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us stock market, trading system
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4/09/01 Investment House Daily
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Investment House Daily Subscribers:
TONIGHT:
- AMZN delivers a positive outlook as a foil to continued analyst dogging of the SOX.
- Very light volume and a very lazy day.
- Low volume rally at hand? Hoping for some upside earnings surprises.
- Transition or just a pause before further selling?
- Mixed stories after hours as WDC says yes while SAWS and FTUS say not quite.
- Subscriber Questions.
- Team Trades.
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THE SUMMARY
A quiet Monday with both upside and downside news.
It was a typical Monday in a way. Analysts started things off airing some more doubts about the semiconductor sector (it is always more fun to target the lead dog even if that dog has already been kicked around pretty good). On the other hand, AMZN gave everyone a pleasant surprise with a positive outlook for the quarter. It was enough to counteract the negative semiconductor story, or at least it didn't hurt. The semis are already pretty roughed up, and some piling on Monday did not seem to add any additional hurt. It was somewhat interesting to hear the wide range of possible scenarios for the SOX index, anywhere from 400 to 200 on the low side. At this point, if something is in a downtrend, assume the worst but watch for the start of a move up. With analysts downgrading and re-downgrading stocks and sectors, can the bottom be too far off?
Extra light volume, please.
Friday's volume was light, but Monday it was really modest (1.449 billion on the Nasdaq, 998 million on the NYSE. Volume was so light it had many saying you could take nothing from it. We are inclined to agree, but note a couple of things. First, the light volume was on a move to the upside, and that always means we cannot put hardly any stock in the move higher; it simply does not show any real interest in the buying that went on. Second, however, we also note that back on March 5 volume was painfully low as well, yet the indexes jumped higher the next day on an influx of volume. The indexes refused to give in today despite the chance to do so; they rallied in the last hour to recapture the gains they lost midday. Thus, it was a nice end to a sleepy day, but that is just about all we took from it.
Earnings surprises leading to a rally?
Hope does spring eternal, but sometimes it is helped along by some crafty moves by companies. We have had a lot of earnings warnings and investors have worked stocks over hard. A warning is not exact science. A company feels numbers are going to be light so it issues one. The main motivation behind it? Note getting sued by angry shareholders. So, you issue a warning to cover for the downside you see as developing, and then work hard to surprise to the upside. It is a twist to the old idea that you say a job will take 10 days and then you do it in 7. Everyone is happy.
Last week everyone was worrying that a big cap company would warn and send things reeling. Today with AMZN's statement that worry shifted to the hope that a big cap would meet or beat its numbers. That means the market is still in a tennis match, and news is the catalyst whether good or bad. Get a little hope up and follow it with some bad news, then you have some pretty hefty selling. Keep in mind that Cisco's CEO has been quite vocal that his company has no 'visibility' ahead. That is Cisco-speak for 'be ready this quarter as well.' We need to be wary of positive feelings about potentially good earnings reports right before the actual event. That is much like hoping the Fed would cut 75 basis points on March 20; false expectations that had no basis in fact and were easily dashed.
Thus we might indeed get a rise heading into earnings based on this hope. We have said the indexes need a good 2-3 more weeks of rallying higher to set up another and hopefully last test of the lows. Problem is, heading into earnings on a false hope sets us up for a big letdown, and there is not a lot of time to get a hope rally underway before the hard numbers hit the street. The Dow and S&P 500 are still trying to move higher in their mini double bottoms, perhaps forming handles. The Nasdaq is trying to hold on here for some type of move. They are still right at resistance, however, and it has been a losing bet to play for a breakout over resistance before it happens.
Transition or pause before more selling?
