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understanding the stock market, stock watch
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10/07/02 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts issued Monday: None issued
Buy alerts issued: None issued
Trailing stops issued: BLL
Stop alerts issued: ABFS
THE MARKET
The Nasdaq and Dow cut to new lows while the S&P 500 toiled to hold above the July intraday low at 775. The Nasdaq is starting to get too distant from its July low to be a real test of that level. If the market does not turn and rally from near this point, the odds of it going much lower jump much higher. The selling volume was light, but it is often light on Monday. New highs jumped over 500 on the NYSE, a signal that more and more stocks are now breaking to new lows below the July and August lows. If they are not holding up, the indexes they make up cannot hold up. Strange as it seems, the ball is in the hands of the large caps. It was not too long ago that the large caps were the dog of the market, but now they are the hope of the bulls just as the consumer is the hope for Greenspan and company. That does not seem all that reassuring.
The gloom was of course high again as the indexes failed once again to hang onto the early session gains. That has been constant, and it is easy to fall into the negative mindset whether you play the upside, the downside, or both. You get bombarded with it each day. And whether you are playing to long or short side you have to push aside the gloom and realize that the market is tremendously oversold, that the S&P 500 is still trying to hang on, and that more than likely there is going to be some kind of snap back near term that boosts prices. For now we have to view it as a relief bounce from several weeks of selling, maintaining that 'guilty until proven innocent' attitude you have to have in a continuing downtrend. Maybe it leads to some big upside volume, but that is for the future and not now. We will continue to look at specific stocks to the downside that are in trouble regardless of what the market does, but we are not going to be opening a flood of downside positions here, particularly after some low volume selling with the S&P 500 still above 775. Better to let the market snap back and fail at resistance again to reset the downside plays.
Sentiment Indicators
VIX: 49.18; +2.90. Tapped 50 on the high once again, the August high but well off the 55+ intraday high in July.
VXN: 62.32; +2.04. Back up to the September high but well, well off the 70+ level hit in July and August and the 90+ hit in September 2001. Falling but no one seems to care. That can be a good thing, but it will have to show it.
Put/Call Ratio (CBOE): 1.04; +0.07. Over 1.00 on the close again for, well, is anyone counting anymore? It is not able to produce a turn in and of itself, and the other indicators are not spiking to extremes on the selling.
Nasdaq
A new intraday and closing low for the year as the Nasdaq continues to work into the 1996 prices. It is slipping too far to be considered a test if it does not stem the tide soon.
Stats: -20.5 points (-1.8%) to close at 1119.4
Volume: 1.408B (-11.51%). Volume fell way back but that has been typical action on Monday's and is a tarnished silver lining.
Up Volume: 385M (+106M)
Down Volume: 1.007B (-287M)
A/D and Hi/Lo: Decliners led 2.65 to 1. After a milder showing in the recent selling, the A/D line has turned nose down again.
Previous Session: Decliners led 2.37 to 1
New Highs: 12 (-4)
New Lows: 453 (+88). Not good action as this shows more stocks are breaking down again at the July and August lows. This is right at the level that was hit at that point and you want them to dry up as the old lows are tested. The index continues to nudge lower, dragged by its stocks that are moving down to new lows themselves. This is a sign of weakness and indicates that the July and August lows are going to be something looked up to soon.
The Chart: http://www.investmenthouse.com/cd/$compq.html
New lows all around as the Nasdaq fell below the bottom of the March downtrend channel. It was not a massive breakdown as volume was very low and well below average for the first time in a week, but it does not bode well for the techs. They will most likely bounce fairly soon after 4 straight selling sessions (6 of the last 7). The Nasdaq is setting up a new and steeper downtrend from the August high much as it did in May after establishing the March downtrend. Another down session looks to be the end of this downleg for a rally and test of the short term MVA.
S&P 500/NYSE
Large caps closed at their year low with only the July intraday low at 775 in the way before it too is free and clear for significantly lower lows.
Stats: -15.30 points (-1.91%) to close at 785.28
NYSE Volume: 1.561B (-13.34%). NYSE volume slid back in lackluster Monday trading as has been the case. Unlike the Nasdaq, NYSE volume was above average and it again finished higher than the Nasdaq.
Up Volume: 261M (+1M)
Down Volume: 1.282B (-253M)
A/D and Hi/Lo: Decliners led 3.45 to 1. Really, really ugly in the last hour, moving from 2:1 decliners in the afternoon.
Previous Session: Decliners led 2.95 to 1
New Highs: 39 (0)
New Lows: 505 (+130). Topped 500, a sign that the NYSE is breaking down as more and more stocks hit new lows. That has the effect of lowering the indexes to new lows with them.
