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us stock market, trade stock
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6/02/03 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Monday: None issued. Many are over the targets and letting them run as long as they will.
Buy alerts issued: AMCC; NCN; STK; CCU
Trailing stops issued: FFIV
Stop alerts issued: LU
You can sign up for Technical Traders Report alerts at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Gap higher cannot hold even with good news.
- National manufacturing still contracting, but slower.
- A test of next resistance cannot hold as market leadership falters.
- Subscriber Questions
Market picks up where it left of but cannot hold the move.
Comments about a strong dollar from Bush, stronger European markets, and general momentum from last week started the market sharply higher. A decent ISM report helped spur it along even in the face on a high number of Monday downgrades. When the market has success, you can count on downgrades. The key is how the stocks react. Techs started out strong with a gap higher, but started lagging midday before rolling over and closing negative. When one of the market leading indexes stumbles, everything else is impacted. Breadth went from 2.3:1 to 1.8:1; respectable, but not the pace it was. All indexes came off the highs to close, though only Nasdaq and SOX closed negative.
Volume remained strong but mixed. Nasdaq volume was higher while NYSE volume faded some. On a high volume reversal to close negative as with Nasdaq, high volume is not a good sign as it indicates sellers were moving in to dump some stocks. The up to down volume ratio favored the upside, but the action was still a clear turn from the highs. NYSE volume was lighter as SP500 and DJ30 posted gains. Even without the reversal from the session highs that is not the best volume action.
It was a day where some leaders stumbled through the session (internets) while other leading sectors continued to reap the rewards of the rally (financial services). In the end the market remained in good shape but showed the signs of weariness after a strong gain: rally early that gives away gains despite continued good news. There comes a point where all the good news is priced in on a run, and it appears the market has hit that point and needs another breather as we have seen several times on this move.
THE ECONOMY
ISM delivers a better report, but the national manufacturing economy is still contracting.
The May sentiment survey for the nation's manufacturers cam in at 49.4, better than the 48.5 expected, but that 50+ Chicago number had many looking for more. As discussed over the weekend, the Chicago report tends to lead the national picture by a month. If things continue to improve the ISM should move back over 50 for June. New orders moved to 51.5 from 47; production rose to 51.5 from 47; prices paid fell to 51.5 from 63.5 (energy price declines). The backlog of orders increased fro the first time since June 2002.
All are hopeful signs of a possible manufacturing recovery, and there is no doubt things picked up after the war issue was determined. It is still not in expansion mode, and we have to remember that ISM was over 50 from June to February (less October) before the current weakness, and that run did not produce a lot of economic activity or jobs. With manufacturing making up a smaller and smaller portion of the economy and GDP still below 2%, there is not enough activity to create more jobs right now. As we have said often, jobs will lag, and the Monday turnaround suggests that investors know this and that some were taking some gains before the focus shifts predominantly to the Friday jobs report where there can be little rational hope for significantly better numbers.
THE MARKET
Five straight gains and a run up to next resistance provided the next point for profit taking, and sellers started moving in. The news remains upbeat, but with that jobs report coming Friday and the manufacturing data being just better than mediocre, some were taking gains now instead of later.
Particularly impacted was Nasdaq where it gapped higher and reversed negative on higher volume. That kind of whipsaw action is not unknown in this rally, and the after effects are mixed. In December and January it led to deeper pullbacks to consolidate the gains. At other times the move higher has righted itself in short order. After moving closer to 1635 yet again (1620 on the high), it was 18.5% over its 200 day MVA. With SP500 topping the August high but turning back at some resistance at 975, the market certainly is getting a bit top heavy.
As noted some leaders were stumbling around on higher volume. Many internets (SINA, SOHU, YHOO) turned back from their powerful moves and sold on some rising volume. Other sectors showed a few leaders selling (OVTI, BRCM in chip circuits), MRGE (data storage) while others held up fine.
