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us stock market, understanding the stock market
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10/09/02 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts issued Wednesday: None issued
Buy alerts issued: ZQK; FAF; ACAS
Trailing stops issued: None issued
Stop alerts issued: None issued
THE MARKET
At first blush things look pretty ugly for the market. Second blush does not clear things up much either. Internals were massively weak. The NYSE A/D line was 6.25:1 late in the session but 'rallied' to close at just 5.96:1. A mid-session rally was shoved back as the indexes closed at the lows. Small caps were brutalized the most, closing at a new 3-year low. That is another vote of no confidence for the economy as small caps usually perform well in a post-recession market.
The techs tried to show some relative strength most of the session, attempting to recoup some of the losses over the past week. In the end it failed, but the large cap tech stocks are trying to make a stand. Many of the big names held recent lows, finishing flat or slightly higher (e.g., CSCO, QLGC, QCOM, KLAC). They are not demonstrating overly strong patterns (mostly descending triangles, a bearish look), but they are not imploding lower. The Nasdaq may try to lead the next relief move that lasts more than a session.
The lynchpin for the market is still the SP500. Until it breaks free of 775 the market is being held somewhat in limbo. Somewhat; there can be no doubt that the overall trend remains down. The question is whether the SP500 breaks down as well and sends things cascading lower.
And that brings up the next issue: what does happen when 775 is broken? Preferably it would be broken early Thursday (though futures are up after the close, somewhat blunting the drive to close at the lows Wednesday) in a continuation of the selling. That would trigger some institutional sell programs that could really get things frothy to the downside. After that we would anticipate a pretty stellar short covering rally. The market has typically turned right back up in short covering after an index breaches a major level. That would be good for a nice and wild ride to the upside with some index options. At the Wednesday close that is what it was shaping up to be, but some positive YHOO earnings and some positive biotech news are lifting stocks slightly after hours.
Sentiment Indicators
Sentiment indicators moved up again, but are hardly moving in proportion to the selling. While there was a lot of glum faces on another lack of 'follow through' to Tuesday's rally, fear was not very high. Investors are either not scared by just another round of selling or they are catatonic by virtue of the arguably the nastiest bear market in U.S. history.
VIX: 49.48; +3.02. Up to the August high level again. That does not push it to major fear levels.
VXN: 62.38; +1.22
Put/Call Ratio (CBOE): 0.92; +0.02
Nasdaq
Another new closing low, but the Nasdaq manages to hold above recent intraday lows, selling on lower volume. The techs are trying to mount a move up to at least test the downtrend.
Stats: -15.1 points (-1.34%) to close at 1114.11
Volume: 1.76B (-4.36%). Above average but lower on the selling. Not total dumping of techs; of course they have already been sold hard up to this point.
Up Volume: 841M (+71M)
Down Volume: 852M (-201M). Very close action, another indication that the selling was not that harsh.
A/D and Hi/Lo: Decliners led 2.85 to 1. The selling did broaden out, but it was a picnic compared to the NYSE.
Previous Session: Decliners led 1.08 to 1
New Highs: 10 (+2)
New Lows: 500 (+41). Not good, rising to 500. This indicates that more and more stocks are hitting new lows, unable to hold the prior lows on the earlier low.
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq basically moved laterally Tuesday even with the loss. It has dropped to this 1115 level and moved more or less laterally the past three sessions. Wednesday it was relatively stronger, three times mounting rallies that were ultimately pushed back. Many of the big names held up once again and look ready to mount a move higher. The Nasdaq usually starts the moves up and the moves down; it looks ready to start another move up to test the near term resistance, most likely the 10 day MVA (1159.06) or the 18 day MVA (1189.16).
S&P 500/NYSE
Closed on the last remnant of support after playing with it all week. A more definitive moves looks to be in the mix.
Stats: -21.79 points (-2.73%) to close at 776.76
NYSE Volume: 1.803B (-5.71%)
Up Volume: 261M (-855M)
Down Volume: 1.569B (+765M)
A/D and Hi/Lo: Decliners led 5.96 to 1. This is as ugly as it has been, and it demonstrates that the selling is getting much more intense as more and more areas are being dragged down.
