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8/13/02 Technical Traders Report Update
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Technical Traders Report Subscribers:
MARKET ALERTS:
Targets hit alerts issued Tuesday: None issued
Buy alerts issued: TEVA
Trailing stops issued: CHIR (preserved a solid gain); GENZ; PDLI
Stop alerts issued: None issued
You can sign up for Technical Trader alerts at the following link:
http://www.investmenthouse.com/alertttr.htm
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SUMMARY:
- Fed prognosis: you may be relapsing from a serious illness. Fed prescription: come back next month if you are not feeling better or not dead.
- Indexes fail to hang onto support in aftermath of Fed announcement as shorts test the waters late.
- Subscriber Questions
Fed leaves rates alone, acknowledges slowing, and again refuses to provide leadership.
"The softening in the growth of aggregate demand that emerged this spring has been prolonged in large measure by weakness in financial markets and heightened uncertainty related to problems in corporate reporting and governance. The current accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, should be sufficient to foster an improving business climate over time. Nonetheless, the Committee recognizes that, for the foreseeable future, against the background of its long run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness." In other words, yes we see the wreck happening, but we don't think it will be bad enough to keep the cars from still limping along toward their destinations.
Once again the Fed refuses to take a leadership role and try to get ahead of the curve, instead opting for the 'wait and see' approach that got it behind the ball all the way down from 8+% GDP growth to negative GDP growth and that Japan so deftly mastered. With its words the Fed tried to reassure the markets by acknowledging the slowdown and telling them they stood ready to take action if needed. The message, however, was internally inconsistent. The Fed said the prior cuts 'should be sufficient' but then changed the bias toward worry of a recession. With that the Fed Funds Futures contract is pricing in an inter-meeting move lower, i.e., between now and September or September and November. Now that gets the FFF back out into a realm where it is not as good a predictor. What is very telling, however, is how the long bond is just collapsing down on top of the short term treasuries (2 year). In a recovery the longer maturities should be higher, giving an upward sloping yield curve. Why? Because better times mean money will be scarce as it is put to work in the business of a strong economy, e.g., buildings, homes, business equipment, etc. If that is not going to happen, then rates fall because there is no expectation of a scarce money supply. With the long bond falling near historic lows, that is not a very good vote of confidence for the Fed action, and it is evident that more stimulus is necessary from the Fed as well as fiscally from the President and Congress. Of course, politics will get in the way, and we will all suffer as each side plays to its political base instead of working together.
What is really amazing is how wet kisses were slathered all over Greenspan today on his 'superb job at handling the economy.' It was something like an early retirement dinner where each speaker lavished praise whether it was warranted or not. First, the Fed does not handle the economy. Its mandate is to control interest rates in an effort to prevent inflation and maintain price stability. That is not 'handling the economy.' Beyond a basic misunderstanding of what the Fed does, however, that summary conclusion of Greenspan's prowess (maybe she just read 'Maestro' over the weekend) is childish folly. Not child-like with its connotations of innocence, but childish coming from a 'seasoned' financial reporter. Was it not Greenspan and his henchmen that super-inflated the money supply ahead of Y2K and set off the buying binge in the last half of 1999 and early 2000? Then those same economic wizards took it all back in one month. They raised rates. They put hundreds of banks on restrictive status, handcuffing them from lending money. They basically fed free drugs to the economy, got it addicted, and then went cold turkey on it. When the Fed finally got around to cutting rates after the economy collapsed from 8%+ GDP growth to negative, it was behind the curve all the way down, failing to cut fast enough to get the Fed funds rate below real rates until after 9-11 when it finally woke up. We have suffered the consequences ever since. Maestro? Of economic disaster. Superb? More like flying by the seat of the pants and artfully dodging the blame by pointing the finger at business and U.S. citizens. Yes, about all we got from the Fed was the finger.
