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5/08/03 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts issued Thursday: ELAB; PKI
Buy alerts issued: None issued
Trailing stops issued: None issued
Stop alerts issued: PNRA; FLMLBWS; SRZ
Consolidation looks like a consolidation.
We heard from two different sources Thursday that the market move higher "had failed" at resistance. Failed. Bummer. Sounds as if we should all make sure our insurance policies are paid up, the windows and doors are locked, and the suitcases packed. We kept checking outside to see if stock prices were falling from the sky, mass animal migrations were occurring, or anything that backed up what sounded like a cataclysmic turn in the market. When we didn't see any we went back and just watched the market action.
What did we see? Lower volume on a modest pullback to support. Breadth was negative but still quite narrow. There were some earnings related burn-ups, but they were pretty specific. Most leaders eased back on low volume the same as the indexes. The Nasdaq even showed a nice hammer doji right on the 10 day MVA as it backs off some from a great run higher that has shown and is showing excellent price/volume action. That sure does not look like failure.
True everyone but the shorts would have loved to see it run higher from here, but as we indicated a month ago, a run to Nasdaq 1522 would most likely initiate some consolidation as the shorts try to step in at that point and short term profit takers sell some shares. That tends to move a market laterally and down some as the sellers do their thing. As long as the price/volume action remains positive and the leaders continue to show leadership characteristics, there is no real cause for alarm. If a consolidation is failure, the periodic failures are common in the market and indeed necessary to set the stage for further moves higher.
THE MARKET
The consolidation has started with the 'failure' at resistance. The indexes banged at resistance for a few days, could not decisively break away from it, and have started to fade back on lower volume and narrow breadth. That is not failure, that is consolidation. Further, it does not necessarily mean it is a long term consolidation. Nasdaq looks super right here with a doji on the 10 day MVA; it could jump right back up and fill out our 'gut feeling' of a Friday rally back up after a very brief respite. It could also take some more time to consolidate in a longer sideways move. The key is the continued solid price/volume action (stronger volume on up sessions, weaker volume on down sessions) and leadership that holds up. Right now the market is doing that dance beautifully.
What about volume? Many are saying it is no bull market without real volume, citing average volume for this year being roughly 1.5B per day. First, volume has started to really surge the past three weeks as the market made the latest move up from the consolidation that started in January. It is very good to see volume swell on the right side of a base (those cup with handle bases on Nasdaq and SP500 we have written about last week) as that shows buyers are really moving into the market. Second, the action this year has been mostly consolidation in the market. The indexes peaked in early December on their run from the October low. That move was accompanied by a nice volume surge, well in excess of the August and September volume levels. As the market pulled back early in the year, volume trailed off; that is exactly what you want to see. After that second leg of the Nasdaq double bottom in March, volume shot higher as Nasdaq started to climb. It backed off in early April as it consolidated the move, and then it shot higher the last half of April until now, showing volume greatly in excess of current averages. That is very good volume.
What these critics are flopping about over is the idea that there is no real institutional support, that there is no overwhelming surge driving the market higher and higher. You know what? That is good. An overwhelming surge would mean everyone is convinced it is the real thing and all the money rushes in and the thing flames out like a July fourth bottle rocket. We listened to several sound bites from retail investors about the market, and 95% of them were negative, describing it as 'not doing very well right now' or needing to see 'more stable action.' Nasdaq is up 20% off the March low. Many of our stocks are up 50%, and option plays 100%. Get the picture? The negative sentiment keeps this a much more sustainable move that is rallying, consolidating, rallying, consolidating, and that drags more and more of that $2 trillion off the sidelines, but it does so in an orderly manner. That is sustainability, and that is how markets build back from a long rout.
Market Sentiment
Too many stories about whether this is a real bull market or just a bear market move. We have already covered this in earlier issues: it is performing well with solid price/volume action and leadership. Bull or bear? It has much more positive attributes than a bear market rally, but whether it is a bull market will only be known in the future. Enough people still doubt it, enough money is still short the market, and enough money is still on the sidelines ready to come in to fuel the rise to keep it going.
VIX: 23.69; -0.02
VXN: 33.29; +1.29
Put/Call Ratio (CBOE): 0.98; +0.07. Lots of option players are betting against the market.
