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us stock market, top stock pick
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10/10/02 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts issued Thursday: CCCG
Buy alerts issued: BBI; OEX; WAG; ETR
Trailing stops issued: None issued
Stop alerts issued: BYD; MCHP
THE MARKET
The action went pretty much to script with the exception that the indexes tried to rally off the bat. They fell, the S&P 500 made a quick, sharp breach of the 775 level, and then a surge of buying. The usual question of whether this was the bottom came up about every 15 minutes on the financial stations. I would love to hear someone say "Who the hell knows? It looked good, it was the right place and time of the year, but it was too much too fast, it was too narrow, and we won't know anything until the institutions either buy or don't buy next week." But that is not what financial news headlines are about and that is okay. We like hearing what they have to say and why as it shows where the mainstream thought is.
Okay, what is the scorecard saying after Thursday? It was a start. It was short covering as usual that set the next rally in motion. It occurred on the heels of Tuesday's failed short covering rally, so there is something brewing here to the upside. Certainly the market is oversold and that led to the rebound when the S&P 500 undercut its low. The shorts started to cover, there was some buying, there was some more short covering. That is how rallies have to start after a decline; the shorts start covering just in case. It leads to the fierce rallies that we really don't like. In this downtrend these blistering upside moves tend to burn off the fuel in a hurry. Smaller, steady gains with great breadth and buy side volume are what really show a solid rally. That, however, is what we look for next week. We see if this rally holds onto most of its gains through next week and then see if it can put on another good show Tuesday through Friday with another big point gain along with some breadth and strong up/down volume.
What do we mean? Thursday's rally was very narrow despite what was said on the financial stations. NYSE breadth was 1.6 to 1. That is weak. Typically when the market was flopping back and forth the A/D line ran 2+:1 either way. When you consider that Wednesday saw decliners leading 6:1, you can see that the Thursday advance was weak. That is a sign of short covering. Not a bad thing necessarily to start the rally, but it will have to do what it has not done successfully in the bear market, and that is provide a really solid follow through next week.
What else. New lows were still very strong on the NYSE and Nasdaq even on a strong move up in the major indexes. That again demonstrates the move was narrow as select stocks advanced and left many still heading to new lows. New lows got a bit out of hand on the recent drop, at least more than you normally want to see on a test (over 600 on NYSE Wednesday). That is a sign of weakness at the critical test of the prior low.
All in all Thursday was a start after the last rally attempt was trashed when the indexes hit new lows. The move was too strong (they tend to burn out of fuel when they do that), but it can test back a bit and be ready for the follow through next Tuesday through Friday. And that is the key. The rally started at the right place and at the right time (October after the selling in September and October to test the prior low), doing so with the short covering that usually starts such a move. In order to mean something other than the usual trip up to the short term moving averages or down trendlines the big money will have to move in next week and post some follow through sessions where the averages again post strong point gains but do so with an A/D line at 3:1 with up volume blowing down volume out of the water. We would like to see 2 or 3 such follow through sessions. That would show that after the initial short covering the institutions were back in buying stocks in earnest.
You sit back and say how can they be interested right now? The economy still looks crappy, there is war on the horizon, the consumer is slowing, security costs are leaping, deflation is brewing, etc. It looks too bleak for any market bottom. Well, it was just as bad in 1974 and the market bottomed when most indicators said it was going lower. At this point we have to fight back our natural skepticism of the market after 2.5 years of bear market action and look at the action with as poised an eye as possible. Fight the uncertainty and just ask yourself is the market showing the signs of a bottom it has shown each prior bottom? If it gives the follow through and there are those good stocks breaking out (and many held up in their patterns during the last test unlike in June), we have to go with what the market is showing and not what our guts are screaming. If it reverses again we get out and move downside. If it fails to give the follow through the plays are set up for downside. Our gut says there is some upside rally of magnitude here, but everyone has a gut. The market will tell the story.
Sentiment Indicators
Bulls/Bears: Bears stormed past bulls at 39.1% to 31%, the largest disparity in the bear market. In July this led to a rally, and in conjunction with the VIX at 50 and the put/call ratio repeatedly closing over 1.0, the foundation for a rally is set, and then whether follow through comes later remains to be seen.
VIX: 46.29; -3.19
VXN: 62.82; +0.44
Put/Call Ratio (CBOE): 0.97; +0.05
Nasdaq
It was looking as if it wanted to mount a move up, and it was leading on the way Thursday.
Stats: +49.26 points (+4.42%) to close at 1163.37
Volume: 1.842B (+4.62%). Another surge in volume, again on buying. Shorts were driving this action, but the volume was the highest since July.
Up Volume: 1.571B (+730M)
Down Volume: 242M (-610M). Good up to down volume, but now blowout yet.
A/D and Hi/Lo: Advancers led 1.58 to 1. Rather anemic breadth.
Previous Session: Decliners led 2.85 to 1
New Highs: 15 (+5)
New Lows: 413 (-87). Lower but still high given the move.
