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us stock market, trade stock
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8/01/02 Technical Traders Report Update
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Technical Traders Report Subscribers:
MARKET ALERTS:
Targets hit alerts issued Thursday: None issued
Buy alerts issued: RYL
Trailing stops issued: SOX
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:
- Stocks sell sharply but volume is very light.
- Economic news lands another body blow, and market feels it.
- Back to the old plan: downside on large caps, upside on small caps.
- Subscriber Questions
No late rally to save stocks Thursday.
The recent string of late rallies snapped Thursday as an upside bounce was used as an entry point for shorts. That pushed the indexes down to close at the session lows. The selling was led by the Nasdaq, particularly the Nasdaq 100 and the SOX. Without the chip sector the Nasdaq has struggled. When the chip sector went into full retreat, the Nasdaq followed it.
The negatives.
That action of the big tech stocks being the first to break lower had to be the most unsettling for the bulls. This is a pattern that set the stage for more selling in recent rally attempts. After trying the short term resistance, the big names turn and start beating a retreat. The rest of the market follows shortly thereafter.
On top of that there was the lack of a late rally attempt. For the past week the market has been able to pop back up after early selling as the dips were used as an opportunity to buy some stocks longer term. The action Thursday was a change in that recent change in character. In other words, it was bullish action recently, but the plunge toward the close as shorts jumped in is a reversion back to the downtrend mentality.
The third point (they come in three's) falls in with the lack of a late rally: the overall point losses on the indexes and in the big names was large. Earlier in the week we discussed how large point losses even on low volume are damaging to fragile markets. There may not be a lot of dumping of stocks, but if there are not a lot of buyers on the upside, it does not take many sellers to upset the rally attempt. As noted, that has shot holes in several rally attempts in the bear market.
Finally, the economic news was considered very bad. The ISM (national manufacturing sentiment survey) fell to 50.5 from 56.2 in June. New orders fell 10 points but were still in expansion. This was the lowest reading since January and had the double dippers out in force. Construction spending plunged 2.2% after expectations of a slight gain. June was revised to -2% from -0.7%; another stellar government call on that one as most of the gains that were supposedly there are being revised away each month. This had investors understandably concerned about the recovery; the government numbers are no better than the corporate numbers the government is cracking down on.
The positives.
Even after a session like Thursday there are positives to note. The first is the overriding motive behind the bounce, i.e., the high readings in the contrary indicators hit in mid-July at the height of the selling. Despite all of the gloom and worry in the market Thursday, those numbers were enough to set the stage for a much better bounce than we have already seen. Now that does not mean this little move up is the one; as we noted last week, July is not the best time for the indexes to ultimately bottom. A bump higher then some selling to test that takes the market into September is better; September is historically the worst month for stocks and October is often when the market bottoms for that late-year run. Thus those signals are not pinpoint timing, but let us know the stage is set for the tide to begin shifting. That is starting with this recent little follow through.
Specifics from Thursday. Light volume. Very light volume. Lightest Nasdaq volume since July 5, and the lightest NYSE volume since July 12. That means there were relatively fewer sellers out there than there were recent buyers. It is always good to have fewer sellers if you want the market to move higher. As we noted earlier this week, however, the follow through session and volume since then has been marginal. Not a lot of conviction behind the rally, and thus it does not take a lot of selling to send it lower if those few buyers lose faith in the move and the shorts take over again.
The Dow and S&P 500 held the 10 day MVA on the close. A lighter volume pullback to support is always good. Then the small cap S&P 600 lost just 0.6% Thursday when everything else lost in excess of 2% up to over 5%. Once again we see small caps stingier than large caps, something that was ongoing before the July selling took everything down to the mat.
The internals were not nearly as bad as the point losses. 1.57:1 decliners on the NYSE. That is not bad action. The VIX shot up over 6 points, a larger one-day gain on the close than any prior session during the July selling. It shows that investors are still on the edge of paranoia about further selling. That was mirrored by the widespread dismay about the economic numbers, numbers that were lower but that still showed economic expansion. June's numbers were BIG jumps; those kind of moves are not sustainable. The fact that the activity fell back but was still expanding was a plus.
Yet, many economists acted as if they had just been told their house burned down. Steven Roach was again out peddling his double dip recession story (of course we all know if it is an up day the bulls come out; if a down day the economic bears are out). As you recall, Mr. Roach in the fall of 2000 was saying the Fed would have to raise interest rates in January 2001 by 100 basis points to prevent rampant inflation from too strong a recovery. Of course the Fed initiated its first rate cuts at that time as the economy had completely rolled over and was plummeting toward the rocks. Now that Mr. Roach is completely to the other side of the economic equation one might think that the worst for the economy truly is over. This negative sentiment was and is rampant, and that is another indication that things are not as bad as they appear or are made out to be.
