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us stock market, trend trading stock
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6/26/01 Stock Split Report
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Stock Split Report Subscribers:
TONIGHT:
- Indexes test support and bounce higher on rising volume.
- Stronger economic numbers pull averages up off their lows.
- Warnings and positive statements: the economy recovers at different speeds.
- Fed speaks tomorrow.
- Team Trades
THE SUMMARY
Indexes test support and start back up.
The Dow and S&P 500 sold down right to support today and then reversed. They did not close higher, but they did bounce well up off of the session lows and did so on stronger volume. That is usually how indexes start their next legs higher: a reach down to support followed by an intraday reversal that shows a doji on the candlestick chart. A doji is where the open price and closing price on the index are very close, and in this case it shows that sellers continued in charge early on as the index sold down to support. When it hit support, however, the buyers came in and drove the price higher. Indeed, they drove the closing price back up into the top quarter of the day's trading range.
When coupled with rising, above average volume, that is a very positive sign for a reversal up off the bottom and a move higher. Today NYSE volume jumped back above average, and that gives this bounce up off of support more strength. So, we have a good reversal day. It is a positive, but it does not mean that the reversal will necessarily carry the indexes through resistance. There is still a lot of overhead resistance not far away, and that could stop the move once again. Still, we like to see the move off of support on above average volume ahead of the Fed rate cut and on some increasingly solid economic news. At the least we get a test of resistance that we can ride back up in the trading range. After riding the DJX and OEX lower during the selling, we are now looking at riding them back up with some call options. Maybe the indexes will break above resistance, maybe not. We are just taking advantage of what the candlestick charts are showing us.
The Nasdaq managed its own little reversal, but it was on a gap lower, a test of the open, and then a rise for the rest of the session. Volume was higher, but it was still below average. It was not a really powerful move, and we would have preferred a test all the way down to 1990 again today and tomorrow, and then a rally on the FOMC announcement. Still, if investors have decided they want to buy at this point, okay. Still we have the suspicion that investors could be a bit disappointed with just a 25 basis point rate cut. And that brings us to what brought the market back up today.
THE ECONOMY
Positive economic reports, but there were not a lot of believers out there. Something we have seen before.
The market was looking pretty weak early, but then a series solid economic reports finally soaked in and appeared to have a positive impact on investors. Durable goods rose 2.9% when expected to fall 0.4% (and were down -5.5% the prior month). New home sales rose 0.8% to 928,000 unites when 900,000 were expected. Moreover, the prior month was revised higher to 921,000 units from 849,000 units. That is a HUGE 8.4% revision to the upside. If units had remained at the first reported number, this month's gain would have been 9.3%. Then there was June consumer confidence at 117.9 when it was expected to fall to 114.5. Again, that was up from the 116.1 last month, and that was revised higher from 115.5. The trend? Improving economic numbers and revisions higher of previous numbers.
Many commentators we heard today, however, were not convinced. In fact, not 2 minutes after the durable goods numbers came off the wire 3.3% hire than expected, they were called an "anomaly" and an "aberration." The question we had was: from what? We have seen in just the last two weeks the Leading Economic Indicators jump higher than expected, existing home sales rise more than expected, building permits jump when they were expected to fall, new home sales jump higher than expected, Fannie Mae saying 2001 will be a near record year in home sales, the Philly Fed survey jump much higher than expected, jobless claims start to waffle back and forth as the steady rise starts to stall, consumer confidence rise more than expected (up the past two months), and durable goods jump back positive.
There is no real aberration. As we surmised a few weeks back, the economic indicators would start turning positive even as the sentiment and the numbers looked as bad as they could be. We have started to see a turn back up. What we are seeing also is no anomaly or aberration in how economists look at economic numbers. Back in the spring of 2000, even as we were talking of weakening economic conditions and warning signs in the economic reports coming out, the economists were still referring to the (and I hate to say it) 'white hot' economy that was out of control. They brushed off each weakening report as an 'anomaly,' noting they were still very strong. But the trend was changing and they were thinking with hope not with their heads, and they ignored the numbers. We think they are doing the same thing now; it is popular to be negative on the economy, and that emotion is overriding any real hard analysis of what is going on.
Yes the numbers are not powerful, especially in comparison with the pre-correction economic numbers. But just as the stock market does not have to return to the old highs for us to make money, the economy does not have to return to 6% growth to make us all very busy and profitable in our jobs and businesses.
What are we going to see? Continued weak Q2 earnings reports tell us what we know about the past, but continued improving economic reports. Then we are going to see more ORCL statements out there about how "big deals" are coming back in and a strong quarter in the works. We are going to see reports such as that from PALM where it says it is going to turn a profit next quarter when it was supposed to post a loss. We are going to get more of this moving forward. There will be recoveries at different speeds, meaning that some earnings reports are going to give crappy forward guidance. Telecom and networkers are simply swimming in overcapacity, and that will hold them back while other sectors move forward.
