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8/08/02 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS:
Targets hit alerts issued Thursday: None issued
Buy alerts issued: DNA; STE; IMN; TECH; VARI; ISIS
Trailing stops issued: None issued
Stop alerts issued: OEX; QQQ; HI
You can sign up for Technical Trader alerts at the following link:
http://www.investmenthouse.com/alertttr.htm
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SUMMARY:
- Market does not stall at 18 day MVA, challenges late July top.
- Volume 'surges' to average on NYSE as big board and Nasdaq volume flip-flops.
- Economic numbers keep with the trend, and that keeps Fed status quo.
- Expecting some lateral moves at the double bottom 'hump.'
- Team Trades
Market does what it has failed to do in the downtrend: break the 18 day MVA on a stronger volume session.
We were geared up for the test of the 18 day MVA, and at first it appeared as if the market might not do it. Futures had been surging but gave almost all of the pre-market gains back just before the open. A quick sell off, bounce, and re-test of the session low was all the market needed. After that it took on the 18 day MVA and the Dow and S&P 500 won the battle fairly early on. The Nasdaq was the laggard; until 70 minutes left in the session it was questionable whether the techs would take out resistance. Once again a late surge pushed the techs over the 18 day MVA as well, making it a clean sweep for the large cap indexes.
This of course was an important move as the 18 day MVA has stalled rally after rally on all of the indexes. The move takes the Dow and S&P 500 right up to the late July 'hump' in the semi-double bottom pattern, and they did it on the first really good volume session since the early August test lower. This becomes the new level to beat and is really the key in a further rally into mid to late August that sets up another test of the July low for a bottom in October. Seems things are falling in place a bit better for the longer term upside than we anticipated.
A steadier session.
One of the problems with the rallies of late: the firecracker syndrome. After selling stocks tend to explode higher in 400+ point gains. Those burn out rapidly, then implode. Now 660 points on the Dow in three sessions is not calm, staid trading, but it is better than 500 points in a day. Also, the Nasdaq is not racing up with 100 point moves. It is a bit calmer, a bit saner. This rally is hard to believe in; even the bulls don't believe in it. That, however, is giving it some legs.
It was not huge buying marked by massive index volume, but there were a lot of those sectors we noted Wednesday that were moving on good volume, e.g., smaller drugs, medical and healthcare and smaller financials. The price moves were good, and when we saw volume coming in it was time to start positions as we said we were going to do if they gave the moves on some volume.
THE ECONOMY
Prices remain stable to lower.
Producer prices (PPI) fell 0.2% in July (expectations at +0.1%) while the core (less energy) fell 0.3% (expected to rise 0.1% as well). Auto costs accounted for most of the drop. What does it show? Continued price disinflation, i.e., prices holding flat or rising at a slowing rate for manufacturers. That helps producers' bottom line as they do not have rising prices eroding their profit margin in an economy where it is still very difficult to make price hikes stick (e.g., the airline industry's repeated attempts to raise fares). It also means there is less inflationary pressure on consumer prices: if producers' prices are lower then there is not as much pressure to pass on higher costs to the final sales.
Retail sales for July lukewarm.
After a big June retailers started announcing same store July sales, and as expected they were cooling off. Best Buy reported sales were slowing and it got slaughtered. Wal-Mart is below its plan, and that generally summed up the retail area although GPS (The Gap) did report a better showing for its stores. The debate rages over whether the consumer is slowing down based on the July retail numbers, but with auto sales surging during that month and home purchases and mortgage applications shooting higher, it is more of a shift of buying emphasis than an abdication by the consumer.
Jobless claims fall even more than the upside revision of the prior week.
Sound convoluted? Well it has been for several months. Seems each week there are fewer reported jobless claims, but then the prior week is revised way up, erasing most of the current week's decline. Well this time around it was not a total washout. New claims came in at 376K, better than the 385K expected and down 15K from a revised 391K (up from 387K). The revision was not in the 10K+ range as we had been seeing, so it was a better week.
The 4-week average mirrored the weekly drop, falling to 379K from 386.75K. The trend is slightly lower, but the continuing claims, after falling for the last several weeks, has been bumping up and down. Last week they rose to 3.53 million from 3.48 million. Overall the trend is lower, and when companies stop laying off workers that is the first step to improving employment numbers. With Schwab laying of workers and the possibility of more layoffs here and there, however, it is not a rosy bottom yet.
Will the Fed cut?
Fed Funds Futures contracts following the PPI and jobless claims fell to just a 30% chance of any type of Fed move next week. This close to the event that is a very reliable indicator. It is pricing in a rate cut by September, but that is too far out just as the predictions of interest rate hikes earlier in the year were too far in advance. It is good close to the meeting; it also helps that the Fed is broadcasting its moves ahead of time on the Alan Greenspan show ahead of each meeting. No such forewarning this time around.