Finally, there are still some very decent patterns out there. After the big moves up last week we were looking for a test or a pullback to consolidate some of the moves. On double bottom patterns that action forms what we call handles, i.e., lateral and slightly lower lows on lighter and lighter volume. The profit takers are selling, but they are in the minority as shown by the lighter volume. Once the quick sellers are going the stocks can move up again as demand outstrips supply. As noted, many smaller cap stocks are holding up, forming these lateral consolidations. Maybe the large caps are going to sell further, but it looks for now as if the market is once again reverting to that pattern where small caps outperform large caps.
THE MARKET
Sentiment Indicators
VIX: 41.49; +6.28. As noted, the biggest one-day advance on the close since September 2001. Fear and anxiety are very near the surface still.
VXN: 60.35; +2.49.
Put/Call Ratio (CBOE): 0.76; +0.01. The VIX might have jumped but put action did not. Put players may be laying low until a clear break lower by the Dow and S&P 500.
Nasdaq
The SOX lead lower again, and this time the Nasdaq simply could not withstand this key component selling. It broke below the 10 day MVA and closed near the low. It was a day for the sellers, but not a heavy selling session.
Stats: -48.26 points (-3.63%) to close at 1280
Volume: 1.552B (-5.45%). Below average volume yet again, the third straight declining volume session. Not much conviction either way of late.
Up Volume: 278M (-118M)
Down Volume: 1.264B (+63M)
A/D and Hi/Lo: Decliners led 1.69 to 1
Previous Session: Decliners led 1.39 to 1
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq undercut the 10 day MVA (1310.03) and 1300, closing near the session low. It was attempting another late session rally off the lows when the shorts jumped on and sold the index sharply. Volume did not rise, a sign that the sellers were not out en masse. That helps maintain the current rally, but the price losses were getting up there to extremes. It is still above the March down trendline at 1260, but that is little solace after a 3.6% loss. As noted, the Nasdaq 100 and the SOX have turned sharply lower ahead of the overall Nasdaq, and in the continuing downtrend that usually means the rest of the techs are not far behind.
Dow/NYSE
Rolled over and fell below the lower channel line, but managed to hold the 10 day MVA on lighter volume. The Dow is still in a decent consolidation. The question is whether the techs drag everything back down with them.
Stats: -229.97 points (-2.63%) to close at 8506.62
Volume: 1.662B (-13.39%). Volume was still slightly above average as it continues its post sell off moves on much lighter volume.
Up Volume: 363M (-587M)
Down Volume: 1.291B (+324M)
A/D and Hi/Lo: Decliners led 1.55 to 1. Internals were not that bad.
Previous Session: Advancers led 1.07 to 1
New Highs: 26 (0)
New Lows: 71 (-8)
The Chart: http://www.investmenthouse.com/cd/$indu.html
Unable to make headway, the Dow sold hard then tried to move off the lows. It failed along with the other indexes, hitting its worse losses late session as some shorts came in. It undercut the 18 day MVA (8554.05) but managed to hold the 10 day MVA (8477.14) after kissing it with 15 minutes left in the session. Once again it traded around 8500 on the low; unlike other sessions it did not bounce off this level. This is an important point for the Dow; it can trade below this level intraday and then rally to start another leg higher. That is really what it needs to do if it is going to move up more on this leg. It is reaching a point that it can have another 100 to 200 points of consolidation and still rally on this move. Otherwise it looks ready to make another test of the July low already. That is too early; we wanted a rally into say the first two weeks of August and then some selling for a bottom at some point in September or October.
S&P 500:
Thursday the S&P broke its 18 day MVA (894.03) and closed below the bottom channel line of the March downtrend. Poor price action, but it did manage to hold the 10 day MVA (892.13) and it did it on significantly higher volume. Realize that this is the first down session for the S&P since the day after the big reversal 7 sessions back. It really did need this pullback to consolidate those gains. The price loss was excessive for one session; it would have been better to break this up over 2 or 3 sessions. As it is, the S&P is at greater risk of getting caught up in a tide of selling; that old up too fast and then burn out problem. As with the Dow it will no doubt undercut the 10 day MVA Friday. We will be looking at some select large cap put plays, but we will also watch for the index to attempt a recovery that it did not on Thursday. If it fails to do that we will look at further downside action.
Stats: -26.96 points (-2.96%) to close at 884.66
NYSE Volume: 1.662B (-13.39%)
The Chart: http://www.investmenthouse.com/cd/$spx.html
FRIDAY
The employment report hits pre-market. We don't expect chocolates and roses, but we don't expect as bad a picture as the ISM and construction spending were painting.
