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us stock market, trend trading stock
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3/17/01 Technical Traders Report
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Technical Traders Subscribers:
TONIGHT:
- Down Friday summarizes a weak week.
- More stocks being torn down as the bear market spreads.
- Economic news continues mixed and that is keeping companies cautious on the future. The result is told in the market.
- Subscriber Questions.
- Team Trades.
Friday a microcosm of the week.
All indexes churned lower Friday as the big caps sold further into bear territory and the Dow made further strides toward its own bear market. Indeed the Dow was down 7.7% for the week, its worst weekly showing since October 1989. The Nasdaq concluded the week breaking below its recent attempt at consolidating above 1920, marking its seventh straight down week. All sold down on heavier volume on the day and on the week. Heavy distribution, i.e., institutional selling, continues to be the main game in town, no matter what index you look at.
The Dow has not hit a new 52-week low as of yet. It tapped an intraday low at 9654.64 back on October 18, 2000, and it bounced up from 9731 after testing that level last March. Will it hold this time? Not many are banking money on it. The Dow has to sell below 9400 to enter its own bear market (down 20% from its intraday high of 11,750.28). Its twin tops in 1998 are at 9370 and 9374 and just below the bear market threshold. That is another 4.5% fall from Friday's close (9823.41), but that appears to be a target the Dow is seeking as it sells on higher volume toward its 52-week lows.
Stocks being torn apart as the last nooks and crannies of the market are being taken down.
For the past few months we have discussed some of the problems with getting through the malaise impacting the Nasdaq and more recently the S&P 500. One of the problems was the continual, rapid rotation that was occurring as fund managers chased the hot sectors of the day. They ran from techs to health care to tobacco and food to techs to drugs to retail to tech, etc. Each time they ran back to tech, they built in another level of overhead supply when there was a brief pop where buyers entered just to become frustrated as more sellers used the upturn to unload shares. Thus, there has been a constant stream of ready sellers each time the Nasdaq attempted a move up.
Then there was the Dow (and until recently the S&P 500) that continued to hold up in a trading range as it harbored some of the defensive stocks in energy, food, healthcare and drugs. As the funds swept in and out of the different market sectors, the Dow rose and fell in its trading range. That was great for those stocks as the Dow seemed immune to the Nasdaq selling even with its tech components. The defensive sectors such as healthcare were still holding the Dow higher despite the selling in INTC and MSFT. Indeed, most all healthcare and drugs were doing fine whether on the NYSE or the Nasdaq.
A final turn of a real bear market is when all indexes and all sectors suffer the bear. In the history of the longer bear markets, all stocks have to suffer before the bear ends. What we are seeing now is weakening earnings outside technology (McDonald's, MetLife, Bristol Meyer), and that has started the peeling of the last refuges in the stock market. We saw that Friday with some of the stronger NYSE technology stocks that have been outperforming the market. When CSC announced its shortfall, the carnage was widespread with EDS, ACS, SDS, and LLL getting hit with the fallout. These are not tradition 'defensive' sectors, but they have been holding up well. Look at PFE, BMY, AHP; traditional areas of defense that are being sold hard. This appears to be the further spread of the bear market into those sectors that were formerly used as safe havens to rotate into. That is another sign that things are getting closer to the end, but it is also appears evident that the Dow has to suffer along with the other indexes before that happens. Also, note that the mid-caps and small caps, performing well this year until just recently, are now selling hard as well. When the majority of investors feel there is nowhere to go in the market, that is when things start to improve.
Not everything is heading down, but we have to adjust our sights.
It is a broad statement to say all sectors get hit. Not every sector is heading down. Materials and construction are doing well, smokes are a classic defensive sector and are performing decently, and some retailers and food services are doing well. We continue to scour the markets for the better sectors and plays, and they are still out there.
