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us stock market, understanding the stock market
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5/29/03 Technical Traders Report Update
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Thursday: None issued
Buy alerts issued: MER
Trailing stops issued: SSYS; ELAB
Stop alerts issued: None issued
You can sign up for Technical Traders Report alerts at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Semiconductors & small caps lead the way but market gives back another gain.
- Jobless claims still poor as GDP is not strong enough to create new jobs.
- SP500 tests August 2002 high and falls back again as volume rises.
- Subscriber Questions
Another giveback as volume rises, techs and small caps lead.
For the second session the indexes posted solid early gains only to give the lion's share back by the close. After breaking over the May highs the indexes are struggling to take out the next resistance level, one that happens to be key as SP500 tries to break the string of lower highs dogging it in the long downtrend.
For the second session as well techs and smaller caps led the way. Chips held up Nasdaq as they put in a solid performance ahead of NVLS' mid-quarter update. After hours the chips were down some, however, as NVLS gave a lukewarm guidance, noting that SARS was really impacting its Asian operations. The small caps again were right behind the techs and chips, posting the next best performance though they did close off of their highs as well.
Volume surged on the session with Nasdaq posting it second consecutive 2 billion share session. Instead of falling as summer approaches, volume is ramping up. That can be a good indication that the market recovery may be able to skirt the summer doldrums. As previously noted, May and June are typically slow months where the market dips lower, rallies back in late summer, then slides into September. Thus far the market has the volume to keep it going or at least holding up as more and more investors start putting money back to work. $16.8 billion flowed into stock mutual funds in April as some of those trillions of sideline dollars were put back in play. That is the additional supply of fuel for the rally that we have talked about: it is trickling back in as opposed to flooding back, and that keeps new money coming into the market yet the pace allows the market to assimilate the new money without mumping up too far too fast.
The volume Thursday was not necessarily coupled with the best price action, however. DJ30 and SP500 both ran higher then turned over to close down as volume jumped. The action again shows some churning, i.e., high volume turnover after a run higher. Nasdaq showed similar action, but it held onto a third of its gain, technically avoiding a distribution session. There is some struggle at this level as SP500 approaches key resistance from August 2002. We have seen this churning on prior occasions, however, without any real correction. Thus far the market has used some churning as a form of consolidation, but continued churn would indicate that some big money was leaving the market. When it leaves and sits out for awhile, some of the source of upside pressure is gone.
THE ECONOMY
Jobless claims remain mired as Q1 economic growth anemic.
There were the usual revisions to the prior week numbers that made it look as if claims fell, but the bottom line is still the same: at a 1.9% GDP growth rate the economy is not able to produce enough jobs to put a dent in unemployment. Thus we see continuing claims rising further (3.76 million versus 3.69 million the prior week) even as the pool of available workers shrinks by estimates as high as 800K. Those are the people that just give up trying to find a job for now and will try again at some point in time. Thus the statistics can be misleading. When times get better or are perceived as better, more enter the job market looking for work. That makes it look as if unemployment is rising even as the economy actually recovers. If the economy is not really recovering, however, some get discouraged and give up. Then you see the jobless numbers fall even as the economy remains in a quagmire. It is thus important to keep in mind what drives the numbers as opposed to just the raw data.
Q1 GDP not inspiring.
Growth was revised upward to 1.9% based on an upward adjustment in consumer spending to 2% from 1.4%. The consumer managed to buck the trend but businesses did not. Business investment fell 4.8% after a 2.3% Q4 increase. Corporate profits did rise 2.5%, a sign of some life. At this stage, however, profits are still being driven more by cost cutting and other efficiencies than growth. Thus the economy continues to struggle onward, and it is hoped that post-war investment will increase on the back of the tax cut package.
THE MARKET
The market continued its struggle to take out new resistance points with the key being the SP500 attempt at the August 2002 high. The large caps ran up to that level on the high but then faded as volume increased. Not the best action at a resistance level. Technology on the other hand fared much better, holding onto some gains as Nasdaq turned in its fifth straight upside close. It too gave back much of its upside move, however, and without the chips things would have been worse.
In the big picture the market is still healthy and is trying to work through another round of choppiness after a nice run up to the next resistance level. It is still getting leadership from key areas such as the small caps and technology, two areas that should provide leadership in an economic recovery scenario. With those sectors firing on all cylinders the market has the horsepower to consolidate while holding onto most of its gains and continue its move from here.
It is still clear that the market will need a pullback or other consolidation at some point after this strong move. The pullback last week was not sustained enough to provide a real rest to the solid break higher. The question is always timing. With the quick snapback and breakout over the May highs, the market indicates it still has plenty of buyers ready to step in on dips. Nasdaq also can run up over 1600 before it reaches 20% over its 200 day MVA (1635); it struggled some at 15%, but quickly regained its stride. In short, while the market leading Nasdaq will need a more sustained rest at some point, it is hard to fight the tape and try to outguess the new money coming in. We are still looking for a pullback to test the recent break over the May high, but that could set the stage for one more run up to Nasdaq 1635.