THE MARKET
Overall market stats:
VIX: 23.35; +0.10. Volatility hit 24.52 on the high, still no reversal-level number. Still fence sitting, but tomorrow will move investors one way or the other.
VXN: 52.81; -1.20. The Nasdaq posted another gain, but before it did volatility hit 57 on the early selling. By all accounts volatility is still at complacent levels, and if you invested on this secondary indicator alone, you would not expect the Nasdaq to break resistance soon.
Put/Call ratio (CBOE): 0.66; +0.05. The CBOE reported incorrect put/call activity on Monday (0.73), and that could have caused some problems. As it turned out, things were okay, and put activity rose a bit on some selling that turned to buying. Not bad action.
NASDAQ: Did not fall as far as we thought it would before starting to recover, but still a tough road right overhead.
Stats: Up 13.75 points (+0.7%) to close at 2064.62.
Volume: 1.658 billion shares (+12%). Not above average volume, but we saw the return of the improving price/volume action of the past week. This is great, but it needs to power through resistance on above average volume (over 2 billion shares). Up volume came in at 946 million versus 696 million to the downside.
A/D and Hi/Lo: Advancing issues widened the gap well beyond the 8 on Monday at 1.20 to 1. New highs rose to 126 (+10) as new lows also rose to 99 (+14).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The techs gapped lower 28 points and then bottomed at 2017.34. From there they started to climb and closed right at the 10 day MVA at 2064.62. This is very close to the 2077 level that has been tossing the Nasdaq right back down over the past two weeks. The index was showing signs Monday that is was going to test lower toward 1990 again, but it never made it that far. The Fed announcement may send it down again if it is 25 basis points, but we do not think it would last. We have seen improving economic reports and a 25 basis point cut would tell investors that the Fed is thinking those reports mean what they say: improvement. We hate, however, that the speculation will then renew about another 25 basis points. Hey, the economic news is improving, so if the Fed wants to cut 50 points, cut it now and say they are done unless the economic news reverses.
Dow/NYSE: The Dow tapped support and turned back up on higher volume. That is what we like to see.
Stats: Down 31.74 points (-0.3%) to close at 10,472.48 (catch the down 10,504.22 points last night?).
Volume: 1.199 billion shares (+14%). Technically a distribution day, but on a reversal off of support, we view the higher, above average volume as a positive. Down volume led, but not by much at 606 million to 577 million shares.
A/D and Hi/Lo: Advancing issues moved out in front on a down day in the Dow and the S&P at 1.37 to 1 (declining issues led 1.36 to 1 Monday). New highs rose to 125 (+29) while new lows rose to 47 (+1).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow did what we wanted, i.e., testing 10,400 on its low (10,394.72) and then rallying up from there to close 78 points higher. This test is the consummation of the head and shoulders pattern that started in May. The index still must deal with resistance at the 200 day MVA (10,610.28) and then 10,750. As we said before, the reversal was good, but it does not mean the index will break that tough resistance right now. If it cannot break that resistance, we will be riding it back down for another test. Longer term, we think the Dow will benefit as well from the improving economic numbers, and it may not ever come back to test anywhere near the March low at 9100. As for now, after this reversal pattern, we are looking to play the move to the upside resistance with some DJX index options.
S&P 500: As with the Dow, the big caps sold down early and tested support on the low (1204.64) and then rebounded to close well off of that level on rising, above average NYSE volume. The reversal and doji candlestick pattern is a sign of at least an interim reversal that can carry the index up to the 1232 to 1250 resistance level. As with the Dow, we are looking to play that move to the upside with some OEX index options. Today was time to close the put play we had on those as we indicated last night. Welcome to playing the up and down action in a trading range.
Stats: Down 1.84 points (-0.2%) to close at 1216.76.
Volume: NYSE volume rose to 1.199 billion shares (+14%) on the reversal, and even though the index did not finish positive, we like that action on a reversal day.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
No economic news other than the Fed is out tomorrow. It looks as if the Dow and S&P 500 are ready to move up into the number, and the Nasdaq may continue its move and do the same. As noted, we are looking at playing the Dow and OEX higher on that move.
But what happens when the result comes out? Contrary to what many are saying, we are not convinced that the market will rally hard on a 50 basis point rate cut. Likewise, we are not convinced it will sell off really hard on a 25 basis point cut. We think we get some selling on the latter, but we think the market would start back up after the news. If there is a big rally into the announcement and we get 25 basis points, the knee-jerk reaction will most likely be to the downside as the short term players take profits. Fifty points will get a reaction to the upside, but will it last?
