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understanding the stock market, trend trading stock
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7/24/03 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Thursday: CECO
Buy alerts issued: None issued
Trailing stops issued: KROL; CGFW
Stop alerts issued: CHPC; LXK
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Early enthusiasm has no real backing and fails in the afternoon session.
- Jobless claims fall below 400K, but met with a lot of seasonal skepticism.
- Market just not ready to rally and will get a test on Friday.
- Subscriber Questions
Market gaps higher, gives it back.
Jobless claims fell below 400K for the first time in 5 months, earnings reports were coming in ahead of expectations and with positive guidance, and upgrades were flowing as well. Futures were up and so was the market, gapping higher at the open. That was met with quick selling that brought them back to flat where they rallied once more.
The action just did not look convincing and we were quite skeptical in our early morning alerts. We held off entering positions on the early move higher. In the end the market turned negative and many stocks that made good moves gave them back. Many held onto gains, but they hit their highs early and spent the rest of the session coming back. That is not our favorite time to enter new positions. As we said Wednesday, sometimes the conditions indicate you should go slow. A gap higher from the bottom of the trading range is not a breakout.
Many rumors were running as to why the sell off occurred. One said that SSB was selling futures. Another cited a small airplane flying over the President's motorcade. A bomb went off in Gaza City, the first such act in seemingly weeks. Still others looked to a change in the terror status as a key. Most amusing was a comment that the VIX broke below 20 and thus was a sell signal. VIX can be important and should not be overlooked, but as a timing mechanism its record is spotty at best. Find a scapegoat; pin the reason on the market's butt. In reality, the market was simply not ready to make the breakout. Action was sharp but sluggish early, and the true current character came through as stocks were too tired to hang onto their gains. In the end stocks just slumped back, simply lacking the enough buyer interest to sustain the early moves and to move higher at this juncture.
Volume picked up on the selling as stocks closed at their lows. That is the reverse of the improving action seen earlier in the week, but not necessarily a signal that the market is ready to crack. There was a lot, almost an excessive amount, of talk about shorting the market now ('not a bad time to be short' was heard at least 6 times) given the action in Iraq (a tenuous reason at best) and other vague references to the time of year. In the end you have to look at what the market and leading stocks did. The leaders were mostly higher. The indexes managed to hold support as they continue to consolidate. Sure things may break lower, but going short on the market in general while the indexes are firmly above support is not an appealing prospect. Take at face value what the market is doing. Right now it has not broken down nor has it made a break higher. Because the selling came after an early rally attempt too much was read into the action just as too much was read into the pre-market futures levels and early gap higher.
THE ECONOMY
Jobless claims fall to 386K.
Expectations were for a modest increase from 415K (415K prior), so the decline was met with much rejoicing. That was the first sub-400K reading in 22 weeks and it brought about too much excitement. The labor department noted that it was a volatile number and that seasonal adjustments due to auto, textile and apparel layoffs this time of the year. In other words, the adjustments could have adjusted too far. Certainly it is a good sign that the claims have been lower and cracked below 400K, but it is not a time to dance in the streets. It is further evidence of a slowing rate of job loss, something that has to happen before job creation starts.
Now there are some interesting features to discuss. Remember how the unemployment rate rose at the last jobs report? That was as much because more hopeful candidates have entered the job market than a major loss of jobs. This is interesting because continuing claims fell for the second straight week. Typically you worry that falling continuing claims are merely workers falling off the roles. If more are re-entering the market seeking jobs because they sense improving chances, the falling claims are more reassuring.
THE MARKET
A rally attempt that reversed did the same with the recent improvement in price/volume action. It was not a great session but it was hardly the end as some appeared to be making it out to be on the financial stations. They were all groping for reasons, and when you see that you can surmise that they are having a hard time understanding the market moving laterally. They can talk about the market moving up or down, but when SP500 and DJ30 move sideways for 7 weeks they can say trading range but they cannot understand trading range.
Market Sentiment
The VIX dipped sank below 20 intraday (19.63 on the low) and that had some commentators blaming that for the selling. VIX is not a good timing device in most occasions. It definitely has not been a good timing measure the past several months. It is important not to read too much into the VIX in day to day action.
