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us stock market, trading system
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6/16/01 Technical Traders Report
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Technical Traders Subscribers:
Happy Father's Day!!
TONIGHT:
- Indexes test the bottom of the trading ranges and fade.
- Volume higher on the selling, but triple witching added to the increase.
- Starting once again to see companies announcing firming conditions.
- Looking for another move up after the Q2 worries subside.
- Leaders put in a solid day despite the selling.
- Economic news still weak as inflation remains tame.
- Subscriber Questions
THE SUMMARY
Trading ranges tested on the session highs, support on the lows
The indexes ran the gamut on Friday pretty much as expected. They made their lows for the session early on the heels of continued JDSU and NT earnings warnings, testing the next level of support. They then went the other way, running up to the bottoms of their trading ranges they just broke down through Thursday. They bounced down from there and then spent the rest of the day banging around in between. Somewhat of a noncommittal day as anticipated given the options expiration.
Volume jumped as expected given the triple witching expiration for the quarter, and it was again above average. Thursday was the first session in a long time that volume cracked above average, and Friday was the second day in a row of such volume. It is hard to take a lot from the session volume given the triple witching, but with the negative breadth, higher down volume, and overall increased volume on the selling, the session was another distribution session for all of the big three indexes. That makes 5 on the Dow since the rally topped on 5-22; 4 on the Nasdaq; and 5 on the S&P 500. The price/volume was never really wicked, and indeed it tried to improve the prior week. The last two sessions, however, there was some real dumping going on.
That means the indexes are still under pressure for now. Even though they were able to bound up off of some potential support, they will most likely test it or even lower again. The reason being that Friday was somewhat of a recovery day given that they did bounce up to finish off of the lows, and that relieved some of the oversold condition building up. Moreover, there will be more warnings coming out as companies come clean for Q2, and that is what all of this recent correction has been about: fears of quarterly earnings that were already know to be weak. For some reason the analysts and investors are taking the warnings for Q2 to mean that any economic recovery will be further out than originally anticipated. Nothing has really changed at this point other than the fact that Q2 earnings are moving closer, and that has everyone on edge. It is one thing to talk about weak earnings coming; it is another thing to actually have to deal with them.
Waiting for Q2 worries to subside and playing the downside while we wait.
JDSU and NT garnered all of the headlines on Friday as they both again warned of further weakness in their numbers. The telecom sector along with networkers are really under pressure as there is just massive overcapacity. There is no reason to produce any product when you can go on the internet and buy servers, optic fiber, etc. for pennies on the dollar. As we said, these sectors will lag the rest of the tech recovery simply because of the huge overcapacity. The scenario reminds us of the energy boom in the late seventies when everyone thought that oil would rise to $100 a barrel and beyond. Of course it did not. The companies and all of us were lulled again into believing the internet buildout would continue unabated for years.
Anyway, those warnings fueled further speculation about a 'pushout' of any economic recovery to 2002 and beyond. Maybe for those sectors, yes. But for the whole economy? We seriously doubt it. Indeed, even in the tech sector we are already seeing more signs that the initial projections of INTC, AMD, MU, XLNX, BRCM and others that there is some firming in business is continuing. Friday Microchip Technology (MCHP) reported that a "bottom is forming as the backlog of cancellations and push-outs are substantially slowing and distributor and OEM inventory has been significantly reduced." This is the first in what we believe will be the next round of positive comments about the future coming out.
These positive comments are important because in a technology economy as we have, the fundamental building block is the semiconductor. When technology starts to recover, chips will be the first to do so as they are the core of all devices. If business in semiconductors improves for these companies, that means that the businesses of the devices they are going into is improving as well. Where are those chips going? Into products, and that is the first sign that things in technology are picking up. No cancellations or pushouts of orders means that inventory is being worked off and that manufacturing will pick up again. Despite what Mr. Niles and Mr. Kumar believe about the supply, you have to go with what the companies are actually experiencing. Niles and Kumar are in a range war with Jonathon Joseph and the like. The former are playing on the near term worries about Q2 to be "I told you so's". Six months from now we believe Mr. Joseph will be the one proved correct.
