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12/02/02 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Monday: VSEA
Buy alerts issued: FRGO
Trailing stops issued: None issued
Stop alerts issued: None issued
You can sign up for Technical Trader alerts at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Big gap cannot hold.
- Economic expectations outpace the recovery.
- Late comers push market higher just in time for the pullback to start.
- Subscriber questions
Good news gap cannot hold up.
The market has received a lot of good news of late, and the market has continued its move that it started in October in anticipation of that improving economic data. Monday before the open the news was sweetened with the weekend retail sales numbers setting records for various chains and overall sales coming in much, much better than expected. Much better. Dan Niles upgraded Intel again and that had spirits running higher as well. Futures were way up but we were leery; the market was already in need of a pullback and economic data had been beating expectations. The gap higher sure seemed above and beyond the usual call of duty. When the ISM hit expectations had been ratcheted too high and the disappointment took away the gap higher. The market was extended and the gap up was a last gasp spurt higher that could not find the necessary buyers to continue the push.
On the high they hit some resistance but could not break it. On the low they held support. Volume was higher than on Wednesday (lower anyway given the holiday), coming in solidly above average. Significantly the A/D lines on the NYSE and Nasdaq were positive even with the Dow and SP500 selling. That indicates there was not a widespread sell off, just that there was some profit taking on stocks that had run higher during the Thanksgiving part of the rally.
THE ECONOMY
First you get the good news, then you get the bad news.
Retail sales explode over the holiday weekend.
It is almost surprising to see how surprised the economists and analysts are each time the retail sales numbers come in stronger than expected. We have already discussed at length the fallacy of the weak holiday season dogma of the economists and brokerage houses. Once again we are now seeing the hard numbers come in that continue to show there is no basis in fact for these questionable prognostications. The early data did not show the weakness, our field surveys did not show the weakness, and the results thus far are not showing the weakness.
Wal-Mart was again the headline grabber. It was the store everyone was citing as the prime indicator of a slower season. WMT said sales were tracking on the low end of expectations so the entire retail industry must be in trouble. We said that was bogus at the time and now we see WMT with its biggest sales day ever on Friday. JCP reported record sales for Friday. Overall retail sales were up 12% Friday ($7B) and +9% Saturday. Those are well ahead of expectations and an indication that there is demand out there. What if there are a lot of sales and incentives? They said that would hurt the autos and yet GM reported record profits in Q3. Retail sales are strong; shoppers were out at 5:00 a.m. to get in to buy. There were deals that helped get them there, but if they were not going to buy in force this year the numbers would not have been there.
ISM disappoints at 49.2 versus jacked up 51 expectations.
As we figured, ISM expectations were ratcheted up over the weekend to 51% and more as the hype wave regarding economic data picked up steam. It is always that way, isn't it? The experts keep saying no until it is very clear the answer should be yes. Then it is not just 'yes,' but it is 'YES, YES, YES!!'. Expectations up through the weekend were for a 49.5 reading, i.e., still a contraction in manufacturing. That 49.5 number took into account the stronger than expected Chicago PMI. As weekend sales numbers came in, however, analysts raised expectations early Monday. When the number came in at 49.2, just below the original expectations it was viewed as a big miss. The only miss was that expectations just got too hot. It was an improvement over October (48.5), and while it would have been nice to see 50 or more, nationwide manufacturing has not recovered and still needs some stimulus to get it up and running again.
The real disappointment in the number was the new orders index that fell to 49.9 (contraction) from 50.9 in October and 50.2 in September. Employment was also weaker at 43.8, down from 45. These were the real sticking points in the report as new orders is more of a future looking indicator as it can give clues as to what may be coming. Overall the numbers show that manufacturing is still hurting and still needs help to get back on its feet.
Construction spending beats expectations.
It was not a blowout, but construction expenditures for October rose 0.3% versus flat expectations (note: these were also jacked up early Monday from -0.2% as late as Saturday). Not a big jump but indicative of the slow scratching and clawing back. Perhaps the terrorism insurance bill will help this out in the coming months.
THE MARKET
The market showed it was a bit winded Monday. It had enjoyed very positive economic news the prior week and had rallied well on that news. The Nasdaq had made it to the 200 day MVA in a strong run. Many stocks had run up to resistance as well. The market was due for a rest and the gap higher and subsequent falter was just more evidence of that.
The psychology of the last gasp gap is often ignored. Think about what has been happening the past two months: a bottom in October and then a stair step higher up to one of the last key near term resistance points on the leading index (Nasdaq). The start of the move and the first substantial moves up are ahead of any real recognition that things are improving. The smart money is anticipating some of the moves. We were seeing the moves and some improving economic data and were moving into chips and others that had already formed good patterns. As the move continued economic data started to back up the numbers and more and more entered the market on the upside. Economic analysts are still skeptical and the commentary continues to be negative.
Finally the data keeps improving and some start to suggest that perhaps they were wrong; not really a surprise given the hard data, but it marks a change in sentiment. Then there is that rush to get in, fearing the bus is leaving the depot (or the train leaving the station, etc.; pick your favorite). Monday saw a rush to get in with the big upside gap. At that point, however, the market has priced the current crop of good news and is ready for a rest. Those chasing the move rushed in early today after the latest leg was running out of gas.