What this market means, however, is that we have to adjust our target profit levels on strong breakout moves when playing the upside. We are focusing on solid patterns on upside plays. In playing the upside in this market, strong patterns give us the moves that can bring us nice gains. Unlike bull runs, however, they do not tend to move on to double or triple out of these patterns. Those with gains in bear markets are quick to take profits, and a stock breaking out with a good gain and moving at or near a new high is a target for sellers. Thus, we make the plays on the breakouts, but we are more realistic in our targets. 10% to 15% is good, 20% is great in this market. The beauty is that the move can occur in just a few days. We follow the move with trailing stop losses to protect us from the downside, preferring to take a smaller profit and miss a potentially longer run than lose a profit and see it turn to a loss. Consistency and discipline are always needed, but in this type of market they are paramount.
THE ECONOMY
Still good and bad news, but the market is not happy yet.
PPI shows January was an aberration as OPEC tries to prop up oil prices.
The overall PPI rose 0.1%, in line with expectations and well below the 1.1% in January. The core actually fell 0.3% when it was expected to rise 0.1%. Again, energy was the major component in the reading, with fuel up 1.4% after rising 3.8% in January. The number is good news as it gives the Fed confidence to cut rates with no fear of inflation. But, the problem is not inflation at this point, but deflation as asset prices are coming under pressure across the globe. Moreover, OPEC again announced potential production cuts by another million barrels per day. OPEC cannot keep prices as high as it wants or at least sees them falling faster than it wants as western demand slackens with slower economies. It is trying to stay ahead of the curve, but as we discussed back in the late summer, OPEC is walking a fine line: it does not want prices to stifle western economic production; indeed, it is finding once again that it has to have western economies healthy to keep income up.
Sentiment improves in March.
Michigan sentiment surveyors said consumer sentiment rose for the first time in three months. The reading moved up to 91.8 in March versus 90.6 in February. This is really a jump given that a reading of 87 was expected. Current conditions closed the gap while future expectations rose to 84 from 80.8 in February.
Housing starts fall, but remain higher than expected.
Housing starts dropped to 1.65 million (annualized), but were again higher than the expected 1.6 million units. This continues to pace the economy, keeping it alive as it scrapes bottom elsewhere.
THE MARKETS
Overall market stats:
VIX: 35.29; +2.66. Volatility is on the rise again, but it is still below the recent highs that topped 36 and 37 just three sessions ago and in December, respectively. Again, these levels have not led to sustained moves in the market, and this is one sentiment indicator that we will most likely have to see at the 45 to 50.
VXN: 76.26; +0.35. Continued its rise, but not much of a spike in volatility as the Nasdaq was able to come back from its lowest point in the session. Still not at its early March peak at 78.95, we still cannot get an accurate correlation with the threshold for turning the index.
Put/Call ratio: 1.08; +0.16. This is the highest reading on the ratio in a year (though the reading was disputed in Investor's Business Daily). Option volume was good again at 1.829 million overall. This marks the second time in a week this indicator has closed over 1.0, and that is a good indicator that a bottom is near. If the bear/bull sentiment reading can equalize (still 15 points apart), the odds of a final bottom improve dramatically.
NASDAQ:
From attempting a stand at 1920, the index gapped lower on Friday and could not recover back above 1920. Volume rose on the move indicating more dumping by the big players. The semiconductors sold down, but not aggressively. The SOX has been forming a large W (double bottom) pattern, but of late it has taken a much more ominous turn in the form of a head and shoulders pattern. The left shoulder is in December, the head peaking in late January, and the left shoulder forming this month. It has made a lower shoulder than the left shoulder, and that indicates a harder slide if it breaks the 'neckline' at 530 (intraday) or 535 (closing). This is the same pattern we saw on the Nasdaq back in late December through mid-February that presaged the recent 350-plus point drop. We don't see heavy semiconductor selling, but if it breaks the neckline on heavy volume the stage is set for a possible 200 point drop from there.
Stats: Down 50.10 points (-2.57%) to close at 1890.61.
Volume: 2.103 billion shares (+7%) as volume rose back to above average levels on selling. 1.673 billion shares to the downside versus 379 million to the upside. When an attempt at consolidation fails on higher volume, that is a sign that further selling is most likely ahead.