Nasdaq
Very nice drift back to support at the 10 day MVA.
Stats: -17.07 points (-1.13%) to close at 1489.69
Volume: 1.614B (-15%). Volume contracted significantly, coming in just above average as Nasdaq continues its excellent string of positive price/volume action sessions during this rally.
Up Volume: 286M (-202M)
Down Volume: 1.307B (-44M). They were all sellers, but there were less sellers than buyers in the overall market and rally.
A/D and Hi/Lo: Decliners led 1.56 to 1. Very modest downside action.
Previous Session: Decliners led 1.28 to 1
New Highs: 136 (-12)
New Lows: 13 (-4)
The Chart: http://www.investmenthouse.com/cd/$compq.html
This is a very pretty chart. Nasdaq gapped lower, but it held rallied back to try to recover. It made it up just over the May 2000/January 2001 down trendline on the high (1504), but could not hold the move. It fell back to the open price on the close, forming a nice tight hammer doji right over the 10 day MVA (1485). This also keeps it over the breakout point at 1475, the point that marks the handle in the cup with handle pattern it formed this year. While it could still pullback further from here to consolidate the move or it could move laterally for several sessions, this is a good pattern to jump right back up from. When we see this on individual stocks that have just broken out on good volume and showing good price/volume action, we are ready to jump in as the pattern can lead to an immediate recovery. Again, this is just pretty.
S&P 500/NYSE
Not the beauty contestant Nasdaq is, the large caps did hold the 10 day MVA on lower, below average volume.
Stats: -9.35 points (-1.01%) to close at 920.27
NYSE Volume: 1.324B (-11.46%). Significant volume decline (below average again) as SP500 tested back after trying to break through 935 the prior three sessions. Very good price/volume action.
Up Volume: 340M (-257M)
Down Volume: 972M (+86M)
A/D and Hi/Lo: Decliners led 1.24 to 1. Very modest negative breadth as the small caps posted the smallest loss of the session.
Previous Session: Decliners led 1.13 to 1
New Highs: 186 (+3)
New Lows: 3 (-3)
The Chart: http://www.investmenthouse.com/cd/$spx.html
It is not showing the doji at the 10 day MVA as Nasdaq is doing, but SP500 held the 10 day MVA on the close and it did so as volume declined. SP500 has moved up the short term MVA, particularly the 10 day MVA, on this move, rallying then pulling back two days, rallying and pulling back for two days. It is at resistance at 935 and that could require a further consolidation, but it is only on its third move up in this pattern, and it could easily break higher yet again from here after this pullback to the 10 day. As with Nasdaq, this pullback has brought it right back to the high in the handle that it broke out of last Friday. As with Nasdaq this is a good breakout test and the point for it to hold and bounce from in the continued move.
DJ30:
DJ30 is doing it the same as the other indexes, pulling back on lower volume to test the move after breaking out of its ascending triangle pattern. Thursday the blue chips pulled back to close at the 10 day MVA, holding very near the breakout point at 8522.
Stats: -69.41 points (-0.81%) to close at 8491.22
Volume: 1.324B (-11.46%)
The Chart: http://www.investmenthouse.com/cd/$indu.html
FRIDAY
No scheduled economic reports, but more retail sales results will be released and more wrangling in Congress over tax packages. The market will be left more or less to find its own way. There are many out there arguing back and forth over what the real status of the market is. We have been pretty clear (I hope) in stating that the action in the indexes and the leading stocks remains solid. That is about the only real cue you can look for. If the market is at an inflection point and is making a real turn from the long downtrend even current weak economic reports mean little; as we saw in 1991, the market can bottom even before the economy slips into recession.
Thus we view the pullback the past two sessions in a positive light even though we wanted to see Nasdaq race higher before starting to consolidate. As mentioned above, however, it is set up beautifully to continue the breakout after this 2-day test of that move. If we saw a stock in this position with this kind of price/volume action, we would be quite lathered up over it.
