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understanding the stock market, trend trading stock
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11/19/02 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts issued Tuesday: Held off on AVID as it was such a strong move.
Buy alerts issued: NXTL (add-to); HYSL (add-to)
Trailing stops issued: None issued
Stop alerts issued: None issued
THE MARKET
Tuesday the pre-market tone was somewhat negative with all the downgrades, i.e., pretty much the opposite of Monday. Stocks sold off then came roaring back. Problem is the roar was cut off mid-session and stocks struggled at the highs and then went again into selling mode. Two sessions where the bias to end the day was down is not very bullish. On top of that the NYSE struggled with some higher though still below average volume. Not very positive. On the flip side Nasdaq volume dried up and the indexes held at near support without a lot of breakdowns.
The market is not strong, but it is not a total noodle. HD is struggling, having resumed its downtrend and then announcing poor earnings and an even poorer projection for 2003. Older stores are being poached by LOW, TSCO, and even other HD stores. Service at HD, the item it touts in its ads, is terrible. Go into HD and try to get help. When you find someone you get the 'this is not my department' excuse without an attempt to even locate someone that does know a deck screw from a lag bolt. It had the wood put to it, but it was not alone. LOW and TSCO, two earnings warhorses, were hit hard as well. It is clear that HD's problems are its own doing and the life cycle of its stores, but in this market the leaders in the group were hit even as the laggard reported, not surprisingly, lagging numbers. This happened in education when DV, the sector laggard, reported crappy earnings and hurt even those doing very well. It is definitely a symptom of the market's continued soft underbelly: you can have the earnings, sales, and revenue growth, but if you get a bit out of whack with the value captains running the rating system, you are going to get slapped as hard as they can do it. Right now you either can get up and go on or you keep stumbling around. Tuesday the valuation boys took control of the action and it impacted the entire session.
Again, however, it was not a wipeout. The A/D line was modestly lower, the major indexes held near support, Nasdaq volume was lower, and NYSE volume crept up but it was still well below average. The indexes look very good with the Dow and SP500 holding above the 18 day MVA with doji's. That can mean they are ready to make a move up for another shot at the near term highs. As we said in one of the alerts today, it is a time to just be a bit patient and let the pullback work through as most stocks are holding up, mimicking the pullback to support on lower volume.
Sentiment Indicators
VIX: 31.36; +0.25
VXN: 45.52; -2.57
Put/Call Ratio (CBOE): 0.81; +0.16
Nasdaq
Held roughly at the 10 day MVA on the close as volume backed off to average levels. Techs have been the laggard the past two sessions; they lead up, they lead down. It needs to step up and lead higher now, and overall it is acting well. That failure at 1426 is still a big cloud, however.
Stats: -19.18 points (-1.38%) to close at 1374.51
Volume: 1.623B (-8.28%). Back to average levels as the Nasdaq lagged the other indexes. Helps ease the slightly higher volume selling Monday.
Up Volume: 435M (-360M)
Down Volume: 1.17B (+220M)
A/D and Hi/Lo: Decliners led 1.36 to 1. Still narrow on the selling.
Previous Session: Decliners led 1.38 to 1
New Highs: 39 (-21)
New Lows: 36 (-9)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Managed a late bounce to close right at the 10 day MVA (1377), holding above 1357 (the 1998 bear market low) and the July, August, and September interim tops at 1345. Volume dried up on the move, a good sign after the slight bump in volume on the Monday selling. Most techs sold back, but volume did not run away overall. So the pullback is not that bad in and of itself, but it has that immediate overhead barrier at 1426 that it has recently failed to pierce yet again. If the Nasdaq holds here or at the 18 day MVA (1358) down to 1345 intraday (those interim tops), it can make a higher low. That needs to be followed by a breakout over that 1426 resistance. Failure to make that higher low takes significant strength out of the move and the Nasdaq then has to struggle just to hang on.
S&P 500/NYSE
The SP500 held the 18 day MVA and rallied a bit off that level to close at the 10 day. It looks better than the Nasdaq simply because it has not performed as well up to this point.
Stats: -3.62 points (-0.4%) to close at 896.74
NYSE Volume: 1.322B (+5.13%). Volume edged up on the pullback but was still below average.
Up Volume: 516M (+8M)
Down Volume: 799M (+52M). Pretty evenly matched.
A/D and Hi/Lo: Decliners led 1.27 to 1. Very mild selling.
Previous Session: Decliners led 1.3 to 1
New Highs: 22 (-17)
New Lows: 28 (-5)
The Chart: http://www.investmenthouse.com/cd/$spx.html
Holding roughly at the 10 day MVA (897) after tapping the 18 day MVA on the low (893) and rebounding a bit to the close. Not bad action and slightly higher volume on the test lower and modest bounce is decent action as it showed a doji on that level and that can signal a potential move back up. It is sitting right on the top of its late October consolidation range, and that is a better point to hold the move for another shot at resistance at 911 and then 925. Bottom line: it did not sell off hard and it is holding near support, but it has to clear that near term resistance. Buyers and sellers are basically evenly matched right now and buyers need some impetus to rally.
