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12/03/02 Technical Traders Report Update
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Tuesday: None issued
Buy alerts issued: None issued
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:
- Pullback continues, small caps hanging on the best.
- E-tailing numbers surging.
- 'Is the rally over?' and other insane television questions.
- Subscriber questions
Monday's gap reversal continues as market gets rid of the froth.
A single session reversal of the gap higher Monday was not going to be enough to put the market back into a new buying position as Tuesday clearly showed. There was no real catalyst to the upside to spark any buying just yet (all the good news priced in last week), and there was no real downside catalyst. Sure Merrill cut its recommended portfolio by 5%, moving that to bonds, but that is in line with the valuation downgrades seen the past three weeks and not a major market mover. And yes, AOL has a gloomy outlook, but no one is really surprised by that: broadband will kill off AOL's dialup customers and it is behind in the broadband game. It was just not a day for any buying activity to take over, and as we said in the alerts, sometimes you just have to make yourself do nothing and let stocks set up once again for the next move.
Volume came in significantly lower as the indexes pulled back to and held support levels. Lower volume on selling is always what you want to see. The losses always seem more than they should be (where is that gentle pullback we all want to see?), but as we said over the weekend, the pullback would not only take some fluff out of the market but also raise anxiety levels as it did. All of the comments on the financial stations about whether the rally had ended demonstrated that the selling was having that effect. The lower volume and the quick questioning of the rally's longevity indicate the pullback is proceeding on course.
THE ECONOMY
Not any scheduled releases Tuesday, but there were some very interesting statistics still coming out regarding sales amounts and patterns. The most intriguing is the e-tail results. Friday was a strong day for retail as the 12.3% gain from last year shows. Online sales Friday were up 40% from the 2001 'black Friday.' When employees got back to work on Monday and could not get to the stores, they did not stop shopping. Instead they went online and pushed Monday's online sales up 49% ($400 million) over the 2001 'black Monday.' For the holiday week online sales were up 41% ($1.5 billion) over 2001. Consumers are spending heartily this year, and the Monday results show that Friday was not the one-day wonder some where saying it was.
THE MARKET
When the pullback is over, a good part of the next move could come from the small caps as they continue to hold up fairly well in the recent selling. They were up 1.1% Monday and were down even with the large caps Tuesday. It was a late sell off in those stocks that took them down, but many small caps suddenly have better relative strength meaning they are moving better than the rest of the market.
This is an important development. How many times have you heard the past 2 to 3 weeks how valuations are getting too high? There could very well be rotation into smaller names as money is taken from some of the bigger names (ala Merrill Lynch) and put into smaller names. This is a seasonal pattern as well as small caps start to perform better near the first of the year, particularly in January. We do not think there will be a wholesale abandoning of the chip stocks and the like that have led the move higher; indeed, we still look for those to perform again after this consolidation is over. Rotation, however, is a key attribute to a healthy market, and if there is movement into small caps as well that would underscore how well the market is performing.
There was a day of selling so the rally must be over, right?
Stupid pet tricks, stupid financial anchor statements. Both found on your local network television. One day of real selling and we heard the question asked right after the close. Apparently there are only two speeds the market can take according to the television cue card readers: full up or full down. Given the past 31 months I suppose that is understandable; one or two days of selling and they start working on the window latches on Wall Street. At least some of those asked the question were logical about it, noting the run up on volume, the need for a pullback, and the lighter volume as it did. A breath of fresh air.
Treasuries rise, but not much.
With the major indexes selling 1% to 2% you would expect movement into bonds. Bonds were up, but they were not up as much as stocks were down, or at least not in the manner we have seen in recent history when bonds were bought as stocks sold. Meaning? There was no major asset shifting ongoing Tuesday, just the anticipated profit taking we were expecting to occur. Another positive to the action.
Sentiment Indicators
VIX: 31.76; +1.71
VXN: 51.99; +1.83
Put/Call Ratio (CBOE): 0.89; +0.21. The anxiety level is already moving up, with put activity jumping on a day of lower volume selling. As we said, it is very nerve wracking to watch stocks sell back after a move up given the long downtrend, but you have to fight your gut reactions and look at what the market is actually telling you. We have been into contrary indicators on this move, and this is another one that, along with the immediate return of those questioning the rally, that gives some comfort.
