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us stock market, understanding the stock market
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10/08/02 Technical Traders Report Update
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Tuesday: None issued
Buy alerts issued: MCHP;
Trailing stops issued: PFE
Stop alerts issued: AMGN; UNT
You can sign up for Technical Trader alerts at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Technology glitch initiates buy programs that are reversed late in the session.
- Volume surges on some short covering as S&P 500 taps at intraday low.
- Subscriber questions
Market rallies on the lack of bad news.
It was not so much great news but the lack of bad news that allowed the market to bounce after 4 consecutive down sessions. The President was going to invoke Taft-Hartley to stop the west coast port shutdowns, the President's speech on Iraq was seen as signaling that war was not imminent, and the market was simply ready to move up after a fairly steep selloff. That started the move and then some market mechanics came in to really make things strange.
There was a bounce higher, but we were watching the spread between futures and fair value. They indicated that there was no real reason for big buyers to step in and buy. Indeed, the SP500 was working its way lower and lower after its early morning bounce. A few downside plays were hitting buy points and it looked as if the selling was going to resume based on the spread.
Well, as it turns out, there was some erroneous data on one or more data systems that indicated the spread was different and that made stocks look much more attractive. That set off some buy programs that pushed the indexes up off of their lows and to their highs in two short hours; a big swing in the action. Thus plays that were doing what they should have been reversed when the erroneous data hit and the buy programs initiated. We were trying to figure out what was going on when we discovered from one of our brokers that there was a discrepancy in the data. Right after that (about an hour before the close) was when everyone became aware of what was going on. Right at that point the market started to turn back down as those buy programs that were initiated on the erroneous data were being reversed. That pressured the Dow to close 120 points off its high, the Nasdaq 14 points, the S&P 500 10 points. In a strange way it made sense out of what was not making sense to us early in the day based on the data we were seeing (which was the correct data).
THE MARKET
Technology is great, but it is only great as the information it carries. The inaccurate data made the day trade differently from what it normally would have done, but it also traded as you would expect after 4 down sessions: once there was a bit of a relief move on some not so bad economic news there was some short covering and some bargain hunting that pushed the indexes higher. The buy program added some volume onto that action.
All of that aside, look at the action versus the internal numbers. Decent upside point gains on a rather dramatic increase in volume, but the A/D lines for the NYSE and Nasdaq were negative. New lows still churned near 500. The day was not as powerful as the volume would suggest. Narrow gains on strong volume as the battered large cap stocks recovered some of their recent losses. That is not a broad surge that would signal that 775 on the S&P 500 held and set off a broad surge in buy-side interest, but is more an indication of short covering in the beaten down stocks. As we have said before, rallies usually start with short covering, so this is not necessarily a bad thing. Still, in this downtrend this action is typical after several sharp selling sessions, and until there is a true surge in upside volume coupled with strong breadth and a follow through as well the trend remains in place.
Sentiment Indicators
Back down on a rally though still at levels considered high. Not extreme that would lead to a reversal, just the same high levels they have held for the past three months.
VIX: 46.46; -2.72
VXN: 61.16; -1.16
Put/Call Ratio (CBOE): 0.9; -0.14
Nasdaq
Rallied, sold to a new intraday low, and then managed a modest gain. Inauspicious and it looks a lot like those mid-decline rally pauses that precede further selling in the current decline from resistance. A lot depends upon what the big money does on the large cap index as well.
Stats: +9.81 points (+0.88%) to close at 1129.21
Volume: 1.841B (+30.72%). Big surge in volume, pushing well above average after Monday took it below average for the first time in over a week.
Up Volume: 770M (+385M)
Down Volume: 1.053B (+46M). Despite the rally, down volume outpaced up volume. Not much strength there.
A/D and Hi/Lo: Decliners led 1.08 to 1. Decliners leading on a rally. They were not even ahead when the Nasdaq was at its session high. No power to the move; short covering.
