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5/24/03 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts issued Friday: CTXS; SINA
Buy alerts issued: UCOMA; SINA; CNQR
Trailing stops issued: APOL
Stop alerts issued: POWI
SUMMARY:
- Modest gains to close week as leaders bounce further while small & mid-cap utilities rally on tax cut.
- Is deflation winning? Smaller caps, gold trying to say no.
- Smaller issues trying to lead but will the large caps follow?
- Subscriber Questions
Quiet, positive close leaves market in same position.
As we have said before, it is where it ends, not necessarily how it got there. Friday the market ended lower, and it did not do much to correct the short term toppy pattern it has formed. As expected volume was light heading into the 3-day weekend, but there was not the intraday volatility we expected. The tax cut bill was passed ensuring at least some favorable dividend treatment, and that set the stage for purchases of small and mid-cap utilities as investors ran to buy dividend stocks for $2 to $3 more than they were just Thursday. Kind of defeats the whole purpose of buying them for the dividend. We are taking the view to wait until the Christmas rush is over and they come back down and work on some dividend capturing techniques as we look into a service focused on that now that there will be more favorable taxation that will in reality most likely go to zero permanently now that the idea is actually law.
In any event, it was the Russell 2000, SP600, and SP400 that were leading the market as utility stocks and other smaller cap leaders were once again the focus of investors. Those stocks are key to the recovery, but the Friday action may not hold over if it was mostly dividend based. There was more to it than that, but volume overall was mushy even as NYSE breadth expanded. While the small and mid-cap indexes did some damage to potentially toppish patterns, the rest of the market more or less ran in place, unable to make a significant move as anticipated.
THE MARKET
Small caps try to lead but a part of the move was a rush to dividend paying utilities.
The Russell 2000 and SP400 (mid-caps) put on good shows, clearing the left shoulder in some potential head and shoulders patterns. That was good news. Smaller caps leading higher after an economic downturn is a signal of potentially better economic times ahead.
They need to lead. The large cap indexes were unable to break up their near term toppy patterns as volume backed off on the pre-holiday Friday. We were not expecting them to do so, but they struggled even to close positive. The small gains after lower tests left them with loose dojis, a sign that the momentum on the bounce from the Monday sharp sell off is running out of steam.
The problem the large caps indexes have (SP500, DJ30, Nasdaq) is that they climbed hard from March to last week and need a breather. The pullback last week, while sharp, was very short lived. Volume came back on the bounce higher, but many stocks, even leaders, are still extended even with a short rest. Combined with the near term top two weeks back, that makes us cautious.
Overall the action remains solid. Price/volume has been solid with just a few hints of distribution the past two weeks. Leaders such as SINA, SOHU, AMZN, YHOO, BCR, AVP, ERES, USAI, GPRO, etc. continue to lead after testing the 18 day MVA or the 50 day MVA. The NYSE advance/decline line continues to advance. The market is not sick by any stretch, but it looks tired.
On top of that, the May to June period is a traditionally a slow period before a July to August pop and a September to October drop. The market remains healthy if a bit extended, and it is entering a typically slower season before a 'summer' rally kicks in. Thus we stick with leadership and buy when it signals it is time to buy (they hold up better in the market overall and we still don't think we are smart enough to outguess the market) and cut dead wood when it looks problematical as we did late Friday. Problem is, many leaders are extended themselves after coming up off the 18 day or 50 day MVA test this past week.
Market Sentiment
Sentiment indicators continue to point to excessive bullishness with the percent of bullish advisors climbing to 56%. 55% historically means there is too much exuberance and has been a bearish indication. NYSE short interest is falling, now down to early April levels but still above the January low and still relatively high. Volatility remains down on the lower rungs while the put/call ratio remains relatively high.
What does it all mean? First, they are secondary indicators, and they can show extremes while the market continues to move against them. The also keep us honest with respect to the primary indicators of price and volume, leadership, and accumulation. The indexes look good overall but are a bit extended. Some would read the sentiment indicators as pointing to a collapse coming. Sentiment varies by degree for each market cycle, meaning that exact correlations to prior levels is not altogether accurate. That is why we refer to the 'normal' volatility range. Even if they do get extreme that is no gauge of how far the market will move as a result. Overall the market action is solid and does not point to a major sell off ahead. There could be some interim weakness ahead based on both the sentiment and primary indications. At this stage the level of pullback, even with low volatility readings, does not point to heavy selling.