The market needs some good news. The Dow and S&P 500 are thus far holding up in spite of the Thursday selling (only the S&P's second selling session since the reversal off the July lows), but the point losses were a bit extreme even with the light volume. With the Nasdaq 100 and SOX once again taking the early lead lower as they did in the start of downturns before the recent follow through, they are precariously perched.
They need some more consolidation, but they cannot do it in big chunks or the market is right back down to the July lows, a much, much too short rally for the market to set up a good bottom to start higher in October. This move up is not going to be the bottom, but it looked promising to be part of the bottoming process over the next couple of months. If it gives it up here the process is pushed back a bit. On the whole there are still positives that seem to outweigh a tank at this point (sentiment extremes, follow through, continued high pessimism about stocks and the economy, low volume selling, holding support, continued strength in small caps and their patterns), but with the Nasdaq 100 and SOX falling harder after failing again at the 18 day MVA, it is hard, indeed foolish, to ignore that the market is still in an overall downtrend and is most likely going to test lower here.
Thus we are looking both ways before we cross the street. We expect the Dow and S&P 500 to test lower and carry through on the downside at the open; that is where it was headed at the close. We are scouring stocks for those that have risen on lower and lower volume and have or are turning at resistance. Those are our downside plays, and most of those are going to be large cap stocks. On the upside we are looking at smaller caps, particularly the medical sectors, financial sectors, and drug sectors to name a few. Those blasted higher earlier and have been consolidating above support on lighter and lighter volume. They are ready to move higher. We don't like bifurcated markets, but sometimes as we saw up into May before they started rolling over in June, bifurcation works. If the small caps are giving us the upside lays we will take them. We may reduce our upside stock gain goals to 10% to 15% and our option moves to 25% to 30%, but that is still excellent money.
Support and Resistance
Nasdaq: Closed at 1280.00
Resistance: The 10 day MVA (1310.03). The 18 day MVA (1332.50). 1357.09 is the October 1998 bear market low. Then 1418, the interim test after the September low. The 50 day MVA (1437.44) and the second March down trendline at 1445. That is followed by 1500.
Support: The March downtrend line at 1260. The bottom of the March downtrend channel (1190), right at price support from 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 884.66
Resistance: The 18 day MVA (894.06) and the lowest channel line of the March downtrend channel at 894 as well. The predominant bottom channel line from the March downtrend at 919. The March down trendline at 952. The 50 day MVA (955.69).
Support: The 10 day MVA (882.13). 855 and 850 from the October 1997 low and Q2 1997.
Dow: Closed at 8506.62
Resistance: The 18 day MVA (8554.05). The lowest bottom channel line of the March downtrend at 8625. The May down trendline at 8775. The March down trendline at 8990. Then the 50 day MVA (9026.47). After that price resistance at 9250 and then 9500.
Support: The 10 day MVA (8477.14). 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: 14.5M units, well ahead of expectations.
Initial jobless claims (8:30): 387K actual, 375K expected, 367K prior (revised from 362K).
Construction spending, June (10:00): -2.2% actual, 0.2% expected, prior -2.0% (revised from -0.7%).
ISM index, July (10:00): 50.5 actual, 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.
SEMINARS NOW ON CD!!
To learn more about options so you can take advantage of up and down markets, check out the Options You Can Use seminar now on CD's! Also be sure to look at the Technical Analysis series on CD as well as the stock splits and covered call series. Go to
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and look for the link to the CD seminars. This is Jon Johnson's internet site for online seminars and the theories taught are the same that have delivered dozens and dozens of fantastic downside put plays during this downtrend. Hope you check it out.
SUBSCRIBER QUESTIONS
Q: What are "buy on close orders" and why are they significant?
A: Buy on close orders are orders that state you want to buy a stock at the price it trades at the close. Mutual funds often buy this way, particularly index funds when they are adding to their portfolios. Tha tis why many times ou ses stocks that are being moved into a particular index run up in the last 15 minutes of trading as the buy and close orders are posted 20 minutes before the close. That can generate a significant imbalance in a stock and drive the price higher.
In a bigger sense, buy on close orders of size indicate that there are insitutions at work, ready to accumulate shares of stock. Many fund managers prefer to see where a stock is closing before taking action. If they like the action during the session and are ready to buy, the post their orders. It is useful to see insitutions making such decisions to buy (are they ready to get in?) and it also can have some carry over effect the next session. You can get this information from your borker as the orders have to be posted prior to the close.
End Part 1 of 2
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