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us stock market, stock strategy
Begin Part 2 of 3
THIS WEEK
The week gets off fast with the ISM services out Monday a half hour into the session. It is expected to fare better than the ISM (manufacturing) report. It should continue to show the expansion in the services sector to mirror the continued expansion elsewhere. Not huge, but a continued expansion. If the economy can show expansion on an off month such as July, that is pretty darn good.
The question is whether the market thinks it is. The past week it obviously did not and it sold. The selling had no conviction, however. For now it has been fear selling by those mortified by the poorer economic news and the belief that it won't get any better. With the recent selling, however, the market has priced in weaker economic news even before it was released. From the lack of volume on the selling, all it needs is to test the prior low to shake out the remaining sellers. That shifts the balance to the buyers. Then it is up to buyers; they need to come in with heavy volume.
We picked up downside positions Friday; some stocks (not many) were selling on higher volume. We anticipate a move down to the July lows. That is our 'safe' target on downside positions given the lighter volume. If volume increases, really increases, then an undercut of the July low is likely. From the recent history with sentiment indicators moving to extremes, the sharp, high volume sell off, and low volume test of the low to set up a double bottom, we anticipate the July low to more or less hold and give rise to a better rally.
Until then there are still some downside positions we are looking at for the move back to that level. After that we will clear out and let the market tell us if it is going to bounce from there or just give it up. Again, lighter volume on the selling increases the odds of the successful test and completion of the double bottom pattern. If volume remains light, we close out our positions at that point and then look for the bounce. There will be some good double bottom patterns with handles at that point to pick from.
Support and Resistance
Nasdaq: Closed at 1247.92
Resistance: The 10 day MVA (1298.74) and price resistance at 1300. The 18 day MVA (1323.59). The hump in the double bottom pattern at 1354.48 followed by 1357.09, the October 1998 bear market low. Then 1418, the interim test after the September low. The 50 day MVA (1430.01) and the second March down trendline at 1440. That is followed by 1500.
Support: The March downtrend line at 1255. The May down trendline (1230). The bottom of the March downtrend channel (1185), right at price support from 1190 to 1200 (the July low is 1192.42).
S&P 500: Closed at 864.24
Resistance: The 10 day MVA (878.88). The lowest channel line in the March downtrend channel (888) and the 18 day MVA (890.92). The middle of the potential double bottom at 911.64. The predominant bottom channel line from the March downtrend at 915. The March down trendline at 950. The 50 day MVA (952.10).
Support: 855 and 850 from the October 1997 low and Q2 1997 held on the low Friday. The July low at 775.68.
Dow: Closed at 8313.13
Resistance: The 10 day MVA (8447.32). The 18 day MVA (8528.69). The lowest bottom channel line of the March downtrend at 8615. The late July high that is the potential middle of the double bottom at 8762.14. The May down trendline at 8765. The March down trendline at 8980. Then the 50 day MVA (8998.50). After that price resistance at 9250 and then 9500.
Support: The September closing low is 8235.81 is possible. 8062, the September 2001 intraday low. The target we look to hold around it the July low (7532.66). The October 1998 lows are at 7400 and 7467. After that is 7000, some 1997 lows and highs.
Economic Calendar
8-05-02
ISM Services, July (10:00): 55.0 expected, 57.2 prior.
8-07-02
Import/Export prices, July (8:30).
Wholesale inventories, June (10:00): 0.2% expected, 0.1% prior.
Consumer credit, June (2:00): $8.0B expected, $9.5B prior.
8-08-02
Initial jobless claims (8:30): 385K expected, 387K prior.
PPI, July (8:30): 0.1% expected, 0.1% prior.
Core PPI (8:30): 0.1% exected, 0.2% prior.
8-09-02
Productivity (preliminary), Q2 (8:30): 1.0% expected, 8.4% prior.