In any event, we believe this Q2 worry correction will be played out before too long. These things go in cycles. In April and May the focus was on 6 to 9 to 12 months down the road, not a Q2 that everyone knew would be poor. After stocks had risen, however, the fear came back to roost as there were some profits built up. Warnings that we knew would come suddenly caused problems. Soon those will be old news and recognized as such as more MCHP-like forecasts start to surface. That will trigger another round of buying for the longer term.
Indeed, several leaders used Friday to move up on stronger volume. After some weakness on Thursday, stocks such as NVDA, THQI, ACS, ESRX moved up on much stronger volume. Investors used the dip on Wednesday and Thursday and then Monday morning to climb back into positions. Frankly, we were looking for some more weakness to get into more positions, but these leaders had just too much pop in them on a day when the big techs and other big caps were getting sold off again. This does not necessarily mean that any correction is over, but the leaders are usually the very first to turn higher when the next move up starts.
THE ECONOMY
Manufacturing still suffering but no signs of inflation.
Industrial production slipped 0.8%, a half point more than anticipated and 0.2% worse than April (revised to -0.6% from -0.3%). Capacity usage fell to 77.4% from 78.2% prior and 78% expected. There is still no sign of life in the manufacturing sector just yet. On the other hand, it is not totally tanking now either. It may not be moving up, but it is not in a freefall either.
Consumers more upbeat.
Consumer sentiment as Measured by the Michigan survey fell to 91.6 (92.0% prior), but that was above expectations of 91.0 and much, much better than April's dismal 88.4 reading. Consumers are feeling a bit better, but no doubt the recent weakening in the stock market will have some deleterious impact though we don't feel it will be major.
CPI climbs on energy, but is otherwise oh so tame.
Consumer prices mirrored the PPI and producers' lack of pricing power. Overall the CPI was up 0.4% and in line with expectations (+0.3% prior), but the core was up just 0.1%, below the 0.2% that was expected and that was the prior reading. But for gasoline prices, there was no real inflation, and the Fed cannot impact energy prices by raising rates. Its best measure of defense is to make sure money is flowing freely enough to counteract the negative effects of higher energy prices on the consumer and businesses. That means further rate cuts come the end of June as the Fed will feel it has plenty of room to make the cuts.
And cuts are still needed for now to keep liquidity, but at some point they do need to end. Investors have to get weaned off of rate cuts that cannot go on forever, and it is a pretty sure bet that the Fed is only going to lower 25 basis points now, though we would prefer that it go ahead and make the final 50 basis points in one move and say 'we are done, live with it.' That would actually help the market by letting investors know that the Fed thinks its job is done, implying it sees the firming it wants.
THE MARKET
The intense selling backed off on Friday, but it was not enough to bounce things higher. We expect a little more downside to at least test the support levels again.
Overall market stats:
VIX: 26.33; +0.13. Not a surge higher at all, and not surprising given the up and down action for the session. It did hit 28.69 on the high early in the session as the S&P plunged lower, and a reading over 28 is getting into the 'high' zone. We like to see anxiety climbing in this indicator as well.
VXN: 60.55; +1.09. Moving higher, but still well off levels considered 'high', i.e., 68 or better. Hit 62.26 on its high Friday.
Put/Call ratio (CBOE): 0.92; +0.03. Put activity continued to climb Friday even as the overall selling took a bit of a breather. Most likely had a lot to do with expiration Friday, so the numbers are somewhat murky. Still, it is clear that put activity remained at high levels as the market tried to hold at the next level of support but made no really solid move.
NYSE Short Interest: This measure actually rolled down on Friday to 5.05. What this means is that most likely some shorts felt that the selling might be coming to an end after such a solid downdraft, and they started closing out some positions in the event of a further bounce higher up off of support levels.
NASDAQ:
Stats: Down 15.64 points (-0.8%) to close at 2028.43.
Volume: 2.108 billion shares (+15.2%). The second day in a row volume rose on selling, and the first above average volume day in three weeks. Down volume led up volume 1.318 billion to 768 million shares; a better ratio than Thursday, but still not anything great. It was the highest volume in a long time yet it was on expiration Friday, and that usually means heavier volume. We expect lighter volume on Monday regardless of which way the market goes as that is the summertime pattern: light on Monday and Friday.
