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7/08/02 Stock Split Report Upidate
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Stock Split Report Subscribers:
MARKET ALERTS:
Targets hit alerts issued Monday: None issued
Buy alerts issued: AZO; ESRX; WHI; LNCR
Trailing stops issued: None issued
Stop alerts issued: None issued
You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.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:
- Selling returns on lack of positive news.
- Large caps roll over, but it was not a nasty reversal.
- Small caps give up relative outperformance late in the session.
- Subscriber Questions
Post holiday hangover pushes indexes lower.
The market partied hard Friday, and it was still feeling the effects Monday. Europe was lower, Alcoa missed earnings by a penny, and accounting questions surrounding MRK combined to put a lid on the Friday gains. It was basically a lack of any upside catalyst to continue the move and counter the negative news hitting the market.
Early it appeared as if the indexes might ignore the moderately negative news, rallying back after gapping lower at the open. That is typically bullish behavior when buyers ignore bad news and keep on buying. It did not hurt that Warren Buffet's company was buying LVLT convertibles; that gave tech a boost. After all, if Buffet was making his first ever foray into technology surely it was time to buy tech.
Cannot top resistance.
The move back up to cut the losses did not last long. About 10 minutes to be more exact. The indexes started a slow, session long slide at that point, picking up the pace in the last two hours after a modest rally attempt after lunch ran out of steam. A very late pop closed the large cap indexes off of their lows, but the trend was not in doubt.
The move looked like a classic rollover in the trend: stalling at near resistance and rolling over for a large price loss. Volume was higher, but was not runaway by any means. It was thus not a powerful reversal. Indeed, the indexes managed to hold above near support for the most part.
One of the things we have to be mindful of this time around is the possibility of a day or two pause after a big rally off of a nasty round of selling before a resumption of the move up. It certainly looks like a move back down again, but as we have explained last week, after so much selling the indexes are due for a higher bounce up. In May there was a big rally, two days that gave a lot of it back, and then a move up to the next resistance level. This has a lot of the same characteristics, so we are not going wild to the downside but instead limiting our choices to patterns that look ready to give us some quick moves lower. If the market tanks lower after that, so be it; we will have taken part in some good downside action and will have more at that time as well.
Small caps drop as well late in the session.
During the day we were watching how the small and mid caps were outperforming the large cap indexes. With an hour to go they were slightly higher to flat. It looked as if there might be a resumption of the small cap move that was the opposite of the large cap action. The last hour, however, was rough on smaller issues. The selling caught up with them and pushed the indexes to their lows and hung losses on them that were right up there with the large cap indexes. So much for a return to the small cap leadership, at least as of the close Monday.
As with the large cap indexes, however, the selling the past 6 weeks has been sharp, and there may be a day of rest or two and then the indexes move back higher. The early outperformance Monday indicates an attempt to reassert some leadership. After a couple of days rest they could be ready to resume a move. As with the large caps again, they may not. A market can get more and more oversold, meaning the smaller issues could continue to sell and not rebound. Again we are taking a cautious approach here until the indexes show us what they are going to do at this point.
THE MARKET
No more relief Monday, and though the point losses were ugly, the relative volume was down. The downtrend remains in force and we were ready to take advantage of that action today with some more select downside plays. We also know that after so much selling the market is primed to give back some gains from Friday and then try once again to move up again to test higher resistance. After such a strong move down the prior four weeks, automatically assuming the trend has resumed is somewhat risky.
We are not losing sight of the existing downtrend, just cognizant of how the market tends to function. We are taking advantage of the move down but will take profits if the indexes are able to hold at support and start back up. There is still the possibility of a follow through starting Tuesday and running through Friday. After the strong selling we recognize the tendency to move up to test the next higher resistance level.
Sentiment Indicators
One of the reasons we are watching the current move lower as a possible head fake is the sentiment indicators. Yes they have not hit levels that would be indicative of a major bottom. They are, however, holding at relatively high levels, and on today's relatively low volume selling the sentiment indicators spiked up. They are showing a lot of volatility of their own of late, and that is a sign that there could be a change in the current trend if only for a short period. As we have discussed in the past, when volatility rises in any dynamic system, that is indicative of change. The recent tendency towards higher volatility indicates a move higher is trying to form.
VIX: 31.53; +1.32
VXN: 59.29; +3.01
Put/Call Ratio (CBOE): 1.02; +0.25. Wasted no time in moving back over 1.0 on the close. Another example of how ready funds and option investors are ready to assume the downside is resuming. Quick assumptions in the market tend to punish you.
Nasdaq
Stats: -42.75 points (-2.95%) to close at 1405.61
Volume: 1.707B (+52.47%). Stronger volume than Friday, but Friday was just a half session. Relatively the volume was lower so it is hard to call this a distribution session.