The Chart: http://www.investmenthouse.com/cd/$spx.html
Fourth session straight down (after that early day rally attempt that takes place), and the large caps are at the threshold of new lows (775.68). After the fairly intense selling the past three weeks the S&P is getting to a point where it will need a bit of a relief bounce. 775 is the logical point for it to do that though we anticipate now that it will undercut that level slightly before it does make the relief bounce. That is the typical action in this downtrend: let an index that has not done so hit a new low and then cover up the shorts just in case that point turns out to be the one that the bulls find significant. From there we see where it carries. First target is always the short term moving averages and the near down trendlines (from 825 to 850). At that point if the downtrend will take over again or there will be a greater attempt at a rally. A move up here would be the third test of the short term trendlines and you usually get another fall from there before a higher move. That sets up another round of downside plays. That is how we have to look at this right now as there has been nothing to jar the market out of this downtrend.
Dow:
Stats: -105.56 points (-1.4%) to close at 7422.84
Volume: 1.561B (-13.34%)
Broke down below the July and September intraday lows (7532.66 and 7460.78) Monday as it joined the Nasdaq in that new low territory once again. Not widespread slaughter, but specific issues were pummeled (GE). Overall volume was lower but still above average as the Dow slipped for the fourth straight session. It has formed a steeper downtrend from the August high as well, and at the close it was on the bottom of that downtrend channel. After some more downside Tuesday we look for it to try a relief move up toward 7700.
The Chart: http://www.investmenthouse.com/cd/$indu.html
MONDAY
As there will not be any scheduled economic releases until Thursday, the void of economic data will be filled by the President's speech on Iraq, the dockworker situation, and whatever else springs up. Tonight we will see how the President can rally the troops so to speak, but he won't be addressing the economy directly (although removing Hussein would remove some uncertainty and have a positive effect) and more talk of war may not appease the sellers. The best thing to happen now would be for Hussein to go into controlled exile or be overthrown by his own people. While we are in fantasy land, I would also like a new John Deere Gator for Christmas.
The market action is deteriorating as the new lows on the indexes and in individual stocks indicate. Even if there is a breakdown and the SP500 does not hold the market is quite oversold and it would be best to let the stocks and indexes make their relief move before getting too aggressive, particularly with the downside. There are still some good downside plays at this point that will produce results even on a relief move in the market. We will continue to look at those Tuesday and beyond though one thing we are going to be careful of is a market that opens sharply lower. After so much selling already, a sharp move lower that undercuts 775 on the S&P 500 would most likely trigger a short covering rally.
In addition there are upside plays that are still holding their ground very well even with this selling that has been doggedly steady if not vicious at times. These are the stocks that are defying the overall market for now, something not many stocks were able to do in July. An early selloff followed by a rally will most likely move many of these to breakouts. If the market is able to rally at the open on the heels of the President's speech (he manages to finesse a difficult situation of foreign affairs and somehow appease domestic issues), we are going to exercise a lot of caution as this recent action has been marked by early rallies that fail. At this point a test of the S&P 500's intraday low appears inevitable, and any move without a tap at that point would be suspect just because of that given the close proximity. We will give any bounce a chance to fail before we commit; that is typical of what we do anyway when the market starts higher, uptrend or downtrend.
Support and Resistance
Nasdaq: Closed at 1119.40
Resistance: The August down trendline at 1165. The 10 day MVA (1177.90). The July intraday low at 1192.42. Then 1200 and the 18 day MVA (1206.08). 1230 and 1250 are price resistance points. 1270 is still more price resistance from the September lows. The March/May downtrend line at 1265 along with price resistance at 1300. The 50 day MVA (1278.92). 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 1351. 1418, the interim test after the September low. That is followed by price resistance at 1500.
Support: 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 785.28
Resistance: Price resistance at 800 and the September 2000/January 2001 down trendline at 797. The first bottom channel line in the March downtrend (812). The 10 day MVA (822.43). The 18 day MVA (839.57). 850 to 855 (the October 1997 and Q2 1998 lows) and the March downtrend line at 852. 875 is price resistance of some significance. The 50 day MVA (880.26). July and August interim highs at 911.64. The September 2000/May 2001 downtrend line at 913. The downtrend lines from the March and April highs (923). Price resistance at 950. 965, the September 2001 closing low.
Support: Then the July intraday low at 775.68 and marks the culmination of the short head and shoulders pattern. The lowest channel line in the March downtrend channel (770). 750 to 760 with an intraday touch to 730.
Dow: Closed at 7422.84
Resistance: The July low (7532.66) is possible but not much resistance. The 10 day MVA (7725.27). The lowest bottom channel line of the March downtrend (7730). The 18 day MVA (7890.61). The August lows (8043) and the September 2001 intraday low (8062). The September closing low at 8235.81. 8250 acted as resistance before after acting as support. The March down trendline at 8200. The 50 day MVA (8298.60). 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 October 1998 lows are at 7400. After that is 7000, at some 1997 lows and highs.
