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world stock market, trend trading stock
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9/03/02 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS:
Targets hit alerts issued Tuesday: None issued
Buy alerts issued: AIG; MOLX; MEDI; WLP; ACS
Trailing stops issued: VFC; ISIS; CCR
Stop alerts issued: CREE; VARI; NBIX; DNA; CSL; FSH
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:
- Beginning of September again proves it is no time to look upside.
- Economic news adds fuel to sell fires.
- Further downside action ahead as indexes break support.
- Team Trades
Very ugly start to fall trading season. Welcome to September.
The negative mood started before the open with the Nikkei hitting a 19 year closing low, a weaker dollar, falling Italian consumer confidence, downgrades, and once again negative comments by Dan Niles about Intel. As we said over the weekend the indexes might have looked ready to make a bounce after selling, but broader forces took over. Blame it on what you want, but investors were ready to disinvest when they came back to the market.
It wasn't even that there were a massive number of sellers. There were simply more investors back from holiday, and of that group, more were sellers. There has not been much to inspire buyers after the run up off of the July lows, and the rollover picked up considerable speed Tuesday as many stocks broke recent support levels or broke down from patterns that were or had developed. That is a typical sign of a topping rally that is going to head lower, not to mention the astounding -4:1+ A/D line during a portion of the session. In short, investors came back to the market inclined to sell if need be, and the news was bad enough and plentiful enough to give several reasons to start dumping.
THE ECONOMY
There is a pervasive fear that the world economy is going to fall further, and that is one of the factors that has come back to hit the market. Despite continued reports of improving data or data showing continued economic expansion, the market has softened. Bond yields are heading to historic lows. What looked to be a short term rally received another burst of buying this week, sending yields lower and lower.
While most consumers look upon low interest rates as a positive (and indeed low interest rates are a positive to a certain extent) with respect to home mortgages and interest payments, rates should not be diving as an economy recovers. Rates forecast the demand for money. If there is greater demand anticipated in the future, long term rates trend higher in what is called a 'normal' yield curve. If there is low demand anticipated for money in the future, longer term rates fall. When the yield curve become inverted, i.e., short term rates higher than longer term rates, that is an indication of recession.
Right now the yield curve is not inverted as both long and short term rates are sharply lower. That could have a stimulative effect as low rates theoretically allow for more borrowing and investment, but the lower and lower rates mean that one of the economic forecasters (the bond market) sees weak economic growth. Not necessarily recession, but weak economic growth. Thus even with some stimulus from lower rates, that stimulus is most likely not enough to offset the overall lethargic, post-boom economy. It needs more than just some Fed rate cuts and a round of income taxes that have yet to go into effect; it needs a big dose of stimulus or we are not going to be able to pay for the war on terrorism, Congress' overspending addiction, and a 'what's in it for me?' populace that more and more looks to the federal government for its sustenance and not to itself.
The bond market knows this will bleed away economic output, and that is why it is rallying and stocks are suffering. It is, however, subject to overreacting just as is any market, and we feel that while the bond market is accurate in predicting continued slow recovery given the current set of circumstances and political climate, it is also suffering from a rush of overinvestment by an investor class that was burned in stocks by buying late and not selling and who are now doing the same thing in the bond market. It is as if investors just discovered bonds over the past 3 months, and now everyone wants to be heavy into bonds. They are going to catch part of the rally and then most of the decline as they will still be too scared of stocks to sell out of bonds when the bond market peaks. It happens every boom and bust cycle.
ISM flat at 50.5, shows very slow expansion.
Chicago PMI's better than expected showing indicated the national manufacturing number would be better. It wasn't. It matched July and was below the 51.8 expected. New orders fell to 49.7, the first contraction number since November. That was the biggest blow to the market as it indicates that the expansion is losing a lot of steam as national new orders for manufactured products fell. That, however, does not really jibe with the durable goods and factory orders seen of late. Nonetheless, it is a reading of sentiment, and if businesses remain pessimistic about the future, they will continue to hold off spending in favor of a rainy day.
Weekly Challenger jobs report shows 46% jump in layoffs.
Planned job cuts announced in August rose to 118K versus 81K in July. These are announced job cuts meaning they are to go into effect, if at all, in the future. Remember the IBM job cuts announced in 2001; well, some went into place and others were 're-announced' just a few weeks back. They were the same cuts announced before, but were being reiterated. It is still not good news to see announcements start up once again. Continuing claims continue to rise as jobs are still hard to come by. Adding more workers to the available pool when there are no jobs further slows an already slow recovery.
