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us stock market, trend trading stock
Begin Part 2 of 3
THIS WEEK
The economy has a chance once again to show the economists it is a bit better than thought with the services NAPM out Monday and productivity out Tuesday. The big story will be Friday's employment report, and that may mean a slowdown in action on Thursday before. We can only hope at that point that we are writing about the Nasdaq trying to break 2400.
Much as we said in the market summary, we will continue to wait for the breakouts and the put plays to set up again. There has been some serious selling that moved a lot of our favorite put candidates down, but we have come up with even more to play this week if the downside bias continues. At the same time we patiently await our upside plays to hit the buy point. In this market patience is the key. We much prefer to make trades that are a week or more in duration, but many that we have run the past few weeks have been 1-2 days. The QQQ and OEX have been so volatile and set up so well that intraday plays are fairly easy, but they are not easy to do when you are not looking at them. The one trend on these has been down if you can stand the spikes higher. That is why we prefer to play the breakouts and also the puts to the downside when the big names run into resistance. Those tend to run for more than just a couple of days as you are playing trends: the breakout and the downtrend.
Friday left the markets mixed again. They all have some potential to move higher, but the Dow and S&P 500 looked the best after Friday as they continue to rebound after testing the lows. That is about all you can say for the S&P at this point as it languishes just off its lows along with the Nasdaq. Thus, while the indexes appear to have the potential to move up from here on an oversold move, the are showing nothing that would make one believe the move would be different than the 1 to 1.5 day thrusts higher. We have to see a strong up day on strong volume sometime on Tuesday to Thursday to try and kick off any real bounce higher that we can play for more than a day. Until then we will continue to watch for breakouts and our put plays to develop. We won't rush any play; in this market, impatience can lead to disaster.
Support and Resistance Levels
Nasdaq: Closed at 2117.63.
Resistance: 2400 to 2500. Then 2650. 2890 to 2900 is next before the 3000 level.
Support: 2000 to 2050
S&P 500: Closed at 1234.18.
Resistance: 1285 to 1300. Then 1335. Then 1360 to 1375.
Support: 1200 is the next clear level.
Dow: Closed at 10,466.31.
Resistance: 11,020 - 11,028. After that, 11,400.
Support: 10,300 - 10,400. Then 10,000.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
3-5-01
NAPM Services, February (10:00): 52.0% versus 50.1% prior.
3-6-01
Productivity, Fourth quarter revised (8:30): 2.0% versus 2.4% prior.
Factory Orders, January (10:00): -2.2% versus 1.1% prior.
3-7-01
Consumer Credit, January (15:00): $5.3B versus $3.0B prior.
3-8-01
Initial Claims, prior week (8:30): 372,000 versus 372,000 prior.
3-9-01
Non-farm Payrolls, February (8:30): 88,000 versus 268,000 prior.
Unemployment Rate, February (8:30): 4.2% versus 4.2% prior.
Hourly Earnings, February (8:30): 0.3% versus 0.0% prior.
Average Workweek, February (8:30): 34.2 versus 34.3 prior.
Wholesale Inventories, January (10:00): 0.0% versus 0.0% prior.
SUBSCRIBER QUESTIONS
Q: When you talk about something moving on high volume, how can you tell relatively early in the day (say anytime before noon) whether volume is above or below average? All the tools I've seen will tell you average daily volume, but volume is not evenly spread throughout the day. So if a stock's average volume is five million shares a day and it has traded 1.5 million by 11:00, how do you know if it's on track to post an above-average or below average day? Thanks. Love your newsletter.
A: Right. Volume is heaviest in the first hour and the last hour. That is why if we see a breakout, we prefer it to happen later in the session so we can get a better feel if it is going to hit the volume we want. Still, when a stock does breakout, there is usually a rush to buy it when it does move into new high ground: a lot of sights are on it, and if the mutual funds are interested, they will start buying and volume will jump even if it makes the break early in the day. Look at the volume you want and see how far along you are. One good place to compare the current session's volume to the previous session is www.investors.com. That site tells you whether the volume is on a faster or slower track from the previous session. It is another useful tool in determining how volume is faring for the session.