A/D and Hi/Lo: Decliners continued to lead, but it fell to 1.31 to 1 (2.7 to 1 Thursday). New highs were a measly 57 (-8) versus 103 new lows (+19).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq ran down to 1992 early in the session, undercutting some potential support in the 2000 range and then bouncing back. It rose to 2048 right after that, but turned back down. As we know, 2052 was the bottom if the recent trading range the Nasdaq fell out of on Thursday. We anticipated a test of 2000 and another one of 2052. we got both within 2 hours of one another. The index was unable to move over 2052 though it made two further rather feeble attempts later in the session. This is what we were anticipating, and we feel that the Nasdaq is going back down to test 2000 and perhaps 1961, the point where it made the breakaway gap, before it can find its footing for good. It may try to bounce on up again off of Friday's doji pattern, but we think at this point it would be hard pressed to climb above the 50 day MVA at 2145.59 for now if it can make it over 2052 - 2077.
Dow/NYSE: The Dow also tested the range it just fell from and tested lower as well before it hung on by its teeth at the 200 day MVA.
Stats: Down 66.49 points (-0.6%) to close at 10,623.24.
Volume: 1.635 billion shares (+32%). Volume was above average for the second straight session as the selling continued. As with the Nasdaq, it was another distribution day, but one with an asterisk as it was triple witching Friday. Down volume led 904 million shares to 649 million shares. Not a slaughter as compared to Thursday, but not a victory by any means.
A/D and Hi/Lo: Decliners continued to lead, but the margin narrowed considerably at 1.1 to 1 (2.32 to 1 Thursday). New highs rose to 80 (+21) as new lows rose to 62 (+11).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow managed to hang on at its 200 day MVA on Friday at the close (10,632.40) after testing down to 10,566.55 on the low. It tried to break above the bottom of the trading range it just broke and 10,750 as well (hit 10,716.30 on the high), but could not do it. It was a struggle to close at the 200 day MVA. It is at a point where it could reverse what with the higher volume reversal off the lows on Friday, but again, it has major overhead resistance at 10,800, and it will be hard for it to move through that level on the first try.
S&P 500: The big cap index dove down to support early on as well, hitting 1203.03 on the low before rebounding to close over an old down trendline connecting the March and April 2000 highs. That does not represent a lot of support in our opinion, but it was enough on Friday. This index too has sold down sharply over the past 8 sessions, and it may be ready to stage a bounce back up toward 1232 (the bottom of the trading range) to 1250. That most likely would be an oversold bounce at this point ahead of the Q2 earnings, and we may see it head lower back toward 1200 again after such a move. That is where we can enter some really solid downside plays.
Stats: Down 5.51 points (-0.5%) to close at 1214.36.
Volume: NYSE volume jumped again to 1.635 billion shares (+32%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
This week we will see housing starts, building permits, and the leading economic indicators. Those are the key reports for us as they touch on the strongest sector of the economy during the downturn, and the leading indicators show us what is moving 6 months down the road. We think we are going to see some slightly better housing numbers or about flat and some better permits. Leading indicators are expected to rise 0.2% versus the 0.1% in April. We anticipate higher than the consensus. We believe we are going to see the leading signs getting a bit better now.
Whether that happens this week or later, we are going to get that improved economic news coupled with some additional positive future guidance from companies. That will be the combination that gets investors looking back toward 6 or more months back down the road, and that will start stock prices back higher. As we said, things are getting pretty oversold on this Q2 earnings fear, and that is selling based on past events or events that will be over in two weeks. History. Stock prices are about the future, not the past. Even before earnings are out we anticipate the beginning of another move higher based on views of a better future. Those views that were jelling in April and May have been shaken by short term, irrational hopes (and fears) about the second quarter earnings.
For now the indexes broke down through their ranges, and are in the process of finding the next bottom for another move back up. We do not believe they are in for a complete re-test of the April lows, but will find bottom before then in conjunction with the better economic news and some positive company guidance, and that will send them higher on strong moves. Interim they may try to move higher just because of the strong selling of late, and we will just have to see how strong the moves are when they run into resistance. Much depends upon the timing of the economic and corporate news we get, but we have confidence in where this market is going over the next 6 months and more.