You hate to fight the tape in this kind of market that is seeing broad buying on strong volume. You cannot, however, ignore when leaders stumble some when the market reaches logical resistance points. It was not widespread among leaders, but it is something to note. The market has ignored bad news and rallied on perceived good news to this point, but that did not carry through to the close Monday. It has anticipated and seen the good news and rallied on it. Now there are some excuses to sell after a strong run, including some post-close news that IBM is under SEC probe for statements made in the 2001-2002 earnings. An old problem was clobbering an important stock after the close and taking the futures lower with it. How the other leaders react to this news will provide a better litmus test to the market's near term intentions.
Market Sentiment
Every time we discuss the secondary sentiment indicators there is a flood of commentary from both sides, those viewing things as too bullish and those viewing the current climate as still leaving room to the upside. Regardless of what the market is doing as far as price and volume action, breadth, and leadership, people get very sensitive about market sentiment. In a way that in itself is an indication that it is useful in investing. The market is driven in large part by emotion, and sentiment extremes give us some insight into that emotion.
In the final analysis, however, sentiment is a gauge of an unquantifiable parameter. It can run to levels considered extreme and stay there for a long time before any impact is shown in the market. It is typically a poor timing tool and that is why it is relegated to secondary status. If you invested or traded based solely on the sentiment gauges in 1999 you were hammered. If you were a bear from 1995 on you were ultimately right but it took 5 years to get there. Again, sentiment can give you a heads up to what may be coming, but it is not a good indicator of when it will happen.
That is one reason we don't devote a big section to it each day. Too many people make it their first investment criteria anyway (i.e., their emotions rule) without us elevating its status further. We use it for what it is, i.e., something to give us a bit more insight into what the real numbers are showing us. We do not pretend to be smarter than the market and push an indicator beyond its useful limits. To us sentiment is like trying to describe how happy Uncle Lee was on his fiftieth birthday versus his twentieth. There are a lot of factors at work and they are from two different times. We prefer to look at what the market is showing us in hard numbers, e.g., are stocks in general and leaders in specific being bought or sold, and base our decisions upon that. If leadership breaks down and stocks and the indexes start to distribute, then we get out of the way and look for opportunities the other direction if the trend does in fact shift.
Sentiment adds a layer onto that analysis, but it does not tell us whether there is an economic meltdown coming, if all who are buying stocks over the past few months are a bunch of suckers, or even if a short term pullback is coming. Those that view sentiment in that light tend to miss out on good moves either direction that are being forecast by the price/volume and leadership action because their investing is more emotional. We prefer to look at what the market is showing and take what the market is giving us regardless of which direction. Over the years we have found that the best indication of direction is how price and volume interplay as that shows what the big money is doing. Sentiment helps in the analysis, but it does not trump the basics. If we traded based on certain sentiment indicators we would have sold out weeks ago and missed a lot of upside profits just as the bears from 1995 through 1999 got clobbered. We prefer to try and see the shifts as they occur and take our direction based on what the market is saying.
VIX: 22.23; +0.53
VXN: 33.63; +1.97
Put/Call Ratio (CBOE): 0.77; +0.1
Nasdaq
Rallied again with a gap higher, but it got top heavy and fell on rising volume, leading the market in lagging.
Stats: -5.16 points (-0.32%) to close at 1590.75
Volume: 2.528B (+9.2%). Strongest volume of the year as the techs reversed solid early gains to close negative.
Up Volume: 1.387B (-283M)
Down Volume: 1.115B (+488M)
A/D and Hi/Lo: Advancers led 1.12 to 1. 2:1 advancers early lost strength.
