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7/31/02 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS:
Targets hit alerts issued Wednesday: None issued
Buy alerts issued: ITMN; STEM
Trailing stops issued: None issued
Stop alerts issued: None issued
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:
- Overcoming bad news to close the gap late.
- Positive price/volume action is a nice plus.
- Economic headlines rattle double dip sabers, but headlines are often . . . wrong.
- Need some more consolidation for another move in this rally, but may not get it.
- Subscriber Questions
Early news sets bar higher, but market continues its improving character.
Sharply lower reported GDP and weaker Chicago manufacturing turned futures sharply negative and the market followed through as trading opened up. Significantly the indexes were able to hold near support and work through the bad news to set up another late rally into the close. This is the same action that hallmarks the recent change in market character since the low a week ago.
As the session wore on the point losses were getting too large. Tuesday we discussed the importance of keeping price losses limited during a consolidation. You can have lower volume, but if the price losses get too big in any one session the same type of damage can occur as if there was higher volume selling. Around 1:00 the indexes were re-testing their lows and we sent an update alert stating it was a good point for a double bottom to set up. Frankly that looked to be a long shot, but it did take root and with some short covering and end of month position squaring (lots of buy on close orders Wednesday) the indexes rallied well into the close. This kept the losses manageable (the Dow and S&P were higher) as the market continues to try and digest its gains in an orderly manner.
Price/volume action good but still not bullet proof.
After the mixed session Tuesday (Dow down on rising volume, S&P 500 up on rising volume, Nasdaq up on lower volume), all indexes were pulling together Wednesday. The Dow and S&P 500 rallied late to post a gain on rising volume. The Nasdaq lost ground, but volume also contracted on the action. Though it is best to have all major indexes moving in sync, the good price/volume action is a good substitute. Indeed, without the SOX that was dragged down by projections of a flat quarter to come the Nasdaq most likely would have been okay. Better watch it; we don't want to start sounding like government economic reports that are ex-this, ex-that, ex-reality.
Even with the improved price/volume action, it is still not on solid ground. The follow through session was on lower relative volume than the prior selling. In short, there were a lot more sellers and short coverers in the market a week ago than there have been longer term buyers this week. If the long term buyers are not convinced they should buy, any rally is going to be short. There has to be more upside volume on gains after this consolidation.
THE ECONOMY
GDP at +1.1% versus 2.5% expected and 5% prior.
GDP dropped hard and that had many wagging heads about a double dip recession. Consumer consumption rose 1.3% versus 3.1% in Q1. Weakening consumer demand was cited as another reason. Without the consumer there would be trouble.
Indeed. The consumer is necessary. July sales have been below target for many retailers (and the retailers were whacked Wednesday), but wait until July auto sales come out. Early reports show they are going to be strong. Instead of buying some blouses at The Limited, consumers were buying big ticket items such as autos. We are not too worried about a slowdown in consumer demand. June was a sharp jump and July is pulling back from there. The trend is still good.
Business spending improving. For the first time since Q3 2000, investment in equipment and software showed a gain, and it was a nice 2.9% bump. If businesses are cracking open their wallets finally, that makes a solid 1-2 punch for the economy as business join consumers.
Don't believe the numbers or the first blush analysis.
Then there is the gaping holes in the numbers themselves. What cut the GDP figure in half from expectations? It was a huge jump in imports. Imports are deductions from GDP because they are goods purchased that are not domestic (gross domestic product). Reports said economists were 'blind-sided' by the huge jump in imports. Where were they the past two months? There was a longshoreman strike threatened on the west coast. In anticipation of this, importers stockpiled billions of dollars in imports. This was known back in early July. This is what skewed the GDP number so low. Taking that into account, the GDP would have been right at expectations. There is going to be a big upward revision to this number at the next go round in August.
Chicago PMI tanks to 51.5 after expectations of 56.5.
This report is considered the harbinger of the national ISM due out Thursday. It showed continued expansion, but at a much lower rate. New orders plunged 9 points to 52.4 (again still showing expansion) after the big jump in June. Employment was not bad, down just slightly. Prices paid, however, moved significantly higher to 64.5. A slower month, yet, but still the trend is up after turning the corner earlier in the year.
THE MARKET
Another comeback that kept Nasdaq losses manageable and provided a higher volume gain on the Dow and S&P 500. Another decent consolidation session. The market needs another couple days of consolidation for a move up to the 50 day MVA or so, but it might just make a run up to that point without rest. That would pretty much shoot all of the ammunition in this rally.
Sentiment Indicators
VIX: 35.21; +0.06. Flat on a back and forth session.
VXN: 57.86; +1.40. Up slightly as the Nasdaq faded a percent.
Put/Call Ratio (CBOE): 0.75; +0.06. Hanging at the high end of the range. No one is sanguine about the market action.
Nasdaq
Looked ugly, weighed down by the SOX, but managed to recover to a respectable level of losses on lower volume. It saved itself today. Looks as if it is going to have to keep doing that for a bit as it tries hold this move up.
