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us stock market, understanding the stock market
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10/14/02 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts issued Monday: None issued
Buy alerts issued: SHFL; UHS
Trailing stops issued: None issued
Stop alerts issued: WOR
SUMMARY:
- Soft open, steady finish
- Looked like a consolidation day.
- Financials lead a big earnings session Tuesday.
- Team Trades
Overcoming bad news for positive though unspectacular session.
Once again the market had yet another string of negative news to deal with, primarily the renewed escalation of despicable terrorist attacks over the weekend. Out of everything the market has to deal with, terror attacks will remain the random events that will inevitably occur. Monday the market took it in stride after an early sell off, indicating that the oversold condition has not yet abated. In general, the action from Thursday and Friday continued with stocks continuing in their general directions: the stronger stocks moving higher, the weaker stocks continuing to move down, with the lines pretty evenly drawn.
THE MARKET
Sure seemed like a consolidation session.
In this downtrend there is always the threat (promise?) of a sharp rally fizzling and then turning back over for a resumption of the downtrend. Depending upon what side of the fence you prefer, you could look at Monday either way. Many quick, hard bounces have turned over on lighter volume after one, two or a few upside sessions. Monday would certainly fit that pattern.
Shorts, however, did not run back into the market as the indexes brushed some near term resistance. The market did lose momentum at lunchtime, but it did not sell off sharply and managed another move higher in the last hour as buyers came back in on weakness. Seems shorts are not ready to make a concerted run at the market right now after the indexes broke over the short term moving averages, but are willing to let the rally run its course before making an attempt. Indeed that is what several said Monday when interviewed. Of course, it did not hurt stocks Monday with the bond market closed and not able to drain away from equities.
Thus the test for the market is half complete. The test of the S&P 500 intraday low and sharp rebound sets up the possibility of a follow through session during this earnings week. But for that test and rebound this would look just like any other oversold bounce in the continuing downtrend. That flirtation with and bounce at the former low, along with arguably the nastiest bear market in U.S. history are the difference. Certainly economic news is not heralding higher stock prices, but again bottoms come out of the darkest economic news.
Thus the market is at a crossroads; its first test, i.e., actually holding at the July low, has so far been passed. The next is whether the market can be stingy with its recent gains, consolidate a day or two more as it did Monday, and then provide a sharp continued rally with outstanding breadth and up/down volume. Monday's action was consolidation for the most part even if the market rose on light volume: several solid stocks moved on strong volume, no real heavy selling in any stocks, flat A/D line. If, however, the market starts to sell on rising volume (and we mean seriously rising volume as it won't be hard to top the puny holiday volume Monday), that second test will most likely fail: if investors start dumping stocks on higher volume early in a rally that is a sign that the shorts are stepping in and that big money is using the rally as an opportunity to unload shares. That is why it is critical after a rally starts and there is some resting or consolidation a week or so into the action that the rally continue with even better internals. That shows it is no longer just short covering driving prices but that longer term buyers are committing money to the market.
Sentiment Indicators
VIX: 42.61; -0.83
VXN: 59.08; +0.21. The Nasdaq moved up and so did the VXN. Would expect it to fall. Still a lot of nervous stomachs out there after rallies.
Put/Call Ratio (CBOE): 0.93; 0. Held steady even as the market held its ground and did not sell off. Normally you would expect the ratio to fall in that situation. It did not, indicating anxiety is still high.
Nasdaq
Continued its push upward but with no volume and a holiday in the bond market, this was not an accumulation day. It was also, and key to the rally's survival, not a distribution session.
Stats: +10.06 points (+0.83%) to close at 1220.53
Volume: 1.2B (-37.48%). Very weak volume on a Monday and with the bond market closed.
Up Volume: 748M (-774M)
Down Volume: 441M (+97M). The up/down ratio backed off significantly, but it was a day of rest.
A/D and Hi/Lo: Advancers led 1.11 to 1. A/D line shows the action was more of a day of rest.
Previous Session: Advancers led 2.21 to 1
New Highs: 15 (-6)
New Lows: 139 (-26)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Opened lower on the negatives facing the world, but did not waste much time in finding a low at the 18 day MVA (1192.29) and moving modestly higher from there. Overcoming bad news is a sign of some strength, and even though the market rose on low volume (fewer buyers) that is acceptable action given the history of reversals during this bear market. Again, upside action is seriously damaged by significant volume selling shortly after the rally starts. The Nasdaq currently is between some support and resistance, above the 18 day MVA and below the March down trendline and the 50 day MVA (1259.13). It did close right at the late September closing high 1222, but that provides a point more of consolidation than a turn lower.
S&P 500/NYSE
Struggled higher to the March down trendline on the close, but it was really more of a drift higher than a real fight as sellers stayed on the sidelines.
Stats: +6.12 points (+0.73%) to close at 841.44
NYSE Volume: 1.187B (-35.79%). Very weak volume on the advance, indicating there were not many buyers or short sellers at work.