One very bright spot: the return of small cap buying. The S&P 600 was up 1.1% on the session. NYSE breadth was positive and up volume topped down volume even as the Dow and SP500 sold back. There was underlying buying in the small caps, an important group at year end and in January.
Sentiment Indicators
VIX: 30.05; -1.03
VXN: 50.16; +0.68
Put/Call Ratio (CBOE): 0.68; +0.06
Nasdaq
Jumped over the 200 day MVA and then fell back below resistance, managing a positive close but hardly a vote of confidence for a further run from here.
Stats: +6 points (+0.41%) to close at 1484.78
Volume: 1.924B (+128.25%). Back above average and at the levels of the pre-Wednesday and Friday levels sandwiching Thanksgiving. It was not that great of a signal, however, as the Nasdaq reversed from its gap higher to finish below resistance once again.
Up Volume: 1.055B (+611M). There were more buyers than sellers but it was pretty even.
Down Volume: 843M (+456M)
A/D and Hi/Lo: Advancers led 1.03 to 1. Not much power here, indicating the give back session, at least in terms of its intraday high.
Previous Session: Decliners led 1.01 to 1
New Highs: 114 (+34)
New Lows: 26 (+11)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Leaped higher to 1521 on the intraday high, topping the 200 day MVA (1493) but then unable to hold the move. It is back below resistance on the close as volume jumped back up on the reversal. That is typically indicative of more selling ahead. Again, after a strong move up to this key resistance point we would expect a pullback, and the failed gap higher is another indication of this. We look for a move back toward the August high (1426) or the 18 day MVA (1424). The action today was not that bad in terms of a pullback. If we look at where it hit on the high, a pullback to the above levels would be a very nice give back and set up the next move up. Now after hours TXN and CTXS reported some better news that had the chips and software initially moving up. It would take some seriously good news, however, to propel another leg from here. One thing, however; the market has been strong and it may not make it all the way back to the levels we are looking for. That is fine. Those are levels that should act as support, and if it turns before then we won't complain.
S&P 500/NYSE
Tried the move up as well and even tested some resistance before closing lower and showing a big, loose doji that could indicate a pullback.
Stats: -1.78 points (-0.19%) to close at 934.53
NYSE Volume: 1.562B (+147.08%). Back to above average volume on the reversal. Very much like Nasdaq. Higher volume reversal sessions off the high are not indicative of buyers having the upper hand.
Up Volume: 853M (+560M). Still managed to top downside even as the index fell. There was small cap buying ongoing.
Down Volume: 682M (+350M)
A/D and Hi/Lo: Advancers led 1.27 to 1. The positive breadth on the NYSE despite the SP500 lower close shows there was buying in issues other than the large caps.
Previous Session: Advancers led 1.01 to 1
New Highs: 59 (+35)
New Lows: 16 (+7)
The Chart: http://www.investmenthouse.com/cd/$spx.html
Tried to make the breakout, hitting 954 on the high (some resistance at 950) before it turned back down. It did manage to close off the low (927.72), bouncing back from some support at 925. It was actually very good action as far as showing how the support and resistance are in force, but the candlestick pattern of a big, loose doji indicates it does not have a lot of buy punch at this point. Thus a test lower toward the July, August and September interim tops at 911 and the 18 day MVA at 915 is not out of the question and would be normal. The inability to hold the strong move is just a sign it has moved well and needs a bit of rest to get some of the profit taking out of the way, increase the anxiety ('gee, I thought this thing had finally turned around'), and give stocks some time to test their breakouts as well.
DJ30:
The Dow ran right up to resistance at 9050 (9043.37 on the high) and then turned right back down. As with the SP500 it tested support on the low (8787; support at 8800 to 8762ish) and then rallied back from that level to the close. That candlestick pattern is a big doji, and as indicated with the SP500, that can mean some selling still that takes it closer to and even undercuts some support at 8800, 8762 to 8726, and the 18 day MVA at 8698. The index remains in good shape as it holds over those July, August and September interim highs and the early November high. If it can move laterally for a few days or more and still more or less hold these levels it will be in great shape for a move higher to once again test that 9050 resistance and then the 200 day MVA at 9173.
Stats: -33.52 points (-0.38%) to close at 8862.57
Volume: 1.562B (+147.08%)
The Chart: http://www.investmenthouse.com/cd/$indu.html
TUESDAY
As noted, CTXS gave an upside warning after the close, indicating revenues at $120 to 130 million and earnings at .12 to .17 versus .12 prior. TXN said it sees strong demand for wireless and specialty analog chips and that its Q4 revenues would be greater than expected. That helped tech stocks after hours and has futures up, but we don't think that will be the kind of news that sets off the next leg. The market is overextended after a good run up and it needs a bit of consolidation as the action Monday indicated (good news, gap up, but could not hold the move). That would be normal. After the bear market no one likes to see stocks move down, but healthy action is a stair step action higher. That is what we have been seeing during the move, and this is a good point for many stocks to come back and test the short term moving averages or other near support before continuing to move higher. The market has to take some time off to absorb some of the gains and shake out the profit takers.