THE MARKET
Poor action as the indexes undercut support on some rising though still modest volume. The magnitude of the drops was the real feature with the Dow off over 300 points and the S&P 500 topping the Dow on percentage terms. The volume may not have been huge, but the point loss was enough to make up the difference. Sellers were in control and well in control. Over the weekend we said it looks as if the 'pat' story of selling into September looked to be the most likely scenario, and that is how it appears to be starting. On the positive side, the sentiment indicators shot higher; they did not just move higher, they shot higher. That indicates ready, willing and able fear in the market, and that is going to be a very key ingredient on a test of the July and August lows.
Sentiment Indicators
These shot higher on the Tuesday selling, and it will be necessary for them to take out the September 2001 levels on a test for the best signal that a bottom is being put in.
VIX: 43.86; +8.06. The largest one day gain on the close by the VIX since 9-17-01, and it puts the index just 6.62 points from its September 2001 closing high (intraday high at 56.74).
VXN: 58.79; +3.81. A more muted response, but the VXN always seems to lag the action by a session. Its July closing high was 69.48; its intraday high was 71.51.
Put/Call Ratio (CBOE): 1.06; +0.24. Bolted higher and closed over 1.0 for the first time since July. It usually takes more than one close over 1.0, but it is a good way to start the selling. We admit that we were part of the reason it closed over 1.0 as we were buying puts today as well.
Nasdaq
Broke down below potential support at 1300 on rising volume. It is hard to call for anything other than a test of the July and August lows at this point.
Stats: -51.01 points (-3.88%) to close at 1263.84
Volume: 1.394B (+27.62%). Stronger though still below average volume. It was less than last Thursday and the gain on that session, but the point loss was more than enough to make up for the relatively light volume.
Up Volume: 88M (-135M)
Down Volume: 1.295B (+438M). It was all downside.
A/D and Hi/Lo: Decliners led 3.11 to 1. Improved from better than 4:1 mid-session.
Previous Session: Decliners led 1.13 to 1
New Highs: 25 (-7)
New Lows: 154 (+90). New lows are starting to climb. It will be key to watch how many new lows surface near the July lows.
The Chart: http://www.investmenthouse.com/cd/$compq.html
Gapped down to 1300 support and then never even tried to retake that level. It closed practically on the low, making a lower closing low than on August 13. In addition, it took out the interim tops in late July and early August. For all intents and purposes that clears out any support ahead of the prior lows (1206 closing, 1192 intraday). Those are not far away, particularly when you look at the point loss incurred Tuesday.
S&P 500/NYSE
Massive plunge, crashing through the uptrend and taking out the interim tops in July and August. It too is looking at the July lows, but it has another potential rest stop along the way.
Stats: -38.05 points (-4.15%) to close at 878.02
NYSE Volume: 1.299B (+44.67%). Volume churned higher than the recent selling or buying sessions, clearly indicating that when the investors came back the sellers were definitely in control and getting rid of stock.
Up Volume: 102M (-358M)
Down Volume: 1.191B (+763M). Almost 10 to 1.
A/D and Hi/Lo: Decliners led 3.36 to 1. As with the Nasdaq, mid-session it was over 4:1 decliners.
Previous Session: Advancers led 1.31 to 1
New Highs: 53 (-7)
New Lows: 69 (+41)
The Chart: http://www.investmenthouse.com/cd/$spx.html
All of the posturing at the end of the week was swept away in a rush of sellers coming back to the market. It was not a tidal wave, but the sellers were in number and easily overwhelmed any bid. The S&P broke the July and August interim highs in the triangle and crashed toward 850 on rising volume. It took out the mid-August interim low as it too made a lower low. It still has some support at 850 ahead of the closing low at 800 (actually 797) in July and the intraday low at 775. The drop was abrupt, much like falling off a table; after a brief respite and trying to recover after some lighter selling, this has the look of a quick run to 850, a bounce, then a further run down to test the low.
Dow:
Stats: -355.45 points (-4.1%) to close at 8308.05
Volume: 1.299B (+44.67%)
A massive point loss, but still eclipsed by the S&P 500 though just barely. The Dow also fell off the table on the drop as it made a lower low as well and looks ready to stair-step its way down toward the July low. There is support at 8250, then at 8000 before it gets back down to 7500 on the intraday low (7700 on the close). That give is bounce points, important levels to buy it some time on the downside. Remember, we don't want this market to implode too quickly but to have some time selling back on a test.
The Chart: http://www.investmenthouse.com/cd/$indu.html
WEDNESDAY
Some were calling Tuesday profit taking after the run higher, but as we often note, profit taking is light volume pullbacks that hold support. When you have support levels broken right and left on rising volume, that is a sure sign that investors are becoming 'disinvestors', i.e., selling stocks instead of accumulating them for the longer term. With profit taking you can look for support levels to hold and bounce stocks higher. Tuesday the indexes undercut the near term support levels on rising volume. Usually when that starts support levels only become interim bounce points where stocks and indexes rest after drops lower.
