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Begin Part 2 of 2
THE MARKET
Overall market stats:
VIX: 24.68; +1.53. Volatility moved higher on the selling in the S&P as we would expect. It had been stuck in the sand, not wanting to get moving as the index weakened. Breaking below support seemed to get it going, but it is still on the lower end of the scale of the 20 to 30 range. It has been showing apathy, and the market is getting a taste of what that means.
VXN: 56.08; +3.62. Volatility rose higher than the fall in the Nasdaq 100, but that was no big deal really at this stage. We are glad to see volatility run higher, but it is not really going to change anything at this point.
Put/Call ratio (CBOE): 0.73; +0.09. Put activity jumped right back up to what are considered high levels when the selling continued and the Nasdaq broke below support. This is still a very good sign: volume was not huge, but pessimism is. Option volume rose to 1.065 million.
NASDAQ: Broke below support early and never really tried to move higher. Sellers were in the lead as the big caps techs sold the hardest.
Stats: Down 75.49 points (-3.4%) to close at 2175.54.
Volume: 1.621 billion shares (+17%). A solid jump, but still below average and anything would have been stronger after Friday's light volume. Sellers were in control, however, with 1.329 billion downside shares to 284 million upside shares. Some of the first negative price/volume action, but tempered because we cannot gauge it based on Friday's action.
A/D and Hi/Lo: Declining issues jumped up to a 1.81 to 1 lead (1.05 to 1 Friday). New highs dropped to 124 (-29) as new lows rose to 30 (+2).
The Chart: http://www.investmenthouse.com/cd/$compq.html
Broke below 2232 without a struggle, and has the 50 day MVA at 2144 as the last real bastion before it tests the gap up point at 2000. The fact that it could not hold at 2250 or 2232 indicates the Nasdaq is just not ready for big, sustained moves higher just yet. There are still sellers out there ready to dump shares when the time is right. At the same time this does not mean that the Nasdaq is going back to its lows as was the talk today. We said coming out of the bear would be tough with great upside and then turns back down. It is always disappointing to see the perfect scenario unable to unfold for the next advance higher, but given the damage done, the repair work takes a while to complete.
Thus for now we see potential downside to the 50 day MVA or the 2000 level, but we remain alert for the start of the next move higher. When the breakouts hold their tests and start back up and when new breakouts make their moves that will be the sign. Again we do not think this is the pullback that dooms the Nasdaq to its old lows. We are looking to take a bit both ways as the opportunities present themselves. We will watch for a higher volume breach of the 50 day MVA that could signal real trouble, but we feel there is an equal chance that the index will rebound soon as it did after selling back for 6 to 7 sessions in early May. After all, it rallied for 6 straight days after that selling, and it is now just pulling back after that run. We feel that this negative mood today is a bit overdone.
Dow/NYSE: After about a week of selling the Dow hit the brakes at the 18 day MVA and managed a move higher. It took a late rally to do it, and volume was light even though it was heavier than Friday. No rejoicing, but it did not give up support.
Stats: Up 33.77 points (+0.3%) to close at 11,039.14.
Volume: NYSE volume edged higher after Friday's low for the year, coming in at 1.012 billion shares (+22%). Still below average volume, and down volume led the day at 640 million to 362 million shares. This was due to the late comeback.
A/D and Hi/Lo: Declining issues continued to lead at 1.19 to 1 (1.17 to 1 Friday). Advancing issues have been the backbone of this rally, and they are flagging the past week. New highs rose to 142 (+28) as new lows rose to 30 (+16).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow sold down to 10,970.43 on its low before it rallied 70 points in the last two hours to close positive and back above 11,000. With the Nasdaq in full retreat and the S&P 500 falling below 1270, the Dow's recovery left some feeling better. Still, it is just 30 stocks and the broader averages were falling as breadth remained weak overall. The big Dow stocks such as MMM, UTX, and JNJ among others continue to perform well, and they are carrying the index. For now it has held its first critical test of the week. We will see if breadth and upside volume come in to support a move up off of this test of its breakout above resistance.