VIX: 21.38; -0.24
VXN: 29.73; -0.38
Put/Call Ratio (CBOE): 0.74; -0.42
Nasdaq
Rallied up over the 10 day MVA, but below average volume and a nominal gain.
Stats: +2.54 points (+0.17%) to close at 1510.09
Volume: 1.45B (-19.2%). Lower, below average volume on the gain. No accumulation, just hanging on ahead of a long weekend.
Up Volume: 920M (-424M)
Down Volume: 486M (+58M)
A/D and Hi/Lo: Advancers led 1.42 to 1. Very modest advance.
Previous Session: Advancers led 1.59 to 1
New Highs: 158 (+16)
New Lows: 14 (+1)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Nasdaq continued its bounce from a test over the January high (1467), clearing the 10 day MVA (1508) but that is about all. It made a lower intraday low on the pullback, slightly undercutting the early May low (1486.91) before making the bounce. The move is slowing some already before the early May high (1525), the left shoulder in the potential short head and shoulders pattern. With the healthy price/volume action Nasdaq could continue to run higher, but it needs help from stocks such as MSFT, AMAT and others that have lagged of late. It showed some strength coming back quickly from the selling, but it has to take out 1525 and then 1554 to make further significant headway. With Nasdaq hovering around 11% over its 200 day MVA, it has limited though not anemic upside. 15%, where it stalled last time, is at 1561. 20%, where it historically corrects (outside the late 90's), is at 1630. With Nasdaq at 1510 that is not chicken feed.
S&P 500/NYSE
Stalled out at the January high on lower volume.
Stats: +1.35 points (+0.14%) to close at 933.22
NYSE Volume: 1.196B (-17.27%). Pre-holiday volume was very weak. Just no buyers to push it through resistance.
Up Volume: 753M (-372M)
Down Volume: 412M (+90M)
A/D and Hi/Lo: Advancers led 1.97 to 1. Excellent breadth as the smaller caps made the difference.
Previous Session: Advancers led 2.01 to 1
New Highs: 368 (+64)
New Lows: 11 (-4)
The Chart: http://www.investmenthouse.com/cd/$spx.html
As with Nasdaq the large caps cleared the 10 day MVA (930) but could not top the January high at 935 or the early May high (939 intraday). SP500 is in a potential small head and shoulders pattern of its own with 948 as the high. Again, however, we don't want to bury it alive. It is showing some struggle, but the overall action is solid.
DJ30:
The blue chips managed to hold 8500 on the close after testing the 50 day MVA (8410) intraday early in the week. A good point to hold and it recovered on strong volume; volume up off a 50 day MVA test shows big money moved in at that support level. What it does from here will depend upon Nasdaq and SP500 and how they resolve their near term struggle.
Stats: +7.36 points (+0.09%) to close at 8601.38
Volume: 1.196B (-17.27%)
The Chart: http://www.investmenthouse.com/cd/$indu.html
THIS WEEK
A short week but full of economic data after last week's dearth. Consumer confidence, durable goods orders, Q1 GDP, personal income and spending, and Chicago PMI top the list. The economy will again take on more importance with earnings over and deflation talk continuing. Near term those expecting stronger economic data will most likely be disappointed, and that can put more pressure on the market near term.
In short the market continues to face hurdle after hurdle, and thus far it has tackled them one at a time as money has continued to move back into stocks. The leaders all have solid accumulation from their first base to set off this rally. That shows big money has been moving into stocks for several months. That money is not leaving stocks as there have been no significant downside sessions on stronger volume.
This week the market faces another hurdle with the short head and shoulders patterns trying to form at the same time the indexes and leading stocks bounce up off the short test. Our game plan in this environment is to continue looking for stocks in the best patterns that are ready to breakout for a higher run or rebound from a pullback. As they present buying opportunities we will move in as we have been doing. The leaders tend to forecast the rest of the market action, and this has paid off thus far. As noted, however, many leaders themselves are not in the best buy points as they have just bounced up off support and are 'in between' that support and next resistance. With the market in a problematic short term pattern, there is no sense in chasing a stock well past a prime buy point.
We will also continue to look at some more downside positions. When stocks stumble at these heights, they tend to fall hard. Overall the market is not under distribution, but it is toppy. The trick is to getting on stocks that are not just in a short term dip but that are falling hard. That is why we like the breakdowns below key support such as the 50 day MVA and then a failed attempt to move back over that level.
