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10/08/03 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Wednesday: None issued
Buy alerts issued: EGOV; INAP
Trailing stops issued: None issued
Stop alerts issued: None issued
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/alertttr.htm
SUMMARY:
- Earnings fail to spur a break over September highs.
- Wholesale inventories decline as sales rise, a boon for future jobs.
- Stepping back to regroup before another run at a new breakout.
Volume edges lower as stocks stall at recent highs.
Stocks found no buyside boost from solid earnings results. After an early test of near resistance they spent the rest of the session selling lower, managing to bounce up off of near support in the process, but that is about all. Stocks had rallied five sessions in anticipation of earnings, using a good bounce off the 50 day MVA to start the rally. The move itself took the gas out of the market, and it was winded by the time it hit that former 52-week high.
It was a natural place for it to stall out again after the distribution in early September on the way up to that high and as it sold down from there. That makes this trip very important in a technical sense as it makes a second try at that recent high. It can roll over here, but it needs to hold at near support at the 18 day MVA or 50 day MVA and make a higher low that leads to a breakout. The last thing you want to see is a lower volume second top; that shows there were buyers that pushed it back up, but fewer than on the first try. That obviously indicates some buyside weakening that can turn into stronger selling and a double top pattern. Other than last Friday the volume has been considerably lower on this move back up to the prior high. Some buyside volume needs to kick in, and at this point that would need to take the form of the follow through session we have discussed earlier in the week.
THE ECONOMY
Wholesale inventories for August -0.2% versus 0.1% expected, and this has a lot to do with the jobs situation.
While lower inventories take away from GDP (it will be strong in Q3 even with lower inventories), they are a good indication for an economy that still needs to increase production. For the second straight month inventories fell while sales rose. In July sales rose 0.5%, followed by a 0.4% climb in August. The inventory to sales ratio, the measure of time it takes to deplete current stocks on hand at the current sales pace, fell to 1.20 months, the lowest level on record.
What this all means is two edged. First, low inventories is caused by sales and lack of building inventories. Sales are up as noted, but they are not surging like wildfire. Thus there is also a lack of production increasing to build inventories. Businesses are selling more but they are still not ready to pad inventories with the confidence that they will be rapidly sold. Second, it means that inventories are getting thin, and any demand increase will require more production.
This has a lot to do with jobs whether or not anyone admits or discusses it. The sages try to explain it all away with productivity, but even though productivity is strong, it is likely not as great as the Fed reports. Inventories are low because companies are producing less even as demand picks up as they would rather produce less right now and risk shortages (good for pricing, huh?) than take on the risks and burdens of hiring. Productivity is helping them hold off hiring, but the rise in temp workers shows that there is an increasing need for workers. Just as companies hold off as long as they can from layoffs when the market softens, they hold off hiring as long as they can when business starts to improve in order to (1) recoup some profits lost in the downturn and (2) to avoid getting hurt by a head fake if the economic rebound fizzles.
Thus to an extent even more than many economists acknowledge, there could very well be a burst of job creation and hiring as the recovery continues to accelerate and companies have no choice but to hire or lose out on business. They will do the prior and avoid the latter. After all, the recession was too long to waste any opportunity at recouping losses and building profits.
THE MARKET
Earnings have done anything but spark demand for stocks. Earnings have been good, but after a run back up to the prior highs the buyers are scarce. It is something like eating Thanksgiving dinner at grandma's, stuffing yourself on turkey, dressing, cranberry sauce, all the extras, and pumpkin pie only to find out she forgot to bring out her special gravy. No matter how much you like it, there is no way that gravy is going down, at least without coming right back up. Stocks have enjoyed a surge, and now they may need to purge a bit before being able to enjoy the earnings and continue higher.
This is the scenario we have been discussing, and all is not lost if the indexes fail here. They just need to make a higher low and either take out the September high or wander sideways and build a new base. If not, the technical deterioration will point to a significantly deeper test.
For now the price/volume action is rather solid of late after the bouts of distribution in September. Leadership is still solid with JCOM, SINA, EBAY, AMZN, DRIV, JBLU, etc. continuing their moves, some after brief pullbacks. The stronger underpinnings indicate a brief test, a higher low, and then another breakout try.
The double top implications discussed above if stocks cannot make a higher low are one potential problem, and the timing of any follow through to the Wednesday start of this last rally phase are another. You like to see follow through sessions 4 to 7 sessions after the first rally day (the rally day is included in the count). Those tend to be your stronger rallies. If it occurs on days 8 through 10, not so strong. The idea is that buyers take a short rest and then get right back into the action. The longer it takes to come around, the less enthusiastic. It does not always mean the rally is a dud, but it can be less intense. Something to keep in mind, but not something to lose sleep over.
Market Sentiment
VIX: 19.18; -0.23
VXN: 29.16; -0.14
Put/Call Ratio (CBOE): 0.81; -0.02. Barely budged, but again at a high level. Last time the ratio closed over 1.0 the market rallied despite the fact it looked as if it was not ready. We will keep an eye on it as the market pulls back.
NASDAQ
Ran into the September highs and fell over on every so slightly lower volume.
Stats: -14.07 points (-0.74%) to close at 1893.78
Volume: 1.811B (-1.85%). Volume was still above average and edged lower, technically indicating no distribution. Close as in horse shoes, however, so you cannot say 'whew, no distribution.' The market is clearly fighting as to what direction it seeks.