VIX: 20.46; +0.02
VXN: 31.45; +0.66
Put/Call Ratio (CBOE): 0.75; -0.1
Nasdaq
After a gap higher on the open, tech stocks flopped back to the 18 day MVA on the close as volume remained above average. Not ready to move higher yet.
Stats: -17.76 points (-1.03%) to close at 1701.42
Volume: 1.908B (+3.76%). Volume rose on the selling, but it was up early on the buying as well. All in all, a higher volume reversal from a gap is not good action and Nasdaq underwent some distribution.
Up Volume: 764M (-280M)
Down Volume: 1.129B (+345M)
A/D and Hi/Lo: Decliners led 1.09 to 1. Not a modest downside, but after advancers leading better than 2 to 1 early, the flat close was not that terrible.
Previous Session: Advancers led 1.23 to 1
New Highs: 273 (+101). Note that new highs rose. Small caps performed quite well relatively, down 0.2%.
New Lows: 7 (-4)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Gapped up to 1740 but could not hold the move, falling back to close just over the 18 day MVA (1699). Volume rose indicating some distribution but Nasdaq is still over its June highs (1677 on the close, 1685 intraday). It did not give itself much cushion to test those levels again, however. The index clearly showed it was not ready to advance with the gap and reversal even with plenty of good news the past two sessions. It appears as if it is going to form more of a consolidation at this point along with DJ30 and SP500.
S&P 500/NYSE
Rallied to near 1000 and then folded as volume rose. Still in the consolidation. Still.
Stats: -7.01 points (-0.7%) to close at 981.60
NYSE Volume: 1.542B (+16%). Volume advanced to well above average on the reversal meaning that there was some dumping of shares. This is not the best price/volume action in a consolidation and it turns the clock back to the distribution off the early July high. At this point we are not getting too riled by it, but something to watch as the large caps fall toward support.
Up Volume: 646M (-2M)
Down Volume: 903M (+234M)
A/D and Hi/Lo: Decliners led 1.07 to 1. From 2.5:1 to flat. Pretty much the day.
Previous Session: Advancers led 1.13 to 1
New Highs: 174 (+95). Small caps are outperforming again and were quite solid relative to the market.
New Lows: 16 (+5)
The Chart: http://www.investmenthouse.com/cd/$spx.html
The large caps covered the field Thursday, up to 999 on the high and down to 981 on the low. The consolidation range is 1015 to 975 (the 50 day MVA is at 973). SP500 has experienced 3 distribution sessions in the past two weeks. As long as it holds the consolidation we are comfortable. Of course if it blows out the bottom on volume that changes the story. Right now stocks are holding up well.
DJ30:
Stats: -81.73 points (-0.89%) to close at 9112.51
Volume: 1.542B (+16%)
Rallied to resistance at 9250 (9281 on the high) and then gave it back and more. Closed just below the 18 day MVA (9120.78), holding above the Wednesday low. Still above the bottom of the range at 9000 (50 day MVA at 8977) and still moving in a fairly tight pattern. Volume for the Dow 30 was up some but still below average. No real problems as the blue chips work through their seventh week of a very flat consolidation.
FRIDAY
After hours earnings reports had the usual disparate results though most were at or better than expectations. EBAY beat the street and doubled revenues over last year but it was down after hours after being up almost $4 intraday. Other stocks enjoyed strong sessions on their earnings (e.g., VRTS, SINA). It is a sign of a market trying to find its direction when stocks receive such divergent treatment on what are very solid earnings relative to expectations.
This mirrors the action in the market, up one session and down the next as it works through the consolidation range. The action in many leader stocks is quite volatile as well, e.g., SINA. During an earnings season after a good run higher with leading tech stocks trying to start a consolidation along the lines of the SP500 and DJ30, such volatility is not unusual. Thus far the indexes have been consolidating well, but action such as that Thursday shows that overall they are not ready to break higher.
