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us stock market, trend trading stock
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5/19/01 Stock Split Report
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Stock Split Report Subscribers:
TONIGHT:
- A nice, quiet close to the week.
- Smaller stocks continue to lead, but many are enjoying in the gains.
- Continuing breakouts, IPO's receiving a warmer welcome: more signs the market is looking better.
- Slow week for economic news; Greenspan speaks on Thursday.
- Subscriber Questions
- Team Trades.
THE SUMMARY
A decent end to an important week.
There was a lot of talk of trouble early in the week. Many big name brokerages were negative on the market. The Fed rate cut seemed to solidify that view. All the while the market was maintaining its quiet building action. It hit a peak Tuesday when short interest climbed higher and the put/call ratio spiked over 0.80; all when there was no negative action by the market. Indeed, we continued to see stocks build solid bases with good price/volume action. The market itself was in a quiet consolidation on low volume. As we have been discussing in the seminars, this action is just what we look for in basing stocks. What is good for stocks is good for the market as well.
Wednesday saw an important breakout by the Dow and S&P 500. The Nasdaq has not broken out over its significant resistance yet, but as with the other two main indexes, it is in a very bullish pattern resembling an ascending wedge: rising lows and a more or less constant top at 2232. We are looking at 2250 as the key breakout point as it marks where the index touched down in early January and found resistance in early March. It needs to clear this point to start a real recovery.
The action Friday was not bad. Volume was lower, but that was pretty much expected after the big day Wednesday and the further gain on Thursday. We were expecting a pullback on lighter volume ahead of the weekend; what we got was the pullback and then some buying later in the session that pushed the indexes positive. Between the choice of a lighter volume day of selling versus a late recovery to give us a gain on lighter volume, we will take the latter. The fact that buyers came back late in the day seeking values indicates the overall bullish action the market is showing. It was not wildly bullish, just a nice finish to an important week.
Smaller stocks moving well.
We continue to see the small cap and mid cap stocks outperform the major indexes, but it is not a landslide. The overall market is moving up well. Still, stocks such as JAKK, OO, FEIC, etc. continue to show some of the best action and breakout to new highs out of very good bases.
These breakouts are something that has been missing in all of the previous attempts at rallying out of the bear market. In the summer of 2000 the bases were ragged and a bit wild; good to rally for a bit, but not a lot of solid bases. In January there were just no good patterns to lead higher. Now we are seeing very good breakouts in retail, energy, electronics, chemicals, medical, etc. After the lateral consolidation for 2 to 3 weeks, stocks completed their bases and started breaking out with earnest this week.
On top of that breakouts are holding up better than they have in a year. We are going to see a lot of tests of those breakouts soon, and that will be another important step, but as we are seeing, as the first round of breakouts come back to test their moves (e.g., TTWO, NVDA), the next wave has been breaking out. That is always good to see as confirmation of the move.
In addition, IPO's actually received a truckload of attention Friday as Instinet rose $3.15 on its initial day of trading and Global Power Equipment raced ahead $11.45 on its first day of trading (makes power plant equipment). There was a time several months back you could not give an IPO away. This year they are up 38% on the whole since the April bottom as compared to the S&P 500's 17% rise since that time.
THE ECONOMY
A comparative slow week of economic news that does not kick off until Thursday with the jobless claims and new home sales, and then durable goods, GDP and existing home sales on Friday. All of these are key reports. Jobless claims have started to fall; can they keep up the trend and bring the four week moving average down below 400,000, a level considered to indicate recession? Will home sales remain strong; remember, they carried the economy through its worst (hopefully) days. Durable goods orders (those lasting for three years or more) is also out this week, and as part of the Fed's consumer game plan, it would be very nice to see durables finally start back up.
GDP will get a lot of attention after the surprise 2% earlier. There have been some competing reports that will impact GDP both directions (inventories, trade gap). Expectations are for 1.9%, but the range could be from 0% to 2%. We all know it is pretty weak. What we want to see is the other reports starting to show more upside life.
THE MARKET
Overall market stats:
VIX: 24.26; -1.26. Volatility continued to fall on the session, breaking below 25 for the first time in quite a while. Not a dangerous levels, but we will watch around the 20 level. Again, we don't let a secondary indicator set our primary investment strategy. We will keep an eye on it as an indication of possible weakness, but the primary focus is on price and volume.
VXN: 53.06; -5.63. Nasdaq 100 volatility is now at its lowest level yet since the index was officially created. Many have taken the data and constructed what the index would have shown if it were tracked prior to this year. We see that back in the rally of 1999 the index was down at 35. It is still new, and basing decisions on what it has shown the past 4 months alone is risky. Secondary indicator behind price and volume.
Put/Call ratio (CBOE): 0.47; -0.12. Still above the 0.40 level that may indicate some complacency, but it is getting to that point. Another thing to watch, but again a secondary indicator. Overall option activity was up again on Friday to 1.86 million (1.74 million Thursday).