S&P 500: The big caps tried but were unable to hold above support at 1270 after smashing through that level on solid volume back on May 16. Volume was higher on the selling, never a good sign, but as we said before, Friday's volume was so low and today's volume was lower than every session last week but Friday. Not a strong selling day, but the past week is filled with down days that were not harsh selloffs, but nonetheless significant moves down. The close under 1270 is not the end of the move; the index spend a lot of time from 1250 to 1270 before making the breakout. Still, the lack of a sharp bounce higher off of what was such solid resistance indicates that the index is not in its prime yet by a long shot. There should be solid support at 1250 where the 50 day MVA converges with some price highs and lows from February through May. If it does not hold there it could be down toward 1200 similar to the Nasdaq. Again, however, we have had a solid move up as we did in late April, then a week or so of light volume selling. On this move that has led to rallies just as everyone despaired. We will soon see what this rally is made of.
Stats: Down 9.96 points (-0.8%) to close at 1267.93.
Volume: NYSE volume rose to 1.012 billion shares (+22%) on the selling.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
No economic news on Wednesday, but the SUNW after hours earnings confession may bring others to the forefront. It certainly did not help the market after hours; a feeble rally attempt after SDLI reported great earnings was washed over as sellers came back in. There is a lot of negative sentiment that may give us some more downside early on. It is not as SUNW was a surprise; the company reported a major slowdown in earnings in January, and we said at the time it smacked of the LU story. Bad news gets worse for this big tech, and the large cap techs were selling down ahead of the news all session long.
We were disappointed to see the Nasdaq and S&P 500 break below support (though the S&P's break was not that severe), but overall we cannot be too pessimistic about the market. As noted, this rally has been marked by gains over several sessions, then selling over several sessions. This is the second such cycle. Note that if the Nasdaq does pullback to the 50 day MVA and bounces from there, it will have made a higher low. Building higher highs and higher lows is how an index moves higher. It is frustrating because it is not the rapid fire succession that many are used to, but that does not mean we don't make money catching the moves higher, inserting the trailing stop losses for when the pullbacks start, and then catching some downside or waiting for the upside action to repeat. That is a pattern we can play successfully over and over.
In addition, the put/call ratio jumped back up over 0.7 on the close and pessimism was high today. Those have produced the moves back up in the past.
As for the negatives, however, the patterns at the close today were not the kind that signal a move higher is imminent (as in tomorrow, at least at the open). Big stocks were showing bearish breaks below support levels, not bullish candlestick patterns on top of support. Many of the big techs that had tried to struggle out of the bottom of their bases showed some double topping action where the second attempt at a top failed on low volume (e.g., SEBL, VRSN, VRTS); these are still above the 50 day MVA, but the price action is bearish for now. Then there is the general problem of earnings warnings and some of the short term gyrations that can cause.
We were frankly shocked tonight to hear one decent analyst saying that he had hoped to see better things in the second quarter earnings, i.e., improving earnings. He was all bummed out about the SUNW news that was NO surprise at all. For crying out loud, when a companies say that Q2 looks like the bottom, take it at its word. Bottom means 'bottom,' not improvement. If Q1 was not the bottom but Q2 is the bottom, there will be worse earnings in Q2 where the bottom is hit. What the analyst said is the kind of emotional 'gosh darn it' analysis that is exactly the wrong approach. He is frustrated; he said he has to wait to see real fundamental improvement. NO! The idea is to get ahead of the upswing; pick off those good stocks as they breakout, test, and then move back higher. Even with today's action, you will see there are many upside plays that have potential; too many to do full write-ups on. We are calling them to your attention to check out and we will cover them in more detail Wednesday, Thursday, etc.
Our point right now: don't lose sight of what is going on. Fed cutting rates, economic stimulus package (though weak) will improve confidence, improving economic news today (not really the hard numbers, but the fuzzy sentiment numbers are important as well). The key is still the economy, but it is not in the tank yet, and we still fully expect to see all three major indexes significantly higher in the third quarter. It won't be a straight run as we have said all along. But, it will be one that we can play as we have been doing. A $15 move on SEBL, a $10 move on BRCD, a $8 move on SGR; these were just basic 'pick them up as they bounced off of the 50 day MVA plays. Then there are the breakouts such as ESRX, KKD, TTWO, etc. that are still performing well. They are out there, we have been finding them, and they have been delivering. They will continue to emerge along with some downside plays as well. Be selective, catch the moves, use mental or set actual stops, take what the market gives you.