We have said it again and again: if the Fed had done NOTHING about Y2K, had left interest rates alone, and had let the market work, supply would have met demand and they both would have found equilibrium naturally. Any slowdown would have been much smoother and less painful. When the Fed stepped in and manipulated the markets it created the very 'imbalances' it so often spoke of, the most massive starting with its liquidity flood of 1999. That was the fatal step that inflated the bubble as it is called; then the Fed felt it had to deflate what it messed up. It is fascinating and frightening how history repeated itself once again as the central bank stepped in and collapsed the economy and the markets. It did it in 1929, it did it in 1972, and it did it in 1999. Being a central banker is just like being a weatherman: they are the only professions where you can have a 10% success rate and be considered a giant in your field.
Indexes distribute and break support on Fed ruling.
The indexes were working their way flat on light volume, but then the Fed issued its mixed statement (things are good but slowing, but things are not good enough not to be worried about a recession). After head faking up and down a few times the downside became entrenched. Sell side volume started to escalate as buy side volume shriveled. The indexes attempted a stand at support, but the Nasdaq broke through and the Dow followed. The S&P 500 closed just below its 18 day MVA, holding close but also finishing at the low on rising volume. Momentum at day's end was down.
Volume was still low and below average overall, but it shot up from Monday's levels. The key: when more investors/traders came back to the market, most of them were sellers, at least after the FOMC decision. Yes you can point to most of the Dow's loss being tied to aerospace with GD taking a massive butt kicking, but that does not explain the Nasdaq 100 and SOX turning tail and leading the rest of the indexes lower with the greatest percentage drops on the session. In past sell offs this Mutt and Jeff combination has initiated the downside moves. Indeed the Nasdaq went from showing once again some relative strength to showing relative weakness in a single bound. It was not a total breakdown, but it is trying to do it.
THE MARKET
Things were too perfect. A very nice consolidation move was upset by the late session sell off. This reversed the positive action of a soft open followed by a stronger close. The market was doing just that, opening weaker and then rallying to slightly positive until the Fed news. We anticipated some selling on the actual announcement, particularly if the index was able to rally ahead of the news. We were looking, however, for a recovery or at least continued low volume selling. A modest increase would have been okay. A 50% increase in volume? That is getting somewhat excessive. The shorts were obviously emboldened by the action, and they came on to sell in the last hour as the shorts that were out there did not cover.
It was not a total knockout; volume remained easily below average, and after the artificially low volume Monday ahead of the FOMC meeting, it does not look all that bad. The indexes closed at the low, but with only 1.75 hours to recover from the Fed decision, it may be premature to nail the coffin shut on the rally attempt. The overall volume was still low (on the NYSE it was still lower than the rally session last Thursday) and the Dow and S&P are still in good patterns. Now they have to test lower, hold and reverse. They have to fight some renewed vigor in the shorts. Gee, no problem there with this dynamo market.
Sentiment Indicators
VIX: 39.8; -0.66. Not much concern Tuesday. Even though the market fell volatility did not rise, the inverse of what you would expect. It shows there was not a whole lot of worry over the action.
VXN: 57.68; +1.39. A slight rise, but it to indicates not a lot of worry over the day's action.
Put/Call Ratio (CBOE): 0.71; -0.03. The put/call ratio has not shown a lot of activity over the past week, not complacent, not at a high anxiety level.
Nasdaq
Tried to break higher heading into the FOMC meeting but then collapsed below the near term support on s significant volume increase. The large cap techs were leading lower and AMAT's earnings are not sparking confidence after hours. It does not look peachy.
Stats: -37.56 points (-2.87%) to close at 1269.28. Too much point loss in a single session. The shorts perked up quite a bit.
Volume: 1.638B (+54.69%). To much volume increase though still below average.
Up Volume: 197M (-297M)
Down Volume: 1.431B (+897M)
A/D and Hi/Lo: Decliners led 2.08 to 1. The large cap techs may have led the move, but it was a broad Nasdaq move lower.
