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us stock market, trading strategy
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6/25/01 Technical Traders Report
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Technical Traders Subscribers:
TONIGHT:
- Mixed, low volume Monday ahead of FOMC meeting.
- Some stocks setting up for a move higher, others a move lower.
- Hope rising for a 50 basis point hike. Does the weak second quarter warrant a 50 basis point cut given some improving economic numbers?
- May existing home sales solid.
- Subscriber Questions
THE SUMMARY
Dow drops again as techs climb slightly.
The Dow continued to tank down toward potential support at 10,400 along with the S&P 500, while the Nasdaq again continued a slow rise higher, but this time on very low volume. It too is showing signs of topping out on this move ahead of the FOMC meeting. We think it will pull back tomorrow ahead of the results to be announced on Wednesday along with several of its stocks that are also running into resistance on slowing momentum.
As the Nasdaq looks ready for a bit of a fall ahead of the Fed meeting, the Dow and big cap index are already ahead of it. The Dow is already close to support at 10,400 (hitting 10,468.12 on its low today) while the S&P 500 is heading toward support at 1200 (1213.60 on the low). These two appear as if they will hit and perhaps find support over the next two sessions and will be ready to rally on the FOMC news if it as investors want it to be.
Some stocks ready to rise, some ready to fall.
Today was a very quiet Monday on most fronts. Volume was low, and while there were movers both to the upside and downside, overall most stocks held pretty much pat. Not much to drive them higher just yet with the Feds meeting and an announcement on Wednesday afternoon. Before that, however, we are looking at taking something from both sides, but we have to realize that moves either way are liable to be short-lived.
Many of the tech stocks that have been making modest moves higher are running out of steam along with the Nasdaq. After a couple of good moves on strong volume last week, we are seeing many stocks making smaller gains the past two sessions as volume drops well below average. Moreover, they are running into resistance in the form of the 50 day, 10 day, and/or 18 day MVA. That combination, without some outside stimulus to drive them higher, usually results in downside action. We are looking to make some quick profits on that, but we do not see the downside as necessarily huge here. These stocks are right above potential support and it may not be much of a move down, just one we can play before the FOMC announcement. As for the outside stimulus, well, the Fed decision may help. No doubt it will help down the road, but will it just right now?
Hope rises for that 50 basis point cut.
Over the past week we have seen the rhetoric about a 50 basis point cut rise after it was universally accepted that 25 basis points was the real target. While we would prefer a 50 basis point cut and then the Fed to say it is done unless it sees something it does not like, we are not buying off on the additional 25 basis points, at least not totally.
Why? Well, there are some great arguments for 50 basis points, the primary one being there has simply been no tangible improvement in actual business. It is one thing to talk about recovery, but another one to actually see it. The Fed usually likes to see things working, and then it will slow down or cease its action. As for other tangibles, the economic numbers of late, while not stellar, are improving. Housing has remained solid, there is some improvement in regional indexes, leading indicators are rising, and unemployment claims maybe (just maybe) are falling. The Fed has already been expressing concern about not being too aggressive as they could overshoot the mark (when did it not overshoot the mark either way?), and the economic news we have seen of late indicates that there is firming going on.
The economic news we are talking about is not the Q2 earnings and warnings we have been hearing. Those are short term and historical; the Fed's focus is at least 6 months down the road. There have been reports that indicate continued weakness in semiconductors and telecommunications, but as we have said before, that is not the whole economy. We still think chips are going to rebound this year, but telecom, that is a way off it appears. Thus, unless the Fed is really worried about the consumer and today's report on lower investor optimism that hit the street today, we anticipate 25 basis points. If we are surprised by 50, great. We can handle that.
What does this mean? Well, we saw in the past that when investor hope got ahead of reality, when reality hit, the market sold off. Hope is a dangerous thing in the stock market. That is why we feel that though there very well could be a 50 basis point cut as the Fed seeks to insure a strong recovery and calm the markets, trading in anticipation of that is dangerous. We are looking for downside plays to exit ahead of the announcement so as not to get caught in any whipsaw. We see downside action setting up on the Nasdaq, and if it gives us two days of selling, it may be ready to rise on the FOMC news. In any event, we have made our trades and profits ahead of the news that could go either way this time around.
