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us stock market, trend trading stock
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7/09/02 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS
Target hit alerts issued Tuesday: None issued
Buy alerts issued: LLL; ROOM
Trailing stop alerts: None issued
Stop alerts: None issued
To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertdly.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:
- Not ready to bounce yet despite 'get tough' attitude in D.C.
- Nasdaq eases back to fill the gap while NYSE shows some distribution
- Subscriber Questions
Where is the bounce? Those who expect nothing are never disappointed.
The market is not selling off hard, but of course, just because sellers are not squeezing the life out of it does not mean it is ready to rally. The fact that it is not getting torched on high volume as it sells is hardly comforting. There is an old saying in baseball: a bloop hit looks like line drive in the book. In other words, a 2.5% loss on the S&P 500 is a 2.5% loss regardless of how many shares traded hands.
Fingers were pointed everywhere for the selling, but as we know those are just the excuses pinned on a continuation of an existing trend. The early selling was because of semiconductor downgrades. The mid-session rally attempt was due to President Bush's speech. Or was it Senator Daschle's 'investor bill of rights' pronouncement? The selling afterward was supposedly because Bush and/or Daschle quit talking. The one certainty: when the trading stopped, the selling stopped.
Of course, all of the excuses are garbage. No rational investor was looking for a speech to change the market conditions. Indeed, it is hard to take the government seriously on any issue when it cannot come close to getting its own house in order. Lavish parties, 'fact finding' junkets to exotic global destinations courtesy of you and me, the inability to make a single hard decision about cutting the budget other than trying to cancel the other party's morning doughnut order; given this largess, no wonder the country just shakes its head in response to the sanctimonious podium pounding about socialized healthcare, controlling crime (white or blue collar), and other issues that one would be hard pressed to find granted to the feds by the Constitution.
Or maybe ordinary citizens are jaded by the government's fervor in pursuing Microsoft on an arguably lame monopoly charge while it let securities laws languish. There is still great legal debate about whether MSFT did anything that would remotely warrant a breakup. On the other hand, there is no question some corporate executives were purposefully committing fraud during the same time period, but no one was watching. The current SEC chairman takes all of the heat for the sins of the prior chairman and his bosses. Pitt (who was approved with strong bipartisan support) was not there turning the blind eye to what was going on; there was no enforcement in the 1990's. Only when Enron broke did the prior SEC director come out of his office and make grand speeches about how he had always supported separating auditing from advising.
Now everyone thinks that more rules, more regulations, and more laws will make all CEO's and corporate officers ethical. Just as prohibition made everyone forsake liquor. Just as gun laws keep guns out of the hands of criminals. We don't need any investor bill of rights. We don't need to overhaul the system and pile on one or more new federal oversight bodies. Just enforce the laws and regulations that are on the books. If you need to stiffen the penalties, do it. Then enforce it. It is obvious that there was NO enforcement during the boom. Then the recession that came after the Fed rate hikes put companies in dire straights and the fraud and chicanery was discovered. More regulations won't fix what has happened. Indeed, as history has shown, we won't need the regulations for some time; it is during booms that the excesses on all fronts occur. We are far from a boom. Thus, enforcing the existing regulations moving forward is how to help control the scope of future problems. You will NEVER, however, keep a crooked CEO from doing crooked things; cannot be done no matter how much you regulate. Indeed, as the U.S.S.R. showed, the more you regulate, the more corrupt things are.
Nasdaq fills the gap on lower volume, but the S&P 500 leads lower on stronger trade.
The Nasdaq eased back to quietly fill the gap higher from Friday. Volume was lighter. There was not really selling, just that old lack of buying. Not many were willing to step in and buy stocks Tuesday. On the S&P 500, however, volume continued to climb. That indicates distribution but volume was still below average on the selling. It was not a slaughter as far as intensity; the point losses were significant (as usual), but the A/D line was not sharply negative.
This is no doubt a continuation of the downtrend, but it does look similar to May where the indexes had sold hard, gapped up, filled the gap, and then rallied to the next resistance level. It did not end the downtrend, but it was like a swimmer coming up for air or a horse that goes out to test the extremes of the electric fence. The fence still works and sends the horse racing back, but after a long time between tests, it needed the reminder.
Now there is no reason with the resumption of the downtrend to say that a bounce is for sure coming. The market has been trying to act resilient, but when push comes to shove it fades like a morning glory in the hot afternoon sun. There are some good indications of a bounce ahead as we have discussed (the Nasdaq's continued lighter selling being just one), but they have not come to the forefront. Thus, while keeping an eye out for that bounce after filling this gap we take advantage of the existing trend with some more downside positions as they present themselves. In the end you have to take what the market is giving you, not try to bend the market to your will. The latter usually does not work.
