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Begin Part 2 of 2

NASDAQ:

Rolled over after the Fed announcement and plunged to a low not seen since November 1998. Volume rose again on selling. Not a huge gain, but it did rise. Things are not really getting better right now as mutual funds are net sellers of stocks, not buyers.

Stats: Down 93.74 points (-4.8%) to close at 1857.44.
Volume: 2.018 billion shares (+13.7%). Down volume was 1.690 billion shares versus a mere 260 million to the upside. Selling all around. Volume was below average, a small silver lining.
A/D and Hi/Lo: Declining issues flipped back in front 1.64 to 1 (advancing issues led 1.44 to 1 Monday). New highs actually rose to 35 (+3) as new lows fell to 185 (-98).

The Chart: http://www.investmenthouse.com/cd/$compq.html

The index sold down to a new 52-week low once again today on stronger volume. The slide continues, and we are going to see if there is anything here to bounce. Primarily, the SOX will be a focus as many are looking for leadership from these stocks. If the index breaks 535 on strong volume, that is not good for the Nasdaq. If it does, we expect the Nasdaq to continue to drop to 1750; it may do so anyway. After the selling today we may see it sell down lower in the morning and try to bounce from there. At this point, however, it appears as if Nasdaq will try 1750.

Dow/NYSE: The Dow performed as expected, though it was not what a bull would want. It tried to punch through 10,000 in anticipation of the Fed action, but that move failed and it fell through potential support at 9,750. That is a fuzzy area, however, and it could find support anywhere from 9700 to 9750.

Stats: Down 238.35 points (-2.4%) to close at 9720.76.
Volume: NYSE volume moved higher once again on selling, rising to 1.233 billion shares (+9.5%). Down volume came in at 885 million shares versus 333 million to the upside. Yet another day of institutions selling stocks rather than buying stocks.
A/D and Hi/Lo: NYSE declining issues moved back ahead 1.35 to 1. New highs rose to 126 (+13) while new lows fell to 62 (-32).

The Chart: http://www.investmenthouse.com/cd/$dja.html

A test of 10,000 and then a plummet to 9720. The Dow closed near support that it found in March and October 2000. Perhaps it will find support here, but the momentum is down and the index closed on its low on heavier volume. It was not blowout volume as we have seen on some of the selling, but that is not really a good thing. Volume was above average, and we usually like to see heavy, heavy volume on selling with a recovery from the session lows. That did not happen today, and that is a portent of more selling. The Dow is easily capable of selling down to 9350. That would be a bear market on the Dow. Will it stop there? Picking bottoms in this market is not healthy; if 9350 does not hold the Dow could fall to 8100 if the character does not change.

S&P 500: The big caps hit another 52-week low on higher volume as they mirrored the other two indexes. It also tested some resistance and rolled over, finishing at its session lows. That means more momentum to the downside. There may be attempts to bounce, but the downtrend is still firmly in place with no change in the character at this point. The Fed failed to provide any catalyst to change direction, so good old economic activity will have to hold up. There is plenty more risk to the downside, but there is a lot of support at 1085 to 1100.

Stats: Down 28.19 points (-2.4%) to close at 1142.62.
Volume: NYSE volume jumped to 1.233 billion shares (+9.5%).

The Chart: http://www.investmenthouse.com/cd/$spx.html

TOMORROW

After the Fed there is the Consumer Price Index before the open tomorrow. Will that do much for the market? The Fed has already told us it is ready to act, and the CPI only tells us whether there is room for the Fed to continue to act aggressively. In other words, the CPI is a measure of potential inflation; if it is low as expected that means the Fed has even more of a cushion to lower rates as it said it is going to do. If it is higher, that tightens things a bit, but the Fed has said it is not worried about inflation; it fears further slowing. Thus, we don't look at this providing a catalyst as it did once upon a time.

That leaves the market to its own devices in determining its direction. There is no question the momentum is down; any bounce up at this point is suspect as there has been no change in character indicated by any price, volume, or any other indicator. Thus we have to continue to look at the trend to make us money, playing the downside on those stocks and indexes breaking lower and bouncing off of resistance. We still see certain stocks moving higher, however, such as CPN, AN, LOW, and others. They are a small, determined group that has been out performing the market. There are others that continually set up good patterns and move up and out of them for solid, quick gains.

We said it last week: the fear in this market makes it easier to trade much as the high bullishness and upside momentum made it easy to trade during the massive bull move. The trend is well in place, and it gives repeated chances to enter it. At the same time, investors are seeking those stocks that are showing outstanding earnings and growth even in this market, and those stocks are continuing to outperform the market. The new Up and Comers on the Daily and several of the pre-announcement split plays are examples of those stocks. When the relief bounces come, the pre-splits show great momentum. The fear rises and falls, and the market falls and rises in response. This allows us to get on the right side of the market to take advantage of those moves just as it did today. The high emotion in the market is a tool we can use to help us make money.