Previous Session: Decliners led 1.1 to 1
New Highs: 18 (-2)
New Lows: 167 (+33)
The Chart: http://www.investmenthouse.com/cd/$compq.html
The lateral move gave up a chunk of ground making it a lateral move no more. The Nasdaq broke through some support at 1292 (10 day MVA) and is now in no-man's land, well above the next support level at 1250 to 1240 (being a bit generous). Expect at least a test to those levels, but it should not sell below 1240 to have much chance of recovering in this current leg. Indeed, if it starts undercutting the next level of lows the rally would be most likely ready for the fork.
Dow/NYSE
Well, the Dow tested the 10 and 18 day MVA Tuesday, only problem is it did more than that, selling below them to close on some rising volume. Not a total failure but less than ideal action after such a good consolidation was underway.
Stats: -206.5 points (-2.38%) to close at 8482.39. As with the Nasdaq, too much of a point loss to be comfortable.
Volume: 1.295B (+24.57%). Still very low but significantly higher volume on the selling. Compared to last Thursday's rally volume it comes up short. Still, any distribution session so early into a rally is reason for concern.
Up Volume: 224M (-132M)
Down Volume: 1.054B (+390M). 15 minutes after the FOMC meeting the up to down volume ratio was 337 million to 461 million downside shares. You can see how the selling volume ramped up as the last 1.5 hours in the session played out.
A/D and Hi/Lo: Decliners led 2.01 to 1. The decline broadened out considerably.
Previous Session: Decliners led 1.15 to 1
New Highs: 39 (+1)
New Lows: 87 (+15)
The Chart: http://www.investmenthouse.com/cd/$indu.html
Cracked the 10 and 18 day MVA (8519.43 and 8524.54, respectively) on that rising volume. This put a dent in the nice consolidation, but it did not pierce the armor yet. On the low it did manage to hold the lower channel line in the March downtrend, and in doing so maintained the pattern that has built a series of higher lows off the July low while the highs have remained constant near 8750. This would be a good point for the index to hold the line, but it finished on the low and the momentum is lower. The up trendline from the July low is at 8266, right at some price support at that level as well.
S&P 500:
Turned back after flirted with a breakout from the wedge off the July low. As with the other indexes the action occurred after the FOMC announcement as volume rose on the selling, but remained well below last Thursday's rally volume; more sellers were in the market Tuesday, but overall they were less than the recent number of buyers as the index climbed higher. The S&P closed ever so slightly below the 10 day MVA (885.95), not full breaking that level though volume was higher and the index closed at the session low. That would indicate it will undercut these levels further before trying to move back up. The next level of support is the up trendline off the July low where it converges with the bottom of the March downtrend channel at 870. That is where we would expect it to bounce.
Stats: -19.59 points (-2.17%) to close at 884.21
NYSE Volume: 1.295B (+24.57%)
The Chart: http://www.investmenthouse.com/cd/$spx.html
WEDNESDAY
Well the Fed was able to style its rate decision in such a way as to somehow avoid the win-win scenario outlined last night. Instead of giving a vote of confidence and a 'we are right here and ready' tone, it managed to come across with a 'yes there are problems and they are getting worse, but we are not going to act now' tone. Big difference. Enough so that the shorts did in fact come into the market late in the session and sold. That is shown in the escalating volume in the last 1.5 hours. The Nasdaq went from 337 million upside shares versus 461 million downside at 2:30ET to 197 million/1.431 billion at the close. Easy to see that the shorts came out.
With the Nasdaq 100 and SOX leading the way lower on rising volume they could continue to make a run at the market and drop it like a bag of dirt. While it could take (and usually does take) several sessions for the ramifications of a Fed move to work through the market, we don't think the late-Tuesday action will end up as the winner on this round. While the action late in the session was definitely not bullish, the overall volume was still lower than the prior buying sessions, and there is still solid support in the Dow and S&P 500 in their current uptrends off the July low. Moreover, shorts would like to see stocks in a better position to short. Yes they can be done from here, but the bears and bulls are both still scratching their heads over what the Fed's action really does to the market.
