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us stock market, top stock pick
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8/06/03 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS
Targets hit alerts issued Wednesday: None issued
Buy alerts issued: None issued. Nothing was making the move.
Trailing stops issued: MRGE; ATYT; DVA; SOHU
Stop alerts issued: Cleared out some deadwood. MXO; FSII; HPOL; MDCC; OPSW; PHMD
MARKET SUMMARY
Selling not as bad as it could have been, but it was no rose party.
The market was poised for a vigorous selloff but managed to put a tourniquet on the bleeding. Indeed, DJ30 and SP500 managed to recover to green by the close though it took a couple of shots to make it stick. Nasdaq, led by the Cisco earnings that merely met expectations, was burned. It rallied off of its lows that breached the 50 day MVA, but it could not hold that rally or the move back over the 50 day MVA, and returned almost to the session lows by the close. Surprisingly the semiconductors performed much better than the Nasdaq overall. Chips continue to show a glimmer of relative strength as they continue to make higher and higher lows, using the 50 day MVA as support.
SP500 managed a gain, but it was hollow as it tapped the 50 day MVA on the high and fell way off that level to close. Indeed all of the indexes gave back their highs as they moved through the last hour. DJ30 is still holding relatively comfortably in its trading range as the other indexes struggle to hang on. The small and mid caps remain at their 50 day MVA, trying to hold on and fight off the effects of a double toppish pattern. Things have not broken down yet, but they are at a crossroads: hang onto the current range or take it down a notch.
THE MARKET
DJ30 and SOX look pretty darn decent but for the rest of the indexes and their struggles. Nasdaq distributed for the second straight session and closed below the 50 day MVA while SP500 failed to retake its 50 day. You could take some comfort and say that now it is the Dow's and SOX' turn to lead after being laggards to this point, but when the leaders such as Nasdaq stumble, the fall can take down a lot of bystanders.
The market did hold up better than most expected, but it does not evoke a lot of warm feelings right now in many investors as some leaders are in trouble and have been taken down hard. Still many stocks are not breaking down at all, just fading back into their trading ranges after breakout attempts failed a week back. That is what is keeping most of the indexes over their 50 day MVA as opposed to Nasdaq and SP500 that have given those levels up.
That leaves the market in position to move higher if it can get the buyers back, but at this point there is nothing to bring them around. Earnings could not do it, good economic data could not do it, and now there is Nasdaq distributing at a time the market typically struggles. Again, there are not a lot of warm feelings being evoked. All stocks are not tanking, but most are going to sleep in the late summer heat.
Market Sentiment
The numbers shed little light on the current market condition as volatility was steady and put activity diminished some as stocks tried to slow the selling.
VIX: 23.3; -0.81
VXN: 34.42; +0.19
Put/Call Ratio (CBOE): 0.88; -0.07
Nasdaq
Closed below the 50 day MVA on another strong downside session as volume moved higher and toward average.
Stats: -20.82 points (-1.24%) to close at 1652.68
Volume: 1.873B (+6.14%). Rising volume, and though still below average it is distribution. That is where big money investors are unloading shares. We have seen the market pullback on lower volume indicating that sellers were not increase; this is the opposite scenario where there are more sellers selling more shares. In other words they are now selling the shares that they were eagerly buying earlier. A couple of days does not doom a rally, but Nasdaq is definitely not showing the same spots it had when it was leading higher through mid July.
Up Volume: 366M (-26M)
Down Volume: 1.49B (+129M)
A/D and Hi/Lo: Decliners led 1.63 to 1. The downside was worse at -2:1 but it eased as the market managed the afternoon recovery.
Previous Session: Decliners led 2.01 to 1
New Highs: 75 (-24)
New Lows: 13 (+4)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Tech stocks took another one on the chin Wednesday, but most agree it could have been a lot worse. Chip stocks held up and were actually positive for a time. If they had been in on the harder selling Nasdaq would have dropped 40 points again. It closed below the 50 day MVA (1658) and is hanging on to a narrow shelf of support from some early June closing highs from 1645 to 1650. It is a narrow shelf, however, in that Nasdaq has already broke through the first wave of closing highs starting at 1685. It peaked in July, made a lower high, and is threatening to break below the June highs toward support at 1600. Of course even if it holds there it is still awhile before it could clear up the ambiguity as that move would complete the head in a head and shoulders pattern. Thus the best action for Nasdaq is to put the brakes on here, hold 1650, and move laterally to consolidate more. It is not a pattern that is screaming buy at this point and has some substantial work ahead of it.