The key to us no matter which one comes, is the increasing perception among investors, if not economists and analysts, that the economy is improving. The numbers coming out indicate this to us. We are not swimming in the Q2 earnings warnings, but are looking at the announcements of ORCL, PALM, SEBL, BEAS, and others that are saying business is getting better. BEAS is hiring. Not all segments of the economy will recover at the same speed, and that is the real hurdle tripping the market up. Investors think every sector will join hands and rush jubilantly higher to 4% growth in the GDP. That is not going to happen. We need to focus on sectors that are doing the best. Take a look at the chart patterns of many software companies. They are one of our picks for a faster recovery, and many of them are stellar. The numbers re sales and earnings have remained solid as well. The two go hand in hand at this point; you don't find a good pattern without strong sales and earnings.
That is the way we have to look at it. The next move up is going to bring some big breakouts to the stocks we are tracking, and we are going to see split announcements and subsequent runs from them on the news. The key will be if resistance is broken, if the indexes have had enough of a test of the lows from March and April. That remains to be seen. What we look for is strong volume breakouts over resistance in the indexes and in individual stocks as well and an end to the choppy action. That is a tall order as we approach mid-summer, but with the improving economic numbers we have seen and the rate cuts in the bag, we believe things will be much better in 3 months, 6 months, 9 months down the road.
Tomorrow we are looking at playing the indexes back up, and we are not too concerned about any massive selloff that lasts if the Fed cuts by just 25 basis points. We think the market will catch itself and move higher after any initial selling. We are also going to look for stocks breaking out on the news, but we will also be looking at where they are finishing the session so we can see where they are closing in their range for the session and with respect to the breakout points as well as the volume. That will help us figure out just what really happened. If stocks jump higher but then sell down to close at the bottom of the daily range, that is not a good sign, and we can wait another day to see how the stocks we want perform.
We saw some good moves today once again, and we feel this is just a precursor to better things ahead. Think about it. Even in this correction over the past 6 weeks, we have still had many quality stocks breaking out and moving higher. Trading has been choppier, but still the breakouts have done pretty well overall. Add another solid rally on that and we can get some 50% breakout returns pretty fast.
Support and Resistance Levels
Nasdaq: Closed at 2064.62..
Resistance: 2052 to 2077 is the bottom of the trading range, and the index bounced down from 2077 today. 2118.24 is the 50 day MVA.
Support: 1990 range is still there and is trying to hold, but it could fall to 1961. 1852 is the next potential level.
S&P 500: Closed at 1216.76.
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 10,472.48.
Resistance: The 200 day MVA is right overhead at 10,610.28. Then 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 10,748.43. 11,000 is possible resistance after that. Then 11,196.53 (the last top). After that, 11,350.
Support: 10,400 held today, 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): +2.9% actyak versys -0.4% expected and -5.5% prior (revised from -4.0%).
Consumer Confidence, June (10:00): 117.9 actual versus 114.5 versus 116.1 prior (revised up from 115.5).
New Home Sales, May (10:00): +0.8% at 928K actual versus 900K expected and 921K prior (revised up from 894K).
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.
TEAM TRADES
COO: Sometimes you have to practice restraint and stick to the gameplan.
COO set off an alert at 2:35. We were watching the stock on The Daily as it moved in a handle to a short cup base, and it set off the alert at 48.40, just under the buy point in pattern at 48.72 (handle high is 48.59). Volume was up to 131,000 (previous volume was 70,200, and average is 144,000). We looked at the August $45 calls, trading at 4.90 by 4.60. Volume was up another 1000 in the next couple of minutes, but the stock was unable to move up to the buy point, closing at 48.58 (a cent under the handle high). Decided to hold off and see if COO would make it over the pivot point tomorrow on stronger volume. Volume closed at 152,400, above average, so the momentum may be there for the breakout.
BMET: Big bounce from BMET off of the doji on the 10 day MVA, and that was the play we were looking for to add to some positions we already have in the stock. The doji was just ripe for the move higher after the health sector was hit on the BGEN and other negative news. We saw the stock start the day lower and test the 10 day MVA and move up from there. We really like BMET's ability to hold above the 18 day MVA of late, so we were willing to commit more funds on this bounce play early. The stock broke back over the first high of the morning (after it bounced down to the 10 day MVA) and was at 47.10 by 47.16 about 15 minutes into the session. We were putting in an order for when it did break over that point, and it happened while we were putting the order in. We dropped it in at the ask and that was that. The stock bounced well, hitting a new closing high on sharply higher volume. That is what we like on the bounce plays.
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End Part 1 of 4
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