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us stock market, top stock pick
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5/21/01 Technical Traders Report
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Technical Traders Subscribers:
TONIGHT:
- Analysts tried to stop the move, but to no avail as Nasdaq enjoys an explosive Monday.
- Volumes up across the board.
- Breakouts galore as plays explode out of patterns.
- SOX makes an important move to the upside.
- Still doubters saying sell into the rally. Wish there were more.
- Treasury Secretary O'Neill says no recession.
- Team Trades.
THE SUMMARY
As we expected, the analysts were out today trying to do battle with the recent turn up in the market. Makes you think that a lot of the big brokerages are short the market and are trying to get points of exit by making some negative calls. It is not working well for them.
Today the semiconductors were being dogged by the same old analysts from Merrill Lynch as he cut estimates on INTC, AMD and company. Toys 'r' Us (TOY) was downgraded as well even though its earnings were not bad. It was somewhat touch and go at the open; futures were up on the Nasdaq, down on the Dow. That did not deter investors as they seized upon the weakness.
We also suspected that any weakness would be viewed as a buying opportunity by investors. That is exactly what happened as money poured into technology and powered the index higher on strong volume after just a bit of hesitation at the open. Volume surged to 2.3 billion shares, up 28% on the buying. NYSE volume jumped up as well; not as much, but it managed a gain (after a lot of indecision) on a gain in volume.
Breakouts continue to come forth with individual stocks and the indexes.
One of the keys to any new bull rally is the follow through by individual stocks that break out of solid patterns and that break over resistance that has kept them down. This rally we are seeing solid patterns yield solid breakouts on high volume. Today saw LOW, ORLY, PL, and WMS broke out or continued their moves out of their bases. We are also seeing stocks such as SEBL, BRCD, EXTR, VRTS, and VRSN reassert themselves as they break resistance, test it, and then power ahead on high volume. On top of that we saw TXN, PRGN, JBL and STMC breakout of the ascending wedges we were watching. Strong moves on high volume make for strong support of a new bull rally.
It is not just the stocks, but the indexes as well. The S&P broke out of a cup with handle pattern last Wednesday and the Nasdaq broke out of its ascending wedge pattern today, clearing resistance at 2250. The SOX also cleared some resistance at 695, though it still has to top its 200 day MVA at 718.38. It has been a long time since the index was above that level (last September).
A mixed view on the future.
After the close today Legg Mason was saying to stay away from tech and to sell into any rally at 2400 or 2500. We heard LEH say sell tech stocks right before last Wednesday. We are not saying that there is no resistance at 2500; there is some from an old consolidation back in the first half of 1999. It just seems kind of premature to be calling an end to any rally at an arbitrary level when we are seeing strong buying on the up days and light selling on the down days. We prefer to let the market tell us more of what is going on directly than guessing on tops.
More to the point. We are seeing the Nasdaq handle what could have been some pesky resistance with relative ease. We saw the big caps and the Dow pause and then blow through resistance. These indexes could be breaking through levels of resistance in this bull rally as easy as they broke through levels of support on the bear drop. The market is showing us good things. Be cautious, but don't start feeling as if you can see through walls or guess what card the dealer is holding. In short, LM is telling us to stay away from stocks such as BRCD and SEBL that have given us moves of $11 and $15 since we bought into them last week. If the Nasdaq does run to 2500 and stall, those stocks will more than likely give us a lot more upside. If we protect ourselves properly we will have enjoyed a nice gain and be out on any selling as opposed to just sitting and watching while they moved higher or got into some other stocks that move $3 to the upside during that time. The point: if the market is showing good action, take advantage of it.
Treasury Secretary Paul O'Neill today said he believed the economy was going to skate by a recession. That is good to hear from a man such as O'Neill who is a respected corporate leader. While we would argue that the U.S. has already suffered a recession in fact due to the sharp GDP drop in just a few months, we don't mind someone looking at the numbers and drawing a positive conclusion. The timing was good: let the markets break higher on their own and then when the first wave of buying is quieting down, goose them with some good news. We still think the economy is dicey, but for now the collective of investors is banking on better times before the end of the year.
THE MARKET
Overall market stats:
VIX: 23.24; -1.02. Strong rallies lower volatility, and that is what we are seeing now. The level is getting closer to that considered low or where complacency sets in, but is still holding above it. At this point it is good to talk about the VIX. At times it does set up an inverse relationship between it and the S&P 100: it falls as the index rises and vice versa. Too far either way brings it back toward the center. It does not always do that with precision, and it takes time for a pattern to develop after a breakout one way or the other. Right now we have to look at the primary indicators; the VIX is not one of them.
