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us stock market, stock watch
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5/23/01 Technical Traders Report
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Technical Traders Subscribers:
TONIGHT:
- Got the pullback today as volume pulled back sharply.
- Many stocks testing support on lower volume.
- Tax bill seems to be in the bag.
- First real economic news of the week up for the morning.
- Team Trades.
THE SUMMARY
All indexes pull back on lighter volume.
It sure looked like a pullback was coming and today it emerged on the Nasdaq and continued on the Dow and S&P 500. Volume was lighter across the board. Nasdaq volume was down 19% while NYSE volume was down 9.6%. Nasdaq price/volume action remains very good, and the NYSE volume was better today after showing some mild distribution on Tuesday.
As for where the indexes closed, they all managed to hold right at near term support. The Dow and S&P were well above support while the Nasdaq slid below 2250 (the first level we wanted to see hold) but closed above 2232, the high prior to Monday's breakout.
Stocks overall demonstrated the same action: down, but down on lower volume and holding above near term support. LOW, VRTS, VRSN, EXTR, etc. are some of the many examples of this. This was a day we were taking some quick profits on those short term plays we still had in place that had not hit our profit targets and buying back some calls we had sold. At the same time we were letting our longer term breakouts ride, checking them at the end of the session to see where they closed and what the volume was to determine if we have to take action tomorrow or can just let them run.
When the market is looking healthier overall, we still take care of short term trades regardless of the action, but we are a bit more comfortable in letting our longer term breakouts run and pullback, run and pullback as long as the action is healthy. Again, healthy action is price gains on higher volume, price declines on lower volume, holding above support (breakout point, up trendline, or the near term moving average that is acting as support).
THE ECONOMY
Today the tax bill passed the Senate and now goes to committee to be reconciled with the House bill. $1.35 trillion over 11 years. Not a whole lot of up front stimulus, but 70% of the U.S. wants a 'substantial' tax cut as the latest poll shows. If it makes them happy consumers once again, we are all for that.
Tomorrow the weekly jobless claims number comes out along with new home sales for April. The jobless rate is expected to hold steady at 380,000. That would not be bad, it would not be great. We would prefer to see this continue to fall as it has the past two weeks as it is a very important gauge of future consumer sentiment: if the threat of a job loss does not loom as large, a consumer is freer with the spending, and that in turn helps drive the economy back up faster.
New homes sales are also out tomorrow, and after declines in permits the past two months, they are expected to fall. This is one sector that held up the economy when everything else was in the tank, mainly because of the low interest rates. But, the lower permits mean ultimately fewer new homes sold as the inventory of new homes dwindles. Improving jobless claims, however, will ultimately help this number but it will take longer.
THE MARKET
Overall market stats:
VIX: 24.65; +1.16. Not a dramatic jump, but another climb as the S&P sold again. We would love to see it jump back up to 28 or so tomorrow on some early weakness, and then have the indexes start back up. That would show there are still investors quick to fear out there.
VXN: 53.64; +0.74. Not much of a gain on Nasdaq volatility in light of a 3% drop on the comp and a 4.2% drop on the Nasdaq 100. WE would like to see a higher move on some early weakness on Thursday.
Put/Call ratio (CBOE): 0.73; +0.13. The put/call ratio jumped the same as it did on Tuesday's selling in the Dow and S&P, and has now jumped 0.26 from the 0.47 reading on Monday. Volume has not shown us that sellers are in control, however. What this shows us is that the fear is still high and that there are still many that use any sign of weakness to try and play the downside. That is okay if you realize it is a short term game, but the historical reading of this ratio tells us that a lot of these playing the downside think things are going to tank. Good. Option activity fell to 1.043 million on the CBOE, but index options again surged to 1.26 to 1.
NASDAQ: Sold down today as expected, reaching down a bit lower than we wanted, but still above support and on lower volume.
Stats: Down 70.37 points (-3.0%) to close at 2243.48.
Volume: 1.885 billion shares (-19%). Back below average on the selling, and that continues the good price/volume action the Nasdaq has exhibited. Down volume was way out in front at 1.463 billion shares to 404 million upside shares, but it was a downside day all day from the start.