Previous Session: Decliners led 2.65 to 1
New Highs: 8 (-4)
New Lows: 459 (+6). New lows remained strong even as the market rallied. Another sign of the lack of strength in the Tuesday action.
The Chart: http://www.investmenthouse.com/cd/$compq.html
Nasdaq hit a new low intraday (1109.64) and recovered to show a tight doji on the close. Volume jumped on the sell off and reversal, and that with the doji can indicate that there were buyers that came into the market and pushed it back up, finally overtaking the sellers that had been in control the prior fours sessions. We do know that some of that was the result of some information glitches and the majority of Nasdaq stocks traded lower on the session. Nasdaq closed just below the bottom channel line of the March downtrend. After four selling sessions the Nasdaq is due for a rally up to the short term resistance (10 day MVA at 1169.05), and despite the strange action today that would seem most likely. For the same reason (technical glitch), however, it could just be a pause before the rest of this down leg continues.
S&P 500/NYSE
Held just above the 775 intraday low and rallied back up. This is what it needed to do, but it did not bring in much buy side interest.
Stats: +13.27 points (+1.69%) to close at 798.55
NYSE Volume: 1.913B (+22.53%). Heaviest volume in over two months held the large caps at key support.
Up Volume: 1.116B (+855M)
Down Volume: 804M (-478M). Unlike the Nasdaq, NYSE up volume managed to edge downside volume.
A/D and Hi/Lo: Decliners led 1.12 to 1. Decliners continued to lead as the market moved higher. Narrow advance.
Previous Session: Decliners led 3.45 to 1
New Highs: 28 (-11)
New Lows: 498 (-7). Barely budged on an up day.
The Chart: http://www.investmenthouse.com/cd/$spx.html
It did in fact move down to test 775 once again as anticipated, and it picked up some buying at that point. On the high the index hit 808.86 but it backed off to close below resistance at 800. The S&P 500 continues to be the focus of the market as it has yet to break its July lows. The upside action Tuesday was not powerful. It needs to pick up more upside breadth and volume as well, but right now that is not showing itself. We at least want it to rally up to the 10 day MVA (818.08) or the August down trendline at 822 to set up better downside action if the action remains weak and does not deliver a strong move up off of this last point of perceived support.
Dow:
Stats: +78.65 points (+1.06%) to close at 7501.49
Volume: 1.913B (+22.53%)
Ran up to 7622 on the high for the second consecutive session, but the Dow could not hold the gain as well as the buy programs that helped boost the rally were reversed in the last hour. On the low (7331.42) it again tapped the bottom channel of the August down trendline. The Dow is still trending lower, now banging around in that new channel from August that is a bit steeper than the March downtrend. A bounce up to the 10 day MVA (7684.83), the August down trendline at 7725 or the 18 day MVA (7849.65) would be the preferred action before further resumption of the downtrend. Tuesday's action where the Dow rallied but gave back 100 points late is not that inspiring.
The Chart: http://www.investmenthouse.com/cd/$indu.html
WEDNESDAY
Again no scheduled economic release for Wednesday, so the market will be controlled by the California dock situation, the debate on Iraq, and even statements from the administration. Either the administration is very adept at subtly delivering a message or it simply cannot stay focused. From everything we hear the president will get his Iraq resolution in a few days, and it will be a super majority that votes for it. With that basically in the bag the administration is starting to talk economy a bit. Whether it is fear that voters are put off by all the war talk and no economy talk or just a shift to the other important issue confronting the nation after defense issues are taken care of is left up to you. In any event the administration started talking economy today regarding the west coast ports and we hear there is going to be some more said about economic issues. Talk is easy of course.
That may help to placate the market, however, depending upon what is said. The market continues to give a no confidence vote to the economy. A speech about terrorism insurance was met with a market sell off. That obviously is not what the market thinks will cure the economic problems. It started to really buckle again in late August when word was hitting that the administration was going to drop any push for further immediate economic stimulus in the form of tax credits, accelerated depreciation, expanded deduction for investment losses or other investment related incentives to get individuals and businesses once again investing in America. If the administration starts discussing that package again and puts a serious timetable on it, the market will take some heed.