VXN: 52.97; -0.09. With a 100+ point rise on the Nasdaq, you would expect the VXN to plunge. It did not. As with the VIX, it has to set up some kind of pattern vis a vis the Nasdaq, and it has not as we discussed over the weekend. Stick to the primary indicators for now.
Put/Call ratio (CBOE): 0.47; 0.00. Holding steady above the 0.40 level that can signal complacency. Much as the VXN, you would have thought it would plunge even more on a day such as today. It went nowhere and even overall option activity on the CBOE was lower at 1.643 million (1.86 million Friday). Buying stock today.
NASDAQ: The Nasdaq cleared some key resistance today on strong volume. There was buying early on. When it cleared 2238 (the recent intraday high) some shorts started to close positions. When it reached over 2500, it was really driving them out.
Stats: Up 106.71 points (+4.9%) to close at 2305.59.
Volume: 2.311 billion shares (+28.9%). Back above average volume, even higher than last Wednesday's move, with up volume clubbing down volume 2.057 billion to 243 million shares. The Nasdaq continues its good price/volume action.
A/D and Hi/Lo: Advancing issues really stretched the lead to 1.89 to 1 (1.07 to 1 Friday). New highs rose to 219 (+54) as new lows dropped to 33 (-7). This was another broad move.
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq broke some critical resistance today, and it did it with ease as volume poured in. It hesitated for about a half hour after it broke through, gave it a half-hearted wave from 2270, and then powered onward and upward. It was a strong day with big and little names leading the way. Now there is a lot of congestion from 2400 to 200 where the index traded up and down in the first half of 1999 before it took off. If volume turns light this summer, there could be some similar action as it tries to move through that 200 points of congestion. Could be. Again, we don't like to guess where at top or bottom will be when an index has entered a solid move up or down. It tends to walk right through resistance when investors make up their minds one way or another. We use them as rest stops along the road in order to get bearings on what is going on: does it hit the level and reverse sharply, does it smash right through, or does it just stop and take a rest as it did earlier in the month? Use potential resistance like that, and you get better results. Use it as something to keep you out of the market and you can be way wrong.
Dow/NYSE: The Dow had a real hard time of it today trying to get on track. It took until late afternoon, but when it did it made a 52-week high on the close.
Stats: Up 36.18 points (+0.3%) to close at 11,337.92; again a 52-week high.
Volume: NYSE volume was not huge, but it did rise on today's buying, coming in at 1.179 billion shares (+4.3%). Up volume improved to 860 million shares versus 283 million to the downside. Not as strong as the Nasdaq, but still the right price/volume action.
A/D and Hi/Lo: Advancing issues widened the lead back to 2:1 (1.23 to 1 Friday). New highs rose to 274 (+54) as new lows dropped to 10 (-1).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow did not nave a lot of momentum today. Indeed, it has been slowing its moves, but then again, we did not count the Dow out as it has continued to surprise to the upside. Now it is right at some resistance at 11,400, and it will need to keep that improving price/volume action to continue its climb. One very interesting development: as discussed in the TA1 seminar, the 50 day MVA (10,625.47) is about to cross over the 200 day MVA (10,638.79) to the upside. That is a bullish indication that usually presages further moves higher. It has not done it yet, but it is knocking on the door. The Dow still may try to give a move to the downside to consolidate some gains as they have not been on huge volume, but it also may just take a rest and then get the volume injection we are looking for.
S&P 500: The big caps ran right up to 1300 where the index moved straight sideways for a half hour before gapping through that level on strong volume. Two and one-half hours later it tested that level, dropping to 1301. it then took off along with the Dow on an impressive run that left 1300 in the dust. NYSE volume was up a few percentage points, a good gain but not as strong as we wanted, and pale in comparison to Nasdaq volume. Still, no complaints about the move as the big caps took off, resuming their move after a couple of light steps higher Thursday and Friday. Now it has to do battle with the 200 day MVA at 1335.11, a level that coincides with some lows that acted as support in February and October of 2000 and a really congested area from back in the summer of 1999. Again, we look at the price/volume action to give us the cues; we want to see NYSE volume back above average on the moves back up. It made a good move today, now we need more volume.
Stats: Up 20.87 points (+1.6%) to close at 1312.83.
Volume: NYSE volume moved higher, but not by much, coming in at 1.179 billion shares (+4.3%). Not a huge blast of volume, but an increase on a solid price gain.