Up Volume: 864M (-412M)
Down Volume: 936M (+435M). A dead heat as the index ran out of some steam at resistance.
A/D and Hi/Lo: Decliners led 1.44 to 1
Previous Session: Advancers led 1.62 to 1
New Highs: 288 (-16)
New Lows: 4 (-3)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Nasdaq tested the September high (1913.74) early, but that was all it did. It spent the rest of the session trending lower. It tapped near support (1889) on the low and managed a weak bounce toward the close. It shows every sign of needing another respite after a week of gains off the 50 day MVA bounce. It needs to hold support at the 18 day MVA (1857) as the best point to make another run at the highs. The 50 day MVA (1806) is not out of the game, but makes the road longer.
S&P 500/NYSE
Another test of the September high and then some lower volume selling. Not a bad session, but it is following Nasdaq, not leading it.
Stats: -5.48 points (-0.53%) to close at 1033.78
NYSE Volume: 1.234B (-3.15%). Lower, below average volume on the pullback from the September highs. This was good action.
Up Volume: 473M (-350M)
Down Volume: 756M (+318M)
A/D and Hi/Lo: Decliners led 1.18 to 1. Very modest downside breadth. Breadth has been quite modest lately, up or down.
Previous Session: Advancers led 1.53 to 1
New Highs: 318 (-31)
New Lows: 5 (-1)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Another test of the September high (1040.29), but that was early in the sessions. It was down from there, but there was no collapse. The large caps held the early September high on the session low (1031) and managed a small bounce on the close. Good action, but it is probably not enough to stave off further downside. A test of the 18 day MVA (1021) looks to be in the cards or down to the June and July highs at 1015. Not a bad scenario, but as with Nasdaq, you do not want to see volume pick up on the downside as that creates a potential double top situation.
DJ30:
Stats: -23.71 points (-0.25%) to close at 9630.9
The blue chips were no different, testing toward the September high (9686) and then fell off pace. Tapped some support on the low (9565) and recouped much of the losses, though the candlestick pattern showed a doji at resistance. This is the exact pattern it showed in late September when it made that high and then rolled over to fall to 9250. A test to 9500 (price support and the 18 day MVA at 9507) looks assured, and a test of the 50 day MVA (9399) is not out of the question.
THURSDAY
Believe it or not, even with the earnings season kicking into gear, the weekly jobless claims will be the focus of attention. The reason is the fixation on jobs: did the September number mean anything, is there a trend of improvement still developing, etc. Despite improving economic reports and earnings, there is this idea that if the jobs don't come the economy will tank. If the economy kept losing jobs at a fast pace, ultimately that would be correct. There is no evidence other than repetition from the gloomsayers, however, that the current level of job loss/creation would lead to a failure of the increasing recovery. It is one of those ideas, very similar to the Fed's 'prosperity must equal inflation' nonsense, that has no empirical support but is adopted by those that think in smaller circles.
Be that as it may, the jobless claims will be closely watched. They need to be good to offset the sour stomach earnings seem to be building. YHOO crushed revenue expectations; crushed them. Yet, after an initial bounce it was getting sold down after hours. As noted earlier, the market has rallied to saturation at the September highs, and it is trying to digest those gains before it gets into trouble on the downside. Thus far it is holding up but has some serious work ahead of it.
Wednesday there were some very good individual movers, and we took advantage of them. As for existing positions, overall stocks held up very well as we anticipated. We are still looking for a milder pullback to regroup, and if earnings are strong along with continued improvement in economic indicators, the stage is set for the next attempt at the September high. We need to be patient, let it develop, and then move in.
Support and Resistance
Nasdaq: Closed at 1893.78
Resistance: September high at 1913. 1930 - 1935. Then 2000 to 2050.
Support: 1889 (early September highs). 1860 to 1865. The 18 day MVA (1857). The 50 day MVA (1806). The March/August up trendline (1800). The July high (1776).
S&P 500: Closed at 1033.78
Resistance: 1040, the September highs. Then 1050 and 1080 from February 2002 lows. 1100 to 1150, the early 2002 double top.
Support: 1030 to 1032 (early September highs). The 18 day MVA (1021) and the top of the summer range at 1015. The exponential 50 day MVA (1009). 975 (December 1997 peak). 965 (August 2002 peak). 961, intraday lows in the summer range.
Dow: Closed at 9630.90
Resistance: 9735. 9800 (April and May 2002 lows).
Support: 9609 (early September highs). 9500 (June 2002 lows) is the top of the recent summer range. The 18 day MVA (9507). The exponential 50 day MVA (9399). 9353 (top of summer range). 9250 to 9236, the early June intraday high.
Economic Calendar
10-7-03
Consumer credit, August (3:00): $8.2B actual, $6.5B expected, $6.0B July.
10-8-03
Wholesale inventories, August (10:00): -0.2% actual, 0.1% expected, 0.0% July.
10-9-03
Initial jobless claims (8:30): 394K expected, 399K prior.
10-10-03
Trade balance, August (8:30): -$41.5B expected, -$40.3B July.
PPI, September (8:30): 0.1% expected, 0.4% August.
Core PPI (8:30): 0.1% expected, 0.1% August.
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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