A/D and Hi/Lo: Decliners of course were still ahead, climbing to 2.44 to 1 (1.12 to 1 Thursday). New highs fell to 25 (-4) while new lows vaulted to 380 (+215). From four days of trying to build a floor to dumping once again.
The Chart: http://www.investmenthouse.com/cd/$compq.html
No upside move, and though the index did manage to rise off of its lowest levels of the session, it was clearly losing traction as the selling intensified. It has now broken the point where it was trying to make a stand. We may see it test 1920 before falling further. How much further? Picking absolute bottom points is akin to guessing, but as we said back when the Nasdaq formed its head and shoulders and started down, 1750 is a target level. It also roughly corresponds with the 1997 tops.
Dow/NYSE: The weak move back over 10,000 blew up in a session of higher volume selling, the highest since the Fed cut on January 3.
Stats: Down 207.87 points (-2.1%) to close at 9823.41.
Volume: NYSE volume shot higher on the selling to 1.57 billion shares (+27.7%). Down volume rushed higher to 1.269 billion shares while up volume halved to 266 million shares. Heavy distribution on the NYSE.
A/D and Hi/Lo: NYSE declining issues reasserted control again, 2.06 to 1. New highs actually rose to 77 (+8) as new lows rose to 114 (+65).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow has some support at the 9700 to 9750 level. After each leg of downward selling we have seen of late, it tends to try and rebound slightly before the selling resumes anew. That allows us the opportunity to set up new put plays on the DJX, the option chain on the Diamond Trust (DIA), an index that tracts the Dow 30. Below 9400 is bear market territory, and we would prefer to see if sell down to that level to try and clear out those that are on the fence.
S&P 500: The big caps suffered heavy selling on Friday as NYSE volume shot up. They broke to a new 52-week low as they head for possible support at 1130. At this point when so many support levels have been snapped, it is best to look at signs of turning other than betting on where the turn comes. Still, it is useful to attempt to determine support levels so if we do see signs of turning (high-volume reversal, gains on higher volume) we can lock in on them and look for further upward momentum that can signal buy points. Right now the S&P continues its downward plunge on heavy selling. The OEX put plays have been great; the trend is still down.
Stats: Down 23.06 points (-1.97%) to close at 1150.50.
Volume: NYSE volume exploded on the selling, rising to 1.57 billion shares (+27.7%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
We have said it before: down Fridays often lead to down Mondays. All indexes finished at or near their lows on higher volume. With the usual round of bad news expected Monday morning, it is easy to anticipate some further selling at that time. Then the FOMC meeting will be out at 2:15 ET on Tuesday. We keep hearing talk and hope of a 75 basis point cut at that meeting. There are even more saying it will be just 50 basis points. The Fed Funds Futures contract is pricing in 50 basis points as a 100% certainty; 75 basis points is well below 50% odds right now, at least for Tuesday's meeting. Thus far the prospect of 50 basis points has not inspired the market, and we were looking for a possible rally in the techs into the number on the hope of a more substantial cut. Friday, however, was not the day with the ORCL, CSC, and CPQ news. Perhaps after some more selling Monday much like the feeble bounces we have seen after the recent hard sell offs.
Indeed, the Dow could try to find some support at 9750 to 9700 and give an oversold bounce from there. The Dow has been sold down hard the past week, almost straight down. That usually leads to a bounce higher in the form of a reflex bounce. In this market we would not anticipate too much of a bounce, though it could last more than one session. We would look for it to attempt to run toward 10,000 once again, but then a failure before it hits that level for another roll down. That would once again set up the downside plays at least back down toward 9750. The short term trend has been down; a breach of 9750 on continued strong volume would threaten to make this a longer term trend.