A/D and Hi/Lo: Declining issues took over control today at 1.65 to 1 (advancers led Tuesday 1.23 to 1). New highs fell to 112 (-89) as new lows fell also to 26 (-14).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The techs sold a bit more than we wanted. Looked as if they were going to hold above 2250 after testing that level three times intraday, but the last leg of late selling was too much, and it slipped below that level in the last 15 minutes.
The close at the low bodes more selling in the morning, but the lower volume on the session is a healthy sign that there has been no change in the otherwise healthy character of the market action we have seen. The spiking put/call ratio is again a good sign as we see many stocks falling back toward near term support; some are there with doji's while others have more to fall. As we said last night, this is the kind of action that sets up the next moves higher. We may see a test lower in the morning, but there is not a lot of room before 2232; we don't want to see it break that, but it might try the moving averages for support instead. The 10 day is at 2210.45; the 18 day MVA is at 2210.45, and the 50 day MVA is at 2170.00. That is a pretty solid lineup of hits, and we would expect them to hold if the action is to remain healthy. So, a pullback again early on; then we just have to see if it finishes the day lower again (6 days of gains preceded this selling) or decides to turn it back up.
Dow/NYSE: The Dow was down early and stayed down all day. It was not nearly ready to turn back up this session as it sold on decreasing NYSE volume.
Stats: Down 151.73 points (-1.3%) to close at 11,105.51.
Volume: NYSE volume was down to 1.139 billion shares (-9.6%) and back below average on the session. Down volume led the way at 891 million shares versus 239 million on the upside. After Tuesday's mild distribution day we were glad to see that selling did not pick up pace. If we have selling, lets have less sellers than we have had buyers.
A/D and Hi/Lo: Declining issues continued to lead and stretched the margin to 1.94 to 1 (advancers led 1.08 to 1 Tuesday). That is a flip from Monday when advancers led 2:1. New highs fell to 130 (-108) as new lows rose to 25 (+4).
The Chart: http://www.investmenthouse.com/cd/$dja.html
After topping out at resistance Monday, the Dow continued its pullback after a very solid move higher. We like that today its fall was on significantly lighter volume, though selling on Tuesday was higher and above average. It closed at the 10 day MVA after testing a bit below that on the low (11,101.21). It is still in decent shape given that it remains over the 11,000 level that it broke through a week ago. As we have stated, we would expect that level to hold as support as resistance tends to become support. The 18 day MVA is just below that level at 10,982.19. That MVA should lend some support to the Dow as long as the price/volume action remains in check.
The index finished right at its session low; it was not building back up during the latter part of the day. That typically means some follow through to the downside tomorrow at least at the open. At a minimum that will give us a chance to close the DJX puts in the morning, barring some unforeseen event tonight that gaps the index higher. We will watch for the index to catch support somewhere between the close and 11,000 for its next move up.
S&P 500: The big cap index continued its pullback today as well, holding above some support at 1281 (and the 10 day MVA at 1283.44). As with the Dow, that old point of resistance at 1270 should also act as support if the index sells down to that level. It too closed at its lows for the session, and the futures are lower after the close. That indicates that this index too will have more downward pressure in the morning before it finds support. Whether it does so tomorrow or not remains to be seen. The selling will need to slow down and trail off fairly rapidly if it is going to do so. Some mild distribution on Tuesday, and some lighter selling today. Not the best price/volume action, but overall, the index still looks as if it wants to hold on for another move higher.
Stats: Down 20.33 points (-1.6%) to close at 1289.05.
Volume: NYSE volume fell to 1.139 billion shares (-9.6%). That is back below average volume on today's selling.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
As noted, there is actually some economic news out tomorrow morning, and it comes in a one-two punch with jobless claims out at 7:30 ET and new home sales for April out at 19:00 ET. Then Thursday night we have Greenspan speaking to the New York Economics Club. Friday is durable goods and GDP before the open, with existing home sales at 10:00. Gets more interesting at the end of the week.