Accordingly we are not about to concede that Nasdaq and the market are going to slide into a longer consolidation here. We want to see the reaction off the 10 day MVA, and we still believe there could be a nice gain Friday that surprises a number of market sages. Maybe it will slide into a longer consolidation, but we are going to be watching for a test lower early Friday and then a sharper rally back up. It may not test too far, however, as some good results from NVDA after the bell are energizing chip stocks. Damn shame it had to announce just now as we have looked at the cup with handle NVDA has formed and were going to slide it onto the report; heck, it will at least give the breakout Friday.
Support and Resistance
Nasdaq: Closed at 1489.69
Resistance: The August 2001/January 2002 down trendline (1500). The December intraday high (1522). 1575, May 2002 closing lows.
Support: The January high (1467). The 10 day MVA at 1486. The 18 day MVA (1462). The March and August highs (1426 and 1427). 1400 is some price support. The exponential 50 day MVA (1414).
S&P 500: Closed at 920.27
Resistance: 935 (November and January peaks). 954 (December intraday high).
Support: The 10 day MVA (921). The 18 day MVA (911) and price tops at 911 (July). September 2000/March 2002 down trendline (909). March and April highs (896 and 905). The 50 day MVA (888) and the 200 day MVA (881). The bottom of the October consolidation range at 875 down to 868, the top of the January trading range.
Dow: Closed at 8491.22
Resistance: 8522 and 8520, the March and April twin peaks represent some resistance, but they have not totally given way as support. November and January highs (8800, 8870). December high (9044).
Support: The 10 day MVA (8500) is being tested. The 18 day MVA (8445). The 200 day MVA (8319). 8250, the bottom of the October consolidation range and other index lows is some support.
Economic Calendar
5-5-03
ISM Services, April (10:00): 50.7 actual, 49.0 expected, 47.9 March.
5-6-03
FOMC meeting results (2:15): Rates left a 1.25%, bias changed from neutral to weakness moving ahead as Fed is concerned about the lack of inflation.
5-7-03
Wholesale inventories, March (10:00): 0.5% actual, 0.2% expected, 0.3% February.
Consumer Credit, March (3:00): $900M actual, $3.5B expected, $1.5B February.
5-8-03
Initial jobless claims (8:30): 425K actual, 440K expected, 453 prior (revised from 448K).
FOMC prior meeting minutes (2:00)
SUBSCRIBER QUESTIONS
Q: Thank you for your service! I have followed several analysts for a
couple years now, but any more, you are the only one I really pay a lot of
attention to. It seems that Greenspan has changed his comments lately to
somewhat more negative, and at the same time the Fed is printing money and
selling new bond notes. Hmmm. Is there some correlation there, or is it my
imagination? And why is the normally inverse relationship between bonds and
stocks kinda gone haywire lately? Thanks!
A: Thanks for the comments. Too many try to make the market as hard to understand as a legal treatise. If you look at the nuts and bolts as to why stocks and markets move up and down and what the signposts for those moves are, things get a lot easier and much of the mystery is gone.
It is not so much Greenspan but the FOMC. Greenspan really wants to wait and see if the consumer can hold on long enough until business recovers. That may happen someday, but if nothing is done (no fiscal stimulus) then we have another recession. The rest of the FOMC, or at least some governors with good credentials, want something done because they don't see anything getting better. In the minutes from the prior meeting released today, there was a concern from several about deflation. Note how it took until this meeting to even change the bias and talk of the problem. The Fed is plodding along behind the curve still, taking baby steps and afraid to make bold moves until after the fact.
What the Fed has been doing is monetizing the bond market by buying bonds to keep rates lower. It is doing so on the short end and there is talk it will start doing so on the long end to keep interest rates lower there as well as they have been the most stubborn. They want to rise some but the Fed is trying to keep the consumer active. Thus the talk of deflation is maybe a bit disingenouous just as the talk of inflation was in 1998 to 1999 when the Fed used that as a reason to raise rates. The Fed fears that rising rates, though an indication of potential economic improvement, will choke off the consumer and stall any recovery. So, print money and buy bonds to keep rates lower.
Your other point about stocks and bonds moving in tandem is a point some on television have pondered. When you think about it, it makes sense. There is real buying ongoing in stocks as insitutions have been accumulating stocks since the October low. That is an indication of future economic recovery even if the economy is weak near term (in 1991 the economy went into recession after the market had bottomed). If the Fed is buying treasuries to keep rates lower, they will continue to rally. Thus you have both rallying together helped by the Fed's intervention. Intervention is a dangerous game. We hope the Fed knows what it is doing, but as we often say, hope rhymes with dope.