Dow:
A tight doji right at the 10 day MVA. Similar to the SP500, it is holding up decently but needs a boot, a reason to buy.
Stats: -11.79 points (-0.14%) to close at 8474.78
Volume: 1.322B (+5.13%)
Blue chips recovered 30 points off the low to cut most of the losses, showing a doji right below the 10 day MVA (8490) after testing to 8400 intraday. Dow volume actually moved up on the recovery off the low, an indication that buyers were stepping in to pick up stocks on the selling. Indeed, even GE looks a bit better. Needs to make the move here to prevent falling back into the trading range and floundering around at best.
The Chart: http://www.investmenthouse.com/cd/$indu.html
WEDNESDAY
Saks Fifth Avenue surprised the street with stronger earnings and ADI beat the street by 3 cents and guided in line for next quarter. That put a bit of polish on an otherwise slow session, but it is doubtful the market will take these as heralds for a new buying spree. Housing and permits are out before the open, and while important, unless there is a significant change there most likely won't be a lot of push on the numbers. One concern is that after such a long string of gains the housing market will eventually soften up. The market, however, has been pricing that into housing stocks. They are well off their highs and still edging lower.
What will drive the market is not so much the here and now but what is going to be. The indexes are struggling now during this 'soft patch' in the economy and the selling that some of the downgrades have put on the market. It is noteworthy that thus far even with the downgrades and 'valuation' concerns being discussed, the indexes have not succumbed to heavy distribution. The Dow and SP-500 look better than the Nasdaq simply because they did not run up as far as the Nasdaq before this recent softness. They are working laterally again while the Nasdaq, the leader on the way up, struggles with its third try at the August high. Again, the volume has not jumped up and the selling the past two sessions has not been broad at all. The indexes have lost near term upside momentum, but despite the voiced concerns they have not started selling hard. There was a bit of complacency building in on the move, and the wall of worry being rebuilt now is a positive.
What we have to deal with now is waiting for the opportunities to develop. There are several stocks on the reports that have pulled back to near support and are showing good candlestick action (e.g., doji's) at that level, indicating that they are ready or close to being ready for a move back up. At the same time we still see those downside plays developing in certain sectors and we will pursue those as they start to break down with more authority.
Support and Resistance
Nasdaq: Closed at 1374.51
Resistance: 1418, the interim test after the September 2001 low, and 1426 the August high. Then some price resistance at 1500 and the 200 day MVA (1508).
Support: The 10 day MVA (1377) is possible support. 1357.09, the October 1998 bear market low and the 18 day MVA at 1357. July, August, and September interim highs at 1345. The 50 day MVA (1318). 1250 from some prior price lows. 1200 (August closing low) to the July intraday low at 1192.42. 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 896.74
Resistance: July, August and September interim highs at 909 to 911. Some resistance at 921 up to the November high at 925.66. Price resistance at 950. 965, the September 2001 closing low along with the August 2002 high. Then price resistance at 990.
Support: The top of the late October consolidation range at 899 is not totally broken. The 10 and 18 day MVA (897; 893). The 50 day MVA (886). The September 2000/May 2001 downtrend line at 883. The March down trendline at 871. 850 to 855 (the October 1997 and Q2 1998 lows). Prior closing lows and highs at 800 from July and October. The July intraday low at 775.68. 750 to 760 with an intraday touch to 730.
Dow: Closed at 8474.78
Resistance: The late July and early September interim high at 8726 to 8762.14 (8745 closing) and the November high at 8800. A range of resistance from 9000 on up to 9050. The 200 day MVA (9220). 9500 from June and July lows.
Support: 8500 from October high and the 10 day MVA (8491) are still not completely broken. The 18 day MVA (8449). The exponential 50 day MVA (8363) and then 8250. The simple 50 day MVA (8173). 8000 (August low at 8043; September 2001 intraday low at 8062).
Economic Calendar
11-19-02
CPI, October (8:30): 0.3% actual, 0.3% expected, 0.2% prior.
Core CPI: 0.2% actual, 0.2% expected, 0.1% prior.
Trade balance, September (8:30): -$37.0B actual, -$37.3B expected, -$38.50B prior.
11-20-02
Housing starts, October (8:30): 1.710M expected, 1.843M prior.
Building permits, October (8:30): 1.698M expected, 1.733M prior.
11-21-02
Initial jobless claims (8:30): 394K expected, 388K prior.
Leading Economic Indicators, October (10:00): -0.1% expected, -0.2% prior.
Philly Fed, November (12:00): -3.0 expected, -13.1 prior.
Treasury budget, October (2:00): -$51.3B expected, -$7.7B prior.
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SUBSCRIBER QUESTIONS
Q: When using stops, do you strictly enforce the levels you set? When is a stop a firm sell?