S&P 500/NYSE
Rallied back but it could not retake the 50 day MVA and closed well off the high.
Stats: +1.62 points (+0.17%) to close at 967.08
NYSE Volume: 1.456B (+10.99%). Volume was up but with the failure at the 50 day MVA on the high this is hardly one to put in the book as an accumulation session. It failed in an attempt to retake a key support level, and it did so on rising volume. That is not a good thing.
Up Volume: 818M (+609M)
Down Volume: 642M (-443M)
A/D and Hi/Lo: Advancers led 1.03 to 1. Very modest A/D line as the small and mid-caps were not in terrible shape though they did lag.
Previous Session: Decliners led 2.19 to 1
New Highs: 32 (-12)
New Lows: 47 (-26)
The Chart: http://www.investmenthouse.com/cd/$spx.html
Tapped the 50 day MVA on the high (975) but that was all as large caps fell back as volume rose to average. This is not the death of the index as it was trading in a very tight range from 975 to 1015 and can easily expand that to 950 on the downside, hold the May highs as support, and form a very nice lateral move. At this juncture it looks as if it will finally test that May high (953 to 946) that we thought it would originally test.
DJ30:
Stats: +25.42 points (+0.28%) to close at 9061.74
Volume: 1.456B (+10.99%)
Held the range, tapping at 9000 on the low (8997) and closing up off of that level. The move kept it over the 50 day MVA (9036) as well though on the high (9135) the blue chips hit the 10 and 18 day MVA and fell back. Volume was up, and given that the Dow showed a hammer doji at support, that is usually a bullish indication. It could very well be if DJ30 has moved into the leadership spot, but it will have to prove it. It too, after all, failed in the breakout attempt last Thursday that led to the rather precipitous run to the bottom of the range.
THURSDAY
Economic news picks back up on Thursday with the weekly jobless claims, productivity, and inventories. The question is whether investors will start paying attention to the economic numbers now or if they will continue to ignore them, storing them away for future reference. The Nasdaq and SP500 charts certainly do not suggest that they are ready to turn and run higher, at least in a lasting move.
Ever since that failed Thursday breakout attempt the market has been under strain with stocks and indexes breaking below support. What was a good consolidation has turned volatile and distributive. That is not the action that typically presages a solid, lasting breakout. You want to see stocks and indexes calm down after a consolidation, kind of the quiet before the storm. The action seen of late looks like a storm still in progress as the indexes moved from a nice quiet consolidation to ones that failed a breakout attempt and started to sell back. Usually they have to rebuild what was just upset by the sudden volatility and distribution.
The rebound saved some stocks but did not put them in buy positions. Put plays rallied up to the down trendline or other resistance and are thus set up very well for continued selling after the Wednesday botched rally attempt. As for upside we have to be very conservative at this point. We have hardly dabbled the past two days. There are times to go full throttle, and there are times to ease off, relax, and let the next action develop. This transition period has opened up some downside plays, but they have not given clear breakdowns yet. As with the upside plays they are still trying to set up, make that last ditch try at resistance, and then fall.
Thus patience is the key right now as the market decides if it wants to transition or not. When the market gives the nod, the action will be typically fast as stocks either breakout to the upside or break down from their struggles to hold support. The action on SP500 Wednesday, for example, had the look of an attempt to regain support that failed. It still, however, has solid support just 25 points below, so this failure is not a major breakdown. It has support and it is not under heavy distribution, but just needs more time to regroup, consolidate, and set up the next move in the trend. That requires us to notch it back a bit but be ready to take what opportunities that are out there. They are still showing up and we want to take what the market gives at all times.