Market Sentiment
VIX: 22.49; +0.49
VXN: 31.42; +1.2
Put/Call Ratio (CBOE): 0.9; +0.2
Nasdaq
Volume continues to surge as Nasdaq moved higher but giving back a large part of its gains as Nasdaq tested the early June 2002 closing high intraday.
Stats: +11.71 points (+0.75%) to close at 1574.95
Volume: 2.224B (+7.71%). Surging volume as Nasdaq ran hard but then gave back two-thirds of the move. The up to down volume ratio was excellent, however, improving even over the Tuesday level.
Up Volume: 1.483B (+344M)
Down Volume: 718M (-87M)
A/D and Hi/Lo: Advancers led 1.4 to 1. Another very modes breadth session after the Tuesday blowout higher.
Previous Session: Advancers led 1.41 to 1
New Highs: 235 (-50)
New Lows: 11 (0)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Nasdaq managed to hold onto a third of its Thursday gain, holding the May 2001/January 2002 downtrend on the close. On its high (1591.26) it failed at the early June 2002 closing high (1595), a point where a May 2002 low converges as well. That sets up some modest though not rally-threatening resistance. The real key to Nasdaq right now is how far it can run before it needs to take a breather. As previously discussed, Nasdaq starts to struggle at 15% over its 200 day MVA (1362). At 20% over its 200 day MVA, it historically starts to correct. That point is roughly 1635. That does not mean it cannot overshoot that level, though the 50%+ levels we saw in 1999 that kept us on edge are not likely. Even then, however, we did not fight the tape but instead went with what the market was telling us, and that was buy. Right now Nasdaq is struggling as it is again at 15% over its 200 day, showing those churning sessions it showed in mid-May when it first reached 15%. We expect another test of the 1550 level and another attempt at running higher before a more serious correction sets in.
S&P 500/NYSE
Tried the August high but then fell back on rising volume, showing some churning.
Stats: -3.58 points (-0.38%) to close at 949.64
NYSE Volume: 1.686B (+12.84%). Rising volume as the large caps tested resistance and then turned lower, showing some distribution.
Up Volume: 656M (-138M)
Down Volume: 1.014B (+322M)
A/D and Hi/Lo: Advancers led 1.14 to 1. The large caps were the drag as the small caps managed to post a gain.
Previous Session: Advancers led 1.39 to 1
New Highs: 308 (-12)
New Lows: 6 (-1)
The Chart: http://www.investmenthouse.com/cd/$spx.html
SP500 rallied to the August 2002 high (965) Thursday, but then failed at that level and the December high as well (954) as the large caps closed lower on rising volume. This is the second session showing rising volume on a doji, indicating higher volume turnover as money moves out of large cap stocks. SP500 could test the 10 or 18 day MVA (940, 933) before trying to resume the move. Much depends upon Nasdaq and its ability to hold the May highs and rally from there.
DJ30:
The Dow again tried the January high (8869) intraday, and again failed. Unlike Wednesday, Dow gave back all gains and more, selling on rising volume. After breaking out of the ascending triangle, DJ30 has been unable to break away and clear the next level of resistance running from January (8869), December (9043), and August (9077) highs.
Stats: -81.94 points (-0.93%) to close at 8711.18
Volume: 1.686B (+12.84%)
The Chart: http://www.investmenthouse.com/cd/$indu.html
FRIDAY
A fairly big day for economic reports with consumer spending and income, revised Michigan sentiment (they get the last 50 responses in), and the 10:00 release of the Chicago PMI. The consumer spending reports get a lot of fanfare, but the key continues to be the business side. The Chicago number is expected to edge toward 50; a reading better than 50 would be very big for the market, but that is more wishful thinking than reality. Better economic data on the business side would really help the market, but it is still very close to the war and the tax cut ink is not dry yet.
What we are expecting is a Nasdaq test of the May highs (1554) before another real attempt at moving higher. The big Tuesday breakout was solid, but the next two moves were pulled back, unable to break free. That action suggests a test of the breakout before Nasdaq makes a run up toward the 1635 range.
After hours NVLS indicated that Asian sales were being hampered by SARS, but noted that Japan was well above estimates. It did not raise guidance. Chips were taking some heat on that news after a strong session. Still, chips look to us as one of the sectors that is ready to lead the next move along with financials, tech (e.g., data storage), and after a rest, biotechnology. Again, looking for a test of the mid-May highs to hold and that to spark the next move higher.
Support and Resistance
Nasdaq: Closed at 1574.95
Resistance: 1573 (May 2002 closing low) and 1595 (June 2002 closing high).
Support: Down trendline from the May 2001/January 2002 intraday highs around 1570. 1567, the mid-June intraday high. The May high (1554) needs to hold any other test. The 10 day MVA at 1535. The December intraday high (1522). The 18 day MVA (1518). The January high (1467). The exponential 50 day MVA (1463).