The Chart: http://www.investmenthouse.com/cd/$compq.html
Managed to take out the 10 day MVA (1159.84) on the close, something it has not done with any authority since its recent top in August. There was a lot of momentum Thursday and there may be a carry over up to the 18 day MVA (1186.44) Friday and then a bit of a rest where it gives back some of the gains before attempting a follow through. This gets to be the tricky point; the market is thus far acting as it has usually done in the downtrend as another index made a key low and then the shorts covered. After a run to the 18 day MVA will it resume the fall or will any pullback be just a few consolidation days before a follow through. The only reason it gets this scrutiny is the S&P holding at the low and it being October and a potential double bottom. We will take care of positions as usual, both upside and down, as if it was normal action, and then we will be in position for whatever comes our way.
S&P 500/NYSE
The undercut led to a lot of covering and a big surge to the 10 day MVA.
Stats: +27.15 points (+3.5%) to close at 803.92
NYSE Volume: 2.023B (+12.21%). Strongest volume since it came off the July low.
Up Volume: 1.649B (+1.388B)
Down Volume: 394M (-1.175B)
A/D and Hi/Lo: Advancers led 1.64 to 1. As with the Nasdaq, anemic breadth. It was short covering, but rallies always start with short covering.
Previous Session: Decliners led 5.96 to 1
New Highs: 18 (-1)
New Lows: 569 (-39). Still a lot of new lows with such huge gains on all of the indexes.
The Chart: http://www.investmenthouse.com/cd/$spx.html
775 was tested out of the box and a rally started. It faded and the index came crashing back through that point. That looked good for much more downside action as stocks were falling apart. After a furious plunge it turned on a dime and rallied up to the 10 day MVA (as shorts were falling all over themselves to cover). The 18 day MVA (826.45) is still a good run up from the close and it has yet to clear the 10 day MVA (809.36). Those remain the key levels to watch on a closing basis as they have been the roadblocks during this most recent leg lower. They are the initial steps, and if the S&P cannot clear them it is really in trouble. Now it may move up to those levels and then stall some. If the selling is contained that is okay as long as a follow through occurs Tuesday through Friday. The S&P is showing the perfect scenario action; now it has to follow through.
Dow:
Stats: +247.68 points (+3.4%) to close at 7533.95
Volume: 2.023B (+12.21%)
From the bottom of the August channel to almost the 10 day MVA (7598.11) in a single bound. It is also about a point over its intraday low back in July. The Dow is basically following the S&P 500's lead at this point, and it still has to tackle the 18 day MVA (7763.36), a point it has not been even able to reach on this selling since August.
The Chart: http://www.investmenthouse.com/cd/$indu.html
FRIDAY
The economic data did not scare anyone Thursday, and Friday's retail sales report may be a non-event unless it comes in really low. Michigan sentiment is out 15 minutes after the open; that is always good for a hiccup or two. Thursday, however, economics did not seem to matter that much; the market had been roughed up and spit on and it was ready to rally if given the nod.
After such a big move you could expect to see some follow through and then some hesitation. After all it won't take much to get the indexes up to territory that has manhandled them during this trip lower, namely the 10 and 18 day MVA. A run up to those levels would almost assuredly lead to some profit taking after a big move higher. And of course there will be shorts trying to run the market lower. The intensity of the selling on this last trip lower, however, was nowhere near the intensity of the July selling. They had the chance to crack things wide open to the downside, but they did not push it Thursday.
The day saw some good breakouts and it saw some put plays reverse. Many of those plays closed below the near term resistance points so we are going to see how they respond to those levels. Most hit those points in the afternoon and fell back toward the close, some on lower volume and some on rising volume. The low volume moves we can live with if they roll back over; the higher volume moves require closer scrutiny. We would rather cut them off if they break resistance and are holding onto it near the close and see what happens with the indexes and then move back in more aggressively. We have not been going all out to the upside or downside during this period as we watch what the market is going to do with the S&P 500 July low. So far it is bouncing almost to a script written on Wall Street, but one session does not make a confirmed rally.
Again we saw solid stocks breaking out after holding their patterns during the recent selling. That is one thing that was different from July and it provides more weight to the rally argument. As the move continues up we will focus on those. Thursday was a day that saw the trampled stocks make recoveries for the most part. That should also turn into breakouts from quality patterns as things progress. Indeed the shorts cover positions on the hammered stocks, then the buyers buy the stocks that have been accumulated all during the selling if there is going to be a more sustained move; that is where the follow through comes in as the shorts hand the baton to the longer term buyers. If the baton is dropped, the shorts pick it back up running the other way.
Friday we expect a quieter session though it could still make its way toward the 18 day MVA. It could also be just a slow day that goes nowhere. That may be the best bet in the longer run for a continued upside move. If the market moves too far too fast it uses up its ammunition and leaves itself open for a harder fall. Better to rally then just pause more or less in place for a time to allow some consolidation and then the follow through. Otherwise there is that risk of that all too common flameout seen in this bear market as furious rallies following prolonged selling shine bright then burn out. We are going to focus on the quality upside plays while the market moves up and tests resistance. If it fails at that point the better patterns will try to hold the gains while the laggards that ran up turn and tank. It is those that we will look at to the downside if that action develops. There were some even today that stalled at first resistance and could be plays if the market does the same. We would prefer to see those set up for another session or two, however, before moving back in.