Thus we continue with a more conservative stance regarding new positions, and if a position gets into some distress we close it, giving some deference to the strong leaders that hold support and manage to rally. The unexpected can always happen as the market works through an earnings season consolidation, and we prefer to put more money to work when stocks have set up and are ready to move in a trend as opposed to back and forth.
We will continue to address new plays that are set up well. Small caps are still performing well, and when stocks start to run we want to be ready. Not all stocks that set up and have good accumulation and other technical indicators will make the move, but again, we want to be actively scouring the market to find those that are showing early leadership skills. Obviously we are not of the opinion yet that the market is going lower; it could do it, but it has not broken its consolidation. Thus we keep looking for the next leaders and current leaders that set up well. When they make the break higher we need to be ready to capture the initial moves.
Support and Resistance
Nasdaq: Closed at 1701.42
Resistance: 1760 (May 2002). 1800.
Support: 1700 (Feb 2002 low). The 18 day MVA (1699). 1685 (June intraday high) and June closing highs (1677 to 1645). The exponential 50 day MVA (1636). 1600 to 1595 (June 2002 closing high). The mid-May high (1554).
S&P 500: Closed at 981.60
Resistance: The 18 day MVA (989). 1003, the early June closing high. June closing high at 1011. The June intraday high at 1015. Then 1050.
Support: 975 (December 1997 peak). The 50 day MVA (973) and 965 (August 2002 peak). The mid-May high (948) and 935 (November and January peaks).
Dow: Closed at 9112.51
Resistance: 9236, the early June intraday high to 9250. 9352, the June high. 9500 (June 2002 lows).
Support: The 18 day MVA (9120) is still in the range. 9000 is some psychological and price support that has held previously. 8980 is the neckline in the short head and shoulders pattern. The 50 day MVA (8977). January high (8870). The mid-May high at 8743
Economic Calendar
7-21-03
Leading economic indicators, June (10:00): 0.1% actual, 0.2% expected, 1.1% May.
7-24-03
Intial jobless claims (8:30): 386K actual, 415K expected, 415K prior.
7-25-03
Durable goods orders, June (8:30): 1.2% expected, -0.4% May.
Existing home sales, June (10:00): 6.00M expected, 5.92M May.
New home sales, June (10:00): 1.111M expected, 1.157M May.
SUBSCRIBER QUESTIONS
Q: We often get questions about stop loss points and how sometimes we set a stop point that a stock hits intraday but rebounds and we keep the position. In looking at stop losses, the first thing to understand is that stops are not absolute and set in stone. Setting a stop loss point involves looking at ranges a stock trades in both up and down as well as support levels. We use those to establish stop losses, but we know at the same time that this is a point where we will sell if the stock shows signs it is not going to recover.
A leader can spend a day lower below support and then jump right back. We will give a leader a bit more leeway. If a stock has hit a buy point but never really makes the move we look for, we will be stricter as it has not shown the ability to be a breakaway leader. Moreover, a stock can sell off intraday and then rebound to the close. We try to set the stop to take this into account, but outrider trades and market orders can trigger a stop point just to see a stock rebound. Thus we use mental stop points and take into account the market action during the session when deciding to sell just as we look at the market action to decide if we want to buy a stock that has hit the buy point. Again, we try to set them at points where the stock would not hit but we have to balance that with the fact that doing so would give up a very large part of the gain.
In addition to the individual stock action, we have to overaly the market action. If the market is rallying higher and we are with a leader, we will be more lenient. If it is rallying and the stock is so-so, we will give it a bit of leeway. If the market is consolidating and holding up we will also give leeway. If it is selling down and we are playing upside, we will be strict.
Given all of this you can see that setting stops has general rules of using support levels and market conditions, but those general rules are subject to experience and risk tolerance. That is one reason we always have some trepidation in setting stop loss points as our judgement of when to take the money off the table will be different from another's. If a stock breaks support you cannot kick yourself for selling if it rebounds a few days later or even that session or the next; you did what you should have done in 95% of the situations. If the stock still looks good you can always buy it again. That is a better position to be in than a stock that dives lower after showing signs of a breakdown.
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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understanding the stock market
trend trading stock
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