Nasdaq
Gapped up Monday, gapped down Tuesday and sold to close on the 10 day MVA. Hefty point loss but volume backed off.
Stats: -35.82 points (-2.41%) to close at 1448.96
Volume: 1.653B (-14.12%). Lower, below average volume on the selling. That is what you want to see on the selling.
Up Volume: 269M (-786M)
Down Volume: 1.375B (+532M). Lower volume but those in the market were sellers.
A/D and Hi/Lo: Decliners led 2.11 to 1. Much stronger than we wanted to see, but the techs tend to show a strong negative session in the sell offs as they show strong positive breadth on the way up.
Previous Session: Advancers led 1.03 to 1
New Highs: 57 (-57)
New Lows: 24 (-2)
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq continued its bounce down from its failed attempt to take out resistance at the 200 day MVA (1490). It never really looked good though it did attempt a post-lunch climb that had some promise before late selling pushed it back down. It was simply too early to try a rally after such a strong move up the prior weeks. We monitor many sites and services each day, and we noted that the word 'disappointing' cropped up many times. That is the emotion you feel, but it is also important to be patient and let happen what you know is going to happen, i.e., the pullback. Nasdaq held the 10 day on the close and still has support at the August high at 1423 (closing) as well as the 18 day MVA (1427). It could undercut these intraday and still be in good shape to continue the move higher.
S&P 500/NYSE
The Monday reversal continued as the large caps fell below the early November high but still holds over the July, August and September interim highs.
Stats: -13.78 points (-1.47%) to close at 920.75
NYSE Volume: 1.437B (-8%). Volume peeled back to below average on the selling just as you would like to see it.
Up Volume: 317M (-536M)
Down Volume: 1.124B (+442M). As with Nasdaq, those in the market were sellers though they were not in the majority compared to prior sessions.
A/D and Hi/Lo: Decliners led 1.6 to 1. Modest decline.
Previous Session: Advancers led 1.27 to 1
New Highs: 35 (-24)
New Lows: 15 (-1)
The Chart: http://www.investmenthouse.com/cd/$spx.html
Gapped lower and pretty much mirrored the action of the other indexes, attempting a post-lunch rally that got slapped back in the last hour. The move pushed large caps below the 10 day MVA (924) though still above the 18 day (916) and the July, August and September interim highs (909-911). We want it to hold over those levels (may test below intraday) to continue a healthier consolidation move. May see it give the up and down action similar to that in the late October consolidation, but that is a good way to work through the gains and set the foundation for the next move higher.
DJ30:
The Dow is already down to the July, August and September interim highs (8726 to 8762) as well as the 10 day MVA (8762). It never made the August high though it made a run at it intraday Monday (9043; August high is 9077). This would be a good place to hold but it is not going to do that, most likely visiting the 18 day MVA (8679) or even an intraday test of the 50 day MVA (8498) and the price support also at that level.
Stats: -119.64 points (-1.35%) to close at 8742.93
Volume: 1.437B (-8%)
The Chart: http://www.investmenthouse.com/cd/$indu.html
WEDNESDAY
Economic news starts again Wednesday with the revised Q3 productivity, ISM Services, and factory orders. Important, but we don't expect it to move the market much simply because the employment report comes out Friday and that will receive the majority of the attention as far as the economy even though it is indicator that lags the most. Then there is the poor outlook from HPQ as it continues to digest the Compaq acquisition.
In short, we don't see a lot of upside catalyst yet; stocks have enjoyed a strong run and have just turned back from resistance. We do expect the selling to lighten up as far as the points lost, but it could also turn into what we saw in late October: overall lower trade but up and down sessions intermixed as the market consolidates. It can always just jump up from here, but it would take some powerful news to do it given all the good economic news built into the market during the Thanksgiving week. It needs some more time for a good foundation to move stocks up. That is why we took our January option positions off the table last week as we did not want any time to work against their value.