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
Breakouts from our plays were thick again today, and that is exactly what we were looking for over the weekend to take advantage of. There is a lot of guessing about how far the indexes will move, when corrections are necessary, etc. When we see strong volume on up days as we saw today, we have an idea that the action is still very healthy and still has life in it. Sure there will always be pullbacks; the Dow may be ready for one still, though it has defied any attempts to call it dead. But right now the pullbacks are being used as buying opportunities.
We can use the pullbacks, but the ones of the right sort. That means pullbacks to test breakouts or to test support that has just been broken. We want to see the pullbacks on lighter volume as that means the investors that just bought the stock are not selling it; they are holding it while those playing the short term move clear out. Then the decks are clear for another move higher as new buyers come in to bid up the price higher from those stronger holders who require a bit more money to sell.
That is the essence of a healthy market, and that is what we are seeing now. We are not going to judge how far the move will go. For all we know it can run another 1000 points on the Nasdaq or just another 200 points. We let the market tell us if it is acting as it should by looking at the volume versus the price and the individual stocks that make up the indexes. For now we see great breakouts from solid patterns on strong volume. Moreover, they are holding up. That is a key ingredient lacking from previous rally attempts.
Tomorrow we look for the Nasdaq to continue its momentum higher early with some profit taking again to give us an opportunity to take the right kind of positions as we spell out in the reports. The
Dow may finally take a bit of a breather, though it had every opportunity to do so today and refused to do so. Instead, it mounted an afternoon rally on rising volume. That continues its bullish if not powerful moves. As long as the indexes and individual stocks keep showing us this action, we can continue to take positions when they present themselves. That is key: as we keep saying, let the play come to you by breaking out, testing the breakout and moving back up, etc. Patience can pay off well in a new bull rally: the initial jockeying gives way to powerful moves by the leaders as they assert themselves over the rest of the market. We have been patiently picking off the leaders as they have broken out. The waves of moves keep coming; pick your favorites and grab on.
Support and Resistance Levels
Nasdaq: Closed at 2305.59.
Resistance: 2500.
Support: 2250 is the resistance that was just broken; resistance should become support.
S&P 500: Closed at 1312.83.
Resistance: 1335.11 is the 200 day MVA and some price consolidations from February and October of 2000 and the summer of 1999.
Support: 1300 and 1270 should act as some support now.
Dow: Closed at 11,337.92.
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 11,087.09.
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.
Greenspan addresses the New York Economics Club in the evening.
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.
TEAM TRADES
VRSN had gotten some good news after the close Friday, the government allowing the company to continue its control of the ".com" domain. The stock had closed higher Friday on a break of resistance, but volume had dropped back quite a bit than the previous day. Nevertheless, it was primed for a move up from the new support.
The stock was testing (at 9:48 CT) the 63.50 level after hitting an early high of 64.54 on a gap higher. Volume was at 4.58 million and looking very good as average is 9 million considering the early hour and that the Nasdaq had rallied up 38.60. The stock found support and moved back up with volume increasing nicely to 4.62 million volume, so we looked at options, trading at 17 by 16.50. That was a decent spread, and since the stock was trading pretty fast, we put in a bid at 17. After that was done we put in a stop limit at 15, and that allowed us to leave things alone for a while. The stock needed to break back over the high of 64.54, and we felt like it had a good chance since things looked good with volume (a 10:03 at 5.12 million) and the Nasdaq rallying.
When we checked again at 2:13, the stock was at 67.19 on volume of 12.4 million, great. The Nasdaq was up a big 93 points. Options were now at 19.40 by 19. We slid the stop loss up to 16. VRSN closed at 67.66.
SMTC: We were watching a lot of ascending wedges, one of our favorite plays in a rallying market. PRGN, TXN, SMTC, JBL, BVF: all looked solid. The chips got our attention, however, and SMTC and TXN were on our radar screen. Both were moving well, so we were going for both. SMTC was softer early, but quickly took out our buy point over the 200 day MVA. We were wanting to see if the Nasdaq was going to firm up, and it started to move and so did SMTC. When it crossed 32 we were putting in an order for the stock (good price level) and by the time we had it entered the stock was at 32.06. We were out of the running, so we jumped it up to 32.11 when we saw it heading to 32.10 (sometimes we get trades a penny off or so from round numbers). That worked, but of course the stock came back to test below 32 pretty fast. Still, we were not too concerned as it held well above the 200 day MVA. It started a steady climb and then it really broke through right before lunch. A very good day for the wedges; explosive moves. We will take a gain up to 40 and evaluate it at that point. These can race ahead higher and higher, or they can fizzle.
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http://www.investmenthouse.com/1questions.htm
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End Part 1 of 2
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