Up Volume: 253M (-702M)
Down Volume: 1.438B (+1.383B). Though reluctant to call this a distribution session, it is clear that down volume was way, way out ahead of up volume. There were not many buyers today; the selling was not that strong, but it looked stronger given the lack of buyers after the first 10 minutes.
A/D and Hi/Lo: Decliners led 1.68 to 1. A return to decliners leading; strong but not runaway.
Previous Session: Advancers led 2.86 to 1
New Highs: 54 (+32)
New Lows: 107 (+52)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Tested toward the 18 day MVA on the high (1452.56) and then rolled down with a pretty nasty 3% loss. Volume was not heavy, but that is cold comfort for the losses. It looks very much like a resumption of the downtrend with a test of the 18 day MVA. It is still, however, above the long term up trendline, the September low, and the recent down trendlines. We are going to watch closely the next sessions to see how those levels hold up on further selling. If volume does not climb on the selling, they could very well send the indexes higher to test the next resistance levels (after it clears the 18 day MVA of course), e.g., the second March down trendline at 1530 and the 50 day MVA at 1559.68).
Dow/NYSE
Stats: -104.60 points (-1.12%) to close at 9274.90
Volume: 1.514B (+113%). This was sharper volume than on the Nasdaq, really jumping higher in the last hour to above average levels.
Up Volume: 328M (-342M)
Down Volume: 835M (+795M)
A/D and Hi/Lo: Decliners led 1.45 to 1
Previous Session: Advancers led 4.39 to 1
New Highs: 69 (+37)
New Lows: 51 (+16)
The Chart: http://www.investmenthouse.com/cd/$indu.html
Continued to move over the 18 day MVA (9646.11) on the high (9410.38) and then rolled back over as the early momentum quickly ran out of gas. The volume was of course higher on the rollover back below resistance after the Friday half session. The index did, however, hold above the March down trendline just below 9250 on the close. There is other support from prior prices at 9250. We expect the Dow to test lower tomorrow, carrying through on the momentum at the close, but we are cautious from the 9250 to 9100 range. Plenty of room to move lower of course, but it can hold there and still mount a follow through to the upside. The Dow, unlike the Nasdaq, has not sold down this recent downtrend from May four rotations (just two for now). It could turn lower for another two rotations lower. If it does, it will be playing catch up to the other large cap indexes, and it may drag them back with it. For now, however, we are being very careful with this resumption of the trend; as noted above, it could turn right back up after a couple of sessions testing the Thursday and Friday moves.
S&P 500:
The S&P 500 turned back at the 18 day MVA and the March down trendline, rolling over on rising, above average volume NYSE volume. This is a classic resumption of the downtrend (the S&P 500 never made the move up the Dow and Nasdaq did), but we are going to be watching the action near 960 (the bottom channel line of the March downtrend) closely as the index may try to bounce there.
Stats: 0 points (0%) to close at 976.98
NYSE Volume: 1.514B (+113%)
The Chart: http://www.investmenthouse.com/cd/$spx.html
TUESDAY
The Monday action looks like another resumption of the continuing downtrend after a brief, passionate attempt to sally the troops. There was short covering and there was buying last week. Today it looked like a lot more short covering as all indexes, large and small cap alike, turned back and sold off with more or less equal fervor.
Though volume was up, we don't want to jump to the easy conclusion that it is automatically a resumption of the downtrend. There was a lot of selling leading up to the rally late last week, and with the increased volatility in the sentiment indicators, we are not ready to conclude the rally attempt is dead. It could easily sell back another session and find support to rally and follow through to the upside just as it did in May. We are not saying this is the bottom, but just that the market is ready to bounce higher to test that next resistance level. There are still too many weak patterns in the large caps to product much near term leadership, and the small and mid-caps rolled over late Monday after outperforming up to that point; it does not look as if they are ready to resume leadership at this point.
Therefore our gameplan is to continue to look at select stocks both to the upside and downside right now until the market is clear as to what it is going to do near term. As noted, it would be easy to say after Monday's action 'continuation of the downtrend;' that would be the easy call and it may be right. After such easy downside money the past four weeks, however, the market is primed to give the downside players a head fake. It is very good at doing that, and the safer course is to see how it responds while we take a few choice upside and downside positions just as we were doing today.
Support and Resistance
Nasdaq: Closed at 1405.61
Resistance: Possible at the September interim test (1418). Then the 10 day MVA (1427.71) and the 18 day MVA (1458.19). After that is 1500 and the May low (1560.29). The second March down trendline is at 1530. The 50 day MVA (1559.68) is where we would expect this rally to ultimately end if it holds support Tuesday and gives a follow through sometime this week.