Economic Calendar
10-7-02
Consumer credit, August (2:00): $4.2B actual, $10.5B expected, $10.8B prior.
10-10-02
Initial jobless claims (8:30): 415K expected, 417K prior.
Wholesale inventories, August (10:00): 0.2% expected, 0.6% prior.
10-11-02
Retail sales, September (8:30): -0.9% expected, 0.8% prior.
Retail ex-auto (8:30): 0.2% expected, 0.4% prior.
PPI, September (8:30): 0.2% expected, 0.0% prior.
Core PPI (8:30): 0.1% expected, -0.1% prior.
Michigan sentiment, prelim, October (9:45): 85.3 expected, 86.1 prior.
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SUBSCRIBER QUESTIONS
Q: I always like looking at your support and resistance values for the three major indices. However, I find them (in my humble opinion) overdone and confusing. There are simply too many values which serve to do little more than make my head spin.
A: When a market is moving down there are many potential support levels, some key, some just possible points were a bounce can occur. A strong downtrend will, as we have seen, snap most support levels as it continues to move lower. It will often hit a level of potential support (either an old high, a trading range, a key moving average) and bounce up from there. That can be used as a trading point or as a bounce to get out of positions that are heading the wrong way. During this bear market that is one of the main reasons we track support levels. The other is to look for those critical levels that may hold as a longer term bottom such as 800 to 775 on the S&P 500. That is a key level as we have noted in the body of the report that can act as a longer term support level. We watch for that but we don't bank on it until you see it hold and then see the markets follow through with buying.
As for resistance points, those are key in the downtrend because those are great points to enter into the downside plays. The 10 and 18 day MVA typically act as resistance in continuing downtrends. Look at the chart of any of the 3 major averages of late and after they try to rally a bit they tend to stall and then move down just below those short term moving averages, testing them on the highs, until the next important support level is hit where they once again try another bounce higher that will either be the end of the selling or just a respite before more selling resumes. Thus while all the numbers may be confusing, in the big picture of the downtrend they fall into place and they have to be looked at in that view as opposed to just a string of numbers.
THE PLAYS:
Upside:
CYH (Community Health Systems--$26.76; -0.34; optionable): Hospitals
http://biz.yahoo.com/p/c/cyh.html
STATUS: Cup w/handle. Working through a 4-month base after rising to its recent peak in June near 30. CYH is now in the second week of its handle, moving laterally on lower, below average volume. Accumulation is positive at 3 up weeks on rising volume to 2 down weeks on rising volume. Holding up very well in a market that is plunging as health services continues to be a safe haven that has not collapsed under this pressure.
Volume: 300.5K Avg Volume: 327.545K
BUY POINT: $27.61 Volume=500K Target=$31.75 Stop=$25.68
POSITION: CYH DE - April $25c (70 delta) and/or Stock
http://www.investmenthouse.com/ci/cyh.html
HCA (HCA, Inc.--$47.48; -0.33; optionable): Hospitals
http://biz.yahoo.com/p/h/hca.html
STATUS: Cup w/handle. Forming the handle to a 3.5 month base. HCA tested the 18 day MVA on the low and closed right at the 10 day MVA as it pulls back from its recent high at 49.42. Accumulation in the base is excellent as 4 up weeks on rising volume to 1 down week on rising volume. The handle volume is up and down; better to see it very low but we note it is lower than it has been of late. The health services sector continues to be one that is acting as a haven in the selling as its stocks form up good bases as the market sells off.
Volume: 2.504M Avg Volume: 2.585M
BUY POINT: $49.52 Volume=3.2M Target=$56.94 Stop=$46.05
POSITION: HCA BI - Feb. $45c (67 delta) and/or Stock
http://www.investmenthouse.com/ci/hca.html
Downside:
SRE (Sempra Energy--$19.2; -0.06; optionable): Electric Utilities
http://biz.yahoo.com/p/s/sre.html
STATUS: Put. Failing the test of the 18 day MVA (20.11). Showed a doji on the session as it tested the 10 day MVA on the high (19.87) and then rolled back down. It has some support at 19, but this is SRE's first test of the short term moving averages after it sold off of its high in late August (24). The selling volume has outpaced the upside volume. Looks ready for a move back down. Some support at 18 and it will probably pause there, but still looks ready for a test of the low.
Volume: 1.126M Avg Volume: 1.208M
BUY POINT: $18.88 Volume=1.2M Target=$16.15 Stop=$20.35
POSITION: SRE MD - Jan. $20p (-50 delta, low OI)
http://www.investmenthouse.com/ci/sre.html
End Part 1 of 2
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understanding the stock market
stock watch
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