Previous Session: Decliners led 1.12 to 1
New Highs: 19 (-9)
New Lows: 608 (+110). Higher than in July.
The Chart: http://www.investmenthouse.com/cd/$spx.html
Three drops to test 778, closing at the session lows but still hanging on by its teeth. Volume was solid but it did back off on the selling; not too much comfort there. There was very negative sentiment at the close, and if it holds over (some positive tech news might help early Thursday) the S&P could undercut 775 early. If it does that will trigger more selling momentum as sell programs kick in. After that downdraft, however, we anticipate that short covering rally that is typical in this market after a new low is hit.
Dow:
Stats: -215.22 points (-2.87%) to close at 7286.27
Volume: 1.803B (-5.71%)
No real attempt to move higher, trending lower the entire session. The Dow closed on its low, thudding down to the bottom channel of the August downtrend and also the May down trendline. It is now in 1997 territory with the next level of support at 7100 from March 1997 tops. Then 6975. There is not a lot holding the blue chip index up.
The Chart: http://www.investmenthouse.com/cd/$indu.html
THURSDAY
The economic news cycle begins again with jobless claims before the open and wholesale inventories at 10:00. Inventories are not that great a thing right now; with a slowing economy and a slowing production sector as seen with the recent ISM, rising inventories indicate lack of consumption. This will be distorted by the west coast dock issues as no one really knows how much inventory has been held up, etc. Thus the number will be even less useful than usual.
Futures were up after hours in relief from the selling as YHOO beat the street by a penny and IDPH had some good news on a drug. The Nasdaq is trying to hold the line in anticipation of a relief move. What we would like to see is a continuation of the selling on the S&P and then a reversal rally. The market is very oversold. In this downtrend it tends to do just what it has done the past week: sell down hard, pause a day in a short covering move, then sell off again for a few sessions before making a relief move up to resistance that lasts more than one session. The fact that the Nasdaq has moved more or less laterally the past 3 sessions indicates that the market is ready to give a better relief move after another punch to a new low for the S&P 500. As indicated above, we would use an early plunge that generates a lot of fear as a time to go ahead and take profits on those put positions at or close to targets (most will be there if that occurs). Then we will look at some index options on the way back up to try and catch what could be a furious short covering rally.
When that rally ends near the short term resistance after a couple or more sessions, we look for more downside action from stocks and the indexes. Remember that until the market breaks the trend we are predominantly playing that trend. If the S&P 500 breaks 775 Thursday, that cracks the ice to the downside. An index can break support and recover and never come back again. A lot of people are looking at that given the oversold condition and the fact that it is October. That may or may not mean something. That is the 'perfect scenario' we laid out, but that is just a scenario. We like proof, and that comes with a huge upside follow through, something that has not been approached recently. Heck, they cannot even get above the near term moving averages. Unless there is such a follow through a week or so after the breach, we can bet the index is coming back through it.
Support and Resistance
Nasdaq: Closed at 1114.11
Resistance: The August down trendline at 1148. The 10 day MVA (1159.06). Then 1200 and the 18 day MVA (1189.16). The July intraday low at 1192.42. 1230 and 1250 are price resistance points. 1270 is still more price resistance from the September lows. The March/May downtrend line at 1252 along with price resistance at 1300. The 50 day MVA (1266.82). 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 1345. 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 776.76
Resistance: Price resistance at 800 and the September 2000/January 2001 down trendline at 794. The first bottom channel line in the March downtrend (808). The 10 day MVA (810.57). The 18 day MVA (829.10). 850 to 855 (the October 1997 and Q2 1998 lows) and the March downtrend line at 848. The 50 day MVA (873.12). 875 is price resistance of some significance. July and August interim highs at 911.64. The September 2000/May 2001 downtrend line at 911. The downtrend lines from the March and April highs (919). Price resistance at 950. 965, the September 2001 closing low.
Support: The July intraday low at 775.68; that point also marks the culmination of the short head and shoulders pattern. The lowest channel line in the March downtrend channel (765). 750 to 760 with an intraday touch to 730.