Support: The long term up trendline from 1991 (1403). The March down trendline at 1376, just below the September low at 1387. The March downtrend bottom channel line at 1320. 1357.09 is the October 1998 bear market low. After that is roughly 1250.
S&P 500: Closed at 976.98
Resistance: The 10 day MVA (979.85). The 18 day MVA (992.95) followed by the March down trendline at 991. The September 2000/May 2001 down trendline at 990 is right there as well. The second March down trendline at 1028 and the 50 day MVA (1033.90). Then the May low at 1048.96. 1060 offers minor resistance from previous prices. Then the February lows at 1074.
Support: The bottom channel of the March down trendline (960). The September intraday low is 944.75. 923.32 is the October 1998 bear market low. 900 is after that.
Dow: Closed at 9274.90
Resistance: The 18 day MVA (9340.48). 9500 is some resistance. After that is the 50 day MVA (9646.11). Then a jump to 9750 and the April and May lows at 9800 to 9811, followed by the 200 day MVA (9816.17).
Support: The March down trendline at 9248, and 9250 represents some prior price support. 9000 is the November low off of the first rally from the September low. The bottom channel of the March downtrend at 8920. There is a rest stop at 8500. The September closing low is 8235.81 and the intraday low is 8062.
Economic Calendar
7-08-02
Consumer credit, May (2:00): $6.08B expected, $8.8B prior.
7-10-02
Export prices, June (8:30): No consensus estimate yet.
Import prices, June (8:30): No consensus estimate yet
Wholesale inventories, May (10:00): -0.4% expected, -0.7% prior.
7-11-02
PPI, June (8:30): 0.0% expected, -0.4% prior.
Core PPI (8:30): 0.1% expected, 0.0% prior.
Initial jobless claims (8:30): 382K prior.
7-12-02
Retail sales, June (8:30): 0.6% expected, -0.9% prior.
Retail ex autos, (8:30): 0.4% expected, -0.4% prior.
Michigan sentiment, preliminary July (9:45): 93.3 expected, 92.4 prior.
SUBSCRIBER QUESTIONS
Q: (Editor's Note: Over the weekend the newsletter referred to the fact that there were few large cap techs in good patterns ready to make sustained moves higher even if the Nasdaq showed a follow through this week, though we did note that MSFT and some others were showing better patterns. That brought the following response that we wanted to address because our philosophy is to use a consistent method of evaluating the market and stocks that historically shows when bottoms and tops are hit, identifying the current trends, showing when the big money is buying or selling stocks, and then making investments in line with those trends. We sometimes go counter to the trends, but we enter the action knowing that is what we are doing. This gives us the edge in our investing rather than chasing the latest tout or fad. Figure out where the money is going or leaving and you are a long way to being on the right side of a trend. The following is the statement and our response.)
Look at qlgc, klac, mxim, etc on friday. What was that? I thinketh you are a tad behind here. i understand your not recommend techs here, but there are some strong stocks/patterns setting up.. symc....a 50% move on chkp with a p/e of 10..... the charts may not be perfect, but the action was in these stocks and will continue in them.. i missed this rally bec i listened to your negativity. my fault. but i am waiting to see what you do next.
A: We would not really call Friday a rally. Now it might be the start of something as we have been anticipating the past several reports, but it is hardly a sustained rally. It is very much like the continued relief bounces after each round of sharp selling. Those stocks you cite were not breakouts, just rallies off of new lows just as they have been doing for the past several months. KLAC has been hitting lower lows for three months. We have made money on the downside with that stock and others because that is the trend. Now you can play the moves up, i.e., the relief bounces, but the patterns show distribution, i.e., selling of stock, not accumulation. That means they typically go lower and lower with periodic jumps higher, and are subject to being jerked up and down by the most recent news story. What we look for in upside plays that you can really invest in are accumulation patterns. Again, you can trade the stocks to the upside as long as that is what you know you are doing as opposed to confusing this with long term investing. Until they get out of those downtrends the downtrend is likely to hold sway, and you are bucking the trend playing the upside in those stocks or sectors that are trending lower. It is much less forgiving if your timing is not just right than playing with the trend.
That said, we did note there are some interesting large cap tech patterns such as MSFT and ORCL, and some are actually holding at long term up trendlines (similar to the Nasdaq holding just above its long term up trendline). Maybe this is the start of something to the upside; as we have been saying, the market is primed for a move to test the next resistance level. If that happens these stocks could come develop into some patterns that show accumulation, and that could lead to a stronger move higher. That remains to be seen. Up to now, except for some early signs such as that ascending triangle in MSFT, the patterns have shown major selling, not major buying.
End Part 1 of 2
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