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us stock market, trend trading stock
Begin Part 2 of 3
Dow/NYSE: The Dow sold on higher, above average volume, but was able to find support again and closed in its recent trading range. Price/volume action continues its negative trend even as the Dow hangs on.
Stats: Down 91.20 points (-0.8%) to close at 10,799.82.
Volume: NYSE volume surged back above average on the session, rising to 1.257 billion shares (+8.9%). Down volume was 842 million shares versus 389 million upside shares. This is the fifth distribution day this month, and that does not speak well for the Dow.
A/D and Hi/Lo: NYSE declining issues took the lead again, 1.68 to 1. New highs fell to 113 (-46) while new lows rose to 28 (+13).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow is holding above support at 10,750, but today's intraday low (10,722.15) was the first time the index has traded below 10,750 since breaking through that barrier on 1-30. The distribution days on the Dow signal it has a high probability of not making a breakout run that is successful. It tested the 200 day MVA on the low, and that may act as support, but the odds are it will snug closer to that level, if it does not break below it, before it moves up for another run at 11,020 to 11,028.
S&P 500: The big cap index took the second largest hit on the session as it too sold on higher NYSE volume, showing its sixth distribution day this month. That strongly indicates broad weakness in the index, and on its low (1293.18) it once again tested just below its down trendline that it broke over on 1-18. It is testing that down trendline now (at 1295), and it will be a real test with the distribution days the index has suffered. That indicates institutions are selling these large cap stocks, and the S&P is in real danger of slipping down to 1275 (January intraday lows) and possibly the 52-week low at 1254.07.
Stats: Down 25.08 points (-1.9%) to close at 1301.53.
Volume: NYSE volume rose back above average to 1.257 billion shares (+8.9%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
The big story (other than any unseen bombshells out there) for the shortened week will be the CPI out Wednesday given the unexpected surge in the PPI. We do not anticipate seeing this rise above expectations in these numbers as we do not believe prices will be passed on significantly other than in energy costs. Other important reports include the weekly jobless report, the Leading Economic Indicators (should show positive improvement), and the help wanted index. The potential market mover is the CPI.
At this juncture the Dow and S&P 500 are looking weak based on the distribution they are suffering. The Nasdaq has been way ahead of them in the weakness category, so it is actually showing decent price/volume action again despite Friday's selling. If the trend continues, we may see the Nasdaq try a recovery while the Dow and S&P drop further. That would continue the out of sync movement the indexes have experienced, and that is another factor holding the overall market in check: as money rapidly rotates from defensive to tech to cyclical to tech to defensive about every two sessions the indexes struggle in opposite directions.
That leaves us with no clear direction, at least not upward with strong, lasting moves that can be discerned at this stage. The big names are being bought and sold with alarming speed. About the only stocks that are holding reasonable patterns are many of the smaller cap issues we have been tracking in the reports. Those are breaking out, but doing so a few at a time; it is a slow process with this market. What we are finding very useful is selling calls on our positions when the market puts in a couple of good rally days and runs into trouble. This is a pattern that is still in its early stages, but it is developing and for now we can take advantage of it with the covered call sales. When the rolling pattern becomes more defined we can add stock and option purchases. We want to get rolling patterns of a week or better for the latter, and the market is not there yet.
Looking at the market, we are looking to apply this method with what we see could be a rally back up in the Nasdaq early next week after a test of the lows or near 2300 on Tuesday. The price/volume action has been decent, and that indicates there is buying interest even as it approaches its lows. We don't have to jump in Tuesday if it tests 2300 and then closed back near 2400; we can wait for Wednesday and see if the CPI sends it higher or lower. We believe the CPI will not be a shock, and thus are inclined to play a move higher on the Nasdaq given its good price/volume action. When in doubt, patience is the key.
We don't mind trading ranges at all as stocks tend to carve out more or less predictable ranges that we can get tag along with and book nice, steady gains on fairly short term trades. We are going to watch for the range to build and hop on board and try to run them both ways. This is simply playing a stock as it rolls back and forth. The problem thus far has been the wild volatility based on negative news or positive news with stocks gapping higher or lower. In that situation we do what we did on Thursday afternoon, and that is get in on the backside of the move if it gaps away from us. In other words, when Wednesday reversed and started up and Thursday gapped higher and ran up further, we started selling calls when the market double topped and started back down. It then gapped lower Friday and made our plays for us. Thus, while we might miss the front side of the move, as stocks cannot sustain a move for long, we wait for it to weaken and then capture the move the other direction. Sounds simple, but it can get confusing if you try to chase gaps. If you miss a gap, if it is for real you will usually get another chance to play it. If it is not, you can play when the move ends.