A: Stops are not exact science. What we try to do in setting stops is pick a point below a support level where we feel the stock will hold above as long as the current trend or move stays in place. With that said, the key is whether the current move or trend does stay in place. That means the stock can actually trade below that stop level intraday and then recover and still be in good shape. What we do intraday is look at how the stock is trading versus the market. Is there anything impacting the stock that is not in the overall market (e.g., earnings, SEC investigation, etc.) or on the other hand is the stock acting immune to what is impacting the market? We are never too ready to jump out of a position if overall the market action and the action in the stock suggests an orderly pullback is still underway. If it is, even if it undercuts the stop we will see if it recovers. Indeed, we will sometimes give a stock a day to jump back into the trend if the volume was not bad on the day it sold down and was going to close below the stop point. Then there are always the days when a stock gaps lower and gives you no chance to get out on the way down. With those we will see if we can get a reflex bounce up toward support for an exit point.
Then when the market gets choppy or it looks as if a move is rolling over, we will tighten the stops more, ready to take money off the table if the stock violates key levels such as the 18 day MVA that it has been using as support on the move higher.
In short using stops is not a simple equation. As we have discussed in the past they are imprefect mechanisms even if you set them ahead of time. A stop loss can hurt you bad if a stock gaps down and you get traded at the low of the day as your stop loss is converted into a market order. Then you invariably get the situation discussed above where you set a careful trailing stop and the stock undercuts that level intraday. When setting a stop with a broker, ask yourself at what point you want to sell the stock regardless if it bounces back or not. In other words, if it gets to this level I want to cut off the loss because I don't want to lose more and risk it not coming back. Then don't worry about it. Same with trailing stops. Ask yourself if you are willing to capture the gain at the trailing stop point and bank it even if the stock comes back. Otherwise you drive yourself nuts with second guessing. We watch the market so we can make decisions about when we want to actually cut off the trade. We set the stops carefully below support levels to try and make it as automatic as possible, i.e., when it hits there we are relatively comfortable something is changing. We will still, however, look at the overall stock action and market to make the final determination in those situations where we are able to watch the market.
THE PLAYS:
Good movers: AVID
Downside:
ZION (Zions Bancorp--$38.26; -0.45; optionable): Regional bank
http://biz.yahoo.com/p/z/zion.html
STATUS: Put. ZION has formed its own little head and shoulders pattern as regional banks cointinue to suffer aftr the last Fed rate cut makes it harder for the smaller financials to make their same margins despite what may seem intuitive. Looks ready for a quick test lower to the October low. With the option price and delta, we can make a nice gain on this weakness.
Volume: 607.576K Avg Volume: 938.409K
BUY POINT: $37.97 Volume=850K Target=$35 Stop=$40.75
POSITION: ZNQ MH - Jan. $40p (-56 delta)
http://www.investmenthouse.com/ci/zion.html
Upside:
NVLS (Novellus Systems--$31.86; -0.38; optionable): Chip equipment
http://biz.yahoo.com/p/n/nvls.html
STATUS: Testing the breakout. Showing a doj at the 10 day MVA on the close, NVLS has moved laterally the past three sessions on lower, below average volume, holding its gains very nicely. We like to see stocks hold their gains as the market consolidates. NVLS has the 200 day MVA at 36.36, so we are looking at more of a trade up to that level, but with the options that can put some nice change in our pockets.
Volume: 8.775M Avg Volume: 10.463M
BUY POINT: $32.26 Volume=12M Target=$36 Stop=$30
POSITION: NLQ CF - Mar. $30c (65 delta) and/or Stock
http://www.investmenthouse.com/ci/nvls.html
Revisited: Some plays have set up well once again.
Play Date: 11/19/2002
NXTL (Nextel--$12.73; -0.22; optionable): Wireless communications
http://biz.yahoo.com/p/n/nxtl.html
STATUS: Testing the breakout. NXTL is at the 10 day MVA (12.55), holding that level on lower, below average volume with a very tight doji. We like this as another entry point.
Volume: 19.01M Avg Volume: 33.267M
BUY POINT: $13.05 Volume=35M Target=$16.15 Stop=$12.14
POSITION: FQC EB - Feb. $10c (78 delta) and/or Stock
http://www.investmenthouse.com/ci/nxtl.html
Play Date: 11/13/2002
KRON (Kronos--$39.25; +0.44; optionable): Business equipment
http://biz.yahoo.com/p/k/kron.html
STATUS: Testing the breakout. KRON looks solid, moving off the 10 day MVA Tuesday on rising volume as the rest of the market sold. Good accumulation and money flow is running up ahead of the stock. Looks ready.
Volume: 224.555K Avg Volume: 310.045K
BUY POINT: $40.12 Volume=450K Target=$47.94 Stop=$37.31
POSITION: KUE DG - April $35c (60 delta, low OI) and/or Stock
http://www.investmenthouse.com/ci/kron.html
End Part 1 of 2
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understanding the stock market
trend trading stock
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