Finally, we will continue to trim the dead wood when opportunity presents. The market was up some Friday, and we closed some positions that were not responding or that were not performing well and we just did not want to risk them rolling over. We will continue to do that and look to those that are performing or are getting ready to make the break higher. If the market fails at either near resistance point from early or mid-May and sells on significantly higher volume, we will be ready to cut marginal positions quickly and guard the winners' gains.
Support and Resistance
Nasdaq: Closed at 1510.09
Resistance: The December intraday high (1522). The early May high (1531) and the May high (1554), right in line with resistance at 1550 to 1560. 1570 to 1578 (June 2002 closing low, May 2002 high). Down trendline from the May 2001/January 2002 intraday highs around 1578.
Support: The 10 day MVA at 1508. The 18 day MVA (1499). The August 2001/January 2002 down trendline (1480). The January high (1467). The exponential 50 day MVA (1450). The March and August highs (1426 and 1427).
S&P 500: Closed at 933.22
Resistance: 935 (November and January peaks). 939, the early May high, then the May high (948). 954 (December intraday high). 965 (August 2002 peak).
Support: The 10 day MVA (930). The 18 day MVA (926). Price tops at 911 (July). March and April highs (896 and 905). September 2000/March 2002 down trendline (898). The 50 day MVA (904) and the 200 day MVA (884).
Dow: Closed at 8601.38
Resistance: May high at 8743. November and January highs (8800, 8870). December high (9044).
Support: The 10 day MVA (8579). The 18 day MVA (8553). 8522 and 8520, the March and April twin peaks. The 50 day MVA (8410). The 200 day MVA (8331).
Economic Calendar
5-27-03
Consumer confidence, May (10:00): 83.0 expected, 81.0 April.
Existing home sales, April (10:00): 5.70M expected, 5.53M March.
New home sales, April (10:00): 980K expected, 1.01M March.
5-28-03
Durable goods orders, April (8:30): -1.0% expected, 2.0% actual.
5-29-03
Initial jobless claims (8:30): 420K expected, 428K prior.
Preliminary GDP, Q1 (8:30): 1.8% expected, 1.6% prior.
5-30-03
Personal income, April (8:30): 0.0% expected, 0.4% March.
Personal spending, April (8:30): 0.1% expected, 0.4% March.
Michigan sentiment revision, May (9:45): 92.7 expected, 93.2 April.
Chicago PMI, May (10:00): 49.0 expected, 47.6 April.
SUBSCRIBERS QUESTION
Today's question covers a specific stock on one report, but it is a lesson (one we learned again) tha applies across the board: don't give up on a good pattern showing accumulation!
Q: Great letter. Just subscribed yesterday after 2 weeks of getting it free. Thanks. Question: Did you miss RL on the daily, or are you not covering it anymore? Thanks
A: RL is part of a small cadre of clothing makers we were looking at and then committed an error that is on the short list of the worst mistakes you can make: getting bored with a good pattern and not sticking with it. CLE is another stock with the same result. Both stocks were showing solid accumulation and good patterns. What happened? We got board waiting on it and we wanted to get 'fresh' plays for subscribers. You can see the results with the attached chart link. Moral: never give up. It is easy to get impatient when we see stocks jumping up all around and one we are watching just continues to work through its pattern in a slow and methodical manner. We moved on to other areas that were jumping faster, but as we know, stocks form up and then breakout in eaves. The apparel makers were getting ready for their time, and then it struck, assisted by good GPS earnings. In letting these slide from our radar we broke one of our primary rules: stick with a good pattern.
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:
Good movers Friday: ADPT; ADIC; AETH; AGEN; BRCM; CNQR; GPRO; MED; MRGE; NENG; NTES; SCSS; UTHR, etc.
New Plays:
Upside:
Play Date: 05/24/2003
BGEN (Biogen--$40.5; +1.22; optionable): Biotechnology
http://biz.yahoo.com/p/b/bgen.html
STATUS: Reverse head and shoulders. Biotechnology is attracting a lot of money, and BGEN's pattern is indicative of the nice accumulation in the sector. It is moving in a 4-month reverse head and shoulders pattern that is part of a larger cup base that started in November 2002. Accumulation since November is excellent at 9 to 3 (9 up weeks on rising volume to 3 down weeks on rising volume.. Money flow is strong and rising just ahead of price. In this right shoulder BGEN has worked up the 18 day MVA (38.83). It is showing good action as it approaches the neckline or breakout point, and we want to see a nice volume surge again as it makes that move.