THE MARKET
The market always has the final say. Wednesday we were concerned about the action at resistance. Thursday the market showed some guts, overcoming that resistance on some better volume for the most part. Now it has moved up well and faces the late July hump in the pattern. It may need to take a breather here for a few sessions to consolidate these gains; that would be normal action. We anticipate those to be less drastic than they were in early August on the first test of the move off the July low. Again, this is looking more and more like the past moves off the lows in more significant rallies, i.e., an initial surge on strong volume, consolidation, and then continuing upside moves on good price/volume action even if overall volume is lower.
Volume shows life on the NYSE. Could the 'perfect' scenario be developing?
It was no 2 billion share session, but the NYSE logged a solid gain on rising, average volume. At over 1.6 billion shares it does not compare to the 2.4 billion, 2.7 billion, etc. days of mid-July, but it was a clear improvement. There was some short covering when the 18 day MVA gave way and there was some longer term buying. As the market clears resistance points that have previously held, the shorts move to close positions. At the same time buyers come in to pick up longer term holds that have just cleared resistance. A double punch that helps give the snowball more momentum.
It is still summertime volume, however. Nasdaq volume was just a fraction below Wednesday, but it was still below average volume. The fact that it did not rally to average levels with the NYSE is another signal of the lack of conviction on this move. These lower volume rallies are easily subject to upset when some negative news hits or some sellers decide to try to take it down again. There are not enough long term upside buyers to give any real comfort, but as we have said repeatedly, the market tends to avoid giving you comfort regardless of the side you are on. The move up off the early August selling has been on higher volume. That means there are more buyers in the market than sellers after that big July sell off. They may be relatively fewer than the sellers in July, but if that was a cleansing, then those sellers are gone and volume would be lower on the move up. As long as it was positive P/V action, i.e., rallying on rising volume and falling on lower volume, this is a positive for this move off the bottom.
Coupled with the volume increase was a very positive A/D line at better than 2:1 on the NYSE. Then there were the individual stocks breaking up and out of some fairly solid double bottoms, cup w/handle, and flat bases on some good volume. That is a key to any rally; if they don't show up then it is doomed. They have to take the first run and then hand off the baton to the next group after they form up. It is not pretty, but it is working.
That brings us to the other point we made a few weeks back: if the market can rally on and off up to the 50 day MVA or a bit further, that gives it a good upside push that takes it into late August/early September. Markets tend to bottom in October after suffering a bad September. The further rally gives it room to sell down to the July lows over September and part of October and then finally setting a firm bottom. That makes this rally the warm up, but that is what we really felt it would be anyway. Again, it is not pretty, but it is working.
Sentiment Indicators
VIX: 39.8; -3.27. After hitting a close over 50, a rarity, the VIX is falling as the market gains. That is as expected, but it is still at 'high' levels.
VXN: 59.35; -9.49. After rising even further Wednesday when the Nasdaq gained, the VXN broke and fell Thursday. This is typical action for this indicator; it tends to run a day behind the actual action.
Put/Call Ratio (CBOE): 0.75; -0.01
Bulls versus Bears: A week of selling had the bulls on the run and the bears on the prowl. Bulls fell to 35.5% (a 35% reading is considered bullish in and of itself) while bears rose to 39.8%. This marks the third week in the last month where bears have outpaced bulls. That is often a signal that the market is nearing a bottom. Remember, these are contrary indicators, so if they get extreme that means the end of a move is nearing. As humans are in general positive creatures, the fact that most advisors are negative and have been negative is considered an extreme indication.
Nasdaq
Sold, rallied, sold, cleared the 18 day MVA and held it. Some rejoicing.
Stats: +35.62 points (+2.78%) to close at 1316.52. A good, steady gain. Nothing flashy.
Volume: 1.537B (-2.38%). Just missed posting higher volume, but it is still way below average and running lower than NYSE volume again. You can take that two ways: first, a weaker move, and technically it was. Second, however, there continues to be no speculation in tech stocks. Investors focused on the old 'safe' consumer stocks, drugs, medical, financial, and many of those are on the NYSE. When the speculative stocks are shunned that is a sign that the market is truly reaching a bottom as investors go for investments they understand.
Up Volume: 1.179B (+152M)
Down Volume: 332M (-163M)
A/D and Hi/Lo: Advancers led 1.56 to 1. Decent, but not really strong.
Previous Session: Advancers led 1.12 to 1
New Highs: 22 (+11)
New Lows: 133 (0). No new lows. That is an interesting statistic. There were fewer new lows on the test, a sign the index is sold out. No new lows at all on the way back up is very encouraging.