Stats: -15.93 points (-1.19%) to close at 1328.26
Volume: 1.642B (-5.29%). Volume backed off as it should on a drop in prices.
Up Volume: 396M (-736M)
Down Volume: 1.201B (+614M)
A/D and Hi/Lo: Decliners led 1.39 to 1. Did not get out of hand on the selling.
Previous Session: Advancers led 1.17 to 1
New Highs: 29 (+3)
New Lows: 152 (+50)
The Chart: http://www.investmenthouse.com/cd/$compq.html
It had to fight hard to hold the gains, falling below the 10 day MVA (1316.71) on the low but rallying back on the close. Volume dropped off but the candlestick pattern is a doji right below the 18 day MVA (1338.67). It is consolidating the move on some better price/volume action, but it is still in the current downtrend, so far unable to crack that 18 day MVA. Our target on this rally is near the 50 day MVA at 1443.87, but this rally has to show more. It has shown the ability to come back from losses intraday, and it has to show that it can consolidate above 1300 and then rally on rising volume. So far it is trying to do just that.
Dow/NYSE
Tapped the 18 day MVA on the low and recovered on some better volume. Once again not bad action as it tries to digest those big point moves.
Stats: +56.56 points (+0.65%) to close at 8736.59
Volume: 1.918B (+5.12%). Volume edged up on the gain, technically accumulation, but as with Tuesday, it is close and looks more like consolidation than accumulation.
Up Volume: 950M (-124M)
Down Volume: 967M (+232M). Neck and neck on a neck and neck day.
A/D and Hi/Lo: Advancers led 1.07 to 1
Previous Session: Advancers led 1.2 to 1
New Highs: 26 (+2)
New Lows: 79 (-14)
The Chart: http://www.investmenthouse.com/cd/$indu.html
On the low it hit the 18 day MVA (8537.10), a bit more than we wanted in a session, but it managed to fight back and close positive just below the May downtrend line right over 8750. The past two sessions it has banged around from 8500 to 8750. Another couple of sessions that slowly edge down toward the 18 day MVA on the close along with lighter volume on those moves would be great action to set up a move higher to 9000 9250. That may be all that is squeezed out of this part of the rally, and it may not give the extra days of waiting. It may just pop up to 9000 without any rest. Again, that would most likely burn it out.
S&P 500:
An important session for the S&P 500 as the index tested the 18 day MVA on the low (889.88) and rebounded to close over 900. The 893 to 900 level is important for the S&P; if it consolidates further it needs to hold roughly above the 18 day to 10 day MVA (881.57). For now it is acting better with better price/volume action, holding key support levels, and recovering off session lows. It needs to continue this more or less lateral movement and then rally toward 950 and the 50 day MVA at 958.
Stats: +7.76 points (+0.86%) to close at 910.54
NYSE Volume: 1.918B (+5.12%)
The Chart: http://www.investmenthouse.com/cd/$spx.html
THURSDAY
The market remains very apprehensive. With each intraday drop you can just fell the tenseness as investors wonder if the bottom is falling out once again. The only thing different right now from prior tests of these levels is that sentiment indicators hit some extreme levels, there was a modest follow through, and the market is coming back from its intraday losses. Those are very big differences, but after two years of seeing each such move get blasted back down, it is very hard to divorce your feelings from the action. Stocks such as SIE, ITMN, AMI, STEM, BLUD, CTSH, IDPH, HGSI etc. have been making some good moves, but even with that action is still hard to fight back the emotion.
A positive is that there is still a lot of pessimism from analysts and commentators as well. Many are not buying the rally, and that also shows up in the volumes on the major indexes. Thus, whether in or out of the action, everyone is still on edge. Good old walls of worry.
Thus far the market has been able to hold up in the face of that adversity as it absorbs bad economic news and then manages to recoup losses. Isn't if ironic how the market appeared to have no interest in improving economic numbers, yet when they are bad the market gets a good whacking? Tomorrow there will be more news out with jobless claims, auto sales, and the national manufacturing report (ISM). Auto sales are running well with the return of 0% financing; again, the consumer is there, it is just that the consumer wants a good deal. As for the ISM, that is not going to do the rally attempt any favors if the Chicago number was in fact a precursor.
What we look for tomorrow is more of the consolidation action where the indexes test the near term support and then hold above those levels. On any selling we want to see lower volume; keep the action orderly, and there is a better chance of the rally making it to the next level. It is a tenuous move thus far, but so were the moves off of the September low and the short rallies before that.
While this action continues, we are seeing some strong smaller stocks make their moves, and those are attracting our attention. We also are watching downside action in the event the indexes roll over on higher volume. We have had some opportunities to take those positions, but have held off because of the market action that rallies back late in the session. If we see a change in that dynamic and see higher volume on the selling toward the close, then we will venture to the downside.