Support and Resistance
Nasdaq: Closed at 1652.68
Resistance: The exponential 50 day MVA (1659). 1685 (June intraday high) is some possible resistance. 1700 (Feb 2002 low). The 18 day MVA (1709). 1740 is first resistance. 1760 (May 2002). 1800.
Support: The lower end of the June closing highs (1677 to 1645) are trying to hold on. 1600 to 1595 (June 2002 closing high). The mid-May high (1554).
S&P 500: Closed at 967.08
Resistance: 975 (December 1997 peak). The 50 day MVA (976). 1003, the early June closing high. June closing high at 1011. The June intraday high at 1015. Then 1050.
Support: 965 (August 2002 peak). 951 (late May high) to the mid-May high (948). 935 (November and January peaks).
Dow: Closed at 9061.74
Resistance: The 18 day MVA (9145). 9236, the early June intraday high to 9250. 9353, the June high. 9500 (June 2002 lows).
Support: The 50 day MVA (9036). 9000 is some psychological and price support that has held previously. 8980 is the neckline in the short head and shoulders pattern. January high (8870). The mid-May high at 8743
Economic Calendar
8-04-03
Factory Orders, June (10:00): 1.7% actual, 1.5% expected, 0.3% May (revised from 0.4%).
8-05-03
ISM Services, July (10:00): 65.1 actual, 58.0 expected, 60.6 June.
8-07-03
Productivity, Q2 (8:30): 4.0% expected, 1.9% Q1.
Initial jobless claims (8:30): 395K expected, 388K prior.
Wholesale inventories, June (10:00): 0.0% expected, -0.3% May.
Consumer credit, June (2:00): $6.0B expected, $7.3B May.
SUBSCRIBER QUESTION
Q: I enjoy your newsletter. Thanks! My favorite stock is Openwave (OPWV). Recently they have decided to vote on a reverse stock split. Do you ever play a reverse split? What are the trends of a reverse split? Are they the same as a regular split? What do you think about this particular stock?
A: In the most general sense it is typically not a good sign for a stock to announce a reverse stock split. What a company is doing is taking the outstanding number of shares and reducing them by converting say 4 shares into one share (a 1:4 reverse split). That immediately boosts the share price as one share is now the price of four shares at the pre-split price. It is usually a defensive move taken to stay listed on an exchange or otherwise generate price stability (at a higher level), something the company has been unable to do on its own in the market. The split itself does not change the fundamentals, and without more it rarely has the desired effect in that most reverse split stocks find themselves below their post-split price within 12 months.
That is not always the case. A general market rally can help as we have seen in the past 10 months. Many stocks that reverse split their stocks have enjoyed nice gains along with the rest of the market. More than that, however, when making the decision on the stock you have to look and see if there is anything else going on that could cause price appreciation after the split is effective. Is there new management, increasing sales, new relationships, etc.? MSTR was one of the early reverse split success stories last year. It reverse split but also announced some changes, some agreements, and some improving financial numbers. Those along with the reverse split helped jumpstart MSTR and made it an early leader in the rally and the stock had a good run over the next several months.
As far as hanging onto a stock as it approaches its reverse split effective date, if it is moving well before the split it is worth letting it run. During the long downtrend reverse splits were a signal for shorts to enter the market. Now with the uptrend, stocks that are working well into a split may continue that action into and after the split.
As for OPWV, what an explosive breakout from that 8-month base! Right now it has run pretty far and needs a test. Shows excellent accumulation recently. This recent base is part of a HUGE one that dates back to early 2000, and it looks like there might be some possible resistance starting around $5. That comes from a lateral consolidation the stock was moving in spring-summer of 2002 (the company made an earnings announcement that sent the stock gapping down), but that is getting dated at this point. Other than that, OPWV is moving well and there is no reason to bail out of it heading into a reverse split given that it is enjoying very solid action.
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.
THE PLAYS:
New Plays:
Downside:
Play Date: 08/06/2003
GNTA (Genta, Inc.--$11.67; -0.28; optionable): Biotechnology
http://biz.yahoo.com/p/g/gnta.html
STATUS: Head and shoulders. Nice breakout from a cup w/handle in May, but peaked at 15 and formed the current 2 month bearish pattern. Tuesday GNTA broke the 50 day MVA (12.35) and then tanked lower Wednesday. It rebounded off of 11.20, and we are looking for another 50 day MVA test and then a roll down from there. Under distribution and money flow is leading lower.
