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us stock market, trend trading stock
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9/09/03 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Tuesday: DCEL
Buy alerts issued: SWIR
Trailing stop alerts: DKS; BLI; CMVT
Stop alerts: GTRC
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertdly.htm
SUMMARY:
- Market distributes again on higher volume as the indexes show some wear and tear from the strong run.
- A veritable wave of positive comments and upgrades is another sign the market needs a break.
- Still trending higher but getting ready for a breather, but as of yet, no September slump.
- Subscriber Questions
Some churning, some distribution, but nothing major thus far.
The market continues its march higher, but notice how it is up then churns, then rallies only to fall back again on strong volume? It is getting tired. It is pushing that rock up the hill and it is not getting any lighter as it goes. The question is whether it will roll back gently and settle down at near support or will it start careening out of control and tumble well down the hill?
Thus far it is showing no indications of a major breakdown as it continues its uptrend with only bouts of higher volume selling and leading sectors mostly holding together. There are signs of trouble as the distribution sessions indicate (2 of the last 3 sessions with a churning session last Wednesday) along with the breakdown of a leadership group as retail sells on higher volume. Those are always the red warning flags that the action is shifting momentum from strong buying to sellers, big money sellers, moving in and dumping some stock on the rallies. Thus far it the market has absorbed the additional supply from the selling, but if it continues the market will make the inevitable pullback to consolidate the gains as there are fewer buyers to push that rock further up the hill. They are already tired from pushing it so far, and if some of them start to jump ship, that only makes the task harder on those left. In the end they have to take a breather.
THE ECONOMY
Wholesale sales top inventories.
Sales rose 0.4% (0.5% expected) and inventories were flat again. That continues the process of eroding whatever inventories are left and continues to help manufacturing. It is no revelation, just continues the trend in place and is continued decent news for the manufacturing sector. Obviously the market was not hanging on the release at 10ET.
Upgrades every day but downgrades thrown in for good measure.
CSCO was upgraded, more are buying off on the recovery, MWD and LEH said head to Japan now that the Nikkei has made a very solid surge. This is all on the heels of several upgrades the past week, increased company guidance, a strong market rally from March.
You cannot get a better indicator than the market, and it forecast this economic recovery starting back in October and again with the powerful surge out of March. Now the next indicator is kicking in, the analyst conversion from bearish to bullish indicator. With all of the upgrades and positive comments, seeing the market start to stumble some is not a surprise. More money is flowing in from money markets as well, indicating that more of the average investors are feeling better. While the latter is good for the longer haul as the market taps into that vast hoard of money on the sidelines, near term it is an indication that things are a bit frothy. The market is still moving higher, but it is getting bumpier after a long ride. The exuberance is another indication it is a bit winded.
RFMD says business looks great. It had a great session Monday but started giving it back Tuesday. NOK warns things may not be that great. Retail gets downgraded right and left as many say it is already done. Probably not, but near term it needs to pull back and form new bases. When WMT starts failing to respond to positive news, it is priced in for the time being. Again, as the rest of the market catches on to the idea that there is a recovery, the market is typically a bit toppy and needs the next rest. It is not a perfect timing mechanism, just a warning to not chase stocks too far, take some gains along the way, and don't tarry too long over those not performing that well.
THE MARKET
The trend is up but distribution is more prevalent as the market sets the groundwork for a pullback. Up to this point it has been making steady strides higher. The past week it has shown a churning session (last Wednesday) and two distribution sessions (Friday and Tuesday). Those show higher volume turnover, i.e., higher volume trade. When they occur after a strong run they are a sign that some are selling into rallies, using the cover of rising volume to unload shares. Then there is a strong upside session such as Monday that closed the market out on the highs on strong trade. Even though it is not reflected in the VIX or VXN, this is higher volatility showing the struggle between the buyers and sellers. It is, on a much lesser scale, the action seen in March of 2003 when the market would distribute heavily and then rally sharply, both on strong volume. It is a sign of change. Thus instead of steady move higher with upside volume that closes each session out near the high, we see this choppier trade of distribution one session and a strong volume rally the next. Just as a the weather gets more unpredictable as seasons change, trends get more volatile as they prepare for a change.