THE MARKET
Sentiment Indicators
VIX: 33.92; +2.39. Good advance but still below the recent highs at 35.99. Showing staying power in the thirties, a good sign. It will still need to spike higher for a good bottom set.
VXN: 62.12; +2.83. Moving back up but still off of its recent high at 66.14. It too needs to ultimately get up in the eighties to really be convincing.
Put/Call Ratio (CBOE): 0.87; -0.15. Back down on more selling. Somewhat curious action given the selling today.
Nasdaq
We would say it 'gently' filled the gap, but it's hard to describe a 1.7% drop 'gentle.' Still it was lower volume and settled down right at the gap up point.
Stats: -24.49 points (-1.74%) to close at 1381.12
Volume: 1.702B (-0.28%). Volume pulled back a hair on the Nasdaq, but it was still well below average as the recent action has been after the last round of really nasty selling in early July. That gives is sort of the feel of just being a test of the recent low and not a new round of selling. Enough to keep us from turning completely bearish.
Up Volume: 408M (+155M)
Down Volume: 1.273B (-165M). A bit more buying, a bit less selling. The selling volume did not ramp up.
A/D and Hi/Lo: Decliners led 1.34 to 1. It was not a heavy selling day.
Previous Session: Decliners led 1.68 to 1
New Highs: 41 (-13)
New Lows: 145 (+38)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Gapped from 1380.17 Friday, and Tuesday settled back to 1379.57 on the low, filling the gap and then moving slightly higher to close. It was a lower, below average volume move, and in that sense it was a gentle fill of the gap. It is resting on the gap up point and the March down trendline. The selling has not been severe to get it down to this point this week, but the prior two months of selling was intense. It is primed to bounce form here for a test higher; it is showing some indications of upside potential. It is enough to keep us cautious to the downside until the index works through this period and gives a clearer picture of where it wants to go. Remember, the downtrend is well-established and pushed the index lower for two uninterrupted months. It cannot continue down in a straight line forever, and it is showing indications that it wants to try to rally higher. Not saying the rally will be successful, but after such easy pickings to the downside the market tends to revert and make everyone honest again before resuming the trend. Don't want to sound like grandma, but there is no point getting impatient.
Dow/NYSE
Continued to sell down from the 18 day MVA and the March down trendline, and though volume was higher, it was still below average. Not showing the intensity it was during the more recent parts of the downtrend. Again, this keeps us on the alert, but does not make us think the bottom is here.
Stats: -178.81 points (-1.93%) to close at 9096.09
Volume: 1.343B (+13%). Stronger volume on the selling indicating there was distribution, i.e., selling of stocks by some big funds, pensions, etc. It was still below average volume, however, indicating the selling is not as intense as prior trips down in the downtrend.
Up Volume: 252M (-76M)
Down Volume: 1.098B (+263M)
A/D and Hi/Lo: Decliners led 1.57 to 1. The selling broadened out a bit.
Previous Session: Decliners led 1.45 to 1
New Highs: 48 (-21)
New Lows: 97 (+46)
The Chart: http://www.investmenthouse.com/cd/$indu.html
Tested the 18 day MVA on the high (9318.10) and rolled over to close near the session lows. That keeps it within the March downtrend channel, just above the bottom of the channel that is right at some intraday lows back in October 2001 at 9060. That offers some support at that level, but anywhere down to 9000 and the recent intraday lows at 8926 and 8897 is in play. The typical pattern in the downtrend has been to make a fresh intraday low and then reverse. That would carry the Dow outside the bottom of the channel if it sold to that level Wednesday or Thursday, but it has done that on the last two moves lower so that would not be anything new.
S&P 500:
The large caps took the lead Tuesday, and of course it was to the downside, falling on that rising though still below average NYSE volume. The tap of the trendline sent it lower, and Tuesday it undercut the bottom of the channel once again, but it is above another lower channel line that was establish by a quick low in April and May. To hit that bottom channel on this round the S&P would have to sell down to the recent intraday low at 934.87. Given the action today, that is a logical point to set the sights on.
