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understanding the stock market, trend trading stock
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4/28/03 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Monday: None issued. With market recovering we let stocks in uptrends keep on working higher.
Buy alerts issued: MATK; USAI; NXTL
Trailing stop alerts: AGIX; RNBO
Stop alerts: None issued
To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertdly.htm
SUMMARY:
- Mood changes, stocks rally as new week reversed late week losses.
- Personal income and spending keep chugging higher.
- Light volume hampers broad advance toward resistance.
- Subscriber Questions
Market bounces back with broad advance.
Friday was a downgrade session where analysts got in their valuation shots on stocks that had managed to continue a rally off the March low with a big early week, high volume advance. If stocks are in a more bullish posture they should be able to shake off most of the negative commentary that is based on nothing more than an analyst's estimate of what it is worth. When considering opinions, we prefer to defer to the market as it represents the opinions, fears, hopes, and general collective wisdom of those interested in making money on stocks. Thus we take our cue from the overall market, putting aside even our own feelings in light of what it is telling us.
Monday the market shook off those downgrades, bouncing right back and recapturing almost all of the losses taken Thursday and Friday. DJ30 jumped up off of its 200 day MVA as it should in a better market as all indexes rallied up to their highs prior to the late week selling. The advance was broad as well as the SP400 and SP600 made impressive advances after testing the breakout over their 200 day MVA last week.
Everything was clicking including several leaders resuming their advances on volume. The point gains and breadth overall, however, was not matched by volume. Volume was below even the Thursday and Friday selling sessions which were below the Tuesday and Wednesday breakout sessions. All in all the buyside volume continues its lead, indicating continued accumulation of stocks, but volume will have to improve once again if the indexes are going to take out the near resistance and then focus on the next key levels that would dramatically change the market's character, primarily 1522 on Nasdaq.
THE ECONOMY
March spending and income rise 0.4%.
Income rose 0.4%, in line with expectations and better than the 0.2% in February (revised down from 0.3%). Sounds decent, but adjusted for inflation incomes were flat. Still, there are pre-adjusted gains; that is another way of saying the number was better than a sharp stick in the eye.
Spending was up 0.4%, lower than expectations (0.6%) but the fastest rate of growth in 3 months. That easily topped the February 0.1% gain (revised up from 0.0%) and showed an important thing: consumers were not overly daunted by the war as confidence rose during the conflict. It is a continuation of the consumer providing the only life force for the economy with its continued optimism for the future.
As we noted over the weekend, however, that will not make the difference for the economy as it is a business recession. The consumer has remained solid, and that has kept the level of pain somewhat lower with a lower unemployment rate (by historical standards) and a housing market keeping demand in the pipeline. The housing market is still moving but it has also lost its big upside potential to lead higher. Thursday the ISM is out and that will give another reading on the manufacturing sector. The consumer did not slow as much as feared during the war; did businesses follow suit? We are not very confident that there was much life there.
THE MARKET
Very pretty price gains and breadth as sectors across the market scored nice gains. The indexes pushed right back up to resistance after the Thursday and Friday losses as some leaders continued higher, building upon success. The pullback was brief, a rest after running up to resistance. Now we see if there is anything behind this move as large cap indexes again challenge the near term resistance.
Volume did not answer that question. Monday volume can be light and this was one of those Mondays. Up volume dominated down volume but it could not match the upside breakout volume last week nor could it top the late week selling volume. All of the attributes are in place for a continued move, now it just needs to score more volume on the move to give the power to make the breakout.
Market Sentiment
VIX: 23.05; -0.85
VXN: 32.68; -1.02
Put/Call Ratio (CBOE): 0.76; -0.11
Nasdaq
Danced with the January high, but was unable to make the move Monday after a couple of tries. Took back most of the losses from last week, however, a good start back at work.
Stats: +27.7 points (+1.93%) to close at 1462.24
Volume: 1.463B (-3.54%). Lower volume underlined the lack of overall punch. Still came in just above average, a sign of continued solid upside interest.