The Chart: http://www.investmenthouse.com/cd/$compq.html
The doji on the candlestick chart did not stall the move Thursday. The Nasdaq did, however, lag the other indexes; it did not crack its 18 day MVA (1304.57) until late in the session. It is an important move, but it was dragged up to it as volume was just not there. It has a clear run up to the late July high at 1354.58 where it will find some more resistance. From there we anticipate the index will move laterally to consolidate the move, perhaps testing back to the 18 day MVA itself when it does.
Dow/NYSE
Burst over the 18 day MVA without much hesitation, and now sits at the late July 'hump' in the pattern, making the move on stronger, average volume.
Stats: +255.87 points (+3.03%) to close at 8712.02. Solid rally but not too much for a change.
Volume: 1.654B (+10.95%). Rising, average volume, keeping the price/volume action more positive than not. Sure we would like more volume, but if July was a cathartic selling event, then we would expect volume to be less after that was over.
Up Volume: 1.249B (+254M)
Down Volume: 371M (-91M)
A/D and Hi/Lo: Advancers led 2.24 to 1. Very solid, very good advance.
Previous Session: Advancers led 1.81 to 1
The Chart: http://www.investmenthouse.com/cd/$indu.html
Wasted no time moving over the 18 day MVA (8483.13) and rallied to the close, surging and rallying along the 15 minute MVA all session. It closed just off the late July high (8762.14) that marks the 'hump' in the 'sort of' double bottom off the July low. The Nasdaq came back and almost fully tested that move and made a better pattern; the Dow and S&P 500 are feeding off of the Nasdaq's offering. After clearing the 18 day MVA the Dow may make a move over this hump here and try the 50 day MVA (8907.39) before consolidating the move. We feel it will do just that, however, after making a higher low and rallying on decent price/volume action. It needs to make a higher high over the 'hump' and then consolidate the move, using that July high or the 18 day MVA as its test point.
S&P 500:
The large caps cleared the 18 day MVA (884.23) as well on the strongest volume it has had in a week. That is good action. It is also just below the late July high it made off the July low at 911.64. The predominant bottom channel line of the March downtrend line is right there as well. That makes for some resistance that may stall out the move for a few consolidation sessions needed after this move. It needs to make another high over that late July high and then do the consolidating. As with the Dow, a move up to the 50 day MVA (940.00) would be good, but the S&P may not make it all that way before it starts the consolidation.
Stats: +28.69 points (+3.27%) to close at 905.46
NYSE Volume: 1.654B (+10.95%)
The Chart: http://www.investmenthouse.com/cd/$spx.html
FRIDAY
Where the market is came clearer Thursday. A few weeks back when the market sold off hard in mid-July we wrote how this looked like the start of a real bottom and that we felt the perfect scenario would be a rally of some substance followed by selling in September and into October for a bottom in that month. Late summer is not a time for the market to make the final bottom simply in historical terms, and it would need another test of the new July low that undercut the prior low a bit too far.
We were concerned that the indexes were going to give too quick a test of the July low and give us some false move as they did back in March and April of 2001. This could be interpreted as a small double bottom here, but we expect it to be a false move to the extent it won't be the final bottoming event. If this rally can continue higher, rising and consolidating, rising and consolidating in a more languid pace, it can set up that final bottoming event in September and October. That would beat an 8 or 9 day double bottom that simply is not enough to support a major market turn. It needs to be spread out over 2 to 3 months. Thursday's move was needed to avoid selling down to the July lows immediately; it is not out of the woods with the immediate July hump to deal with, but it was an important move. This is another reason we want to avoid those big 400 and 500 point sessions; they don't build but just burn out. Time is necessary for these moves.
So if that is what is happening do we just say 'I am out of here' until sometime in October? We were not taking that view today. We saw good patterns moving higher on solid volume and were initiating positions. It might not be breakneck speed to the upside, but building higher and higher is the key, and our targets are not out in the stratosphere. We want to capture the move up to the rollover; we are designing our targets along those lines. Then when we get there we clear the decks when the targets are hit or take the gains that are there if things start showing the change (bigger reversal off the high at or near resistance after a good gain), and gear up for some pretty fast downside action. If all goes well, after that sell off we start looking for long term buys along with our usual bevy of shorter term plays.
We had a lot of good moves the past two sessions, more on good volume Thursday. Friday we anticipate an attempt to take out the late July high. At some point Friday or Monday the market will need to take a breather. So, the key is not to chase stocks to the upside that are already a bit extended; we need to be able to ride through some interim consolidation of this move in relative comfort. Friday we will again cherry pick stocks that are in good position and make good volume moves. They will most likely be fewer Friday than they were Thursday.
As for the downside there are always stocks breaking down, and after the move higher there will be some softness in the market as the move up is tested. That will give us a better exit on some put positions that closed right around the stop point on lighter volume. Thursday's move shed some more light on where the market is, and while we will still look for the stocks breaking down (we do that even in a bull market) the general trend lower is taking a breather. Thus our downside action will focus even more on those stocks that are breaking down technically.
End Part 1 of 2
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