Will these numbers have much impact on the market? Well, if there is marked worsening that will be a negative. Now we have the situation where it has been somewhat accepted that the Fed action, a tax cut, and some better guidance by companies will lead to better times ahead. We have said that the economy is the lynchpin to this market. If it continues to recover, investors will continue to discount better future earnings into stocks. We do not want to see wildly positive numbers, just continuing positive improvement.
As for the action tomorrow, we expect some early weakness based on the downward momentum at the close. The short sellers have been trying to jump back on the market. The short interest rose Tuesday and today after taking a bit of a dip late last week and Monday. It is again at a new multi-month high even as the selling in the market has not been that severe. As we said, the buyers have outnumbered the sellers on the Nasdaq for quite some time, and that is bullish action. While some shorts have closed their positions, others are still putting them back out. Indeed, judging from the spike the past two sessions, it seems there are many at it again. Combined with the spiking put/call ratio and still good volume action on the Nasdaq, that is a bullish sign that after this bout of selling is over we will get another rally back up. We want to see another higher low put in and a launch back up from there. Holding at the support levels is the first step.
So we continue to be patient now that there is some selling, keeping an eye on the breakouts we are playing longer term to make sure things don't suddenly get out of hand if for some reason the sellers jump back into control. It does not look as if that will be the case, but you can never let down your guard; stick by your stop rules no matter what the market condition. We see stocks pulling back to support on lower volume. Again, that can lead to strong bounces higher as they continue their breakouts, trendline bounces, moving average bounces, support bounces. We are looking to play options for the short term moves back up and to add to or take new stock positions on the breakouts that start back up after successful tests of the breakout or their trendlines or moving averages. Patience, pick the plays, move in.
As for our short plays, we do not like to bet against the market for too long when it looks healthy overall, and we will use any early weakness tomorrow to close them out and then wait for the upside moves to begin.
Support and Resistance Levels
Nasdaq: Closed at 2243.48.
Resistance: 2500.
Support: 2232 to 2250. The index is toying with this right now, and this is where we want it to hold as it is the resistance it just broke through. If not and selling stays mild, look to the 10 day at 2210.45; the 18 day MVA at 2210.45, or the 50 day MVA at 2170.00 (though we don't want to see it this low).
S&P 500: Closed at 1289.05.
Resistance: 1333.39 is the 200 day MVA. Some price consolidations are at 1325 from February and October of 2000 and the summer of 1999.
Support: 1300 and 1270 should act as some support now.
Dow: Closed at 11,105.51.
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 18 day MVA is at 10,982.19.
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
ESRX: Another stock split pre-announcement at one of our favorite times, the shareholder meeting. The meeting was at 9:30 CT, so we were looking at some option and stock positions before the meeting got too far underway. The stock started selling at the outset, so we were not ready to jump into anything as we did have some time and did not get the announcement before the open (always a possibility with an early shareholder meeting). It started to jump up and down as the meeting got underway. We were watching the options and tried to pick up some August 90 and 85 strikes. We were being too aggressive with trying to shave the spread, however, and the market maker was not willing to play our game with the light volume. As jumpy as the stock was we thought we would get them, but they never did make it. Stock turned out to be the play for this day. We waited, but no announcement came. The stock was basically flat all session, closing at 92.95. Then the announcement came after hours and the stock jumped up to 97 on a few trades. We ended up selling a partial position on the news, and we are hanging onto the rest until tomorrow to see if the stock can hold the gains and make that move over resistance at 95.
NVDA: The action turned out pretty good even without the split announcement as the company reaffirmed is yearly outlook. It hit 100 on its high after closing at 92.90 Tuesday. Good news, but then the bad market for the session. It started to pullback after hitting 100 about an hour into the session. This was a short term play for us, so we banked the gain. It made 100 and then turned down; sometimes that can act as a barrier.
BRCD: We were buying some of the calls back today. BRCD was an example we used last night and today it was down at 50 early in the session, trading between 49.50 and 50. It was looking as if it wanted to hold even though it was a bit below 50; it kept trading up off of that level, so we adjusted our buy order from $4 to $4.10 and were taken out. That closed the position with a $1.40 net. We could have made more if we had waited for the day to play out, but we had other things to do and that was our plan. Now we are going to watch for BRCD to mount another run.
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