As noted the indexes are trying to hold up just below resistance, and the Nasdaq once again is making some moves laterally as opposed to its propensity to out and out sell. A low-volume lateral move by the S&P and Dow could signify handles to their short double base patterns, and that would give time for more patterns to set up for upside moves if something delivers a breakout punch. We will have to see them develop, however, as the best patterns in tech were in semiconductors before their recent breakdown when the SOX completed its head and shoulders pattern. The Nasdaq is not in any great pattern, but it is not tanking. It has done this before, however, and we of course have to see the break over resistance and get some real buying going before we get all excited.
But, also remember that short selling and trading the downside is getting very popular these days. We have not seen the put/call ratio spiking to close well over 1.00, but we are seeing the ratio consistently hold in the 0.70 and above range. Indeed, the CBOE ratio was 0.95 today on a lazy, up and down day. That represents much more put activity on an ongoing basis. It is not overwhelming right now, but it is on the higher side showing a lot more downside investing. As we know, when everyone starts playing the downside, that means investors are becoming comfortable with the situation. That usually means it is about time for an upset. That is how short squeezes get started, and that can give the short term upward pressure that starts a rally even if it is a bear market rally. Again, we have not seen the move yet, but we are going to keep watching for a breakout on the Dow and S&P 500 over their resistance and out of their double bottom patterns as a sign that there is some upside potential.
THE MARKETS
While there are signs of life (or would it be more accurate to say there are no signs of active selling?), we also have to look at what the indexes did today. A weak volume move up to resistance and even over resistance on the Dow and S&P 500, and then a fall back to once again close just below resistance. The S&P 500 traded over its 10 day MVA, but fell back down below it on the close. The Dow traded over its 18 day MVA on its high, but it too faded and closed just below that resistance level. The Nasdaq approached its 10 day MVA, but did not touch it; it closed just below the down trendline connecting the late January closing price and the late March high of 1972.76. All have to make some serious breakouts before we have much upside comfort for the indexes overall.
Overall market stats:
VIX: 36.74; -0.02. Volatility was on the flat line today, reflecting the lazy trading. The trading range on the S&P was twenty points, and the VIX was pretty quite. It did spike up to 37.57 on the high. Volatility remains well into the high range even on 'slow' days; that indicates apprehension remains high, but it is not racing up in one blow-off frenzy.
VXN: 75.18; -4.38. Nasdaq volatility hit its high at the open. It fell even as the Nasdaq fell, and it dropped hardest as the Nasdaq rallied back in the last hour. A spike to 78 started the last attempt at a move up, but it did not go far. The fact that it is holding on and trying to put something together again is a good sign.
Put/Call ratio (CBOE): 0.95; +0.14. As noted above, put activity was up again on a rather mild day where all three major indexes rallied to close positive. We have already seen days such as this where the indexes move higher and the put/call ratio spikes up. That is not really an indication of fear as we see it. It means more puts are being bought and sold, but it could be from companies selling puts on their stocks for stock buy back programs, or it could as we noted earlier simply be that more investors are playing the downside. Overall put activity rose to 1.04 million on the CBOE, up from Friday's 964,000, but not overwhelming volume (1.8 million recent high).
NASDAQ: Did not sell off on more chip outlook downgrades from Joseph and Niles. That is a positive, but it was not a guarantee for a move higher. The index just glanced at its 10 day MVA before it settled in just below resistance.
Stats: Up 25.35 points (+1.5%) to close at 1745.71. Hard to believe that a 25 point move translates to more than a 1% move.
Volume: 1.45 billion (-17.3%). Up volume rose to 908.5 million (223 million Friday) while down volume was sliced to 531.8 million (1.512 billion Friday).
A/D and Hi/Lo: Advancing issues were actually in the lead, but not by much (1.2 to 1). That is well below the 3:1 ratios on both sides we were seeing last week, but it is a start. New highs rose to 65 (+14) while new lows rose to 242 (+13).