THE ECONOMY
Existing home sales rise above expectations.
A busy economic week got off to a good start today with existing home sales rising when they were expected to drop. Home sales rose 2.9% to 5.37 million (annualized) versus the steady 5.2 million units expected. That is a 3.5% rise over the same period in 2000, and it shows that low interest rates, particularly mortgage rates, continue to have a positive impact on home sales. Indeed, the supply of existing homes fell 6.1% in May.
Tomorrow the market gets the durable goods orders, consumer confidence, and new home sales reports. Those are all potentially market moving, but again, we have the governor of the FOMC meeting. While that may keep stocks from rising, a weak consumer confidence number may push stocks lower ahead of the FOMC result.
THE MARKET
Overall market stats:
VIX: 23.25; +0.75 points. Just hanging out as the S&P falls another 0.6%. Not really jumping either way, indicating a lot of investors fence sitting ahead of the Fed.
VXN: 54.01; +2.17. Interesting action. The Nasdaq rises a bit and volatility rises as well. this appears to indicate some nervousness ahead of the Fed, but not much more in our book at this point. As noted over the weekend, the index is at a level where the Nasdaq topped twice and started to sell back.
Put/Call ratio (CBOE): 0.73; +0.04. Edging higher ahead of the Fed meeting, it remains at the high end of the scale. One reason we feel that any selling could be short term even with 'just' a 25 basis point cut on Wednesday.
Sentiment: A private survey of investor optimism was released today, and it showed investor sentiment at a 4 year low. The factors noted: energy prices and their impact on the future, consumer spending, and market volatility. More negative sentiment building is tough to deal with day-to-day, but overall it is typically a catalyst the other way. Further, once again we see the weekly publications coming out with covers depicting economic troubles. In April it was the bear on three covers. This weekend it was recession on three major magazine covers worldwide.
NASDAQ: A quiet session of back and forth trading, but the intraday chart pattern etched out one of the prettiest double bottoms you will ever see. It was a great day traders index today.
Stats: Up 16.03 points (+0.8%) to close at 2050.87.
Volume: 1.491 billion shares (-13%). Up volume led 923 million to 558 million to the downside. Another below average volume session, and it comes right at resistance for the index and many of its stocks.
A/D and Hi/Lo: Advancing issues moved back ahead, but by just 8 issues. New highs rose to 116 (+1) as new lows rose to 85 (+5).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq rose to 2060 on its high, just below the 10 day MVA (2064.26) and still below resistance at 2077 that marks the bottom of its trading range that it fell out of. A solid rally should easily push through that, but there is a lot of work after that. For now, the Nasdaq could not even breach 2052, the intraday bottom of its trading range, and it showed a hanging man doji just below that 10 day MVA. After moving higher the past four sessions, the lower volume combined with the doji at resistance signal a move back down once again. The 1990 level has been trying to act as closing support for the past two weeks, and on a new round of selling ahead of the FOMC announcement we would very much like to see that hold again. We are going to try and take advantage of any downside move here over the next 2 sessions and make some quick downside profit.
Dow/NYSE: The Dow continued its selling, looking to head down to near 10,400. It has a 2 day start on the Nasdaq, so the selling might end sooner. Still, IP, a Dow component, warned after hours, and that will impact the Dow tomorrow, at least in the morning. We will see if it can hold at 10,400.
Stats: Down 10,504.22 points (-0.9%) to close at 10,504.22.
Volume: 1.029 billion shares (-13.4%). At least volume pulled back on the selling, meaning there was not a lot of share dumping going on. Down volume led 682 million shares to 333 million to the upside. We will look for the more positive price/volume action to return when the Dow starts to head back up.