If the ISM news is not as bad as anticipated after the Chicago number, then the market could actually make an upside move with somewhat of a sigh of relief rally. If that happens and it makes it to the 50 day MVA, that might be all she wrote. Why? The move will have come very far, very fast on less than perfect volume. Moreover, we don't like those rallies that race higher without proper rest; they get too tired. If we see that happening we will take some money off the table on some good upside plays.
Support and Resistance
Nasdaq: Closed at 1328.26
Resistance: The 18 day MVA (1338.67) had indeed not been totally cleared. 1357.09 is the October 1998 bear market low, and it held the index back Tuesday. Then 1418, the interim test after the September low. After that is the 50 day MVA (1443.87) and the second March down trendline at 1450. That is followed by 1500.
Support: The 10 day MVA (1316.71). The March downtrend line at 1262. The bottom of the March downtrend channel (1195). After that, 1190 to 1200. There is some support right above 1100, but to wipe away the gains from 1995 when it rally started a ballistic incline, you look more at 1,000. That is getting way out there, however, and as we said, much fuzzier.
S&P 500: Closed at 911.62
Resistance: The predominant bottom channel line from the March downtrend at 921. The March down trendline at 954. The 50 day MVA (958.58).
Support: 900 is some support. The 18 day MVA (895.17). The lowest bottom channel line of the March downtrend at 891. The 10 day MVA (881.57) followed by 855 and 850 from the October 1997 low and Q2 1997.
Dow: Closed at 8736.59
Resistance: The May down trendline at 8785. The March down trendline at 8995. Then the 50 day MVA (9047.69). After that price resistance at 9250 and then 9500.
Support: The lower bottom of the channel of the March downtrend at 8650. The 18 day MVA (8559.64) and the 10 day MVA (8470.59) on a consolidation of this move. The September closing low is 8235.81 is possible. 8062, the September 2001 intraday low. The October 1998 lows are at 7400 and 7467. After that is 7000, some 1997 lows and highs.
Economic Calendar
7-30-02
Consumer confidence, July (10:00): 97.1 actual versus 101.5 expected, 106.3 prior (revised from 106.4).
7-31-02
GDP, Q2 (8:30): 1.1% actual versus 2.3% expected, 5.0% prior (revised from 6.1%).
Chicago PMI, July (10:00): 51.5 actual, 56.50 expected, 58.2 prior.
Fed Beige Book (2:00): Guess what? Slow but uneven growth.
8-1-02
Auto and Truck sales, July.
Initial jobless claims (8:30): 375K expected, 362K prior.
Construction spending, June (10:00): 0.2% expected, prior -0.7%
ISM index, July (10:00): 55.0 expected, 56.2 prior.
8-2-02
Non-farm payrolls, July (8:30): 55K, exepcted, 36K prior.
Unemployment rate, July (8:30): 5.9%, expected, 5/9% prior.
Hourly earnings, July (8:30): 0.2% expected, 0.4% prior.
Average workweek, July (8:30): 34.3 expected, 34.3 prior.
Personal income, June (8:30): 0.5% expected. 0.3% prior.
Personal spending, June (8:30): 0.6% expected, -0.1% prior.
Factory Orders, June (8:30): -2.2% expected, 0.5% prior.
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SUBSCRIBER QUESTIONS
Q: Please can you help me regarding your BWA stock analysis? You had a stop set at 55.25, and the stock went through this intraday on the 29th July. You appear not to have exited the position at this time, as the position is still current in your 30th newsletter, please can you explain why you ignored the stop? Many Thanks
A: One thing to remember about stop points is that by nature they are somewhat arbitrary. Not in the sense that we put them right above resistance or right below support levels; those levels are fairly clearly defined as a moving average or prior price high or low. What is arbitrary is how a stock moves around them. What we mean is that a stock can trade above a resistance point or below a support point intraday and even on the close and still not make the break. Recall how Tuesday night we stated that the S&P 500, though it had cleared the 18 day MVA, was still not free of it. If the move through a resistance level is not decisive, it may take another day or two to see if it is going to hold the break or if the stock is going to be pushed back. Many times it pays in the market not to get too impatient on an intial move. Many times a stock will hit a buy point but not have the right volume or dances around the resistance, not making a solid break. If the market is somewhat equicoval we will often pass on the play and give it time to see if it will make the move the next session or a couple of sessions later. Let the play come to you so to speak; make it prove to you it is worthy of your hard earned money.
As for BWA, it was going to close over the stop point, but volume was still below average on the session. We had watched the action and the stock was rallying with the market but was closing near the stop; it had not broke free of it when it was heading the close and volume was less. The move in the market was huge. It would most likely test the move to a certain extent. As it turned out it sold back on stronger volume Tuesday and again Wednesday as it mirrors the market action. It may be ready to move up again along with the market. This time if it moves on rising volume it will have made a higher low, and that would be a signal to exit the play.
End Part 1 of 2
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