Support and Resistance
Nasdaq: Closed at 1163.37
Resistance: The 18 day MVA (1186.44) and then 1200. 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 1250 along with price resistance at 1300. The 50 day MVA (1262.76). 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 1342. 1418, the interim test after the September low. That is followed by price resistance at 1500.
Support: The 10 day MVA (1159.84) is possible, but not great support on a failed rally. 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 803.92
Resistance: Price resistance at 800 has not totally been cleared. The first bottom channel line in the March downtrend (805). The 10 day MVA (809.36). The 18 day MVA (826.45). 850 to 855 (the October 1997 and Q2 1998 lows) and the March downtrend line at 846. The 50 day MVA (870.41). 875 is price resistance of some significance. July and August interim highs at 911.64. The September 2000/May 2001 downtrend line at 910. The downtrend lines from the March and April highs (916). Price resistance at 950. 965, the September 2001 closing low.
Support: The September 2000/January 2001 down trendline at 792. 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 (764). 750 to 760 with an intraday touch to 730.
Dow: Closed at 7533.95
Resistance: The July low (7532.66) has not been totally cleared. The 10 day MVA (7598.11). The August down trendline at 7675. The lowest bottom channel line of the March downtrend (7690). The 18 day MVA (7763.36). 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 8125. The 50 day MVA (8201.61). 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): 384K actual, 415K expected, 417K prior.
Wholesale inventories, August (10:00): 0.2% actual, 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
HLYW: HLYW caught our eye early in the week as it tested its break over its 200 day MVA on low volume and started up Wednesday on high volume. Good accumulation to boot. Thursday HLYW was up fast but then moved laterally for the next 45 minutes. We were watching this one closely. It blew past the buy point early and we were seeing if it would come back a bit. It showed strength when the market turned down as it just moved laterally as noted. When the SP500 bounced, HLYW started up out of the lateral consolidation. That was too much. The stock was at 18.50 and the options were 4.40 by 4.80. We went for both, feverishly putting in orders (did not have them pre-entered; that can be a problem at times). Turned out okay, however, as the stock ran up but tested lower once more before it really started to run. That saved us on the positions. The stock flew, fought off some afternoon weakness, and then rallied to the close. A momentum play but with great accumulation and volume as well.
THE PLAYS:
Upside:
BLUD (Immucor--$20.07; +1.09; optionable): Diagnostic substances
http://biz.yahoo.com/p/b/blud.html
STATUS: Breakout. After moving laterally just over resistance at 18 the past week on low volume, BLUD was just waiting for a rally. It came and BLUD took off on some very strong volume. We want to go ahead and get in on this move.
Volume: 921.875K Avg Volume: 331K
BUY POINT: $20.22 Volume=650K Target=$24.24 Stop=$18.75
POSITION: QMQ CW - Mar. $17.50c (73 delta) and/or Stock
http://www.investmenthouse.com/ci/blud.html
QCOM (Qualcom--$29.92; +2.01; optionable): Telecom equipment
http://biz.yahoo.com/p/q/qcom.html
STATUS: Trading range. QCOM had traded up to the top of its 4-month trading range (24 to 30), holding the past two weeks above the mid point at 28 (the 50 day MVA is at 28.37). Money flow is racing up ahead of the stock. Accumulation in the trading range is solid at 5 up weeks on rising volume to 2 down weeks on rising volume. With a market recovery QCOM looks ready to rally higher out of its range it has held during all the selling. After it makes the move we can either sell calls against the position or take the gain.
Volume: 19.018M Avg Volume: 14.913M
BUY POINT: $30.22 Volume=20M Target=$35 Stop=$27.96
POSITION: AAW AY - Jan. $27.50c (67 delta) or AAW AE - Jan. $25c (77 delta) and/or Stock
http://www.investmenthouse.com/ci/qcom.html
VZ (Verizon Communications--$32.95; +0.8; optionable): Telecom services
http://biz.yahoo.com/p/v/vz.html
STATUS: Testing 50 day MVA (31.58). A few telecom companies are showing some relative strength and are trying to move higher. VZ is one of those having rallied over its 50 day MVA last week and then moved laterally over that level during the selling. It held up well when the rest of the market was failing, and then Thursday it started up on rising, above average volume. Looking for a move up to clear resistance on some strong volume. Money flow is moving up well ahead of the price and after breaking over its recent downtrend. Looking for a move up to resistance just below the 200 day MVA (39.95).
Volume: 10.592M Avg Volume: 8.96M
BUY POINT: $33.25 Volume=10M Target=$38.45 Stop=$30.92
POSITION: VZ AF - Jan. $30c (68.66 delta) and/or Stock
http://www.investmenthouse.com/ci/vz.html
End Part 1 of 2
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