Don't get caught up in chasing stocks up and down; that is like chasing a bus as it leaves the stop. The powerful gaps higher or lower don't leave any room to trade. When we see positive market action setting up for a rally as we saw earlier this week and the market starts weak but hits a low and builds, we can play the move when we see it start. Right now this continues to be very aggressive, very short term trading, something we do not like to engage in unless a play is perfectly set up. If the market sets up correctly, if the stock hits our targeted support and bounces, we will make the play. Otherwise, no thanks. As we have said, these are not long term plays right now, just hit and run. We are taking some long term positions on the earnings horses that we feel will be much higher in a year, but we do that on the pullbacks and are not playing them short term.
In addition we continue to monitor the great mid-and and smaller cap stocks that are showing solid patterns, setting alarms and telling our brokers the breakout points so we can take advantage of the many smaller stocks that are outperforming the indexes. Overall the indexes look weak, but the non-name brands are performing well. Patience is the name of the game here. Wait for the move to occur on strong volume then make your move. A breakout on stronger volume indicates a lot of support for the move and that is the edge in this market.
We are also going to be looking at some OEX puts as the S&P 100 is suffering those distribution days as well and tapped its down trendline on its low today as well (670.04). It is right at support and if the big caps break, it could give us another play to the downside even though it has already dropped significantly on this down leg.
The name of the game right now is patience and flexibility. We can add our favorite stocks on dips for the long term, but for short term plays you can try to nimbly play the bounces, catch trading ranges as they emerge (upside and downside), jump on pre-splits on good momentum days, and play the breakouts. We keep a list of stocks in each category for each day that we can jump on depending upon the market conditions and how they are performing. Just avoid overtrading right now and make the plays you want to make without feeling you have to trade.
Support and Resistance Levels
Nasdaq: Closed at 2425.38.
Resistance: 2650. 2890 to 2900 is next before the 3000 level.
Support: Trying to hold at 2400. After that, 2300.
S&P 500: Closed at 1301.53.
Resistance: Interim at 1335. Then 1360 to 1375.
Support: Down trendline at 1300 to 1305. After that, 1275.
Dow: Closed at 10,799.82.
Resistance: 11,020 - 11,028. After that, 11,400.
Support: 10,750. Then 10,650.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
2-21-01
CPI, January (8:30): 0.3% versus 0.2% prior.
Core CPI, January (8:30): 0.2% versus 0.1% prior.
Trade Balance, December (8:30): -$32.4B versus -$33.0B prior.
Treasury Budget, January (14:00): $73.0B versus $62.2B prior.
2-22-01
Initial Claims, 2/17 (8:30): 345K versus 352K prior.
Leading Indicators, January (10:00): 0.4% versus -0.6% prior.
Help-Wanted Index, January (10:00): 79 versus 79 prior.
SUBSCRIBER QUESTIONS and TEAM TRADES
While the market churns, defensive strategies take front stage, and we are not necessarily talking about rotating into defensive stocks. When the market has been taking violent declines on over 100 points we have been accumulating shares of many of the leading earnings stocks that appear to have a lot of growth still ahead of them. These include stocks such as JNPR, EXTR, SEBL, EMLX, BRCM, BRCD, AMCC, GLW, CIEN, VRTS and VRSN. We don't jump in with a full position at once, but we work in with shares here and there when they suffer those setbacks. This is not what we usually do, but as we feel the market is bottoming and feel that these stocks will be much higher in a year we are willing to put some money to work in building positions now and then committing more money when they form good patterns and break out. That is averaging up in a position.
While we build these positions we keep an eye on the market; thus far it has not broken to new lows that could signal trouble for these positions say if the Nasdaq decided to try and head to 1500. If it does hit a new low we will have to be on alert to get out, but at this stage, as discussed in the market summary, this would most likely be a shakeout of most of the last sellers.
What we have been doing with these positions is selling covered calls on them after we acquire them on the heavy down days and they then run up in the next rally. This week we reported several instances when we were doing this as the market struggled and then ran up. The first was in frustration with the market, and that almost got us in trouble until Wednesday's dip to test 2400 helped us to close those positions with decent gains. That was lucky because we were looking at the patterns and trying to pick those stocks that looked dead, but in reality most were at the bottom of their range; they were either going to move higher or really crash, and we jumped in without waiting to see which. Thursday we were back at it after a 205-point swing from Wednesday's intraday low to the double top hit that session. When we saw that occur and the index start to slide, we rushed in and sold covereds on JNPR, EXTR, CTXS, BRCM, SEBL and others. We sold some naked calls on NTAP even though it had reported great earnings; indeed, we did so because of that as it had run up four sessions and we believed the sellers were going to move in. Then NT announced its earnings problems and the rally was getting gut-punched after hours. Friday morning we started putting in orders to buy the stocks back as they immediately moved up at the open, but we put in limit orders and we missed the first shot. We saw the moves up start to top so we pulled our buy orders and let the stocks fall which they did when the Michigan survey came out and the bombing runs hit. We started buying positions back when we saw some bouncing down around 2400 again. We did not get them all at the low of the day, but we did net some nice gains that put cash in the accounts to buy more shares next week if the market falls further, and then get ready to sell calls when the market runs back up and shows topping signs once again.