That means we have to continue to be patient. One urge is to look at some of the stocks that have run up and then short them. This is what some bears were doing all the way up the rally. Problem is, we don't like to go against the established trend. We prefer to short stocks that have broken their trend, tested the breach, and then continue down. Or we like to get those in continuing downtrends and short them as they tap that down trendline and then continue down. As for our upside we sit tight and let the leaders take some fluff out and then continue the move up. There were some dancing up and down around stop loss points today and some broke below the 18 day MVA (some gaps lower related to AOL news and the like); overall the volume on these was low. We were not inclined to start bailing out of positions based on the volumes we were seeing.
Wednesday we may not do a lot once again. After all of the activity that is not necessarily a bad thing. You do not want to push the action, try to make something that is not there or see something that is not there. Overall the market is trying to work through the large November gains and it is normal for it to do that. We need to fight the urge to trade, buy or sell just because we got used to doing a lot of it on the run higher. The keys are keeping a clear head, looking at what the market is actually doing, and waiting for things to set up to give you the entry points. We put stocks on the reports that look as if they are ready or getting ready to make the moves. We have to wait for the moves, however. That can come tomorrow or it can come in 2 or more days. The key is to know what you are going to do and simply being ready. Right now we are waiting for the consolidation to work its course and set up the next moves.
Support and Resistance
Nasdaq: Closed at 1448.96
Resistance: Price resistance at 1500 and the 200 day MVA (1491). 1574, the May low, is next.
Support: The 10 day MVA at 1453 may provide some support. The August high at 1427. The 18 day MVA at 1427. Then 1418, the interim test after the September 2001. The 50 day MVA (1364). 1357.09, the October 1998 bear market low. July, August, and September interim highs at 1345.
S&P 500: Closed at 920.75
Resistance: Price resistance at 950. 965, the September 2001 closing low along with the August 2002 high. Then the 200 day MVA (981) and price resistance at 990.
Support: The November high at 925.66. 921 is some price support. The 18 day MVA (916). July, August and September interim highs at 909 to 911. The top of the late October consolidation range at 899. The 50 day MVA (899). The September 2000/May 2001 downtrend line at 868. The March down trendline at 856. 850 to 855 (the October 1997 and Q2 1998 lows).
Dow: Closed at 8742.93
Resistance: The early November high at 8800. A range of resistance from 9000 on up to 9050. The 200 day MVA (9172). 9500 from June and July lows.
Support: The 10 day MVA (8762). The late July and early September interim high at 8726 to 8762.14 (8745 closing). The 18 day MVA (8679) and then the October high at 8500. The exponential 50 day MVA (8498) 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): 54 expected (was 53.2), 53.1 prior.
Factory orders, October (10:00): 1.7% expected (revised up from 0.9%), -2.3% prior.
12-05-02
Initial jobless claims (8:30): 374K expected, 364K prior.
12-06-02
Unemployment rate, November (8:30): 5.8% expected, 5.7% prior.
Non-farm payrolls, November (8:30): 35K expected (revised up from 13K), -5K prior.
Workweek: 34.2 expected, 34.1 prior.
Hourly earnings: 0.3% expected, 0.2% prior.
Consumer credit, October (2:00): $7.1B expected, $9.9B prior.
SUBSCRIBER QUESTIONS
Q: You said in one of your past reports that the 10 and 18 day MVA acted as resistance in continuing downtrends. Regarding the consolidation or pullback you expect the next week do you consider these levels as necessary to be tested before a possible break higher? Could you please tell me where I can consult [to find] these MVA levels for different stocks.
A: The 10 and 18 day MVA tend to act as resistance for stocks in continuing downtrends and they also act as support for stocks in continuing uptrends. As we have indicated in several individual stock write-ups on the way up, stocks that breakout often make that initial rally then come back and test the breakout before starting back up. Then they tend to use the short term MVA (10 and 18 day) as support as they continue the breakout move, bouncing up off of the 4 to 5 times before testing lower (typically down to the 50 day MVA or other longer term uptrend.
As we saw in the downtrend, these same short term MVA act as resistance as the stock or index moves lower, rallying up to them and then failing and starting another leg lower in the downtrend. We made a lot of money on the way down playing that very action.
When a trend is changing, they are not such good indications of support and resistance. In other words, the trend needs to get organized and established before they act as reliable levels to enter positions from.
As for the current action we do anticipate a test of these levels on the pullback. That is typical action after stocks run higher. They can test below those levels intraday and then run back to close over them, thus holding the support on the close.
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End Part 1 of 2
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