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us stock market, trend trading stock
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9/17/02 Technical Traders Report Update
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Technical Traders Report Subscribers:
MARKET ALERTS:
Targets hit alerts issued Tuesday: DJX put
Buy alerts issued: BDK (put); HD
Trailing stops issued: None issued
Stop alerts issued: DROOY
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:
- Iraq news proves it is the economy stupid.
- Falling production levels indicate inventory increases are not driven by rising production.
- Indexes crack through support on rising volume.
- Subscriber Questions
Foreign markets were rallying, futures were up. Looked like a roaring open after Iraq said bring on the inspectors. The bond market was down, but not tanking. Oil was off but not a lot. The non-equity markets were not buying into it. Indeed, the futures were eroding as indicated in the pre-market alert; we were not going to be taking any drastic action on the open given that action. The move was over before trading even started; the indexes gapped open and the upside action was over in 10 minutes.
Why would the cessation of an immediate threat of war not have a lasting impact on the market? Because war is just a subset of the economy. War impacts whether the economy's resources will be drained to fight instead of used to invest at home. Shooting bullets on foreign soil does not start many businesses at home. Thus, a war that is not going to happen soon if at all is a plus for the economy.
But again, it is just a subset. The economy still has serious problems as we have been pointing out. There were more problems Tuesday as August production was reported down along with capacity utilization. This is another in a series of softening economic data. Not huge drops, but showing the stagnation characteristic of a weak, anemic recovery. The market reaction indicates that it still has serious reservations about the economic recovery. Yes the war is put on the back burner, but that just brings to light the other problems with the economy. There was no reason for boisterous upside. Simply put, just one reason for the lack of upside action was removed; there is still plenty of concern for the economy's health outside any war.
THE ECONOMY
When it came down to it, the economy is still the key. War is feared by the market because of the uncertainty, but the uncertainty is based in the economy: how will war impact oil prices that have a direct effect on the economy; will consumers stop buying and watch the war news on television as they during the Gulf War, etc. No kidding on the latter; people stayed at home and watched the war news as the sales in restaurants, movies and malls fell while sales at places such as Domino's pizza (delivery only) shot higher. In any event, the news from Iraq may have taken away some of the war threat (may have), but it does not mean the economy is cured. War was something that could further damage an already weak economy. Now the market is back to focusing on the economy and its problems even without a war.
Industrial Production -0.3%, first dip of the year as capacity utilization falls.
Monday business inventories were up but some were saying it was due to factories ramping up production. While the factories had been improving for the year, they were doing so at a very anemic pace, and in August production fell for the first time in 2002, falling well below expectations of a 0.2% rise (a half point swing). With the declining production you cannot say the rise in inventories was due to continued production increases. While the consumer has not collapsed by any stretch, production is not the sole cause of the increase in business inventories.
Industrial capacity (August) was 76.0 (76.1% expected), the first time it has been down this year as well. Plant capacity is nowhere near levels considered robust nor near a bottleneck level. You know what is really surprising? When the Fed was so worried about 'imbalances' in the system, it cited rising capacity utilization. At that time, however, the utilization was in the mid to low eighties, still well off levels where bottlenecks could develop that lead to rising prices. Just more smoke to purposefully slow the economy at the time. It got its wish and now is adopting a 'stay the course' attitude that is giving some representatives the ammunition they need to stop any action on stimulating the economy.
THE MARKET
War with Iraq is not the only thing on investors' mind as the gap and tank demonstrated. The indexes spent the morning giving back the early gains, and then after 4 hours of lateral movement they started breaking near term support on higher volume. What the market did: big money used what looked to be a big rally developing to dump stocks.
It was not a clean support break, but volume was some of the highest in a month on the Nasdaq and NYSE as they moved through the near term support. They did not crash through it as they moved laterally in the last half hour. We were on the phone to one of our brokers and he indicated there were many buy on close orders during the last half hour. Putting two and two together, it was clear that those orders were holding the indexes steady as they worked toward the close. Without them there would have been a deeper tank in the last half hour. Will they provide upside impetus Wednesday? Most likely not. They can indicate buy interest, but after hours news from JPM and ORCL was neutral at best and futures tanked.
Sentiment Indicators
Starting to move up with rising anxiety about the indexes breaching support. Just starting, however. With everyone watching them, they will have to really hit extremes. For example, remember in June when the VIX hit over 30 and all you heard on the financial stations was how 'high' the VIX was? That was nothing, yet everyone was all hot about it. It is when they are no longer excited about it but scared by it when it becomes a meaningful indicator.
VIX: 41.96; +1.42
VXN: 60.39; +2.66
Put/Call Ratio (CBOE): 1.2; +0.11. Second day over 1.0 on the close, a good reading.
Nasdaq
The SOX did not join in the early move, gapping lower and then failing an attempted rally with the Nasdaq. After hours ORCL was nothing exciting, and the Nasdaq now stares at 1250 as the last point of potential support before July and August lows. All in all, it sold the least of all indexes as the overall selling remains somewhat mild by historical comparisons.