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SUBSCRIBER QUESTIONS
Q: [Editor's note: We received a lengthy email making good counterpoints to the Thursday newsletter that listed the positives the market was showing. These dealt with worsening volume in the SOX sector versus the market; the general poor patterns in techs and bellwhether stocks; and the fallibility of double bottom patterns. We cannot put the question here, but here is our response]
A: Lots of double bottoms forming in the savings and loans, regional banks, small medical, small drug stocks after long uptrends were damaged in the July selling. They needed to correct, and in a very volatile market as seen in July, double bottoms are the patterns that usually form. They may have a higher failure rate, but in market turns double bottoms are the earliest patterns you see. Why? Because the leaders are torn down with the rest of the also rans (those tech stocks that you are looking at are the also rans; they are dead for the most part. They can rally but they are longer term dead), yet they are leaders because of earnings, a continuing economic recovery (yes, despite the gloom late last week it is still proceeding), etc. and rebound right back up after the 'throw them all out' selling is over. As for the poor patterns in tech and other bellwether stocks, most of these will not be leaders in any recovery. They make up a large part of market cap in the large indexes yes, but as seen in the 1970's, the majority of the market leaders into that period did not ever recover. Thus we are not looking to them to really lead.
Now the patterns may or may not succeed. That is our underlying theme of 'take what the market gives.' You ALWAYS have to let the market determine what the outcome of any potential move will be. You read all the signs, prepare, and get ready. The early leaders show double bottoms. If they are successful and the rally proceeds, other stocks will be forming other patterns that are not based on such volatile action, e.g., cup with handles, flat bases, etc. If the move is not successful, the downtrend resumes.
Recall in that same issue we said that even with these positives it would be foolish to ignore that the overall market is in a downtrend as the predominant pattern. We also said the large caps were heading lower as once again certain small caps were leading to the upside. Further, we noted how the big techs and the SOX had in the past been leaders to the downside and the rest of the market followed. That is whey we said you don't ignore that current trend. Still, there are always moves that try to break the pattern because someday it will indeed be broken. This one has some more foundation because of the high sentiment readings on the selling, as high or higher as September 2001 when the Nasdaq rallied over 40%. This paltry rally that has just occurred is hardly proportionate to the high sentiment readings flashed. That is why we think we are seeing a low volume test of the July lows that could give rise to a better, longer term rally. Remember, gloom is always highest before the turn back up. When the majority thinks things have broken down for the long term, that is the time to keep an eye open for some sort of turn. It may not be the ultimate bottom, but if you ignore changes in market character that could lead to a reversal in the predominant trend you are just as guilty and just as likely to be caught unprepared as when you ignore the predominant and prevailing trend. That is why we are playing the downside on this test of the July lows, but we are keeping our eyes open for a change.
Remember also, trendlines, bands, retracements, etc. all basically show trends. When the market changes character, trends are broken. That is why we cannot become too married to one view, particularly when there are signs that change may be coming. When the seasons change from winter to spring, from spring to summer, etc., there are signs the change is occurring. Things get unsettled. We saw a lot of that in late July. Just as you have to prepare for the change in the weather lest you get caught off guard, it is best to acknowledge signs of change in the market and be ready. Maybe this is just a passing front or maybe it is something more. Preconceived notions and overly rigid thinking only lead to failure in the market. While things are never really 'different this time,' the market can dull your senses to the point you think things will never change whether it is upside action or downside action. That is human nature. You have to fight human nature and simply be aware and ready to take what the market hands you. If you do, then you are ready for any changes whether short term or if they become longer term. Because believe me, there is NO way in knowing if any market move is really short or long term until after the fact. You have to go with what the market is telling you and act accordingly.
TEAM TRADES
It was a day for downside action and we had several downside plays working well. One old 'favorite' to the downside was rolling over at the 50 day MVA and we were waiting for it to break the short term moving averages on some volume. It had done that early in the session, but we wanted it below 40 on stronger volume. It was below 40 and volume was building. We were also watching to see if it would rebound. It did not, and volume was solidly higher. It still had plenty of room to fall before it hits the July low and volume was up on the selling. That is what we were looking for, and it was not rallying at the close with the market, at least nothing close to defnitive. The spread on the September options was narrow at 30 cents; no point in trying to shave much off as the close was coming. We put in a limit order at the ask. Now we are ready for a continued fall Monday on toward the July lows. It ahd the attributes at the close that we were looking for. Sometimes it is a better strategy to take the position going into the close as we can see all the action and determine very readily if the stock is meeting our criteria. On this one we could have jumped in earlier and come out like a rose; we wanted to see it break that price support first, however.