Up Volume: 1.161B (+820M)
Down Volume: 282M (-874M). Upside volume easily topped the downside action, showing that the buyers were in control for the session.
A/D and Hi/Lo: Advancers led 2.07 to 1. Excellent breadth all session helped the advance. Advancing issues continue to make new highs as the upside session breadth stomps all over the downside breadth.
Previous Session: Decliners led 1.41 to 1
New Highs: 146 (+32)
New Lows: 29 (+2)
The Chart: http://www.investmenthouse.com/cd/$compq.html
A breakneck advance in the first 1.5 hours gave way to a lateral move the rest of the session. It was a good 3-hour lateral move that broke to the upside with just under 2 hours left. Two runs as resistance from the January high (1467) failed as trade was not strong enough to send the index over this near term resistance where it failed last week. The action was very solid, however, as some of the big names started up on volume as well as many smaller Nasdaq issues doing the same. Recapturing most of the Thursday and Friday losses in just one session is an excellent way to start the next assault on the near resistance (January high) and the next key resistance points at 1512 (May 2001/January 2002 down trendline) and at 1522, the December high where the rally from the October 2002 peaked. Nasdaq has led the market off the lows and in this last move from the March low as well. It has formed a nice little cup with handle or double bottom with handle since the January high, and a strong volume breakout would send it toward those resistance levels.
S&P 500/NYSE
After a quick test of the 10 day MVA, large caps were up again right to the longer term down trendline. It is ready if buyers are willing.
Stats: +16.03 points (+1.78%) to close at 914.84
NYSE Volume: 1.273B (-3.73%). Lower and below average NYSE volume for the second session. The selling was on lower volume last week indicating no distribution, but the Monday upside was on even lower volume indicating it was not a powerful accumulation session even though many stocks rose.
Up Volume: 1.088B (+782M)
Down Volume: 160M (-856M). Buyers were in command, but there were fewer of them in the market.
A/D and Hi/Lo: Advancers led 3.09 to 1. Exceptional upside breadth. Downside selling has not come close to matching this level.
Previous Session: Decliners led 1.63 to 1
New Highs: 156 (+60)
New Lows: 21 (-9)
The Chart: http://www.investmenthouse.com/cd/$spx.html
A nice test of the 10 day MVA (900) at the open and then it was all upside. The large caps ran over the September 2000/March 2002 down trendline (915) on the high (918.15), but did not have the buyside strength to push over that resistance point. This was a good return to the upside after the lower volume pullback Thursday and Friday. As with the rest of the market, the index is ready to make the move to clear immediate resistance in order to take on the January high (935) and even the December high (954). Nasdaq is already on the verge of the last leg of its trip; if it makes it before the large cap index it will most likely need to take a breather. Thus SP500 may not make it up to the December high on this round.
DJ30:
The blue chips tested back to the 200 day MVA (8309) last week, roughly held that level, and then provided a nice upside advance to again challenge the highs in the ascending triangle (8522). Volume was lower, so as with the other indexes the move lacked the highest quality. The Dow is still at the threshold of its initial resistance breakout; it still must deal with 8800 (early November high) and 8870 (January high) before even trying the December high (the high in the rally from the October low) at 9043. That could happen rather quickly if DJ30 makes a breakout and good news keeps coming, but we are not looking at DJ30 as our leader right now. It could act as an anchor and that is why the breakout here is important.
Stats: +165.26 points (+1.99%) to close at 8471.61
Volume: 1.273B (-3.73%)
The Chart: http://www.investmenthouse.com/cd/$indu.html
TUESDAY
The Conference Board announces its version of consumer confidence at 10ET, but it most likely won't surprise many; the estimates have edged higher and higher as smaller surveys (Money, IBD) and Michigan sentiment have all shown a decent surge in confidence. It is something that is watched by the market, but historical evidence indicates that consumers say one thing and often do the other. We all know that; no one really answers a survey completely honestly (sometimes there is just no way of knowing what you are going to do), and how the questions are phrased structures the answer. In short, unless it is over 75 (70 expected), we don't see much impact.