Volume: 3.25M Avg Volume: 3.787M
BUY POINT: $40.94 Volume=4.5M Target=$47.55 Stop=$38.07
POSITION: BGQ JU - Oct. $37.50c (69 delta) &/or Stock
http://www.investmenthouse.com/ci/bgen.html
Play Date: 05/24/2003
CMVT (Comverse Technology--$13.15; +0.06; optionable): Telecom processing systems
http://biz.yahoo.com/p/c/cmvt.html
STATUS: Testing the breakout. CMVT broke out of a 4.5 month reverse head and shoulders in mid April, rallied to 13.46, and then started the current lateral test, forming what is called a rectangle. That is a bullish pattern where the stock tests up and down with the same top and bottom, basically a trading range. It is a pattern that, like others, weeds out the sellers by wearing them out with the up and down action. Accumulation in the entire pattern is a solid 5 to 3 as CMVT uses the 50 day MVA (12.19) as its support in the pattern. CMVT rallied up to the breakout point after a Wednesday test of the 50 day, but volume dwindled. It may take one more test down to the 18 day MVA at 12.76 before it is ready. We will be patient and let it make the final adjustments and then breakout on volume.
Volume: 1.713M Avg Volume: 2.953M
BUY POINT: $13.58 Volume=4.4M Target=$16.32 Stop=$12.63
POSITION: CQV JV - Oct. $12.50c (64 delta) &/or Stock
http://www.investmenthouse.com/ci/cmvt.html
Play Date: 05/24/2003
STX (Seagate Tech Holdings--$13.32; -0.11; optionable): PC data storage
http://biz.yahoo.com/p/s/stx.html
STATUS: Testing the breakout. STX was a new issue in December after going private and then coming back to market. It formed a nice 4-month cup with handle base showing solid 5 to 3 accumulation. It finally made the volume breakout in May and has spent the past two weeks testing that move with a gentle pullback to tap the 18 day MVA (12.95) and hold. Volume started to creep higher late last week as the stock started up off of that support. Excellent money flow and a very good test that looks as if it is about to be resolved. Looking for a high volume move up for the test to be successful and to enter.
Volume: 1.288M Avg Volume: 1.959M
BUY POINT: $13.72 Volume=2.9M Target=$16.55 Stop=$12.76
POSITION: STX IV - Sept. $12.50c (70 delta) &/or Stock
http://www.investmenthouse.com/ci/stx.html
Downside:
Play Date: 05/24/2003
OSI (Outback Steakhouse--$36.3; +0.27; optionable): Chain restaurant
http://biz.yahoo.com/p/o/osi.html
STATUS: Put. OSI double topped in April and May. The May high at 38 was below the April high, and it was unable to generate any volume on th emove. Telltale signal of trouble. The volume finally came in, but it was on the downside as OSI tumbled Tuesday on a massive volume spike as the Canadian mad cow story hit. It made a lowe voluem rebound Thursday and Friday, but OIS was already having trouble before that, sliding down from its double top the two prior sessions before the news broke. It has moved back up to test the 18 day MVA, and we are looking for a roll back down and a break through the 50 day MVA (35.83) on rising volume.
Volume: 517.6K Avg Volume: 598.272K
BUY POINT: $35.8 Volume=897K Target=$33 Stop=$36.85
POSITION: OSI SH - July $40p (-84 delta)
http://www.investmenthouse.com/ci/osi.html
Play Date: 05/24/2003
ZMH (Zimmer Holdings--$45.93; +0.15; optionable): Medical appliances
http://biz.yahoo.com/p/z/zmh.html
STATUS: Put. ZMH has been a market leader, and it made us some nice money in its run in 2002 and earlier this year. It started a new base in march, worked over the 50 day MVA (46.41), and set up for a breakout. Instead it broke down, gapping through the 50 day Tuesday on a massive volume surge on news of a 'friendly' takeover bid. The market obviously did not like it. The stock rallied back to the 50 day MVA Thursday and Friday, but volume was tailing off as it did. We are looking for another test of the 50 day MVA and then a reversal as volume rises. Just as we wait for a stock on a breakout test to start back up on volume, we wait for a breakdown test to roll back down on rising volume to show the sellers are jumping on it again.
Volume: 2.517M Avg Volume: 1.595M
BUY POINT: $45.72 Volume=2.4M Target=$42.12 Stop=$46.45
POSITION: ZMH SJ - July $50p (-79 delta)
http://www.investmenthouse.com/ci/zmh.html
End part 1 of 2
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