Previous Session: Advancers led 2.26 to 1
New Highs: 361 (+92)
New Lows: 8 (-1)
The Chart: http://www.investmenthouse.com/cd/$compq.html
As indicated, Nasdaq was up to 1620 on the high, 18.6% over its 200 day MVA when it reversed and started leading the market lower. It double topped intraday, and we sent an alert anticipating a further decline. It was not able to recover from its lows with the important SOX acting as a real drag. It is still in a strong uptrend, but as we have noted the past two weeks, that success breeds its own problems, kind of like the problems of the rich. If it gets up too far without a nice sustained consolidation it becomes subject to sharper pullbacks. It could still run up toward 1635, and thus far has been able to shake off these setbacks. The action Monday was on higher volume than the prior setback 10 sessions prior, and that shows sellers ready to step in after such a good move. We still look at a test of 1500 near the mid-May high as a logical consolidation point when the profit taking commences, but as of yet these intermittent sessions have been isolated and the buyers have used them to step into positions as the leaders have been able to recover and advance.
S&P 500/NYSE
The large caps rallied to next resistance near 975 and then reversed to close barely higher.
Stats: +3.41 points (+0.35%) to close at 967
NYSE Volume: 1.67B (-1.11%). Volume was lower on the reversal though still strong, indicating no real have selling attempt as stocks turned off their highs. Indeed, the up to down volume ratio shows mostly buyside activity. You would want volume to expand on upside sessions, but given the reversal off the highs, the lower trade was not a bad thing.
Up Volume: 1.096B (-198M)
Down Volume: 542M (+179M)
A/D and Hi/Lo: Advancers led 1.82 to 1. Solid but was 2.3:1 and better earlier in the session.
Previous Session: Advancers led 3.39 to 1
New Highs: 546 (+160)
New Lows: 3 (-2)
The Chart: http://www.investmenthouse.com/cd/$spx.html
The large caps surged past the August 2002 high (965), running to 979 and just over next resistance at 975 before following Nasdaq lower in the last 1.5 hours. The pattern suggests a near term test lower coming, but the index has shaken off other such indications in the past and the lower volume shows no real distribution. In any selling, the mid-May highs at 948 would be a great point to find support.
DJ30:
The blue chips were damn ambitious Monday, starting to challenge the December and August 2002 highs (9043, 9077) on the high (9003). Cannot blame them for trying though the effort failed in part. DJ30 did take out the January high (8870) and it did so on stronger volume. It still had that reversal, however, and even the close over the January high provides little support in light of IBM's after hours announcement regarding the SEC probe; IBM was down $3 after hours on the news, and that will set the Dow for some turbulence early on. Again we look to the mid-May highs as a possible point of support (8750 to 8725 on the highs).
Stats: +47.55 points (+0.54%) to close at 8897.81
Volume: 1.67B (-1.11%)
The Chart: http://www.investmenthouse.com/cd/$indu.html
TUESDAY
ISM services hits at 10ET, but we doubt that is going to have much market impact as it has been fairly steady over 50. Moreover, as noted earlier, the market has heard quite a bit of what it considers good news and has priced most of that news in. Without a doubt the big influence will be IBM and how the market handles that will tell us more about its near term direction in that the market was in a selling mood and this will either get it out of its system quickly or start something more sustained. The market needs a consolidation as we have said, but it was just not interested in doing it.
Nasdaq has been the leader, but if we are looking at the mid-May highs as a litmus test of where the market can consolidate to that would take a 40 point drop Tuesday; not inconceivable, but that would indicate some serious problems. We would prefer to see the indexes settle back to that level over a couple of sessions or more and then bounce around for a better consolidation. This is the first really potentially negative news to hit the market simply because it raises an issue that hounded the market in 2002. Again, how it responds is important. If the market is able to digest it and provide a more orderly pullback on lower volume or even ignore it to a certain extent, that indicates the underlying strength is still there.
Right now many stocks are extended in tech, some biotech, retail, and other sectors. That makes it hard to go jumping in, and we have been quite picky lately about what we do move into given the extension. There are still areas that money can rotate into (starting to look more at energy), but Nasdaq has been the leader, and if it takes a needed rest, much of the market will rest as well. The key, as always, will be how the leadership responds. Today many internets were lower on volume but financials were up on volume. As long as we see leaders making solid advances and other setting up and moving higher, we will take advantage of that. At the same time we are also waiting for the next good consolidation to really set up the next move where we can really pile into new positions.
