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understanding the stock market, trend trading stock
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10/02/02 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Wednesday: None issued
Buy alerts issued: MME; BCGI
Trailing stop alerts: None issued
Stop alerts: WEN
To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertdly.htm
SUMMARY:
- Rally and rollover: market mirror image of Tuesday.
- Housing market trouble.
- Trading error or just a fizzled rally?
- Team Trades
Dow gives back 200 in a reverse from Tuesday's action.
There was some positive news (Iraq consensus, Dell, Ralph Block calling a bottom) and some bad news was being overlooked (CMA write-downs; Dow earnings warning) as the market continued the move started with the Monday reversal from 800 on the S&P 500. As soon as the indexes came in range of the 18 day MVA, however, they turned and fell. The NYSE on lower volume, the Nasdaq on rising volume. None of the indexes were able to take out the near term down trendlines, and that gave the sellers something to focus on. What was a decent rally was turned into some hefty selling. Some focused on a trading error, but the indexes were rolling down before that really took effect. It was a rollover at resistance, but it was not necessarily a ticket below the recent lows.
THE ECONOMY
Very quiet day economically with no real reports hitting the wire. The economic news dealt mostly with company issues such as Comerica taking a huge writedown and weighing down the banking sector and Dow warning it was going to miss. On top of that Family Dollar in retail warned; BNI (railroads) also warned. After hours AMD surprised no one with a warning, but the $100 million revenue miss raised some eyebrows. Things are not that great in the economy.
Housing market destabilizing.
Mortgage rates were down again this week and applications were at a high, but we have been out talking with builders and real estate sellers again. We have reported that the high end of the market was soft, and that is usually the first part of the market that weakens when there is some economic trouble. Well, today we were getting word that there were incentives being made in the $250K range by builders that had not been seen. New homes being discounted, builders pressuring agents to forgo commissions in exchange for a smaller 'bonus' so the price could be cut further with both the builder and agent absorbing the reduced profits. Just a couple of months back there was no discounting; you paid the price if you wanted the property.
Important point: just as the consumer could not prevent the recession or pull the country out of recession, low interest rates cannot magically keep the housing market up if job losses continue to rise and the economy continues to deteriorate. It is not just the rates in a vacuum. Plunging rates, plunging equity prices and lack of pricing power are attributes of deflation. Low rates prompted a lot of buying and refinancing, but they are a symptom of a bigger problem that can ultimately drag everything lower, housing market included.
THE MARKET
The indexes were in rally mode, overcoming some early bad news from DOW and Comerica and moving positive. Ralph Block came out and said this action had the attributes of a classic bottom. Sounded good, but the real test is yet to come. Today they were unable to break the 18 day MVA and the near downtrends and turned back down. Volume was milder on the NYSE just as it was rather mild on the Tuesday rally; no conviction. Nasdaq volume was up; the SOX was rallying and managed to hold positive, but gave back around 5% of its gain on the session. There was some upside volume, but it turned to downside action as the selling grew.
It was not violent selling, just another turn back down in the downtrend. Volume has bumped up as the July lows are approached, but it is not violent turmoil. The price action is extremely volatile, however, and that is often a sign that change is being attempted. There are still pockets of stocks that are performing well that have not been taken out and shot as they were in July. Those are positive signs for a bottom. It is still too early to tell, however, as any follow through to the rally from Monday or Tuesday would be on Friday at the earliest, and more likely early next week. For now the downtrend continues as the 18 day MVA stopped the indexes and sent them negative.
There was talk that a trading error in the afternoon was the culprit for the selling when a sell program with the wrong dollar amount was initiated. Many of the trades were stopped before they were made, however. Moreover, the financials were already selling before the program hit. The program did not help matters, but it was not the root.
Sentiment Indicators
VIX: 43.36; +3.23
VXN: 58.15; +0.91
Put/Call Ratio (CBOE): 0.83; -0.04
Nasdaq
Moved over the 10 day MVA intraday, making it half way to the 18 day MVA before it rolled over and closed significantly lower.