That sounds great, but we are not counting on that tomorrow or even this week. What Tuesday showed was a short covering move that was narrow in scope. It may have enough push to take the indexes up to the next resistance at the short term moving averages or August down trendlines if it can garner any further buy side activity Wednesday. In this downtrend we have often seen a test of the resistance that starts the next selling. After a few down sessions the indexes try a one-day reversal; that often fails and is followed by a couple more down sessions before the next serious move continues.
This one is a bit different as the S&P 500 has that critical July low at 775 that acted as a catapult Tuesday. That could push it up to the short term moving averages from here before another round of selling takes hold. We will watch to see if that broadens out into a stronger move, but we will not be expecting it to do so.
For tomorrow we have some downside plays that are ready to go from the Tuesday close but would really benefit from another day or two move up; indeed a brief move higher would really set up a lot of downside plays. Some good news continues to leak out in dribbles; SLE (Sara Lee) said its Q1 would exceed expectations. Seems people like to stoke up on desserts when times don't look so good. That kind of news may fuel a further move up to test the near term resistance before the downtrend resumes.
Support and Resistance
Nasdaq: Closed at 1129.21
Resistance: The August down trendline at 1155. The 10 day MVA (1169.05) is the point where we start looking for it to stall. The July intraday low at 1192.42. Then 1200 and the 18 day MVA (1197.99). 1230 and 1250 are price resistance points. 1270 is still more price resistance from the September lows. The March/May downtrend line at 1260 along with price resistance at 1300. The 50 day MVA (1273.05). 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 1349. 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 798.55
Resistance: Price resistance at 800 and the September 2000/January 2001 down trendline at 795 held Tuesday. The first bottom channel line in the March downtrend (811). The 10 day MVA (818.08). The 18 day MVA (835.25). 850 to 855 (the October 1997 and Q2 1998 lows) and the March downtrend line at 850. 875 is price resistance of some significance. The 50 day MVA (877.06). 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 (921). 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 (768). 750 to 760 with an intraday touch to 730.
Dow: Closed at 7501.49
Resistance: The July low (7532.66) is possible resistance. The 10 day MVA (7684.83). The August down trendline at 7725. The lowest bottom channel line of the March downtrend (7728). The 18 day MVA (7849.65). 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 8150. The 50 day MVA (8267.34). 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: As for the latest newsletter (Monday, October 7th), The Economy section appears to be more receptive to the double dip recession possibility than in the past based on potential falling consumer confidence. I know you've quoted ECRI before. After a quick scan of their web site they still seem inclined for a slow expansion without the relapse. Any ideas on why ECRI feels the recovery is still on track, albeit slowly, when what appears to be their best indicator is falling?
A: The reason ECRI sees things as still on track are two-fold. First, the ECRI is above where it was back in the 1981 and 1991 recessions and recoveries. Second, its inflation indicator is pointing higher, and they are interpreting that as indicative of a recovery as well.
Here is why I am not 100% in line with ECRI right now. As usual, it is interpretation of the actual numbers not the numbers themselves ("Forecasting is always difficult, especially when it is about the future".). While the overall numbers may be higher, the economy also started from a relatively higher level before the crash, and the bottom was not as low as those prior recessions. That gives the appearance that things are not as bad as they are. Think of it as shifting higher on the scale; the magnitude of the drop was as great (actually greater) than in the prior recessions but the fall started from a higher point. Thus the ECRI can still give higher numbers because the economy did not fall as low on the prior scale set by the prior recessions even though the absolute fall was further and harder. That is why I also don't buy into the textbook definition of recession; there has been recession based on declining growth a lot longer than the 2 to 3 quarters officially labeled the recession.
In sum, I think it is a case of falling in love with your indicator and not putting it in its relative place in the bigger picture.
End Part 1 of 2
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us stock market
understanding the stock market
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