Support and Resistance Levels
Nasdaq: Closed at 2175.54.
Resistance: 2232 and have to be put back on, along with interim resistance where it stopped this last time at 2328. Then 2500.
Support: 50 day MVA is at 2144.01. Then 2000 to 2005.
S&P 500: Closed at 1267.93.
Resistance: 1270? 1315.93 is the recent high it needs to plow back through. After that there are some price consolidations at 1325 from February and October of 2000 and the summer of 1999.
Support: Still right at some support from the 1250 to 1270 level. The 50 day MVA is at 1248.56, making 1250 look pretty solid at this point.
Dow: Closed at 11,039.14.
Resistance: 11,400 to 11,450. Then the old high at 11,750.28.
Support: 11,000. The 18 day MVA is at 11,002.18. Then 10,750.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
5-29-01
Personal Income, April (8:30): 0.3% actual versus 0.3% expected and 0.5% prior.
PCE, April (8:30): 0.4% versus 0.3% prior.
Consumer Confidence, May (10:00): 115.5 actual versus 110.3 and 109.2 prior.
5-31-01
Initial Claims, 5/26 (8:30): 407,000 versus 407,000 prior.
Chicago PMI, May (10:00): 40.0% versus 38.9% prior.
Help-Wanted Index, April (10:00): 66 versus 66 prior.
6-01-01
Auto Sales, May: 6.4M versus 6.4M prior.
Truck Sales, May: 7.0M versus 7.0M prior.
Nonfarm Payrolls, May (8:30): -25,000 versus -223,000
Unemployment Rate, Mate (8:30): 4.6% versus 4.5% prior.
Hourly Earnings, May (8:30): 0.3% versus 0.4% prior.
Average Workweed, May (8:30): 34.3 versus 34.3 prior.
Construction Spending, April (10:00): 0.3% versus 1.3% prior.
NAPM Index, May (10:00): 43.5% versus 43.2% prior.
TEAM TRADES
Tonight an example of how you can get singed using stop losses even if you use them according to your rules. Again, however, we have to say we would prefer to get taken out and have to get back in if we still like the play than have a position sell hard on us.
OO: We bought OO on the breakout as it moved over 24 on May 17. It was a good breakout on high volume, and we caught it in some late selling at 24.80 before the close on 5-17. The stock moved up to 26.56 on 5-22, about a 7% gain (but not counting commissions). Volume remained well above average, it was moving well, it was not at our target. The stock then sold back the next two sessions on low volume. Friday it moved higher, but again on low volume. At this point we had set a stop loss at 22.80, below the breakout point at 24 and 8% below our buy point. Indeed, the stock tested 24 two sessions after the breakout intraday and rallied right back up. It looked to be good support.
The stock gapped higher today, but it immediately started to fall. We were not too concerned as the stock had held up well. As we saw the Nasdaq break below support, however, we started to review positions. Retailers were mixed; some were being clobbered while others were holding up okay. OO was moving laterally above 24, but we noted the volume was picking up and was going to be much stronger than Friday. We saw the stock break 24; in a moment of doubt in the rally we moved our stop loss up to 23.50. OO dropped right on through and we were taken out as the stock plowed down to 21.70, just undercutting the 50 day MVA. Thought we were pretty smart until OO turned right back up and rallied to close at 24.60, above the breakout point. What an intraday move $20 stock (13%). We were taken out and saw it rally back up. Of course, we would have been taken out even if we had kept our stop loss at 22.80 below what appeared to be very solid support at 24. We had a feeling and saved us some money today; not we will see if OO resumes its climb after such a turn around. We can still get in, but we need to be convinced if today's action was a reversal or just some high volume selling.
For a review of frequently asked questions, please use the link below:
http://www.investmenthouse.com/1questions.htm
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Good Investing!
Jon Johnson and the Tech Traders Report Staff.
All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners of Online Investment Services, LP or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.
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