NASDAQ: Opened softer as expected, rallied and then sold back. But, it would not give up the session, rallying to positive in the last hour.
Stats: Up 5.20 points (+0.2%) to close at 2198.98.
Volume: 1.792 billion shares (-16.7%). Volume slipped back on the day. This was expected given the Friday after a big gain in the week. What we did not expect was the index to necessarily rally late in the session for a positive close. Up volume was 993 million shares versus 773 million to the downside. Not bad action, not great action.
A/D and Hi/Lo: Advancing issues hung onto a slim lead Friday, 1.07 to 1, well off the bullish pace earlier in the week, but again not bad with a market that was selling down and then made a late recovery. New highs fell to 165 (-48) as new lows fell to 37 (-9).
The Chart: http://www.investmenthouse.com/cd/$compq.html
As noted above, the Nasdaq is currently still below resistance at the 2250 level, a key level it has half-heartedly tested on two prior occasions since the April bottom. It really has been in no position to take it out on this move up to this point. Now that it has consolidated and started to move higher on rising volume with more stocks breaking out, it has a realistic chance of challenging and taking out that level. The price and volume action has been excellent, indicating that big buyers have been in the market. If they continue we could see the breakout over resistance this week.
Dow/NYSE: The Dow was suffering a light day of selling as well until the last hour when it reversed off of its session low (11,193.60) and powered 100 points higher to a 53 point gain.
Stats: Up 53.15 points (+0.5%) to close at 11,301.74.
Volume: NYSE volume dropped back to 1.130 billion shares (-16.6%), falling back below average on the session. Lighter volume, but up volume was out in front 680 million to 417 million shares. As with the Nasdaq, we knew it would be light, so might as well have a gain on the session.
A/D and Hi/Lo: Advancing issues continued to lead but by a narrower 1.23 to 1 margin (1.57 to 1 Friday). The NYSE A/D line has been very solid of late, particularly last week. New highs fell to 220 (-65) as new lows rose to 11 (+6).
The Chart: http://www.investmenthouse.com/cd/$dja.html
Not much to take from the day from a technical standpoint, though the rally off of the low in the last hour indicates the buyers are ready to come in on perceived weakness to take positions. The index has run well to this point, but it is now already knocking at the next level of resistance, 11,400 to 11,450. We hate to bet against it, but a pullback of some degree toward the 11,000 level would be normal before another run at 11,400. At least that would give it a better chance of running right through it. It may try to make a move to 11,400 first, but it might have some trouble taking it out after such a fast move up to this level. We expect some weakness early this week, but we do not expect a 'correction' as some are calling for. Remember, a correction is a drop of 10%. We do not see that in the cards at this juncture; at least that is not what the market is telling us right now.
S&P 500: The S&P staged its own nice recovery late in the session along the same lines as the Dow (11 points off of its low at 1281.15). Volume was lighter again, so the gain was not a powerful buying session. It was, however, a nice recovery that saw buyers come into the market to pick up stocks that had pulled back. That is still bullish action. Used to be that sellers would use weakness to jump on stocks and short sell them even more. Now it is used to pick up shares again. Positive action, but we need to see a resumption of the higher volume gains next week. The S&P 500 is possible in the best shape of any of the indexes for a move higher (until the Nasdaq breaks resistance), and we are looking forward to more moves higher next week after some possible softness early. 1300 is still the level to beat at this point. Any pullback should hold fairly easily above 1270 if this move is going to last.
Stats: Up 5.20 points (+0.3%) to close at 1291.96.
Volume: NYSE volume was fell back below average to 1.130 billion shares (-16.6%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
Friday was a nice close to what could be an important week for a long time to come. Buyers came back in on a weak day. Moreover, the market overcame attempts to talk it down and short sell it and finished much higher. Buyers were in the market again. We have been counting up the signs that the market was looking very good, it is just that the mood was bad. As we noted at the time, that was very good. Another one of those times when bad was good, but for the right reason.
Now the question that was asked on every stock market show this weekend has been 'can it last?' The pontificators would then fluff up and talk about bear markets, bear market rallies, new bull markets, projected highs, projected lows, etc.
The key remains the economy. The market is showing the action that is bullish. It looks very much like a new bull market has emerged after 5 rate cuts totaling 250 basis points, talk of a tax cut, and massive pessimism in the market even as things improved. The moves are based on the belief that the future will be better than the present. That is why stocks are moving higher. If that view changes, stock prices will then be adjusted to reflect that change in belief. Right now the market is not showing that to be the case as price/volume action is solid, stocks are breaking out of good bases in waves, testing the break, and then moving higher. IPO's are getting attention. Stock splits are starting to surge higher on announcements and prior to the split. That shows a lot of momentum returning to the market as well.