After such a big plunge you can expect a bit of a snapback, and indeed futures were up after hours Tuesday. While that is nothing near a guarantee with respect to the next session's action, it is typical of the action following a real drubbing to the downside or a massive upside rally. Thus early Wednesday may bring some upside action to test the move lower a bit, but with support broken we feel it will merely be a test of that support before further selling kicks off.
That may set up a bounce higher later in the week after some further selling takes more air out of the rally and puts the indexes near some interim support and some decent economic news hits. At this juncture, however, the economic news would almost have to be colossal to get the markets to reverse their rollover. What we expect would be a bounce up off of support on any decent economic news but then seeing that dissipate and the indexes step down to the next level. Given the action seen today we would be surprised to see the indexes mount a sustained recovery so soon. There was damage done Tuesday that needs some healing, and a good way to do that is to stair-step down to the prior lows.
With that in mind we will use any upside to exit any remaining upside positions that are on the bubble as to whether we want to hang onto them or not. We will also use that upside to let some more downside plays set up as they test up to resistance levels and roll over or bounce a bit from their big downdrafts Tuesday. That way we can get some entry points on new plays and some 'add-to' points on continuing downside plays we already have taken positions in.
Support and Resistance
Nasdaq: Closed at 1263.84
Resistance: 1300 may provide some resistance on upside moves. The 18 and 10 day MVA (1335.94 and 1331.90, respectively). The late July high (1354.48) and 1357.09, the October 1998 bear market low. The March/May downtrend line at 1373. The 50 day MVA (1376.01). 1418, the interim test after the September low. The August uptrend line at 1440. There is another downtrend line from the March and May highs at 1445. That is followed by price resistance at 1500.
Support: The July lows at 1240 to 1230. Price support from 1190 to 1200 (the July intraday low is 1192.42).
S&P 500: Closed at 878.02
Resistance: The March downtrend line at 905. The top of the wedge at 911.64. The 18 day MVA (917.58). The July up trendline at 928. The 50 day MVA (932.68). The September 2000/May 2001 downtrend line at 941 along with 950. 965, the September 2001 closing low. The next downtrend lines from March and April highs at 960. Then 1000 is psychological resistance.
Support: 850 to 855 has previously held (the October 1997 and Q2 1998 lows). The lowest channel line in the March downtrend channel (832). 800 is next. Then the July low at 775.68. 750 to 760 with an intraday touch to 730.
Dow: Closed at 8308.05
Resistance: 8500 is some resistance. The March down trendline at 8590. The 18 day MVA (8698.09). The July uptrend line now at 8755). The late July high that is the top of the ascending wedge at 8762.14 (8745 closing). The 50 day MVA (8835.41). 9000 is key on up to 9050. A range of resistance from 9000 to 9500, but specifically 9250 and then 9500.
Support: The September closing low at 8235.81. The lowest bottom channel line of the March downtrend (8175). 8062, the September 2001 intraday low, has tried to hold on a couple of occasions. 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
9-03-02
Auto sales, August: 6.2M expected, 6.5M prior.
Truck sales, August: 8.0M expected, 8.1M prior.
ISM national, August (10:00): 50.5 actual versus 51.8 expected, 50.5 prior.
9-04-02
Construction spending, July (10:00): -0.4% expected, -2.2% prior.
9-05-02
Initial jobless claims (8:30): 395K expected, 403K prior.
Q2 Productivty, revised (8:30): 1.1% expected, 1.1% prior.
ISM services, August (10:00): 54.0 expected, 53.1 prior.
Factory orders, July (10:00): 4.7% expected, -2.4% prior.
9-06-02
Non-farm payrolls, August (8:30): 47K expected, 6K prior.
Unemployment rate, August (8:30): 5.9% expected, 5.7% prior.
Hourly earnings, August (8:30): 0.3% expected, 0.3% prior.
Average workweek, August (8:30): 34.2 expected, 34.0 prior.
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TEAM TRADES
MEDI: With the downside bias we had prepared for several downside moves to take advantage of the shift. MEDI had broken its 50 day MVA and support at 26. We were looking to pick up the downside move as it continued its move lower. As the market opened lower, MEDI sold down hard early as well. We waited to see if there would be a bounce as there usually is after early moves down or up as buyers and sellers enter after each strong move. That happened with MEDI as it bounced off of 24.60 up to near 25.10. That was what we liked because our buy point was just below that level and we like to see a test of the breakdown point and then another drop. That is exactly what MEDI did, and the stock started back down. The put options were trading 5.60 by 5.80 and we did not see much reason to try and shave a 20 cent spread. So we put an order in at the ask and with the decent volume in the options Tuesday morning the fill was pretty quick. The stock continued its downward trend during the session; all in all, a good entry point.
End Part 1 of 2
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