We were impressed by the Monday action but were somewhat frustrated by the lack of major new breakouts as the market shot higher on breadth. Frustrated is not entirely correct; many leaders started back up on solid volume. More like disappointed as with the overall volume. In any event we were pleased with the immediate recovery and the resumption of leadership moves. When the leaders are leading, they run ahead of the market. If they showed good volume it is an indication that overall volume will come. If you rally, they will come.
There were many smaller issues moving along with the big names, and we are going to be looking at those Tuesday and as the week progresses. There were some good moves Monday, but many we were watching did not have the volume you want to see on a rebound. That is part of being patient and sticking with a game plan and not chasing low volume movers. Those stocks with strong upside volume behind them have proved to be the workhorses of the rally; we are letting many of those continue to run even when we could bank profits. We have banked some profits on partial positions, but as long as they keep the trend and good price/volume action we will give them room to run.
In short we expect the move higher to continue with a break over near resistance and a move toward the December highs with Nasdaq leading the way. We should not forget the small caps, however, as they show excellent action up off the 200 day MVA. The key, as always, is to focus in on those stocks with the good accumulation in good price patterns as these tend to provide the best moves and then hold onto them better during the pullbacks.
Support and Resistance
Nasdaq: Closed at 1462.24
Resistance: The January high (1467) remains in the way. The December high (1521).
Support: The 10 day MVA at 1432. The March and August highs (1426 and 1427). The 18 day MVA (1415). 1400 is some price support. The exponential 50 day MVA (1382).
S&P 500: Closed at 914.84
Resistance: September 2000/March 2002 down trendline (915). 925 to 935 (November and January peaks). 954 (December intraday high).
Support: Price tops at 911 (July). The 10 day MVA (900). March and April highs (896 and 905). The 200 day MVA (879). The bottom of the October consolidation range at 875 down to 868, the top of the January trading range. The exponential 50 day MVA (874
Dow: Closed at 8471.61
Resistance: 8522 and 8520, the March and April twin peaks. November and January highs (8800, 8870). December high (9044).
Support: The 18 day MVA (8327). The 200 day MVA (8311). 8250, the bottom of the October consolidation range and other index lows is some support.
Economic Calendar
4-28-03
Personal income, March (8:30): 0.4% actual, 0.4% expected, 0.2% February (revised from 0.3%).
Personal spending, March (8:30): 0.4% actual, 0.6% expected, 0.1% February (revised from 0.0%).
4-29-03
Employment cost index, Q1 (8:30): 0.8% expected, 0.7% Q4.
Consumer confidence, April (10:00): 70.0 expected, 62.5 March.
4-30-03
Chicago PMI, April (10:00): 48.5 expected, 48.4 March.
5-1-03
Auto sales, April: 6.0M expected, 5.5M March
Initial jobless claims (8:30): 432K expected, 455K prior.
Productivity, prelim. Q1 (8:30): 2.0% expected, 0.8% Q4.
ISM index, April (10:00): 47.0 expected, 46.2 March.
Construction spending, March (10:00): 0.2% expected, -0.2% February.
5-2-03
Non-farm payrolls, April (8:30): -58K expected, -108K March.
Unempolyment rate, April (8:30): 5.9% expected, 5.8% March.
Hourly earnings, April (8:30): 0.2% expected, 0.1% March.
Average workweek, April (8:30): 34.2 expected, 34.3 March.
Factory orders, March (10:00): 1.2% expected, -1.5% February.
SUBSCRIBER QUESTIONS
We continue to answer questions as fast as we can get to them and still get the reports, trading, investing, etc. done. Keept them coming and bear with us.
Q: Volume questions. Because we emphasize volume in conjuction with price, there are always questions about how we go about looking at volume for a play. Tonight we cover some of the issues listed in the questions below:
Do you find that a 'normal' day's volume is normal for every stock?
If a stock is normally at the '40% of day's total' at a certain point
in the day (10:15 say), but instead it's at 70%, that would suggest that
it's going to exceed your 150% volume criterion.
Does each stock tend to have a different volume footprint?
Does the volume differ on different days of the week?