The Chart: http://www.investmenthouse.com/cd/$compq.html
Again the Nasdaq stalled below the 10 day MVA (1777.97) and the down trendline that connects the January 29 close (the start of the most recent down leg) and the March 27 close (an interim top). The candlestick pattern showed us a doji as the index rose on light volume, fell back and then rallied higher at the close. The doji does not give much guidance here other than it formed just below resistance. The Nasdaq has used this pattern to make sharp advanced the following session, but those types of moves with this pattern can be very news specific. A surprise earnings report to the upside could spark such a move. The next issue is whether buyers jump in. The Nasdaq will be in day 5 tomorrow since it again tried to reverse last Wednesday. A strong move up on solid volume could give a follow through day to that rally. Unless volume picks up substantially, and follow through would be suspect along with all of the other follow throughs we have seen in the past year. And without strong patterns to lead it forward, its longevity may be in question. That would suggest a potential bear market rally in the making if it rallies from here.
Dow/NYSE: The Dow tried to break over the 18 day MVA, but it ran into trouble and sold back. It made another run at the close to put it positive for the session and right below that 18 day MVA (9849.12). It traded over that level the first half of the session, but then had to claw back to finish there. Could be something good brewing, but we will have to see the breakout.
Stats: Up 54.06 points (+0.6%) to close at 9845.15.
Volume: NYSE volume slid sharply as well, down to 997 million (-21.2%). This is a hefty drop on a day of gains, but we cannot read too much into it. You could easily say the lower volume rise was a continued bad piece of price/volume action or was a welcome low-volume day while the index consolidates below resistance it want to break over.
A/D and Hi/Lo: Advancing issues led 1.75 to 1. Not a bad day from that angle. No new high/new low information tonight.
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow was trying to go somewhere, but it did not have any high octane fuel in the form of buyers to goose it up over resistance. As a consequence it could not hold above resistance. That is troubling as it reinforces the resistance, but the Dow also avoided a sell off that was in the making. Again, some sideways action on low volume would be excellent as it would form a handle to the double bottom pattern it has formed, and time is a great asset to bases: the more time it can build, the stronger the foundation. The 9-day double base pattern was on the very short side for a sustained breakout. A handle of a week or more would be a boon. On the other hand, we are in a down market, and the index has been unable to break that resistance. That has meant selling in the past. We have to see the breakout (over 9992.53) on big volume. Again, if it cannot make the break, we will be looking at DJX puts to the downside.
S&P 500: The big caps continued in their short double bottom pattern as well, but they are struggling well below the breakout point of the pattern (1183.24, the 'hump' in the pattern). They also have to beat the 18 day MVA (1153.31) and the down trendline that started in January (now right at 1156). This is a tall order so far from the breakout point unless the markets do in fact get some unexpected help from a surprise earnings report. Hard to bet on that ahead of time.
Stats: Up 9.16 points (+0.8%) to close at 1137.59.
Volume: NYSE volume really fell, dropping back well below average at 997 million (-21.2%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
No economic news, but earnings will be tricking in. After hours the Western Digital news had some optimism brewing. WDC sells disk drives to Dell and others and it said it would lose just 4 to 6 cents versus the 7 to 10 cents it warned of in January. That had tech stocks related to PC's moving higher after hours, and there was a general drift higher in the QQQ. Problem: it is 50-50 whether that type of news translates to positive moves the next morning. As noted, some people are all of the sudden hopeful for a good report from a big name. Remember, however, that a company can meet or beat lowered estimates and still warn about the future or say 'no visibility.' WDC did not say what its future looked like. Would that have made a difference in how it was treated after hours? You bet. So, this hope may rhyme with dope in all capital letters if we get a low volume rally just to get shot down by a big name that misses or that hits and says it will probably miss. That does not push the ball forward. It needs to be ' we did better than was expected, and we think we will do even better in the current quarter.' As we said earlier, if investors are thinking there might be this kind of talk at earnings, they are being set up for yet another round of disappointment.