Up Volume: 667M (-985M)
Down Volume: 499M (+307M)
A/D and Hi/Lo: Advancers led 1.06 to 1. Tells the story. It was a bit better at some points and it was negative at some points, splitting the baby at the close.
Previous Session: Advancers led 3.58 to 1
New Highs: 17 (-4)
New Lows: 93 (+19)
The Chart: http://www.investmenthouse.com/cd/$spx.html
Rallied on low volume to butt up against the March down trendline now at 841. That is also just below a raft of price resistance at 850 to 855 and the 50 day MVA at 867.95. This 840 to 850 ranges looks like the point where the large caps will try to put together a low volume consolidation that works its way toward the 18 day MVA/825 on the downside before trying a follow through rally later this week.
Dow:
Stats: +27.11 points (+0.35%) to close at 7877.4
Volume: 1.187B (-35.79%)
Finding some resistance just below the late September top at 8000 (it topped out at 7969 in early October as well) as volume backed way off on the session. With the August low and recent interim highs just over 8000 this is the logical place for the Dow to start to test/consolidate its recent move and try to hold on for a follow through by any (preferably all) of the main indexes.
The Chart: http://www.investmenthouse.com/cd/$indu.html
TUESDAY
Earnings are starting to take the front seat. Economic reports are one thing, but then they have to be put to the test. The government says things are improving, the recent economic reports tend to contradict that, and now earnings reports will put some reality to the figures. Some weight will be given to the actual results, but given the easy comparisons and lowered guidance they won't carry a lot of weight for long. The key will be what is said about the future. At some point companies are going to say 'we expect this quarter to be 5% better' or something to that effect. That will confirm what is already happening with the market, i.e., the market is trying to bottom ahead of the numbers.
Now it usually anticipates this increase well in advance (e.g., months), and not just three days ahead of the earnings onslaught. That makes us dubious about what companies are going to say; certainly not many were crowing at the recent CEO conference though some said things are no longer getting worse. Hardly a ringing economic endorsement. Despite what has been said in the past about disconnects between the market and the economy, the more things seem to change the less they really do. Thus we do not anticipate any great statements regarding the future (5% improvement), but some of that 'it is not getting terribly worse' talk. That won't be the big boost many are looking for, but if the market is looking 3, 5 and more months down the road as it historically does, that kind of talk lends credence to improvement down the road and would support a continued modest advance. That is what happened in 1974 when the market bottomed.
Tomorrow several financial institutions will announce before the open, Intel after the close, and many more as earnings kick off. We could have moved into several downside plays and indeed many that were rallying last week sold back down today. Volume was light, however, so we were not too aggressive downside. In the past this action would have been a trigger to enter downside plays but with the increase in sentiment indications, the timing and point of the test, etc., we would prefer to see the rally show higher volume selling to get in on downside action.
Many stocks were moving well today on some volume (though some good price moves were not volume supported and we avoided them), and that is a decent sign for the rally continuing: the leaders were still moving well on volume after their moves last week while the market took a bit of a breather on lighter volume. If the leaders continue to lead and attract good volume doing so, that is a real positive for the rally to continue. Thus we will continue to do what we did today: pick off the stocks moving well and showing volume when they hit the buys. That of course means we have to be ready to pull the plug on them if the rally turns over and starts some higher volume selling, but with these stocks in good patterns showing good volume in this climate we feel it is worth getting in.
Support and Resistance
Nasdaq: Closed at 1220.53
Resistance: The March/May downtrend line at 1240. The 50 day MVA (1259.13). 1291 to 1316, an early August interim high. 1357.09, the October 1998 bear market low. There is another downtrend line from the March and May highs at 1332. 1418, the interim test after the September 2001 low, and 1426 the August high.
Support: 1200 (August closing low) to the July intraday low at 1192.42. The 18 day MVA (1192.29). The 10 day MVA (1178.41). 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 841.44
Resistance: The first March down trendline 841. 850 to 855 (the October 1997 and Q2 1998 lows). The 50 day MVA (867.95). 875 is price resistance of some significance. July, August and September interim highs at 911. The September 2000/May 2001 downtrend line at 909. The downtrend lines from the March and April highs (915). Price resistance at 950. 965, the September 2001 closing low along with the August 2002 high.
Support: The 18 day MVA (828.86). The 10 day MVA (819.06). Prior closing lows and highs at 800 from July and October. The first bottom channel line in the March downtrend (801). The September 2000/January 2001 down trendline at 788. The July intraday low at 775.68. The lowest channel line in the March downtrend channel (759). 750 to 760 with an intraday touch to 730.
Dow: Closed at 7877.40
Resistance: 8000 (August low at 8043; September 2001 intraday low at 8062). The 50 day MVA (8175.65). 8250 acted as resistance before and is coincident with the second March down trendline at 8245. 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.
Support: The 18 day MVA (7783.55). The 10 day MVA (7686.40). The August down trendline at 7575. The lowest bottom channel line of the March downtrend (7635; corrected). 7100, the March 1997 tops. 6975 is next.
