May down trendline. Then there is the bottom channel of the May downtrend at 1418. After that is the September low at 1387.06.
S&P 500: Closed at 1037.14
Resistance: The 18 day MVA (1040.98). The second March down trendline at 1051. The May low at 1048.96. 1060 offers minor resistance from previous prices. Then the February lows at 1074.
Support: 1025 is some possible support. 1005 is the September 2000/May 2001 down trendline. Below that is the bottom of the March downtrend channel at 995. The September low is 944.75.
Dow: Closed at 9706.12
Resistance: 9750 and the 18 day MVA (9738.38). The April and May lows at 9800 to 9811. The 200 day MVA (9846.75). The September 2000/February 2001 down trendline is at roughly 9938 and the 50 day MVA at 9930.03. Then 10,100, followed by 10,250 to 10,300.
Support: The January and February lows at 9620. 9500 is the bottom of the shelf of support from 9500 to 10,100, and it is also where the March down trendline resides. 9250 rose up from nowhere to turn the Dow Friday; possible support there. Then 9000 to 9100. There is a rest stop at 8500. The September low is 8062.
Economic Calendar
6-18-02
CPI, May (8:30): 0.0 actual versus +0.1% expected and 0.5% prior.
CPI, core (8:30): +0.2% actual and +0.2% expected and 0.3% prior.
Housing starts, May (8:30): +11.6% to 1.733M actual versus 1.600M expected and 1.53M prior.
Building permits, May (8:30): 1.674M actual versus 1.620M expected and 1.631 prior.
6-20-02
Current account, Q1 (8:30): $-107.5B expected versus -$98.8B prior.
Trade balance, April (8:30): -$32.1B expected versus -$31.6B prior.
Intial jobless claims (8:30): 38kK expected versus 390K prior.
Leading Economic Indicators, May (10:00): 0.2% expected versus -0.4% prior.
Philadelphia Fed, June (12:00): 10.6 expected versus 9.1 prior.
Treasury Budget, May (2:00): -$60,0B expected versus -$27.9B prior.
End Part 1 of 2
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