Stats: -26.42 points (-2.18%) to close at 1187.3
Volume: 1.769B (+3.35%). Volume rose on the reversal, never a good sign on a close well off the intraday high.
Up Volume: 467M (-816M)
Down Volume: 1.284B (+871M). It was not as bad a ratio as it has been due to the earlier buying related to Dell.
A/D and Hi/Lo: Decliners led 1.78 to 1. Not a horrid rout.
Previous Session: Advancers led 1.25 to 1
New Highs: 18 (-13)
New Lows: 225 (-45). Good to see new lows falling on a down session. Very positive.
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq had help from Dell and thus the SOX on the idea that Dell's ability to raise revenue guidance was good. The news was not that at all; Dell cut costs and stole market share. The pie for chip makers did not grow, just Dell was taking more of the pie. The AMD warning after hours won't help Thursday. The 18 day MVA (1232.29) was waved at on the high (1222.72), and then the techs rolled over. There was up some upside volume early on as the SOX was moving back up, and that was a large part of the Nasdaq support. That gave way in the afternoon, however, and the Nasdaq slid lower and lower. It is again below the August down trendline roughly at 1189, but there is some support at 1160 where it has found support the prior two sessions. On selling back down near that area we will be inclined to take the gains on our downside plays.
S&P 500/NYSE
Similar to the Nasdaq, the large caps forged back from early selling to test the 18 day MVA and resistance at 850, but they failed.
Stats: -20 points (-2.3%) to close at 827.91
NYSE Volume: 1.658B (-3.1%). Volume fell back on the selling, indicating no share dumping.
Up Volume: 305M (-1.049B)
Down Volume: 1.356B (+1.016B)
A/D and Hi/Lo: Decliners led 2.11 to 1. A broad move lower if not on heavy volume.
Previous Session: Advancers led 2.23 to 1
New Highs: 76 (-24)
New Lows: 111 (-41). As with the Nasdaq, new lows fell as the large cap indexes pulled back. Good action.
The Chart: http://www.investmenthouse.com/cd/$spx.html
The early recovery attempt failed but it was not heavy selling. The rollover was on above average volume, but it was lower. There was no heavy dumping, and that keeps alive a low volume test and a follow through of the rally attempt early next week. Again, however, the index remains in a downtrend from the August high and the March down trendline. We cautiously play that downtrend as we watch to see if the index can hold the low at 800 to 775.
Dow:
Stats: -183.18 points (-2.31%) to close at 7755.61
Volume: 1.658B (-3.1%)
The Dow never really made a run at the 18 day MVA. It recovered from some early weakness but then was hammered lower with the afternoon selling. Volume was lower as with the S&P 500 indicating the selling was not overly vicious. The Dow is still in position along with the other indexes to hold above the recent low on some lighter volume selling and then follow through on the rally attempt next week. Can happen, but the Dow is back below the 10 day MVA (7881.48) and the bottom channel line of the downtrend, meaning it is still entrenched in the trend lower. That has yet to change.
The Chart: http://www.investmenthouse.com/cd/$indu.html
THURSDAY
Dell on Tuesday had some hoping tech was back. AMD after hours Wednesday warned it would miss revenues by over $100 million. Not a real surprise, and the market has a chance once again to try and shrug off some bad news. The selling was not vicious Wednesday, leaving the market with some breath to try another move up. The one-day respite in economic news ends with jobless claims before the open and ISM Services and factory orders at 10ET.
As the downtrend resumed we let our downside plays run and we still continue to look at ripe downside plays as they present themselves. If the indexes bounce at recent lows or support we will be inclined to take them off the table at that point, pocket the gains at that time, and then see whether the indexes can rally or fail once more. At this point the market is quite volatile, running back and forth; that is an attribute of an attempted change and we can let it happen and then act accordingly.
A signal of the lack of downside vigor are the stocks that continue to move up and breakout on strong volume. We are moving in here and there on those stocks that are showing that kind of strength. If this light selling proves just to be some backing and filling before a follow through session next week, those buys will be quite nice. At this point we feel it is worth taking some positions on these stocks moving up; they are holding up and making good upside moves even as the overall market struggles. For now the market is giving some safe harbors and we are taking advantage of that.