We are not saying the market is going to reverse and start a downtrend. It is just showing signs that a long run is getting a bit weary and needs a rest but has been correcting internally as it did in June. To this point the distribution has been mild and the breakdowns few. Nasdaq struggles when it gets roughly 25% above its 200 day MVA. It has run the farthest and hardest and is bucking now a bit. The action, however, does not say 'sell all positions now.' The distribution has been overall mild and the market could swallow it all and keep going. That would be unhealthy longer term and we would prefer it make a normal pullback to the 18 day MVA or so. We think that is what it will do more or less, but the key is to watch the individual plays and let them tell you whether you need to get out or not. If a stock is still in its uptrend there is little need to bail out other than taking a gain because you want to or if you are using options and have that limited time frame. If they break the trend you are playing, then close them. Right now the market is still in the trend. It is, however, telling us to proceed with caution.
VIX: 19.68; +0.89
VXN: 30.38; +0.83
Put/Call Ratio (CBOE): 0.83; +0.16. Quick to ratchet higher when the selling starts, this has been a decent indicator for bounces in the market. We want to see the market pullback to near support, see the ratio rise, and then provide the next rally higher.
NASDAQ
Volume jumped up as techs suffered another distribution session right on the heels of an accumulation session. It is showing that rising volatility day to day that shows some straining near term even as the longer term trend stays in place.
Stats: -15.19 points (-0.8%) to close at 1873.43
Volume: 2.235B (+9.07%). Sharper volume as techs suffered a second distribution session in three sessions.
Up Volume: 923M (-828M)
Down Volume: 1.293B (+1.016B)
A/D and Hi/Lo: Decliners led 1.43 to 1. No broad selling on the decline.
Previous Session: Advancers led 2.06 to 1
New Highs: 305 (-92)
New Lows: 3 (-3)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Nasdaq gapped lower, tested support toward 1860 (1868 on the low) and then buyers jumped in to try and take advantage of the pullback. They rallied the index to a session high, but it was still basically flat before rolling back over and again falling down to 1868 where it again bounced, but just put together a modest move before the close. Nasdaq continues its strong trend above the 10 day MVA (1838) but we cannot ignore the warning signs that it may need to test the 18 day MVA (1806) to 1800. At this juncture, moving into technology stocks just on the general principal that you think they will go up is not the best idea. Sooner than later Nasdaq will make a pullback to test the move before proceeding. That would be the best near term entry point if you are looking to ride the coattails of tech stocks in general. Until that pullback comes and starts to rebound, buying tech stocks is a very stock specific endeavor.
S&P 500/NYSE
Not major distribution, but higher volume selling nonetheless as the large caps find it difficult to make headway on the breakout.
Stats: -8.47 points (-0.82%) to close at 1023.17
NYSE Volume: 1.362B (+4.06%). Back to above average as stocks sold off. The lower volume Monday rally did not show much strength here and the distribution shows a shifting toward some selling in these big names.
Up Volume: 337M (-681M)
Down Volume: 1.022B (+744M). Downside volume really led the way as there was no question large caps were selling off.
A/D and Hi/Lo: Decliners led 1.59 to 1. Good to see the selling was not as widespread as the buying.
Previous Session: Advancers led 2.47 to 1
New Highs: 195 (-128)
New Lows: 3 (-2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 is struggling to escape from 1015, the breakout point from the 2.5 month consolidation. It is unable to make the breakaway, and if it continues selling on volume it will fall back into the range, condemning it to a test of the 18 day MVA (1009) as a light pullback, or down to 1000 or 994 (the 50 day MVA). Breakouts are great if they can be extended. SP500 is not dead yet, but the breakout is looking a bit feebler with its inability to follow through to the upside.
DJ30:
Stats: -79.09 points (-0.83%) to close at 9507.2
Volume: 1.362B (+4.06%)
As with SP500, the Dow cannot get on track and push off of 9500 after making the breakout 6 sessions back on some strong trade. It has by no means collapsed back into the range, and it has not been distributing on the volume that the other indexes have shown. On the other hand, it has been somewhat of a follower, and thus if the others fade it will most likely do the same. Support is 9500, basically where it closed, and then there is the 18 day MVA (9429) where there is also price support from mid-July. That is the first level. 9250 and the 50 day MVA (9261) are next. We must remember, however, that DJ30 has not shown much distribution, and it is not breaking lower, just moving laterally along support from the top of the trading range. That is not bad support given the length of time spent building it.
WEDNESDAY
No scheduled economic data, so the market will be able to move more or less on its own. Thus far it has been trading blows, one day selling down on volume, the next day rallying on volume. That would make the rubber match for the week thus far.