You know our philosophy. We will continue to watch the market on a daily basis, and put the moves into context with the overall market, individual stock action, and the economy. There are still tremendous hurdles for the economy at this point. It is no 'gimme' that we are going to just rock on up in economic output from here. But, as we have been saying for several months, the market does not wait for times to get better. The collective of investors knows ahead of time when the signs are right. We said it last Tuesday before the big rally day: you cannot argue with 250 basis points in rate cuts. Investors started getting on board in April, and just as the big names on the street were declaring another move dead, it sucker punched them.
This week we look for perhaps some indecision on Monday. Expect the usual Monday bad news as analysts are still downgrading stocks even as they start to make real moves higher. They are still negative on the future, the opposite of their unbridled enthusiasm last year when the run was dead and over. There have been some very negative market calls made; don't expect them to give up easily on those until they have to. Thus we may see some softness early in the week, but we have a suspicion it will be met with buying as it was at the end of last week. That gives us opportunities.
Now we look for opportunities to get into great stocks that are leaders, that are making great momentum moves, and that otherwise have the edge to make us money. We are looking for breakout tests to give us another buying opportunity on stocks that have already broken out, and we are of course ready for the next breakouts to occur. As we noted last week, there are a multitude of plays out there to take advantage of in several different ways (stock, option purchases, covered call sales). With the better market we are also looking at some put sales this week.
Support and Resistance Levels
Nasdaq: Closed at 2198.88.
Resistance: 2250. After that 2500.
Support: Looking at the 50 day MVA (2112.75) and the 18 day MVA (2124.34). 2005 after that.
S&P 500: Closed at 1291.96.
Resistance: 1300. Then the 200 day MVA at 1335.81.
Support: 1270 should act as some support now. After that, the 18 day MVA at 1255.54.
Dow: Closed at 11,301.74.
Resistance: 11,400 to 11,450. Then the old high at 11,750.28.
Support: 11,000 should now act as some support (old resistance usually becomes support). The 10 day MVA is at 11,031.35.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
5-24-01
Initial Claims, 5/19 (8:30): 380K versus 380K prior.
New home sales, April (10:00): 984K versus 1021K prior.
5-25-01
Durable orders, April (8:30): -2.0% versus 3.5% prior.
GDP-Prel., Q1 (8:30): 1.9% versus 2.0% prior.
Chain Deflator-Prel., Q1: 3.2% versus 3.2% prior.
Existing Home Sales, April (10:00): 5.27M versus 5.44M prior.
SUBSCRIBER QUESTIONS
Q: Is there anyway that you could put just one or two stock in the daily with entry point and target price without all the option terms. I am small investor, and don't understand all the option terms. I only need 1 or 2 stock per week. Seems all the stocks you mention are for option traders. I appreciate the information and trouble.
A: We put both stock and option information in as well so stock traders OR option traders can take advantage of the trade. Option moves are mainly keyed off of the underlying stock's movement. We say stock and/or ___ option because that is a choice: you can trade the stock alone, the option alone, or both the stock and the option if you so desire. If you are only interested in stock purchases, just ignore the option information and note the buy point that applies to the stock or the option.
Q: What do you mean by "aggressive" play? What do you look for in order to buy into the stock as an aggressive play and what are your rules for loss stops?
A: An aggressive play is one that is either a play before a stock breaks some resistance point (i.e., on a breakout) but still has good potential to move higher, or it is one that has already made a good move but could add to the position on further momentum. For example, if we see a stock move higher and then come back to test support, the more aggressive investment would be to jump in when it starts back up off of that support level. The safer entry point is after the stock clears the breakout high on strong volume: it has beaten potential resistance again. Several aggressive trades we have made of late involve the beaten down former leaders that have started to recover but still have a lot of overhead supply out there and their recoveries are not certain at all. They are still working on their bases, but are in a good position to give us a nice gain in the shorter term. Those are more aggressive because the stock has not cleared all of the potential resistance.
TEAM TRADES
KEI: Keithley is in a sector that has looked better of late, and Friday it gave us the second stage of the move we were looking for: a break over 30 on stronger volume. We had the move Thursday, but we decided to hold off another session to see if it could generate even more volume. It did. Plus we thought we would get some weakness and wanted to pick it up as it moved back up. Seminar was going on Friday morning, so we left instructions with one of the brokers to see if the stock tested the 30 level, and if it did and started back up, pick up some shares. Well, it started where it left off Thursday, running up to 31.50 in the first few minutes. It did test down to the previous close and the days' opening price, but went no further. Our broker saw it do that once in the first few minutes, let it run up, and then it tested the open again. At that point he felt the previous close was going to hold and entered the position. Turned out to be a decent choice as the stock tested that level one more time over the next hour and then moved higher the rest of the day on rising volume. Not bad. Leave good instructions or just put in a limit order to pick up the stock at a lower price on a bounce up off support, or a buy stop at a higher price and it can be done on a more automatic basis.
End Part 1 of 4
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