Economic Calendar
10-16-02
Business inventories, August (8:30): 0.2% expected, 0.4% prior.
10-17-02
Housing starts, September (8:30): 1.636M expected, 1.609M prior.
Building permits, September (8:30): 1.670M expected, 1.666M prior.
Initial jobless claims (8:30): 384K prior.
Industrial production, September (9:15): 0.1% expected, -0.3% prior.
Capacity utilization, September (9:15): 76.0% expected, 76.0% prior.
Philly Fed, October (12:00): 2.0 expected, 2.3 prior.
10-18-02
Trade balance, August (8:30): -$35.2B expected, -$34.6B prior.
CPI, September (8:30): 0.2% expected, 0.3% prior.
Core CPI (8:30): 0.2% expected, 0.3% prior.
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TEAM TRADES
SHFL: Building the right side of its base, bounding off the 50 day MVA, SHFL is part of the gaming industry, making automatic shufflers. That industry did well in the good times and well in the bad times (living the high life then drowning the sorrows). SHFL had some resistance at 20, but we were on an alert for a break over that level as Friday showed a big volume spike. It was doing just that Monday and it was time to move in. The stock was moving in a series of rallies then lateral moves higher. It made one of the moves up right at 9:30 and started a lateral move; that is where we wanted to pick it up as volume was building nicely. This is one we were looking at both options and stock, but we opted for stock given the sector's strong performance. The spread was nice and narrow at 25.60 by 25.65; it was easy to slip a limit order in at the ask as the stock moved sideways. About 11 minutes later SHFL made another one of its moves and then rallied to 21.67 on the high before eroding back the last hour to close just about where it was acquired. Still a strong move on solid volume as it works up the right side of the base. Picking off the strong stocks as they make solid moves.
THE PLAYS:
Upside:
CRL (Charles River Labs--$39.56; +0.25; optionable): lab rat breeder among other things
http://biz.yahoo.com/p/c/crl.html
STATUS: Ascending wedge. After forming a rather looks cup June through August and failing a breakout, CRL has formed an ascending wedge the past 1.5 months on low volume. We like these combination patterns: the stock failed earlier, but it had enough support to immediately form a new base. This one looks to weed out the remaining weak holders. Accumulation is solid at 3 up weeks to 1 down week on rising volume since August (6 to 2 since May). Looks ready.
Volume: 542.1K Avg Volume: 569.545K
BUY POINT: $40.22 Volume=700K Target=$46.45 Stop=$37.55
POSITION: CRL BG - Feb. $35c (74 delta) and/or Stock
http://www.investmenthouse.com/ci/crl.html
HLYW (Hollywood Entertainment--$19; -0.48; optionable): Music and video stores
http://biz.yahoo.com/p/h/hlyw.html
STATUS: Cup w/handle. HLYW is pulling back on low volume, testing the recent strong move. Accumulation in the base is 4 up weeks on rising volume to 1 down week on rising volume. Expect HLYW to form a handle for another session or two and then start a stronger volume move back up.
Volume: 1.016M Avg Volume: 811.818K
BUY POINT: $19.45 Volume=1.2M Target=$22 Stop=$18.09
POSITION: HQW AC - Jan. $15c (83 delta) and/or Stock
http://www.investmenthouse.com/ci/hlyw.html
Revisited:
NBIX (Neurocrine Biosciences--$41.11; +1.12; optionable): Biotechnology
http://biz.yahoo.com/p/n/nbix.html
STATUS: Reverse head & shoulders. Tested the 50 day MVA last week and is now moving up again on rising volume. It is looking very good in the pattern and it is in a sector that investors like to get in. Accumulation is solid at 11 up weeks on rising volume to 5 down weeks on rising volume. Money flow is racing ahead of the price even as it pulls back here for one more test before it breaks higher.
Volume: 695.069K Avg Volume: 717.5K
BUY POINT: $42.35 Volume=1.1M Target=$50.75 Stop=$39.39
POSITION: UOT BH - Feb. $40c (60 delta) and/or Stock
http://www.investmenthouse.com/ci/nbix.html
Downside:
HRB (H&R Block--$42.51; +0.81; optionable): Tax services
http://biz.yahoo.com/p/h/hrb.html
STATUS: Testing breakdown. HRB broke the 200 day MVA in late September and cascaded lower. It is just coming off a low near 36, rallying back up to the 18 day MVA on the Monday high (43) on lower and lower volume. It appears that the recovery is running out of gas here. Like the play because it can hit the target and still be well inside the recent low.
Volume: 1.768M Avg Volume: 2.271M
BUY POINT: $41.96 Volume=2.8M Target=$38.12 Stop=$43.45
POSITION: HRB MI - Jan. $45p (-52 delta)
http://www.investmenthouse.com/ci/hrb.html
End Part 1 of 2
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us stock market
understanding the stock market
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