What we ended up doing Tuesday was mostly preservation of gains, taking some profits on targets hit and preserving some gains with trailing stop losses/modified targets. Biotechs were hit some Tuesday so we took a lot of that money off the table, pocketing some nice gains along the way. Wednesday we expect a further downward push early as the momentum continues lower and the AMAT earnings that were okay but cautioned about customers with 'cautious tones'. That had techs under additional pressure after the close.
So what we will do now is see how the uptrends off of the July lows hold up on the S&P 500 and the Dow (the Nasdaq does not have much of an uptrend) hold up on some further selling Wednesday. If those do not hold on continued rising volume then the move is in the trashcan. During that time if we have some trailing stops hit we will go ahead and act on them unless the market is right at the up trendline when they are hit. With a distribution session there is no point in letting gains slip away or letting a positive position turn negative. The upward bias is still alive, but its resolve is going to be tested Wednesday and Thursday. While we still think there is more to the upside here we have to let the market make that ultimate decision for us.
Support and Resistance
Nasdaq: Closed at 1269.28
Resistance: The 10 day MVA (1288.13). The 18 day MVA (1301.20) and prices at 1300. 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 (1393.27) and the second March down trendline at 1410. That is followed by 1500.
Support: The July lows at 1240 to 1230. The March down trendline (1221). Price support from 1190 to 1200 (the July intraday low is 1192.42). The bottom of the March downtrend channel (1162).
S&P 500: Closed at 884.21
Resistance: The predominant bottom channel line from the March downtrend at 901. The top of the wedge that has formed at 911.64. The 50 day MVA (935.31). The March down trendline at 937.
Support: The 18 day MVA (888.13) and the 10 day MVA (885.95) are still not broken; kind of support and resistance. The lowest channel line in the March downtrend channel (868) and the July up trendline (865). 850 to 855 has recently held (the October 1997 and Q2 1998 lows). 830, the recent August low is possible, but 800 is more likely. Then the July low at 775.68. 750 to 760 with an intraday touch to 730.
Dow: Closed at 8482.39
Resistance: The 10 day MVA (8519.43) and the 18 day MVA (8524.54). The May down trendline (8495). The late July high that is the top of the ascending wedge at 8762.14. The March down trendline at 8870. Then the 50 day MVA (8876.63). After that price resistance at 9250 and then 9500.
Support: The lowest bottom channel line of the March downtrend at 8470. The July uptrend line (8266). The September closing low at 8235.81 more or less held last Wednesday. 8062, the September 2001 intraday low, has tried to hold on a couple of recent occasions as well. Then 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
8-13-02
Retail Sales, July (8:30): 1.2% actual, 1.2% expected, 1.1% prior.
Ex-autos: 0.2% actual, 0.3% expected, 0.4% prior.
FOMC results (2:15): Rates unchanged. Bias toward risks to the downside though the Fed says the prior cuts 'should work.' If there are risks, why doesn't the Fed go ahead and make that insurance cut?
8-14-02
Business inventories, June (8:30): 0.2% expected, 0.2% prior.
8-15-02
Initial claims (8:30): 370K expected, 376K prior.
Industrial production, July (9:15): 0.2% expected, 0.8% prior.
Capacity utilization, July (9:15): 76.2% expected, 76.1% prior.
Philly Fed, August (12:00): 8.5 expected, 6.6 prior.
FOMC minutes, June (2:00)
8-16-02
CPI, July (8:30): 0.2% expected, 0.1% prior.
Core CPI: 0.2% expected, 0.1% prior.
Housing starts, July (8:30): 1.670M exected, 1.672M prior.
Building permits, July (8:30): 1.680M expected, 1.700M prior.
Michigan sentiment, Aug. preliminary (9:45): 89.0 expected, 88.1 prior.
End Part 1 of 2
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