Because the indexes just held steady on low volume, we have to be ready for whatever happens on Tuesday. It did not look like much was happening today, but we had some excellent breakouts on some of our basing plays such as VFC, CHBS, and DRI. Solid, high volume breakouts on a lazy day. This is why we tell our brokers about these basing stocks, what the breakout points are and said 'call us if they hit this point!!' Or, that is why we have alarms set on eSignal so it can send us an email when the price gets close so we can call the broker and ask what is going on. Thus, while it seemed to be a lazy day, there was heavy trade in some stocks breaking out to new highs.
We have more of those to look at again tonight. Also we have to keep an eye on the downside plays in the event this turns out to be just another failure at support. There is some hope out there that this time it is more; that could fuel more of a move up, but without serious volume it would look like a real setup for more downside; indeed, that may be the bear market rally and fall that we are looking for. We can play the rally, but we have to stick with the winners that are in good patterns and are breaking out. There is real buying behind those. But, we cannot rest on the breakouts; use trailing stop losses, and be careful around the target levels. We are still in a down market and have to focus on taking profits when a move starts to sputter; we can always get back in on a successful test, and we have locked in some gain in the interim.
Support and Resistance Levels
Nasdaq: Closed at 1745.21.
Resistance: The 10 day MVA is at 1777.97. The 18 day MVA is at 1847.24.
Support: 1619.58 is the recent low. After that 1500 or 1300.
S&P 500: Closed at 1137.59.
Resistance: 10 day MVA at 1138.91. The 18 day MVA is at 1153.31. The down trendline is at 1157.
Support: Potential soft support at 1100. Then 1085.
Dow: Closed at 9845.15.
Resistance: 18 day MVA is at 9849.12. Breakout is 9992. After that, the down trendline is at 10,172.20.
Support: 9106 is the intraday low. Then it is 8750.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
4-11-01
Export Prices ex-ag., March (8:30): -0.1% versus -0.1% prior.
Import Prices ex-oil, March (8:30): -0.1% versus -0.1% prior.
4-12-01
Initial Claims, 4/7 (8:30): 383K versus 383K prior.
PPI, March (8:30): 0.1% versus 0.1% prior.
Core PPI, March (8:30): 0.1% versus 0.1% prior.
Retail Sales, March (8:30): 0.0% versus -0.2% prior.
Retail Sales ex-auto, March (8:30): 0.2% versus -0.3% prior.
4-13-01
Business Inventories, February (8:30): 0.3% versus 0.4% prior.
Michigan Sentiment-Preliminary, April (10:00): 91.0 versus 91.5 prior.
SUBSCRIBER QUESTIONS
Q: On Friday the VXN closed at a new high. If it were a stock or an index, one would believe that the VXN is heading higher. Can one in fact threat this chart pattern as if it were a stock or an index?
A: It is true that the VXN and the VIX are measures of emotion, and thus are similar to stock charts that graph investor emotion. They track the volatility of index options; for example, the VIX tracks the volatility of near term, at the money OEX options. The volatility component of options is a much more nebulous measure of emotion. On a stock chart we have price and volume; in tandem these give a very good picture of investor emotion as a stock traces out a signature pattern. Volatility on an option contract runs higher and lower without the same tie necessarily to volume, and thus it is much more difficult to say based on the chart that it will move higher or lower. What it is good at showing us are comparative values that have resulted in up and down moves in the indexes. When it hits a certain level it tends to bounce the other way in an inverse move to the index. Drawing conclusions beyond that, however, is difficult. You use it to forecast what the index is going to do, but it is not a good predictor of what the volatility index itself is going to do.
Q: A subscriber responded to the options in IRA accounts with the following information. We have no relationship with Fidelity, but we have sampled its online trading system and it is very good. So is the last statement this subscriber makes.
A: Not that they need more advertising, but Fidelity brokerage will let you open an IRA and buy calls and puts. I've bought short term puts in my Fidelity IRA last week. The availability to do this in a retirement account obviously requires some real self-discipline.
End Part 1 of 2
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us stock market
trading system
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