Volume: 986.889K Avg Volume: 1.228M
BUY POINT: Test 12.35, then $11.94 on the way back down. Volume=1.1M Target=$9.76 Stop=$12.45
POSITION: GJU UV - Sept. $12.50c (-60 delta)
http://www.investmenthouse.com/ci/gnta.html
Play Date: 08/06/2003
ITRI (Itron--$19.69; -0.41; optionable): Scientific & Technical Instruments
http://biz.yahoo.com/p/i/itri.html
STATUS: Head and shoulders. Another stock that broke out of a nice cup with handle base and rallied only to roll over with a big gap down in mid-July. Bounced up off the 200 day MVA (19.81) but failed at the 50 day and is right back down. It cracked the 200 day Wednesday, and with the heavy distribution and tanking money flow we are looking for ITRI to follow them below the 200 day MVA.
Volume: 154.156K Avg Volume: 185.954K
BUY POINT: $19.57 Volume=200K Target=$17 Stop=$20.55
POSITION: IUP ID - Sept. $20p (-51 delta) or IUP WD - Nov. $20p (-47 delta)
http://www.investmenthouse.com/ci/itri.html
Upside:
Play Date: 08/06/2003
DRIV (Digital River--$22.49; +2.32; optionable): Business software
http://biz.yahoo.com/p/d/driv.html
STATUS: Test 50 day MVA. An early leader, DRIV has been consolidating, breaking out, consolidating, etc. It just broke from a 2 month flat base from May to June and exploded higher in July. It has come back to fully test that breakout, falling to the 50 day MVA (20.29) and the top of the May to June base. Wednesday DRIV ignored the market and rallied on sharply higher volume off the 50 day. Solid money flow and relative strength. Want to pick it up here and ride it to the old high. If it goes further, great.
Volume: 1.991M Avg Volume: 1.119M
BUY POINT: $22.62 Volume=1.7M Target=$26 Stop=$21.04
POSITION: DQI LX - Dec. $22.50c (56 delta) &/or Stock
http://www.investmenthouse.com/ci/driv.html
Play Date: 08/06/2003
PMTI (Palomar Medical Tech--$6.5; +0.55; no options): Medical Appliances
http://biz.yahoo.com/p/p/pmti.html
STATUS: Breakout. PMTI is making its move out of its 3 month cup with ragged handle base showing excellent 4 to 1 accumulation (4 up weeks on rising volume to 1 down weeks on rising volume). Outstanding money flow and a relative strength breakout on a second strong volume surge Wednesday. Looking to pick up some positions on a further move and then more on the test of the break higher.
Volume: 574.989K Avg Volume: 114.5K
BUY POINT: $6.59 Volume=200K Target=$7.91 Stop=$5.96
POSITION: - Stock (no option chain)
http://www.investmenthouse.com/ci/pmti.html
Play Date: 08/06/2003
TUES (Tuesday Morning--$27.55; -0.13; optionable): Discount variety stores
http://biz.yahoo.com/p/t/tues.html
STATUS: Cup w/handle. A nice test back to the 18 day MVA (27.01) Wednesday, showing a doji at that level as TUES forms a double handle to its 15 month base. In early July it rallied up to 28, the point where it started to sell back and start the base, and then fell back to the 50 day MVA. It rallied back to 28 and has now made this nice dip to test that move. The higher low sets the stage for a breakout. Accumulation in the base is solid at 14 to 8 (14 up weeks on rising volume to 8 down weeks on rising volume). Retail continues to set up for the next move in anticipation of better economic times.
Volume: 459.436K Avg Volume: 205.863K
BUY POINT: $28.88 Volume=309K Target=$34.65 Stop=$26.94
POSITION: UUG LF - Dec. $25c (70 delta) &/or Stock
http://www.investmenthouse.com/ci/tues.html
End part 1 of 2
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