THE PLAYS
Best Plays:
1) OEX: More large cap selling to test gives a nice play.
2) ITW; MTG: Both ready to fall further.
3) LTR: Started the move and still a buy.
4) DNA: Nice test of the 50 day MVA
5) STE: Excellent accumulation
6) CHIR: Good volume move over the 50 day in a weak market.
7) IVGN: Another good volume move in a weak market.
8) TECH: Pattern has formed up very well.
9) Watchlist/current: TEN looks ready to move back up.
NEW PLAYS
Downside:
$OEX (S&P 100 options--$434.05; -10.27; optionable):
http://biz.yahoo.com/p/$/$oex.html
STATUS: Put. The large caps are under pressure again, but it is not heavy selling pressure for now. Still, after the sharp bounce off the July lows, they look to settle still lower to test that move. Whether or not the test will be successful no one knows, but either way we can play the move down to near those levels. We won't try to squeeze every penny out of the move, but keep our target above the low to capture the 'sweet spot' of the move. In that way you usually do not get hurt when you play an established trend. Take the middle chunk of the move and be very happy with it. You tend to lose less when you do that, and that is the key to successful investing.
BUY POINT: $431.95 Target=$400 Stop=$435.25
POSITION: OXB UG - Sept. $435 put OR OXB TH - Aug. $440 put
http://www.investmenthouse.com/ct/$oex.html
ETN (Eaton Corp.--$66.35; -2.35; optionable): Auto parts
http://biz.yahoo.com/p/e/etn.html
STATUS: Put. A lower volume move up over the 18 day MVA on the rally from the July selling ended Friday as ETN broke below the short term moving averages in rising though still below average volume. As with many stocks, it may not sell down hard on this test of the July lows, but that still gives a nice fact sweet spot to take out on this downside play. A basic V bottom rally and a test to follow it.
Volume: 461.8K Avg Volume: 430.363K
BUY POINT: $65.95 Volume=500K Target=$62 Stop=$68
POSITION: ETN UM - Sept. $70c (-65 delta)
http://www.investmenthouse.com/ct/etn.html
ITW (Illinois Took Works--$61.2; -3.28; optionable): Manufacturing machinery
http://biz.yahoo.com/p/i/itw.html
STATUS: Put. Manufacturing got a bad rap last week and ITW was selling late in the week on rising, above average volume. It tested the 50 day MVA on the rally off the July V bottom and sliced through the short term moving averages Friday. It has plenty of downside room to make us a nice downside play here, and the higher volume is a nice plus.
Volume: 1.371M Avg Volume: 1.028M
BUY POINT: $60.95 Volume=1.2M Target=$57 Stop=$62.25
POSITION: ITW UM - Sept. $65p (-80 delta)
http://www.investmenthouse.com/ct/itw.html
MTG (Mgic Investments--$58.89; -3.21; optionable): Title insurance.
http://biz.yahoo.com/p/m/mtg.html
STATUS: Put. Stocks related to consumer consumption of most sorts took a hit. Those related to home buying are under pressure. Despite assurances that the market is strong, stocks related to the housing industry don't look that way. MTG rolled over at the 50 day MVA Thursday on high volume and kept it going Friday as it cut through the short term moving averages on continued high volume. There is a lot of room here to take out a nice fat gain before it gets to the July lows.
Volume: 1.148M Avg Volume: 557.09K
BUY POINT: $58.65 Volume=1.1M Target=$54 Stop=$60.45
POSITION: MTG UL - Sept. $60p (-51 delta) OR MTG UM - Sept. $65p (-77 delta)
http://www.investmenthouse.com/ct/mtg.html
End Part 2 of 3
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us stock market
stock strategy
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