Whether the market rises or falls, given the tug of war between buyers and sellers that is shaping up, our plays have to be looked at on an individual basis. In other words, they have to look like aces on their own without needing any market momentum to pull them along. That will most likely lead us to those areas that have not rallied out ahead of the rest of the market and are the targets on a pullback. That would indicate plays in the biotech, drug, medical appliance, and similar sectors. Whatever the sector, it will have to be solid on its own.
As for continuing plays we will continue to protect positions as we did today, using trailing stop losses to protect gains on established plays that are breaking down, and cut off those plays that are struggling and look to be in trouble. Given that the market is still very much within its uptrend, we are not too wild about running out and opening many shorts; this market has corrected internally before, maintaining its trend even as it alternates buying and selling sessions. Unless we see choice breakdowns we are not going to rush out and short the market in general.
Support and Resistance
Nasdaq: Closed at 1873.43
Resistance: 1930 - 1935.
Support: 1860 to 1865. The August high 1812 and 1814. 1838 (10 day MVA) and the 18 day MVA (1806). 1776 the July high.
S&P 500: Closed at 1023.17
Resistance: 1050.
Support: The June intraday high at 1015. June closing high at 1011. The 10 day MVA (1017) and the 18 day MVA (1009). The exponential 50 day MVA (993) and 975 (December 1997 peak). 965 (August 2002 peak).
Dow: Closed at 9507.20
Resistance: 9735.
Support: 9500 (June 2002 lows) is the top of the recent range. The 10 day MVA (9487). The 18 day MVA (9429). 9361 the July intraday high down to 9353. The exponential 50 day MVA (9261). 9250 to 9236, the early June intraday high.
Economic Calendar
9-8-03
Consumer credit, July (3:00): $6.0B actual, $5.0B expected -$0.4B June.
9-9-03
Wholesale inventories, July (10:00): 0.0% actual, 0.0% expected, 0.0% June.
9-11-03
Initial jobless claims (8:30): 400K expected, 413K prior.
Trade balance, July (8:30): -$40.5B expected, -$39.5B June.
9-12-03
PPI, August (8:30): 0.3% expected, 0.1% July.
Core PPI: 0.1% expected, 0.2% July.
Retail sales, August (8:30): 1.5% expected, 1.4% July.
Retail ex-Autos (8:30): 0.8% expected, 0.8% July.
Michigan sentiment, September (9:45): 90.4 expected, 89.3 August.
SUBSCRIBER QUESTIONS
Q: Sometimes I miss the buy point on a stock and don't want to chase it too far up. A day or so later, the stock will sometimes pull back close to the original buy point price wise, on light volume. Is it ok to step in and buy at that point, or should I wait until the volume rises again.
A: This is a great question. We have had many subscribers ask if they can "buy late" into a stock or option if the stock has moved beyond a designated buy point. We make the same point as you about chasing it too far up: we time our plays in order to jump in at the best time and beyond that there is the chance that the stock will have run too far, thus falling back on you right after getting in. That leaves you with the uncomfortable decision of whether to let it fall further and test support or just exit. We all get in this position from time to time and wonder whether we should buy or let it come back.
When a stock surges beyond the buy point, we often expect it to pull back a bit to test the nearest support level, and this is usually a breakout point, or some close support like the 10 day moving average. This is entirely healthy if the pullback is on lighter, decreasing volume, because we know that a stock can bounce back up from this support after the short term profit takers sell out. This makes a pullback such as this an opportune time to consider adding to existing positions, or buying into the stock for the first time. Indeed, we often write bounce plays off of support if we didn't catch the move on a previous breakout.
It is important to make sure on such a bounce after a test that volume is supporting the move. We like to buy when the stock is moving up on strong, heavy volume, since that will push the price up in what we hope will be a sustained gain. Weak volume won't support a move for long as it shows there are not that many committed to the stock at this 'cheaper' price. It does not have to be blowout or breakout volume, just a good solid volume surge over and above what it was on the test. If you are game, really like a stock, or a bit more aggressive, you can look at taking partial positions on the pullback while the stock is holding at the support on low volume. If it did not sell on heavy volume, is showing a doji on support, and otherwise enjoys good accumulation and solid price/volume action, this is a consideration. It can backfire, however, as even stocks that show the above attributes can just turn lower (e.g., MOBE Tuesday). Price should move up on rising volume and down on decreasing volume, even if it's in small increments. If you see a high volume surge off support, that is the best time to move in as the breakout has been 'proved up' by the low volume test and subsequent higher volume rebound as buyers jumped back into the stock when they saw an opportunity.
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.
End part 1 of 3
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us stock market
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