This is being flexible in this market and taking what it is giving. This is some of the easier trading we can do at this point: we just bought many of them so we are not way up or way down on them, so we trade the calls pretty aggressively. The key is to act when you see a few days of movement to the upside and then a reversal that starts intraday. Sell the calls and set reasonable buyback targets. We discuss this in the FAQ's on the website. You can search the FAQ's using 'covered calls' and look at questions 109, 42, and the others in that section.
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 Friday.
Best Plays: Tons of great patterns this weekend. Aside from those listed below, take a look at LOW, WEBM, CERN, WB, FITB as well.
1) FAF: Ready to move back up.
2) RBNC: Moving up in an ascending wedge.
3) NEU: A doji in the tail of the pennant.
4) EDS: Ready for a rally after this pullback.
5) PNC: Got a shot of volume Friday.
6) BGEN: Moving up on strong volume.
7) EFX: Good-looking cup with handle.
8) May: Ready to spring back up.
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.
Continued Plays:
SUB (Summit Bancorp--$42.87; +0.42; optionable (SUB)): Regional banks
http://biz.yahoo.com/p/s/sub.html
STATUS: Continues to hold above the 10 day MVA (42.81) as volume remains below average, slightly higher Friday on the move up (537,100; avg. 741,681). The low (42.10) tested support at the 42 level, and on the low volume SUB looks ready to hold above that level. Patience has been a virtue for other such lengthy patterns that have broken out for us. Pattern high is 44.61. Excellent money flow and note that relative strength broke out late in the week, a sign the price could follow soon.
BUY POINT: Over 44.61 on continued rising volume.
POSITION: Stock and/or April $40 calls to buy (SUB DH).
NATI (National Instruments Cp--$53.00; -1.31; optionable (SJQ)): Computer peripherals
http://biz.yahoo.com/p/n/nati.html
STATUS: Broke below our targeted support level (10 day MVA, 53.51) to close just above the 18 day MVA (52.71). The low on the day ducked below the latter moving average before the stock recovered back over the support on lower volume (206,100; avg. 257,000). The stock's up trendline (connecting October, January and February lows) is at 52, and it has a tendency to pull back to the 50 day MVA (at 50) before it starts its bigger moves. The stock launched its breakout run on a bounce from this trendline February 5 (breakout high from the ascending wedge is 57.56). Great money flow and high relative strength. Buying picked up.
BUY POINT: On a move up from here on strong volume, or from a further test of 50-52.
POSITION: Stock. June $50 call options have 57 open interests (SJQ FJ).
SDS (Sungard Data Systems Inc--$55.94; -0.55; optionable (SDS)): Business software
http://biz.yahoo.com/p/s/sds.html
STATUS: Tried to move up after the short, two-day pullback earlier in the week, opening higher Friday but dropping to a low of 55.25. That was a test of the 10 day MVA (54.88), and despite lower volume the stock moved up from there to close slightly lower on the day. Looking for a move over the Thursday high of 58.50 on stronger volume after this test of the recent breakout. Huge money flow and high relative strength for this leading stock.
BUY POINT: Over 58.50 on volume in the range of 905,000 or better. Friday's volume dropped to 670,300 (avg. 850,000).
POSITION: Stock and/or April $55 calls to buy (SDS DK).
ASD (American Standard--$56.14; -1.31; optionable (ASD)): Materials and construction
http://biz.yahoo.com/p/a/asd.html
STATUS: Reversed the selling Thursday and on lower (but still high) volume that day moved up to a new all-time closing high at 57.45 after the breakout a week ago. Friday saw the stock opening lower (56.90) and moving down to close above support (at the 56 level) on low volume (257,700; avg. 388,863). Looking for a hold here for a break over the previous high on higher volume. 10 day MVA is at 54.87.
BUY POINT: On a move back up from here on stronger volume fir additional positions.
POSITION: Stock and/or April $55 calls to buy (ASD DK).
End Part 2 of 3
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us stock market
trend trading stock
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