A: These are all good questions given that volume is so important yet overlooked by most investors and analysts. A good-looking price pattern can be a trap if the stock is under distribution during the pattern, i.e. big money is moving out as evidenced by the accumulation weeks (price up on rising volume) versus distribution weeks (price down on rising volume). Even if there is good accumulation, at the moment of truth there needs to be volume. That moment is typically when a stock clears resistance or it holds support on a test and starts to rebound. Those are the two main points where we look to buy into stocks on the upside. We like to see volume when we enter as that shows the side we are entering on (up or down) is running the show. We readily admit we don't make the market; we follow what the really big money does because in a market this size, big money makes stocks move.
The questions above presume that the first criteria, i.e., good accumulation over distribution, exists. The questions focus on that moment of truth when the buy point is met and the stock is either making an important move or just going through the motions. It is important to see big volume at these points as that confirms that the accumulation has created a shortage of supply such that price breaks higher. Even at this higher price big money wants the stock. If that demand is not there it will be hard for a stock to maintain any upside momentum. It may reverse intraday or it may rally for a few sessions and then get clobbered. In the seminars we describe it as trying to push a rock further and further up a hill. You need plenty of fresh legs coming in to help the higher it goes. If there is a lot of help at the key breakout point, then the stock clears a good path with momentum and it rolls easier. If there is not enough push at that critical point, then it never gets the big push and it can roll right back down on top of those few buyers.
Normal volume. We look at the 50 day average as our normal level that we base volume on. The question is whether the volume at the moment of truth is just another ordinary day of volume or something special. Typically most volume is generated in the first and last hours of trading. The key to understanding what we are looking for is a strong surge. You don't necessarily have to know the daily volume pattern for a stock. If it is clear early on that volume is well on the way to our target (e.g., 40% to 50% of target volume in the first two hours), you can act with confidence. It can still tail off on you, but it is up and running well. We will often go ahead and pull the trigger in such a situation without hesitation. If it is running 20% in the first two hours, that is not good and we will most likely hold off unless it is a pure momentum trade and we are looking to capture momentum.
Remember: we are looking for stocks to clear resistance or bounce off support with strong volume. The key is how volume is trading as to the target volume as opposed to its every day volume. We adjust the target volume depending upon the type of play; breakouts require more volume while successful tests of support require less (the stock has already broken out on volume, clearing the path so to speak) though we want to see a solid surge in volume as it moves up off the test of support. Thus regardless of what the stock's itnraday trading patterns are we can act based on a surge as compared to average volume.
How do you use this? We look for volume surges early as compared to the daily average volume and where volume is as a percent of our target volume. Again, if a stock is at 40% to 50% of its target volume by mid-morning, we like what we see. If we see a stock at 25% we will stay interested and check back on it a bit later and again in the afternoon. We watch manually and we also set volume alerts; if a stock surges to 40% to 50% of its avearge or target volume early, we want to know about that stock. Many times on a strong breakout it will show much more early. Even if it shows 30% early on and is making a good price move we can enter a partial position, set another volume and/or price alert to see if it continues to ramp up on volume. Even then, we always check all stocks we are interested in for volume just to see where they are.
In sum, volume is important to gauge the strength of a move, but it does not have to be exact down to 1000 shares to make decisions. You want to see stocks moving on strong volume early to take positions early. Strong early volume is 40% to 50% of target. The hardest thing to do is see a stock running up but 10% of the target volume. Hard to lay off those high fast ones. In most cases if a stock is going to make the move we want we will see volume surging early; there is a reason the stock is hot and institutions use their program buys early and late. Early volume means institutions are moving the stock. The key is not to be exact on the volume, but to get in on the move when it is happening. If we are not sure, we just wait and see if it builds. On a breakout we are trying to catch on to a move that is going to deliver over several days to weeks to months (if it can continue its stregth); in most cases we don't miss out on a play if we wait a bit longer to make sure the volume is there. If it is showing strong trade we make the move. If it is not we hold off and see if it will build.
End Part 1 of 2
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understanding the stock market
trend trading stock
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