Stats: -15.94 points (-1.25%) to close at 1259.94
Volume: 1.494B (+35.94%). Volume was of course going to be higher after Yom Kippur, but the Nasdaq showed its strongest volume since early September and then mid-August. Sharply rising volume on selling is a signal of more stock dumping by big money, and that typically signals the continuation of a downtrend.
Note also that Nasdaq volume topped NYSE volume by 120 million or so. This is remarkably close volume, something seen the past two weeks. When the Nasdaq volume drops near or below the NYSE, there is no speculation in the market and that is a good sign for a longer term bottom forming.
Up Volume: 341M (+161M)
Down Volume: 1.13B (+221M)
A/D and Hi/Lo: Decliners led 1.76 to 1. The Nasdaq has been relatively calm on the recent selling as opposed to the 2+:1 declines seen the prior weeks on selling.
Previous Session: Decliners led 1.82 to 1
New Highs: 27 (+1)
New Lows: 179 (+53)
The Chart: http://www.investmenthouse.com/cd/$compq.html
The rally stopped just below resistance at 1300 where there is price resistance and the 18 day MVA (1302.93). It rolled over, took out support at 1270, and now has 1250 just below as the next potential level of support. That bounced the index on September 5 and that is why we are looking at it. At this point these levels are not necessarily viewed as levels that will turn the market, but they provide points where the market can bounce in relief. Below that level are the July and August lows (1192.42 intraday, 1206.01 intraday). The SOX has already led the Nasdaq to new lows. Monday's new low could not bounce it, and after a second consecutive multiyear low, it now has resistance at 275. Without the SOX the Nasdaq is hard pressed to rise or even hold its own.
S&P 500/NYSE
The S&P broke below 875 by the narrowest of margins. It would be an oversimplification to say it breached support just yet as it has undercut it before intraday and recovered. Still, it is the lowest close in September and it made the move on higher volume. The support is cracking.
Stats: -17.58 points (-1.97%) to close at 873.52
NYSE Volume: 1.379B (+39.76%). The strongest volume since August 15, approaching but not reaching average (1.5 million is about average). Nonetheless it was stronger selling than we have seen as the index started to break through support.
Up Volume: 181M (-252M)
Down Volume: 1.189B (+644M)
A/D and Hi/Lo: Decliners led 2.33 to 1. The small and mid-caps joined in the selling, just a bit lower than the Dow and S&P 500 losses (small and mid-caps -1.9% each). That is why the A/D line was very negative.
Previous Session: Decliners led 1.23 to 1
New Highs: 50 (+7)
New Lows: 115 (+39)
The Chart: http://www.investmenthouse.com/cd/$spx.html
The large caps undercut 875, breaking below price support and the March down trendline now at 881. It has not undercut the September intraday low (870.50), but the sharply rising volume indicates it will be there soon. 850 then 833 are next in line if this current support level at 875 is broken. A break lower would complete the short head and shoulders pattern that started in late July. That pattern is about 100 points high, and the rule of thumb on head and shoulders is that they fall as far as they were high. That would put the S&P near 775 on the low, remarkably right at the July 24 intraday low of 775.68. That is where we predict the S&P to ultimately find a second bottom at some point in October after an up and down trend down to that point.
Dow:
Stats: -172.63 points (-2.06%) to close at 8207.55
Volume: 1.379B (+39.76%)
The Dow ran to 8482 on the high, right at the 18 day MVA (8495) and price resistance at 8500. From there it rolled over and fell below price support at 8250 and the near low channel in the March downtrend channel. The September 5 intraday low was 8217.05, making Tuesday's downside move even more significant. The fact that NYSE volume was the highest in a month is a signal this downside move has some more sellers behind it. The Dow will struggle again tomorrow as JPM came in light on its numbers after hours and was down over $2.
The Chart: http://www.investmenthouse.com/cd/$indu.html
WEDNESDAY
Iraq's news was met with a big drum roll and then splat. The market was running fast and ran out of road quickly. It was all downside from there on rising volume. The indexes started the break through interim support, but what could have been a real tanking at the close was blunted with buy on close orders that held the market steady but did not give any upside push. After hours JPM indicated it was going to miss its numbers and ORCL was light on revenue. That sent them both lower after hours along with Nasdaq and S&P futures.
We have been expecting a continuation of the downtrend, and it looks to be resuming as many stocks tested resistance on the upside today and rolled over on higher volume. Those higher volume reversals off of resistance are always telltale signs of a resumption of a downtrend just as tests of support and higher volume bounces indicate a resumption of an uptrend. Today we started seeing downside targets being hit, and tomorrow we will see more with the likes of JPM tanking after hours on its Q3 earnings warning.
As the market works lower we will continue to pick downside positions as they give us entry points. There will also continue to be upside plays as investors move to defensive areas such as healthcare and gaming that have performed well during the other down times. The move will be up and down as always: trending lower but bouncing at support levels. When the bounces hit resistance or run out of steam that gives entry points for further downside.