Support and Resistance
Nasdaq: Closed at 1187.30
Resistance: The August down trendline at 1190. The 10 day MVA (1210.39). 1230 and 1250 are price resistance points. The 18 day MVA (1232.29). 1270 is still more price resistance from the September lows. The March/May downtrend line at 1277 along with price resistance at 1300. The 50 day MVA (1296.51). 1316, an early August interim high. 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 1358. 1418, the interim test after the September low. That is followed by price resistance at 1500.
Support: Price support from 1190 to 1200 (the July intraday low is 1192.42). 1160 has held twice intraday. There is price support from 1080 to 1100. Then there is a big shelf of support at 1050 down to 1000.
S&P 500: Closed at 827.91
Resistance: The 10 day MVA (841.46). 850 to 855 (the October 1997 and Q2 1998 lows) stopped things Friday. The 18 day MVA (855.10). The March downtrend line at 859. 875 is price resistance of some significance. The 50 day MVA (890.35). July and August interim highs at 911.64. The September 2000/May 2001 downtrend line at 920. The downtrend lines from the March and April highs (928). Price resistance at 950. 965, the September 2001 closing low.
Support: The first bottom channel line in the March downtrend (820). Price support at 800 held Monday. The lowest channel line in the March downtrend channel (780). Then the July intraday low at 775.68 and marks the culmination of the short head and shoulders pattern. 750 to 760 with an intraday touch to 730.
Dow: Closed at 7755.61
Resistance: The lowest bottom channel line of the March downtrend (7765). The 10 day MVA (7881.48). The August lows (8043) and the September 2001 intraday low (8062). The 18 day MVA (8027.39). The September closing low at 8235.81. 8250 acted as resistance before after acting as support. The March down trendline at 8240. The 50 day MVA (8393.77). Some price resistance at 8500. The late July interim high at 8762.14 (8745 closing). A range of resistance from 9000 on up to 9050. Then 9250 and then 9500.
Support: The July low (7532.66). The October 1998 lows are at 7400 and 7467. After that is 7000, at some 1997 lows and highs.
Economic Calendar
9-30-02
Personal income, August (8:30): 0.3% actual, 0.5% expected, 0.0% prior.
Personal spending, August (8:30): 0.4% actual, 0.5% expected, 1.0% prior.
Chicago PMI, September (10:00): 48.1 actual, 53.0 expected, 54.9 prior.
10-01-02
Auto sales, September: 6.1M expected, 6.6M pior.
Truck sales, September: 7.8M exepcted, 8.8M prior.
ISM index, September (10:00): 49.50 actual, 51.0 expected, 50.5 prior.
Construction spending, August (10:00): -0.4% actual, -0.1% expected, 0.0% prior.
10-03-02
Initial claims (8:30): 410K expected, 406K prior.
ISM Services, September (10:00): 51.4 expected, 50.9 prior.
Factory orders, August (10:00): -0.3% expected, 4.4% prior.
10-04-02
Nonfarm payrolls, September (8:30): 6K expected, 39K prior.
Unemployment Rate, September (8:30): 5.9% expected, 5.7% prior.
Average workweek, September (8:30): 34.1 expected, 34.1 prior.
Hourly earnings, September (8:30): 0.3% expected, o.3% prior.
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TEAM TRADES
ACS: The ITS sector continues to have problems, and ACS had rallied on low volume up to resistance at the 50 day MVA. Wednesday it rolled back over on some major volume and we wanted in on that action. When ACS hit the buy and we were ready to look at positions, the put options were 4.80 by 5.10. The stock was moving fairly quickly, but we were able to catch them at the ask. The stock had definitely decided to drop at that point as it barely poked its head back up during the rest of the afternoon until a small bump up late in the day put 50 cents back on price. Options closed at 5.40 by 5.80 as the stock fell on massive volume.
End Part 1 of 2
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understanding the stock market
trend trading stock
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