Similarly, we could see the S&P 500 test 1130 and then try to make a reflex move up toward the 1200 level. The Nasdaq could try the 1920 level ahead of the FOMC meeting. 1200 is a long move for the S&P, and there is not that much upward enthusiasm. A 75 basis point cut on Tuesday could provide some excitement for more of a climb upward. But, let's think about it. The main culprit holding the market back has been a lack of belief that the economy is ready to really turn things back up and that the Fed is up to the task to manage the turn. So, after an initial rise on the news, we have to see if there is any real buying power out there by the institutions as stocks and the indexes run into resistance. If they hit it on mediocre volume and start turning back, we are going to be hunting the shorts again.
As we commented last week, up or down we don't really care about. That may sound callous, but at this point the market has been trashed and the idea is to make money on the market while it tries to find bottom. Most long term positions have been sold awhile back as the selling broadened. What we continue to look for are the plays where we can pick up the easiest cash as stocks and the indexes roll up and down, and down some more. There are rolling stocks, pre-split momentum plays on up rallies, pre-announcement plays in good patterns, and put plays, all providing opportunity to make money. The trend is still down, and the downside plays have been more forgiving: if you are off a bit on entering a downside position, the trend has bailed you out this past week. That is the opposite of what the trend was in the bull rally. We have been showing you how to take advantage of that trend to your advantage. It is easier to swim with the current. We always have to watch the bottoms or potential support levels to start a bear market rally, but when we play the puts as they come off of resistance or break down through support we have the trend on our side.
Stay focused, stay unemotional, and patiently let the plays develop and come to you. Take what the market gives whether it is a quick roll up for a few dollars on a rolling stock or another rollover at resistance for a nice downside put play. At the same time realize that the Fed is cutting rates and the Congress is going to cut taxes, both important factors in an economic and financial market recovery. Stay in the game, keep your head, take what is given, and look for the signs of the next bull run setting up. For now we are continuing to take advantage of the bear run to the downside to make the same money we were making to the upside.
Support and Resistance Levels
Nasdaq: Closed at 1890.61.
Resistance: Building at 2030 to 2050. Then 2250 to 2300. 2400 to 2500.
Support: 1750
S&P 500: Closed at 1150.50.
Resistance: 1215. Then 1265, followed by 1285 to 1300.
Support: 1130
Dow: Closed at 9823.41.
Resistance: 10,000. Then 10,300 and 10,750. Then 11,020 - 11,028.
Support: 9750.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
3-20-01
Trade Balance, January (8:30): -$33.0B versus -$33.0B prior.
Treasury Budget, February (14:00): -$44.0B versus -$41.7B prior.
FOMC Announcement (14:15)
3-21-01
CPI, February (8:30): 0.2% versus 0.6% prior.
Core CPI, February (8:30): 0.2% versus 0.3% prior.
3-22-01
Initial Claims, 3/17 (8:30): 368K versus 375K prior.
Leading Indicators, February (10:00): -0.2% versus 0.8% prior.
SUBSCRIBER QUESTIONS
Q: In [Thursday's] newsletter, you suggest that if SEBL breaks support at 25 you would go for the April 35 puts. Why do you suggest going so deep in the money? Wouldn't the April 30s provide you with more liquidity? Wouldn't the April 25s afford the best leverage and profit potential?
A: It is true as a general rule that the short term, at the money options are the most volatile. Put options, however, even with the falling market, are showing lower delta's than their call option counterparts. Thus we prefer to go in the money to obtain a better delta. We would prefer to pay a little bit more and get a better delta. Why? Because the underlying stock does not have to move as far for us to make our profit target. Now we pay more than we would for an at the money option, but the underlying stock would have to move further down to make the same dollar amount of profit. That means we may have to stay in the play longer, and if the play moves against us much at all, it is harder for the option to regain the lost premium than it is for an option a bit further in the money. In this market we like to get in, get our profit, and then get out if the play appears to be stalling. Having a higher delta allows us to do that. Now we won't go pay $30 for an option to make $1; that is too risky even with a good delta. We want to balance how much we are paying versus the delta and the profit potential. That is a personal choice related to individual risk tolerances.
End Part 1 of 2
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us stock market
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