Monday we did not get very aggressive on the buy side. We saw the big gap and were not about to go jumping off into that until we saw how the action played out and what kind of volumes we were getting. When the market is a bit extended you have to be selective and pick those moves that are what you were looking for. With the positive A/D lines, there were obviously some stocks that performed well; it just was not the groundswell of buying we have been seeing.
Unless things turn much different we do not plan to be too active on the buy side Tuesday as stocks will still have to finish their pullbacks to set up the next moves. Many held up quite well Monday. We could say this is the second day of pullbacks given that the market finished a bit soft Friday as well. It is not an exact 'three days back then rally' formula, but one where stocks step back toward near support and test it or below it on lower volume and then start rising on stronger volume. This will give some stocks the extra time to finish their bases while others will be testing good moves already made. Both provide good entry points once again when completed. We sit back and wait for that to happen while we keep an eye on existing plays and stop points. We moved most of them up below the 18 day MVA in most cases as we want that short term MVA to hold. We will be watching the entire market action along with our individual plays to determine if they need adjustment or not, but it is a good starting point.
Support and Resistance
Nasdaq: Closed at 1484.78
Resistance: Price resistance at 1500 and the 200 day MVA (1493). 1574, the May low, is next.
Support: The 10 day MVA at 1454. The August high at 1427. The 18 day MVA at 1424. Then 1418, the interim test after the September 2001. The 50 day MVA (1360). 1357.09, the October 1998 bear market low. July, August, and September interim highs at 1345.
S&P 500: Closed at 934.53
Resistance: Price resistance at 950. 965, the September 2001 closing low along with the August 2002 high. Then the 200 day MVA (982) and price resistance at 990.
Support: The November high at 925.66. 921 is some price support. The 10 day MVA is at 925 and possible support. The 18 day MVA (915). July, August and September interim highs at 909 to 911. The top of the late October consolidation range at 899. The 50 day MVA (898). The September 2000/May 2001 downtrend line at 870. The March down trendline at 856. 850 to 855 (the October 1997 and Q2 1998 lows).
Dow: Closed at 8862.57
Resistance: A range of resistance from 9000 on up to 9050. The 200 day MVA (9173). 9500 from June and July lows.
Support: The early November high at 8800. The 10 day MVA (8793). The late July and early September interim high at 8726 to 8762.14 (8745 closing). The 18 day MVA (8697) and then the October high at 8500. The exponential 50 day MVA (8505) and then 8250.
Economic Calendar
12-02-02
Auto sales, November: 5.5M expected, 5.2M prior.
ISM index, November (10:00): 49.2 actual, 51% expected (up from 49.5), 48.5 prior.
Construction spending, October (10:00): +0.3% actual, 0.0% expected (up from -0.2%, +0.6% prior.
12-04-02
Productivity (revised), Q3 (8:30): 4.5% expected, 4.0% prior.
ISM Services, November (10:00): 53.2 expected, 53.1 prior.
Factory orders, October (10:00): 0.9% expected, -2.3% prior.
12-05-02
Initial jobless claims (8:30): 364K prior.
12-06-02
Unemployment rate, November (8:30): 5.8% expected, 5.7% prior.
Non-farm payrolls, November (8:30): 13K expected, -5K prior.
Workweek: 34.2 expected, 34.1 prior.
Hourly earnings: 0.3% expected, 0.2% prior.
Consumer credit, October (2:00): $7.3B expected, $9.9B prior.
SUBSCRIBER QUESTIONS
Q: Please can you give me an indication of how you scan for stocks? Are you looking for volume change relative to prior days, earnings growth, minimum average volume etc? I would just like to know the base criteria on how stocks make it in to your shortlist before you scan the charts to pick out the best.
A: One thing we always like to do is scan for stocks that are approaching a 52-week or greater high. This helps us look at stocks that are outperforming the market. We like these because they are doing something right or are being favored for one reason or another. Another important point is that in an improving market, stocks that are moving to new highs tend to be leaders and continue to make new highs. We want to catch them as they complete their bases and this is a good way to get an idea of the stocks doing that as well as what sectors are performing well. You can vary the criteria to get stocks of a certain average daily volume (we look at several, e.g., >100K daily average, >75K, >1M, to give us an idea if just what is moving). We also look at certain P/E ranges as a holdover from the downtrend when 'value' stocks were in favor. This is good because it also gives you an idea if there is any ongoing bias or not; in a growth market P/E's are not as big an issue with investors, and seeing that change is useful.
We can then cross-reference those stocks with some economic data such as earnings growth (+20% or more year/year) and relative strength. This helps narrow the search. After that we can then look at what some of the cream of the crop are.
That does not replace some of the other more difficult aspects. As we saw with the chip stocks and other tech stocks coming off the lows, it was not that they were moving to highs. Now we picked up the stronger leaders easily, but the chips were building off their lows and it took just some hard looks to see what stocks were under real accumulation and were building higher lows, breaking key resistance, etc. Unfortunately scans for these are harder to develop.
End Part 1 of 3
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