Support and Resistance
Nasdaq: Closed at 1590.75
Resistance: 1595 (June 2002 closing high). 1635 (20% over the 200 day MVA).
Support: 1573 (May 2002 closing low). Down trendline from the May 2001/January 2002 intraday highs around 1565. 1567, the mid-June intraday high. The May high (1554) is a good place to hold on an test. The 10 day MVA at 1554. The 18 day MVA (1533). The December intraday high (1522). The exponential 50 day MVA (1473). The January high (1467).
S&P 500: Closed at 967.00
Resistance: 965 (August 2002 peak) is not completely broken. 975 (December 1997 peak). 990 to 1000.
Support: 954 (December intraday high). The May high (948). 935 (November and January peaks). The 10 day MVA (948). The 18 day MVA (940). Price tops at 911 (July) and the 50 day MVA (914). March and April highs (896 and 905). The 200 day MVA (886).
Dow: Closed at 8897.81
Resistance: January high (8870) is not totally cleared. December high (9044). The August high (9077).
Support: November high (8800). May high at 8743. The 10 day MVA (8731). The 18 day MVA (8664). 8522 and 8520, the March and April twin peaks. The 50 day MVA (8482). The 200 day MVA (8334).
Economic Calendar
6-02-03
Auto sales, May: 5.4M expected, 5.4M April
ISM Index, May (10:00): 49.4 actual, 48.5 expected, 45.4 April
Construction spending, April (10:00): -0.3% actual, 0.2% expected, -1.0% March
6-03-03
Productivity, revised Q1 (8:30): 2.0% expected, 1.6% prior.
ISM services, May (10:00): 52.0 expected, 50.7 April
6-05-03
Initial jobless claims (8:30): 421K expected, 424K prior.
Factory orders, April (10:00): -1.8% expected, 2.2% March.
6-06-03
Non-farm payrolls, May (8:30): -30K expected, -48K April
Unemployment, May (8:30): 6.1% expected, 6.0% April
Hourly earnings, May (8:30): 0.2% expected, 0.1% April
Average workweek, May (8:30): 34.2 expected, 34.0 April
Consumer credit, April (2:00): $2.2B expected, $0.9B March
SUBSCRIBERS QUESTION
Q: I am a new subscriber. I find your news letter very inspiring. For most questions, I can find answers from your glossary. Here is one general question. When you say "excellent 7 to 3 accumulation for 6 months" ...What do the number mean? Are they stock price?
A: The 6 months would be the length of the base. During the base we look to see whether the stock is being accumulated by big money institutions or are they being quietly sold off. By counting the weeks the stock rises in price (as measured by the close each week versus the prior week close) as volume rises (accumulation) and the number of weeks the stock falls in price as volume rises (distribution) we can get a good idea whether the stock was being bought up or sold off during this time. Institutions like to move quietly when they can so as not to cause price swings in stocks they are trying to buy or sell. They want to get in or out ahead of everyone else. They take their time buying in when they can. The good ones spot the strong sales and earnings growth stocks and start to buy them. When the rest of the market starts waking up to the stock that is usually when the breakout comes as many want a part of it. Other institutions buy in and the stock breaks out. We like to follow the big money as that is what really drives stock prices (they have the most money to spend).
Accumulation only needs to be positive (e.g., 4 to 3) for accumulation to be sufficient. If it is much stronger (e.g., 4 to 1 or 7 to 3 in the example you cited), that just shows stronger accumulation. This sets the foundation for a really good move on the breakout because the stock was being accumulated in the base, and those institutions that believed in the stock then are going to be even stronger believers as their ideas are proved correct. They most likely won't sell, and instead will use pullbacks to buy more positions. That gives the stock longer life, that better foundation to move higher.
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 3
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