It is important when looking at the action to keep the big picture in mind. The market tried to rally on perceived good news regarding Iraq but failed. A big negative. The bond market was lower but not sharply, and then it started to rally; that indicates a continuation of the belief that there is going to be little demand for money due to a continued slow economy. These are the sign posts that show the macro view of market direction. Overlaying that are the support levels and resistance levels that the indexes trade between and around as the grind out the general trend. We use those for entries and exit points.
Overall the action remains better longer term with the more or less orderly move toward the July and August lows on still below average volume. The perfect scenario would be a continued trend lower over the next 3 to 4 weeks on this mild volume. That would set up a good test and potential bottom in October. It seems pat to say this same old pattern will work again, but the market just seems to set up for this type of action. Look at the S&P 500 'mini' head and shoulders pattern and its conclusion point at 775, right at the July intraday low. It looks almost too simplistic, but the market always keeps you guessing as it jumps back and forth. That is why it is so important to stick with what it is telling you on a macro and day to day basis and draw your conclusions on the facts. We have been saying the market would move further down when it was trying to move up; the market was showing the move was weak. It won't fall in a straight line, but if we stay focused on the bigger trends we stay out of the way of most trouble.
Support and Resistance
Nasdaq: Closed at 1275.88
Resistance: Price resistance at 1300, followed by the 10 day MVA (1297.81). The 18 day MVA (1307.99). 1316, an early August interim high. The March/May downtrend line at 1335. The 50 day MVA (1350.56). The late July high (1354.48) and 1357.09, the October 1998 bear market low. There is another downtrend line from the March and May highs at 1410. 1418, the interim test after the September low. That is followed by price resistance at 1500.
Support: 1270 is support as is 1260 to 1250 from recent lows. Then 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 891.10
Resistance: The 10 day MVA (898.65). The 18 day MVA (903.38). July and August interim highs at 911.64. The 50 day MVA (921.34). The September 2000/May 2001 downtrend line at 930. The downtrend lines from the March and April highs (949) along with price resistance at 950. The July up trendline at 966. 965, the September 2001 closing low. Then 1000 is psychological resistance.
Support: The March downtrend line at 884. 875 continues to provide near term support. Then 850 to 855 has previously held (the October 1997 and Q2 1998 lows). The lowest channel line in the March downtrend channel (812). 800 is next. Then the July low at 775.68. 750 to 760 with an intraday touch to 730.
Dow: Closed at 8380.18
Resistance: The March down trendline at 8465. The 10 day MVA (8467.28). Some price resistance at 8500. The 18 day MVA (8528.97). The late July interim high at 8762.14 (8745 closing). The 50 day MVA (8713.96). A range of resistance from 9000 on up to 9050. Then 9250 and then 9500.
Support: 8250 continues to act as price support down to the September closing low at 8235.81. 8062, the September 2001 intraday low, has tried to hold on a couple of occasions. The lowest bottom channel line of the March downtrend (8015) near the August lows. 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
9-16-02
Business inventories, July (8:30): 0.4% actual, 0.2% expected, 0.3% prior (revised from 0.2%).
9-17-02
Industrial production, August (9:15): 0.2% expected, 0.2% prior.
Capacity utilization, August (9:15): 76.2% expected, 76.1% prior.
9-18-02
CPI, August (8:30): 0.2% expected, 0.1% actual.
Core CPI: 0.2% expected, 0.2% actual.
Trade Balance, July (8:30): -$37.0B expected, -$37.2B prior.
9-19-02
Initial claims (8:30): 426K prior.
Housing starts, August (8:30): 1.650M expected, 1.649M prior.
Building permits, August (8:30): 1.690M expected, 1.712M prior.
Philly Fed, September (12:00): 2.5 expected, -3.1 prior.
9-20-02
Treasury Budget, August (2:00): -$55.0B expected, -%80.0B prior.
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SUBSCRIBER QUESTION
Q: I'm a bit confused about certain aspects of the Oct. 460 $OEX put option. My quote screen shows the value of the $OEX index in the red (~441, down over 4 at this writing) whereas the value of the contract is rising (bid 26.90, ask 28.90, up $2.90 at this writing). The value is increasing with time, and I thought it was far more common for the contract value to decline in value over time. Am I missing something, or do I still not understand options well enough to mess with them?
A: You are right: option value decreases with time, but it is also affected by the movement of the underlying security. Thus the option value rises as the underlying issue value falls (for a put option). Right now the value of the underlying index is falling faster than the impact of the time value. As long as it falls at a sustained rate, the value will increase. If it becomes stagnant, then time will start eroding, especially after Friday with respect to October options. The closer it gets to expiration (the third Friday of the month), the faster time erodes and the less impact price movement has. At expiration the option will only be worth the amount the option is 'in the money.' For example, if today was the expiration for the October $460 put, the put option would have a value of $21.45 as the option is 21.45 in the money (260 strike price - 438.55 closing price = 21.45. The option closed with a bid of $31. That means there is still $9.55 time value built into the option. That will start to erode faster, i.e., will make up less and less of the option's value as the expiration draws closer.
End Part 1 of 2
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