SEMINARS ON CD
http://www.stockseminarsonline.com
This is Jon Johnson's own site devoted exclusively to seminars designed to teach you what you need to know about the stock market and stock movement and how to take advantage of those moves without incurring the usual high costs of travel and related expenses usually associated with seminars.
THE PLAYS:
New:
Play Date: 05/08/2003
DRIV (Digital River--$17.15; +0.05; optionable): Business software
http://biz.yahoo.com/p/d/driv.html
STATUS: Testing the breakout. DRIV broke out of a 4.5 month base in April, running up to 18.89 on the move. It is now on its second test of the 10 day MVA (16.64), showing a hammer doji right over that level after three sessions of pulling back from the strong breakout move. Volume has backed off to below average, the first time in three weeks. Positive accumulation in the base and excellent money flow set the stage for another strong move.
Volume: 841.942K Avg Volume: 931.537K
BUY POINT: $17.45 Volume=1.4M Target=$20.95 Stop=$16.23
POSITION: DQIIW - Sept. $17.50c (54 delta) &/or Stock
http://www.investmenthouse.com/ci/driv.html
Play Date: 05/08/2003
NVDA (Nvidia--$16.06; +0.01; optionable): Semiconductors
http://biz.yahoo.com/p/n/nvda.html
STATUS: Cup w/handle. NVDA has been forming the handle this week to its 5 month cup base. The base shows solid 6 to 2 accumulation (6 up weeks on rising volume to 2 down weeks on rising volume). Thursday it showed a strong volume surge as it flexed its muscles a bit. After hours NVDA beat the street with earnings and had good things to say about the future. It was up sharply. We are going to let it gap higher and then come back to test toward our buy point. When it makes its test and starts back up we will be looking to get in. We are looking for a test back to 17.50 to 17.
Volume: 17.702M Avg Volume: 7.368M
BUY POINT: $17.55 Volume=11M Target=$21.25 Stop=$16.32
POSITION: UVA IW - Sept. $17.50c (51 delta) &/or Stock
http://www.investmenthouse.com/ci/nvda.html
Continuing plays that look good:
Play Date: 04/23/2003
FFIV (F5 Networks--$14.63; -0.17; no options): Internet software and services
http://biz.yahoo.com/p/f/ffiv.html
STATUS: Ascending Triangle. FFIV ran up to the breakout point in its 5-month base with a strong Friday and Monday move. It has since tested back to the 10 day MVA, tapping it on the Monday low (14.40). The move was on lower, below average volume, and it rebounded off the 10 day MVA to recover most of the session loss. Solid 7 to 3 accumulation in the base as FFIV looks as if it is making its last shakeout move before the breakout. A turn up form the 10 day MVA makes a higher low and sets the stage for the move higher.
Volume: 282.739K Avg Volume: 508.142K
BUY POINT: $15.25 Volume=750K Target=$18.32 Stop=$13.94
POSITION: FLK GC - July $15c (52 delta) &/or Stock
http://www.investmenthouse.com/ci/ffiv.html
Play Date: 05/03/2003
RMD (Resmed--$36.87; +0.07; optionable): Medical appliances
http://biz.yahoo.com/p/r/rmd.html
STATUS: Testing the breakout. RMD broke out of a 8-month trading range from 30 to 34 in mid-April. It rallied to just over 38 and has now pulled back to the 10 day MVA, tapping that level on the Thursday low (36.67). Volume has fallen back below average as it makes this very nice orderly test. The candlestick chart shows a doji on the 10 day MVA, an indication that a potential move up lies ahead. Looking to pick RMD up on this move.
Volume: 105.7K Avg Volume: 234.253K
BUY POINT: Aggressive: $37.25; Next: $37.75 Volume=322K Target=$43.75 Stop=$35.15
POSITION: RMD GG - July $35c (77 delta) &/or Stock
http://www.investmenthouse.com/ci/rmd.html
End part 1 of 2
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