Stats: -24.15 points (-2.47%) to close at 952.83
NYSE Volume: 1.343B (+13%)
The Chart: http://www.investmenthouse.com/cd/$spx.html
WEDNESDAY
The Nasdaq was selling on lighter volume, filling the gap from Friday. It is the speculative index of the large three, and it is showing less selling intensity on both a historical basis and (on Tuesday) an actual basis. Even with the semiconductor downgrades the Nasdaq was able to keep its losses below the other two large cap indexes. On the other hand there is the SP 500 that picked up the pace today, selling harder on rising volume as the broader measure of large cap stocks took the worst beating. It is accelerating to the downside as the Nasdaq puts on the brakes. The S&P's selling, however, was still on lighter volume than in recent rounds of selling down the trendline.
Does this mean an end to the downtrend? Not hardly. After several rotations down the down trendline, the Nasdaq is taking a breather or a pause in the selling intensity. We will know more Wednesday and Thursday if it will try a further rally without making new lows this time around. Even if it does rally higher it won't be an end of the downtrend by our reckoning; the sentiment indicators never hit levels that would set the bottom. What it would be good for would be to clear some upside positions that have hit the target or are not performing as we want them to. Then we would reload for the downside and play a resumption of the trend that would have the need to try and rally washed away; the pressure would be gone.
As we noted to one subscriber today, there are signs that it is not the same selling as it has been in the past two months in the trend. We prefer to err on the side of caution after easy pickings to the downside. The market works in cycles. It will give it up easy, then look as if it is going to continue the move again just to sucker punch you. No point in getting impatient and trying to milk a long downtrend too many times. We always get nervous after four runs down a trend; years of experience tell us that the trend is going to want to be tested after such a move. I hardly every play a fifth rotation as it can take back the last two rotations from you with a violent reversal. The fact that the selling has been less intense the past two days just makes us a bit more cautious.
Not much news tomorrow though export and import prices are out and wholesale inventories. Those are important, but the focus now is on earnings guidance that is going to start in earnest next week. There is not a whole lot of faith that earnings will be better looking ahead. Retail is pre-announcing strong results, but tech is just not going to make diluted expectations.
Tomorrow we will watch the nearer term support levels to see if they hold. Of course we will also see how much downside volume there is. This has been a low volume rotation down, and if volume continues to rise on further selling any bounce scenario has to wait until the fresh lows are hit and then the rally back up to the down trendlines. In other words, just a continuation of the trend after a brief reprieve to the 18 day MVA. We will let the index work out the wrinkles and then get more aggressive when it does. In the interim we will continue to cherry pick the downside and upside plays.
Support and Resistance
Nasdaq: Closed at 1381.12
Resistance: Long term up trendline is near 1404, but it is a general level of support. After that is possible resistance at the September interim test (1418). Then the 10 day MVA (1419.24) and the 18 day MVA (1450.08). After that is 1500 and the May low (1560.29). The second March down trendline is at 1527. The 50 day MVA (1552.67) is where we would expect a rally to ultimately end if it holds and gives a follow through sometime this week.
Support: The March down trendline at 1373, just below the September low at 1387. The March downtrend bottom channel line at 1318. 1357.09 is the October 1998 bear market low. After that is roughly 1250.
S&P 500: Closed at 952.83
Resistance: The 10 day MVA (974.84). The 18 day MVA (988.73) followed by the March down trendline at 990. The September 2000/May 2001 down trendline at 991. The second March down trendline at 1026 and the 50 day MVA (1030.72). 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) and the lower channel line it has recently bounced from at 930. The September intraday low is 944.75. 923.32 is the October 1998 bear market low. 900 is after that.
Dow: Closed at 9096.09
Resistance: The 10 day MVA (9217.50) and the 18 day MVA (9314.66). The March down trendline at 9250 is just before that. 9500 is some resistance. After that is the 50 day MVA (9624.54). Then a jump to 9750 and the April and May lows at 9800 to 9811, followed by the 200 day MVA (9819.77).
Support: 9000 is the November low off of the first rally from the September low. The bottom channel of the March downtrend at 8915. 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: Your explanation of how open interests affect stock prices was fascinating! How do I determine what is a large open interest for a particular stock?
A: It is not really a fixed number for any specific option on a stock. It depends on what the current open interests are and that can vary from month to month. What you look for is any open interest for a particular strike or group of strike prices that is head and shoulders above other open interests. For example, if you see several strikes with 200 to 300 open interests and then see one at 700 or a thousand open interests, that is a strike where the market maker could suffer a lot of pain. That one sticks out as a resistance level if it is a call position above the current stock price or a support level if it is a put position below the current stock price.
End part 1 of 2
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us stock market
trend trading stock
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