A/D and Hi/Lo: Declining issues continued to lead at 1.36 to 1 (1.5 to 1 Friday). New highs fell to 96 (-21) as new lows rose to 46 (+6).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow ran right through its 200 day MVA (10,614.02), hitting 10,468.12 on its low. That is 68 points above potential resistance at 10,400. The volume was lower on the selling, and that was positive as it has had decent price/volume action of late. Now we will see if 10,400 can hold on a closing basis. The JNJ warning could precipitate a test of that level early tomorrow. After 10,400, the next level with any sand is 10,300 to 10,250.
S&P 500: The big caps were down as well on the session, mirroring the Dow's action. The big caps suffered the second session of selling, but they moved up off of their low at 1213.60 well ahead of potential support at 1200 (actually, other than the 1203 intraday low, 1208 has been pretty solid). The key once again will be whether the index can find support at this level that represents the gap up point out of the previous double bottom pattern. Three downlegs have transpired and we have had that rally off the low that is now being tested. Again, we want it to hold at 1200, but we won't panic if it moves down below that level; we like the overall pattern being set up in conjunction with the rate cuts.
Stats: Down 6.75 points (-0.6%) to close at 1219.60.
Volume: NYSE volume at least sank on the selling, falling to 1.029 billion shares (-13.4%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
Slow start to the week, but that was more or less expected ahead of the FOMC meeting. Though we may see positive economic news before the Fed announcement, that may not get things moving higher as there is hope for a 50 basis point cut ahead. Positive economic news is not good for a bigger rate cut, but the Fed may have already made its decision. If it is leaning toward 50 basis points, anything other than positive comments from businesses would most likely not stop it.
So, instead of guessing on this Fed call as it is not as clear, we are going to play the short term patterns that we see to the downside for two-day plays before the Fed announcement. We have to remember that there is nothing really broken with the Nasdaq pattern as its price/volume action has been improving. That is why we are not going to stay in these plays more than a couple of sessions. We could very easily see the Nasdaq continue down on the FOMC announcement of 25 basis points in cuts and then a rebound from there. We just want to play the move we see short term and get out, and then let the chips settle before we get back in.
Of course we will still keep an eye on all of the breakout stocks. Today was a quiet day on the breakout front; there were some breakouts (e.g., ROOM, CECO, FHCC), but most either moved down to support levels or climbed in their handles or otherwise in their patterns. As we said above, some are setting up for good moves on a good market day while others are looking ripe to fall back to potential support levels. Patience and flexibility are the keys at this point. Patience in waiting for the stocks in good patterns to move up off of support and breakout, and flexibility to play the downside when it forms.
Support and Resistance Levels
Nasdaq: Closed at 2050.87.
Resistance: 2052 to 2077 is the bottom of the trading range, and the index bounced down from 2077 today. 2120.43 is the 50 day MVA.
Support: 1990 range is trying to hold, but it could fall to 1961. 1852 is the next potential level.
S&P 500: Closed at 1218.60.
Resistance: 1232 to 1240 are the bottoms of the trading range. Then 1250.
Support: 1200 is the next level that is trying to hold. Head and shoulders bottom and the breakout support from the double bottom pattern is right at 1182.
Dow: Closed at 10,504.22.
Resistance: 10,750 to 10,800 (down trendline between the January 2000 all-time high and the September high is currently at 10,700). The 50 day MVA is at 10,759.69. 11,000 is possible resistance after that. Then 11,196.53 (the last top). After that, 11,350.
Support: 10,560 may have tried, but it failed. The index broke below the 200 day MVA (10,614.02) and is testing 10,400. That is the point of consummation for the head and shoulders pattern and some previous lows. After that we have to look at 10,300 to 10,250.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
6-25-01
Existing Home Sales, May (10:00): 5.37M (+2.9%) actual versus 5.2M expected and 5.2M prior.
6-26-01
Durable Orders, May (8:30): -0.4% versus -4.0% prior.
Consumer Confidence, June (10:00): 114.5 versus 115.5 prior.
New Home Sales, May (10:00): 900K versus 894K prior.