Dow: Closed at 7286.27
Resistance: The July low (7532.66) is possible resistance. The 10 day MVA (7612.36). The August down trendline at 7705. The lowest bottom channel line of the March downtrend (7720). The 18 day MVA (7790.35). 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 8135. The 50 day MVA (8228.86). 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: 7100, the March 1997 tops. 6975 is next.
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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TEAM TRADES
ZQK: In the apparel sector, ZQK was in the process of failing a test of the 200 day MVA Tuesday, setting up Wednesday's play. We were very cautious today, waiting for the initial selling to abate, a rebound to occur, and then that rebound to top out. It started to do that between 9:30 and 10:00 CT. At that point ZQK had been moving laterally but then started to break below the early lows. That was our cue to enter. The November 25 puts were trading 4.40 by 4.80, the February 5.20 by 5.70. We decided to split up the buy with some of each in case we got a long ride lower. The November moved on us by the time we entered the order so we had to settle for 5. We missed the February buy, and we decided not to chase it after waiting for it tom come back a bit. Can't complain as the stock continued to tank all session and the options closed at 5.80 by 6.10.
THE PLAYS:
Upside:
BBI (Blockbuster--$25.12; +0.72; optionable): Music and videos
http://biz.yahoo.com/p/b/bbi.html
STATUS: Test 50 day MVA. The movie stores are making high volume moves up off of support that tests the breakout over that level. For BBI that is the 200 day MVA at 24. Wednesday it defied the market, rallying on very strong volume. We are looking at this as a trade up to the recent highs. Relative strength is breaking out and money flow is leading the stock higher.
Volume: 1.107M Avg Volume: 451.818K
BUY POINT: $25.24 Volume=600K Target=$28.65 Stop=$23.47
POSITION: BBI AX - Jan. $22.50c (67 delta) and/or Stock
http://www.investmenthouse.com/ci/bbi.html
UHS (Universal Health Services--$52; +0.7; optionable): Hospitals
http://biz.yahoo.com/p/u/uhs.html
STATUS: UHS is forming its handle to its 3.5 month base after it surged late last week on a good jump in volume to complete the base. You could argue it formed the handle in the mid weeks of September and made the breakout move the last few days of that month. Either way there is a good test of the move ongoing right now just below the pre-correction high at 52 back in June. Good volume move Wednesday as it moves laterally above the 10 day MVA (51). Accumulation is positive at 4 up weeks on rising volume to 3 down weeks on rising volume.
Volume: 700.1K Avg Volume: 578.363K
BUY POINT: $52.12 Volume=800K Target=$58.25 Stop=$49.95
POSITION: UHS AJ - Jan. $50c (66 delta) and/or Stock
http://www.investmenthouse.com/ci/uhs.html
Downside:
ACDO (Accredo Health--$42.38; -1.18; optionable): Specialized health services
http://biz.yahoo.com/p/a/acdo.html
STATUS: Testing the 10 day MVA. After blasting below 40 early in the week, ACDO rallied back up to the 10 day MVA (44) on very low volume. It hit that level and turned back down Wednesday. Looks ready to head down from here.
Volume: 625.283K Avg Volume: 756.09K
BUY POINT: $42.25 Volume=850K Target=$38.65 Stop=$44.75
POSITION: DZU WI - Nov. $45p (-54 delta)
http://www.investmenthouse.com/ci/acdo.html
WAG (Walgreens--$32.53; +0.21; optionable): Drug stores
http://biz.yahoo.com/p/w/wag.html
STATUS: Put. WAG is testing its breakdown, rallying off 30 to try the 18 day MVA (32.69) intraday but failing to hold a move over that level as volume backed off to average levels. It is exhibiting the signs of a test of the breach and the downtrend that formed in August. Looking for a rollover here.
Volume: 3.274M Avg Volume: 3.34M
BUY POINT: $32.28 Volume=3.5M Target=$30 Stop=$33.35
POSITION: WAG MG - Jan. $35p (-61 delta)
http://www.investmenthouse.com/ci/wag.html
End Part 1 of 2
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us stock market
understanding the stock market
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