Q: When you are playing QQQ. Which index are you watching? The Nasdaq Composite or the Nasdaq 100 which the stocks in QQQ represent? And are you also watching the intraday chart of QQQ?
A: Yes. We watch them all, but the primary focus is on the QQQ and the Nasdaq 100 that it tracks. All three set up a nice head and shoulders pattern after the rally that was a dead-on play to the downside. We used the Nasdaq 100 to confirm the move we were seeing in the QQQ, and we also kept a tab on the Nasdaq overall.
TEAM TRADES
QQQ: Cannot stay away form it with all of the volatility. Take a look at an intraday pattern: the QQQ, Nasdaq 100 and Nasdaq all set up perfect head and shoulders patterns in the early afternoon, and that was enough to get us ready to enter once it started to fall from the top of the right shoulder. The safest entry point is on the break below the neckline, but we were confident of the move. The March 55 puts were trading 7.7 by 7.9 as the index continued to try but fail to move back over that shoulder top. The QQQ is so liquid we always try to split the spread even if it is narrow. The limit order was at 7.8 and a slight uptick filled it. The index tracker then rolled over and fell. We were looking for the index to fall as far as the height of the pattern; that is the usual drop. That would have put the index at 47.60, a point where the index was hitting highs early in the session. It tried to hold after tapping at 47.20, but it failed, collapsing to 46.80 at the close. A down Friday often leads to a down Monday, so we decided to let it ride the downtrend and look at getting out in the morning on a lower open.
CEFT: A stock we have been tracking on the SSR and still looking strong, Friday it broke to a new closing high on very strong volume. We were looking for a break over its recent closing high at 27.20, and right before the first hour was up it shot past that level on its way to 48.50. Knowing that stocks often come back to test moves over such levels, we did not panic, but were ready to see how much of a test we would get. It pulled back to 47.50 on some brief trades 30 minutes later and started back up. We wanted some of this stock that has been defying the market, and were willing to take a partial position before the actual breakout over 48.13. 47.75 was the best that we could do, but that was fine. The stock ran up to 49.13 and bounced around at the top for three hours. Then it suffered the late selling and closed right at 48. Not bad, but not great. The move was on powerful volume that was established early in the session as there were a few funds piling into the stock. We will look for another move higher on powerful volume once again for more positions.
For a review of frequently asked questions, please use the link below:
http://www.investmenthouse.com/1questions.htm
All prices reflect prices at the close on Friday.
THE PLAYS:
Best Plays:
1) OEI: Moving up on great volume after testing the breakout.
2) DME: Breaking out and still a buy.
3) CNX: Ditto
4) ITG: Breaking out..
5) EAT: Testing the breakout on low volume.
6) WFT: Moving up after testing the breakout.
7) SDS: Watch this one on the stronger volume.
8) EDS: Continuing its breakout move.
9) RE: A new trading play.
READY TO BREAK TO A NEW HIGH (or just did):
New Play:
OEI (Ocean Energy Inc--$19.39; +1.36; optionable (OEI)):
http://biz.yahoo.com/p/o/oei.html
STATUS: What a great uptrend this stock has been in over the last year. After a recent breakout from a short double-bottom pattern in January, the stock has tested and is moving back up on strong volume, the first solid upside move since the breakout. Getting ready to break to a high. Great buying and money flow. Relative strength has broken out ahead of price.
BUY POINT: Aggressive: Up from here on continued strong volume. February high is 19.87.
POSITION: Aggressive: Stock and/or May $15 or $17.50 calls to buy (OEI EC or EW).
Continued Plays:
SRCL (Stericycle Inc--$40.50; +1.12; optionable (URL)): Materials and construction
http://biz.yahoo.com/p/s/srcl.html
STATUS: Broke to the new all-time closing high closing high Friday despite lower volume of 149,300 (avg. 184,272). We will look for volume to surge back up (Thursday's volume was nicely above average) to support the stock. It still needs to beat the Tuesday intraday high of 40.75 and the December high at 42.25, but we will take Friday's move. Money flow remains strong.