Short term worries have a lot of people flustered. Keep your eye on the ball which is longer term. We are not in as serious an economic crush as we were in 1973. We are not in a 1929 to 1930 crisis either. Those saying the economy is not going to recover are as wrong as those saying the traditional market indicators 'just don't work in this bear market.' Nonsense. It is this kind of talk that convinces us even more that we are correct.
Still, that does not mean all of the fallen will rise from the ashes. We must stay focused on what is working. That means looking at the leaders in the great patterns that are on the Split report, the Daily, and the Technical Traders. We are following the leaders with the great patterns and the small to mid caps that are also in the lead and exhibiting the better patterns. Pick the best of the best without fretting over ORCL, SUNW, EMC and those that have fallen and may or may not get up. They are not showing great plays at the moment short term, so we go back to the basics, the patterns that work and have been holding up even in this selling. These are the stocks that still have the good 'numbers' (sales, earnings, etc.) and their patterns reflect this. Those are holding up the best and moving higher even as the rest of the market stalls.
Support and Resistance Levels
Nasdaq: Closed at 2028.43.
Resistance: 2052 to 2077 is the bottom of the trading range. 2145 is the 50 day MVA.
Support: 2000 is trying to hold. Then 1961 where it made the breakaway gap.
S&P 500: Closed at 1214.36.
Resistance: 1232 to 1240 are the bottoms of the trading range. Then 1250.
Support: 1200 is the next level. Head and shoulders bottom and the breakout support from the double bottom pattern is right at 1182.
Dow: Closed at 10,623.64.
Resistance: 10,800 where the down trendline between the January 2000 all-time high and the September high is currently (and the 50 day MVA is at 10,805.59 as well). 11,000 is possible resistance after that. Then 11,196.53 (the last top). After that, 11,350.
Support: Hanging on at the 200 day MVA at 10,632.40. After that, 10,400 is the point of consummation for the head and shoulders pattern and some previous lows.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
6-13-01
Export Prices ex-ag., May (8:30): 0% versus 0% prior.
Import Prices ex-oil, May (8:30): -0.5% versus -0.5% prior.
Retail Sales, May (8:30): 0.1% actual versus 0.3% expected and 1.4% prior (up from 1.1%).
Retail Sales ex-auto, May (8:30): 0.3% actual versus 0.4% expected and 0.8% prior.
6-14-01
Initial Claims, 6/9 (8:30): 428,000 actual versus 425,000 expected and 440,000 prior (revised up from 432,000).
PPI, May (8:30): 0.1% actual versus 0.3% expected and 0.3% prior.
Core PPI, May (8:30): 0.2% actual versus 0.2% expected and 0.2% prior.
Business Inventories, April (8:30): 0.0% actual versus -0.1% expected and -0.4% prior (revised from -0.3%).
6-15-01
CPI, May (8:30): 0.4% versus 0.3% prior.
Core CPI, May (8:30): 0.2% versus 0.2%.
Industrial Production, May (9:15): -0.3% versus -0.3% prior.
Capacity Utilization, May (9:15): 78.0% versus 78.5% prior.
Mich Sentiment-Prel., June (10:00): 91.0% versus 92.0% prior.
SUBSCRIBER QUESTIONS
Q: I've been trading for almost 10 years, and I had never heard of an
18 day moving average until I subscribed to you service. Is it a "trader's secret" or something? It just seems kind of odd when compared to the 10,50,and 200. Do you have any information about it?
A: We developed our system of looking at stock movements after reading and trying everything we could get our hands on and then holding onto what worked. We found that the 18 day exponential moving average is often a much more accurate indicator of shorter term support for stocks moving out of solid patterns than other moving averages. It is quite simply a case of trying many and focusing on the one that worked for us. These change over time depending upon market volatility and changing attitudes. That is why we always look at other MVA's to see if there is any change. Some stocks will adhere to the 20 day MVA more than the 18 day, but we find them to be the minority at this stage.
End Part 1 of 2
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