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Begin Part 2 of 2
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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Good Investing!
Jon L. Johnson and the Technical Traders Team
All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners of Online Investment Services, LP or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.
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