6-27-01
FOMC meeting results (2:15): 25 basis point cut expected.
6-28-01
Initial Claims, 6/23 (8:30): 420K versus 400K prior.
Help-Wanted Index, May (10:00): 65 versus 65 prior.
6-29-01
GDP-Final, Q1 (8:30): 1.3% versus 1.3% prior.
Chain Deflator-Final, Q1 (8:30): 3.2% versus 3.2% prior.
Michigan Sentiment-Rev., June (9:45): 91.6 versus 91.6 prior.
Chicago PMI, June (10:00): 39.0% versus 38.7% prior.
SUBSCRIBER QUESTIONS
Q: My strategy in trading since 1997 was to buy LEAPS on stock in a strong
uptrend and hold them until the stock closes below its 18 day moving average.
I had great success doing this simple strategy. It was a strategy that was
unemotional that told we when to get out. Since April of 2000 I have not found
any stock that has been moving up in a strong uptrend. Those that seem to be
breaking out and moving up seem to just fizzle out causing me to stop out.
Since receiving your newsletter I have found a few potential candidates
(EBAY, LOW, etc.). When you are buying the stock in your news letter are you
playing the stock on the breakout and selling as it peaks, then buying again
at support etc.? Or are you holding these stocks longer term? Does the
strategy I used from 1997-2000 still work and I just need to find the right
stocks? Or do I need I need to become a shorter term play in these markets?
A: A great question for these markets. We are seeing many stocks that are in great patterns with great fundamentals that are breaking out and moving higher. When the market is improving and moving into a new bull phase, leading stocks in great patterns are the best place to be. We have a pretty good idea when we are in such a time when we see the market reverse off of selling and give us a follow through day that confirms the reversal. We had that on the Nasdaq back in April and we had double bottom breakouts on the Dow and the S&P 500 in early April as well. Since then the indexes ran up and are now correcting back down. For us a major key is whether they hold at the gap up points from April. If not the rally is not over as discussed in the weekend issue, but it just weakens the move overall.
When we see breakouts of good patterns by leading stocks, that is the last piece of the puzzle, but the majority of the breakouts have to hold up. We are seeing more fail right now, but others are doing well still. There are still many, many stocks in good patterns that are ready to breakout if this current correction ends at the gap up levels on the indexes. With the rate cuts and the patterns in the indexes, we remain positive on the future if not the immediate future.
What does that mean to you? Well, that is one reason we keep tracking the leading stocks on the reports. When we see breakouts ready to happen we are ready to invest in those because history tells us that if the market is going to run higher, these will be the early leaders that will provide strong returns. At the same time we have to recognize that the market is choppier right now than it was in May, and that breakouts can still fail. We have not gone totally defensive at this point on breakouts, i.e., setting targets at 10% to 15% and then selling when those are hit or the stock shows topping signs (finishing off the intraday high after the breakout run, declining volume on the move up and a close off the intraday high, smaller and smaller daily moves up, doji's after the move higher). That is for our stock purchases that we want to hold long term, and we do like to hold stocks if we can for years. For our shorter term plays with options and those plays that are bounces up off of support, we are taking profits when they appear to be peaking as just described.
We may have to go back to what we were doing in January to March, tightening our stop losses to just below the breakout point and selling when our breakouts hit a 10% or 15% gain and showed the first sign of topping. Right now we are going to let them run and see if support levels hold and they bounce back up strong for the really big moves up. What they do depends primarily on the overall market as 3 out of 4 stocks follow the market. If you are not comfortable with that and want to take profits after the initial surge, that is never a bad strategy when the market is not making those higher lows and higher highs. It is correcting right now, so if you adopt this strategy until things turn back up, that is not a bad call.
For a review of frequently asked questions, please use the link below:
http://www.investmenthouse.com/1questions.htm
Investment House subscribers are offered a special from eSignal for those
interested in a realtime service. Contact:
Jeff Whitney
Account Executive
800-322-1875
Office hours 6:30-3:30 PST
www.esignal.com
End Part 1 of 2
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