Tomorrow we expect more weakness at the open, but the pattern has been for a weak bounce after heavy selling. There was a lot of frustration selling today, and after a bout in the morning it may try to bounce. After the Fed move, however, the pattern of bouncing may have been temporarily interrupted as investors feel the need to further sell stocks on the belief that no further action is coming in the short term. Indeed, the short sellers are going to be out in force over the next two weeks trying to drive down some big name stocks. We saw IBM, one of our put plays, get hammered today. The short selling is going to try and drive some of the IBM's down, and that will pressure any bounce attempts. Thus, as we said, the pressure is downward for now, and we need to keep an eye on the SOX for a sign that a key sector is either further weakening or able to bounce. Until we get more clarification, we play the trend and we take advantage of those stocks that continue to provide the strength to the upside.

The market may just need to take a bit of time here to realize 150 basis points is a good thing. We are not willing to toss history to the side: at some point the Fed rate cuts and the tax talk will give us some serious rally. For now it is not here, but we will see the road signs.

Support and Resistance Levels

Nasdaq: Closed at 1857.44.
Resistance: 2030 to 2050. Then 2250 to 2300. 2400 to 2500.
Support: 1750

S&P 500: Closed at 1142.62.
Resistance: 1175 is potential resistance. Then 1215 and 1265.
Support: 1130. After that, 1085 to 1100.

Dow: Closed at 9720.76.
Resistance: 10,000. Then 10,300 and 10,750. Then 11,020 - 11,028.
Support: 9750 failed, though there is support from 9700. After that, 9350.

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 (2:00): -$44.0B versus -$41.7B prior.
FOMC Announcement (2:15): 50 basis point cut in Fed Funds and Discount Rate.

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: How do you start and finish a put play online? Do I place a sell at a stop limit?
Q: I am trying to set up a Stop Loss. I did a SELL ORDER and key in the stop loss target. However there are 3 choices: Limit, Stop and Stop Limit. Which one do I pick?
A: Both questions cover similar ground, so we are combining the answers. Starting a play is a buy order to open a position. In that respect it is just like any other order. To close it, you place a sell order, either one to be executed immediately (market or limit order, though we always use limit orders) or a stop loss or stop limit order. A limit order is a buy or sell order saying you want to buy at the price you enter or a better price. A stop loss order is an order to sell at a specific price. The order is triggered if there is a trade at the stop loss price. That is why we like very liquid options to be able to use stop losses; if a trade is not made, the stop loss is not triggered. If the price moves past your stop loss price without a trade and then trades at a lower price, your stop loss then becomes a market order and you are taken out at the next lower trade. A stop limit is a stop order to sell at a particular price. If the price of the stock or option falls through the stop limit without a trade, the next lower trade will NOT trigger a stop limit. You are saying you want to sell at that price and no other. A stock can gap below your stop limit price and then rebound and you are taken out on the rebound. A stock can gap below your stop loss price and rebound, but if there is a trade below your price, you will be taken out at that lower price. That is why we often cancel our stop loss orders when there is news after hours that is going to cause a stock or the market to tank on the open. We don't want to be taken out at the lows of the day.

TEAM TRADES

MERQ: We were looking MERQ for a possible put if it could make a move up to resistance, but then pull back. We were especially interested in its reaction to the rate cut. Before the announcement the stock made its way up over the 10 day MVA, which was at 41.75, hitting close to 43.50 before the rate cut announcement. Our target for resistance had been the 43-45 range, so we were ready. When the announcement came, May $55 puts were 14.875 x 15.625. The stock reached down a bit on the announcement, but bounced with the market, which we thought it might. The stock climbed back up over 44, but the market turned and so did MERQ, dropping rather hard just after 1:30 CT. At 1:35 the market took out its low for the day, and the 5 minute MVA for MERQ passed below its 15 minute MVA. Taking that as our cue, we went for the puts, which were at 15.50 x 16.25. The price went down and hit 15.375 x 16 as the stock fluctuated a bit, but the overall trend was in place, and the stock dropped back close to 38 before closing at 39. The options hit a high 18.375 x 19.125, and then closed at 17.50 x 18.25.

QQQ: Today I was on a boat trying to take something similar to a vacation and trying to catch white bass. Fishing was slow, but even if it was hot I was going to call my broker to confirm the plays and see what the Fed actually did. While we were looking at some last minute positions, the announcement came. One of the plays we were debating was a QQQ put. I went with the May $50 puts (broker wanted me to buy something further out of the money) on the news of the cut, getting them at 8.90. The broker called back 10 minutes later in a panic saying the market was rallying. While we talked it hit its old top and started to fall. I said buy more. I put in a sell order at 9.90 and went back to fishing. He called back with 20 minutes left saying the market was falling and did I want to change sell orders. Fortunately I did not get the message but was actually catching fish. The sell order was hit; I could have made another 0.50 on the trade, but for a day of fishing, things went pretty well anyway. I spent about 10 minutes total on the phone, got all of my orders entered and traded, made some really good money, and got to spend some time with my father in law and my sons. With upfront planning I was able to make my trades and make the money from an opportunity that was presented even though I was not in the office. You can do it too.

For a review of frequently asked questions, please use the link below:

http://www.investmenthouse.com/1questions.htm

Good Investing!
Jon Johnson and the Tech Traders Report Staff.

All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners of Online Investment Services, LP or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.

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