BUY POINT: Over 42.25 on above average volume.
POSITION: Aggressive: Stock and/or May $35 calls to buy (URL EG).
ASD (American Standard--$58.14; +1.20; optionable (ASD)): Materials and construction
http://biz.yahoo.com/p/a/asd.html
STATUS: Hit a new high Friday but volume was below average and lower (277,400; avg. 396,090). Volume was higher the previous session but also below average. The stock can pull back to test the 57 range before making a strong move back up, unless it gets a volume surge to keep this move alive. Strong money flow.
BUY POINT: Over 58.50 (intraday high) on volume in the range of 375,000.
POSITION: Stock and/or July $55 calls to buy (ASD GK).
BREAKOUTS:
New Plays:
DME (Dime Bancorp Inc--$31.70; +3.46; optionable (DME)): Savings and loan
http://biz.yahoo.com/p/d/dme.html
STATUS: Breaking out of a type of wedging pattern as volume surged Friday (1.2 million; avg. 699,545) and the stock broke above resistance at 30.40. Remains a buy on this move up to 32.06; at that price DME will surpass its previous all-time closing high of 31.81, hit back in 1998. Strong money flow and high relative strength.
BUY POINT: On a move up to 32.06 on continued strong volume.
POSITION: Stock and/or June $30 calls to buy (DME FF).
CNX (Consol Energy Inc--$32.15; +1.97; no options): Metals and mining
http://biz.yahoo.com/p/c/cnx.html
STATUS: Broke out of a short base Friday on strong volume (283,300; avg. 153,272). Remains a buy on this move up to 33.35. The stock is heading for new highs after testing the breakout from a lengthy ascending wedge pattern that formed last fall. Strong money flow and good buying.
BUY POINT: A buy up to 33.35 on this breakout move, on continued strong volume.
POSITION: Stock.
ITG (Investment Technology--$56.35; +1.85; optionable (TG)):
http://biz.yahoo.com/p/i/itg.html
STATUS: Broke out of a cup with handle pattern Thursday and Friday, on outstanding volume (594,600; avg. 178,454). The stock is just within our limit of buying on a breakout, and with this strong volume, can move higher than that. For the test, look for a pullback to the 56 level. Excellent money flow and high relative strength.
BUY POINT: Remains a buy up to 56.52 on continued strong volume.
POSITION: Stock and/or July $50 calls to buy (TG GJ).
TESTS OF THE BREAKOUT: Some of these stocks are moving back on low volume to test the breakout. We often take profits on option plays when they start to pullback on the breakout move and then get back in when the stock bounces up off of the breakout point. This second move is where some of the biggest gains are made.
New Plays:
EAT (Brinker Int'l--$29.60; +0.32; optionable): Restaurants.
http://biz.yahoo.com/p/e/eat.html
STATUS: Testing the breakout from its recent cup with handle (previous high, 28.89), breakout high, 30.21. Volume has been low as we like on a pullback, and the stock has held over its 10 day MVA (29.14) while testing close to its 18 day MVA Thursday (28.50). The stock has been a steady performer over the last year, correcting a couple of times but managing to continue back up and forge new highs. We are looking for a move to a new high from here. Good relative strength.
BUY POINT: Over 30.21 on above average volume.
POSITION: Stock and/or July $26.625 calls to buy (EAY GW-low open interest).
WFT (Weatherford International--$54.00; +1.65; optionable (WFT)): Oil and gas equipment http://biz.yahoo.com/p/w/wft.html
STATUS: Testing the recent breakout from a cup with handle, having formed in the process a nice and somewhat lateral consolidation that pulled back gradually to the 18 day MVA (52.38). Friday the stock moved up from Thursday's doji on that level. Volume spiked back up to near the average at 1.4 million (average 1.43 million) on the move. Looking for a break over the February high of 55.18 for possible positions with stock and/or calls to buy. Good money flow and relative strength (broken out ahead of price).
BUY POINT: Over 55.18 on above average volume.
POSITION: Stock and/or May $55 calls to buy (WFT EK).
End Part 2 of 3
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us stock market
trend trading stock
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