S&P 500: Closed at 949.64
Resistance: 954 (December intraday high). 965 (August 2002 peak).
Support: The May high (948). 939, the early May high. 935 (November and January peaks). The 10 day MVA (940). The 18 day MVA (933). Price tops at 911 (July) and the 50 day MVA (910). March and April highs (896 and 905). The 200 day MVA (885).
Dow: Closed at 8711.18
Resistance: May high at 8743. November and January highs (8800, 8870). December high (9044). The August high (9077).
Support: The 10 day MVA (8660). The 18 day MVA (8611). 8522 and 8520, the March and April twin peaks. The 50 day MVA (8450). The 200 day MVA (8332).
Economic Calendar
5-27-03
Consumer confidence, May (10:00): 83.8 actual, 83.0 expected, 81.0 April.
Existing home sales, April (10:00): +5.6% actual, 5.70M expected, 5.53M March.
New home sales, April (10:00): +1.7% actual, 980K expected, 1.01M March.
5-28-03
Durable goods orders, April (8:30): -2.4% actual, -1.0% expected, 1.0% March (revised from 2.0%).
5-29-03
Initial jobless claims (8:30): 424K actual, 420K expected, 433K prior (revised from 428K).
Preliminary GDP, Q1 (8:30): 1.9% actual, 1.9% 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): 93.0 expected, 93.2 April.
Chicago PMI, May (10:00): 49.0 expected, 47.6 April.
SUBSCRIBERS QUESTION
We are getting lots of great questions. We are getting to them as fast as we can so bear with us!
Q: Many stocks have had a nice run-up lately, and I have been waiting for a good entry point. Today, we finally witnessed the break causing some stocks to crater and sell hard (case in point: JCOM and APPX}. Do you view this type of action in stocks which have performed excellently in recent weeks as a buying opportunity? My real question is: How can an investor know when the stock looks as though it is recovering, whether it is just a head fake, or a real recovery? Because of situations such as what I described, I tend now to hold off too long and miss out on the buying opportunity. Case in point: I watched SSYS sell off hard to 21.25 on May 9th. Even though it recovered to 22 on Monday May 12th, I was waiting for further weakness - which never came and I completely missed the run-up to the 30s.
A: Very good question. Try to think of stocks as going through phases of life. There is a larger phase over the years, and then there phases within the larger moves. When a stock is trending higher it tends to follow a routine: base, breakout, run higher until it exhausts the base, then bases again for the next breakout. This can occur on average 4 to 6 times before it needs a much longer correction or base. It can be longer than this, but on average stocks follow this pattern. The runs from base to base to base can last over years and can reap huge rewards (e.g., DELL, MSFT, CSCO in the late 1980's through the 1990's).
In between bases the stock runs up the short term MVA with an occasional test of the 50 day MVA. Just as with the larger bases, a stock makes 4 to 5, maybe even 6 runs up the short term MVA before it needs a deeper rest. That usually takes it down to the 50 day MVA. After a few such runs and tests of the 50 day MVA it needs to form a new longer base. Note how the cycle is about the same for all of the phases. That is key in understanding just where a stock is in its lifespan so you can make intelligent decisions about when to enter or exit based on what your goals are (really long term, short term options, medium range making good profit and moving on to the next stock that is ready to make the next move right now).
As a stock makes the runs up the short term MVA between the 50 day MVA tests, the action tends to get more volatile as the stock gets into the later stages (fourth to fifth bounce). In other words, the stock runs harder to the upside, but it also tanks harder to the downside. Your example of SSYS is a good one. It spent much of 2002 in a base. It broke out and ran to a peak in January 2003. It then formed the next base and broke out in March. From there is has run up the short term MVA without tapping the 50 day MVA. The first tow runs were nice and orderly, taking it up after nice lateral consolidations that moved laterally until the 10 day MVA rose to meet it and popped it higher. The last two short term MVA tests have been wilder, with tests down to the 18 day MVA and big bounces up off those levels. Then it gapped back down to test the 18 day MVA again before jumping back up. Now it looks as if it has made a lower high & needs a deeper rest. It has rallied from $10 to over $30 on this run; tripling in price, fourth bounce off the short term MVA, more volatile action. Those are all signs it needs a deeper test and maybe a new base.
Applying this to when to enter, if you are in the first or second and even third bounce up off the short term MVA, you enter when the stock starts to bounce from the test on rising volume. Not blowout volume, just solid, rising volume. Odds are it is in a stronger uptrend after that breakout and will rebound in a way that is typical for stocks in a strong uptrend. Thus we have better chances of success just waiting to see it start the bounce and then moving in. If it is late in the run, then the action will be wilder to the upside and the downside. The same tactics apply, but we have to understand it will be more volatile and be ready to act if we don't want to ride the stock longer term through a correction.
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.
End part 1 of 2
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us stock market
understanding the stock market
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