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us stock market, trend trading stock
Begin Part 2 of 3
Dow/NYSE: The Dow just gave up on Friday. Four shots at the 200 day MVA failed and it tanked on higher volume. HON really hurt the index as the GE deal rolled over and died. JNJ, MRK and IBM did the rest of the major damage. Other than that, there was not much either way.
Stats: Down 63.81 (-0.6%) to close at 10,502.40.
NYSE Volume: 1.732 billion shares (+30.5%). Simply could not make the break over resistance, but note the volume: 964 million to the upside versus 758 million to the downside. Very interesting volume dynamics on a day when the index tried to run but was held back by a deal gone bad and one sector.
A/D and Hi/Lo: NYSE advancing issues once again improved to 1.7 to 1 (1.55 to 1 Thursday). Again we see the overall breadth that has been the hallmark of this entire rally. New highs rose to 198 (+36) while new lows fell to 17 (-27).
The Chart: http://www.investmenthouse.com/cd/$dja.html
After looking really slick, the Dow turned down at the 200 day MVA (10,600.10) after 4 attempts to punch through on Friday. Usually you get three tries and you are out. The Dow went the four full rounds before it gave in. When it did give up, however, it gave up, falling 100 full points to the close. The damage was in the last hour when the Nasdaq was drifting around with no updates. Without its cousin, the Dow was stumbling badly. So where does that leave it? Still below resistance at 10,600 for one thing, not to mention the 50 day MVA and down trendline at 10,723. This continued the downtrend started in late May and early June as the Dow bounced right down from that trendline. Still, while the picture is not impressive, we think Friday was an aberration (there we go, sounding like those analysts we just got finished raking last week) and that the index found support at the 10,400 level. But, even if the Dow falls at this point, the breadth overall has been impressive, and it is those smaller issues that are doing the heavy lifting. We will see if it can hold at 10,400. It is struggling at this resistance and the downtrend is in control, so we would not be upside options players right here. When that resistance is broken, that is another story.
S&P 500: The big cap index moved with the Dow, and that means it rolled over and died in the last two hours of trading. Volume expanded significantly on the NYSE, and what was a nice gain for the index in the 11-point range was washed away and replaced with a small loss. We chalk this one up to the bizarre trading day on the indexes, but we have to note that for the second straight session the S&P bounced down from the same level (1237.39 Friday; 1234.44 Thursday). That is that serious resistance at 1240 to 1250 we were talking about. That level represents some serious ice overhead in the form of the 50 day MVA (1240.81) and the down trendline that started back in September 2000. We may see the index squeezed back down to the 1200 level from here to see if that will hold. Not good to have such a quick test (same with the Dow). While we think the S&P is done testing its low, we have to be ready in the event it is not. Still, many of the stocks we are investing in on the reports have held up well even as the S&P has struggled as they are not the large cap heavyweights.
Stats: Down 1.82 points (-0.1%) to close at 1224.38.
Volume: NYSE volume leaped to 1.732 billion shares (+30.5%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
Economic reports take front and center again this week before earnings reports really get in gear the following week. Lots of key reports: auto sales, construction spending and the NAPM are out on Monday. These are important because they show what consumers and businesses are doing. We expect to see continued strength in autos and construction, and then improvement in the NAPM. Factory orders are out Tuesday. We expect those to be positive (+1.5% expected), another sign of improvement. Friday is the employment report, but that is a history lesson. Not every report will be positive, but we will continue to see the overall improvement that has started. As with the market it will be up and down, but the trend will be higher in our opinion.
So, we are bullish on the economy and the market. Again it is not 'buy everything now and ride it to millions,' but buy the leading stocks that we follow on the reports and buy them at the right time. Then let them do the hard work for you while you monitor them to make sure they are behaving properly: moving up on higher volume, selling back on lower volume, holding trendlines or other support lines, holding above the breakout. As long as they are doing that we can let them work for us. We can also use the covered call strategies for cash flow on new buys and long term holdings we learned in the covered call seminar. That is one thing we are doing: we are buying stock right now as they breakout, and then we are selling calls on them as the top and start to come back to test the breakout. We make money on the stock as it appreciates in value, and then we make cash when it tops and we sell the calls and buy them back. That is putting your money to work for you. We are positive and we are looking for ways to play that positive outlook. Breakouts, stock splits and covered calls are good methods to do that. But, we are buying as the stocks move higher.
At the same time we are not letting plays that don't work for us drag us down. If the play does not work, we get out. The market is still going to be up and down as we move forward and it trends higher. Hanging on when the stock turns against you can wipe out some good gains. If it drops 7% below the purchase price we bail out. If it crashes back below the breakout on high volume, if it cannot jump right back over it, get out. Keep it simple by keeping disciplined. The market is going to help us out over the next several months as it improves.
To us this looks like it will be the chance to buy that we will not see for years to come, but we need to buy the right stocks and not go back to the names that are not proving themselves to be leaders in this round. We see lots of stocks starting to form up patterns that were not doing much until recently. We like to see that because it means that as things continue to improve, we will see waves of stocks in different sectors coming to the forefront and moving higher. This gives us so many opportunities to make great money using breakouts, splits, covered calls, spreads, and the like. We are going to be looking at each of these more and more as the market starts to improve. Of course, improving markets always mean breakouts, and we can play those a variety of ways as well.
The Nasdaq has moved up 5 sessions. Perhaps we get some weakness ahead of the Fourth, but it is not a long holiday. If the economic news stays good, we will look for buying opportunities. Now, with earnings coming up we could also see some profit taking after this move higher as investors don't want to be holding ahead of the numbers. We do not think there will be major damage from earnings. We think the major damage was done in the warnings season in anticipation of earnings. We may just see a bit of selling and then see earnings turn into a catalyst for the next leg up. That is what we are really expecting.
Support and Resistance Levels
Nasdaq: Closed at 2160.54.
Resistance: 2160 to 2200. Then 2250.
Support: 1990. After that, 1961.
S&P 500: Closed at 1224.38.
Resistance: 1240 to 1250 where the down trendline and 50 day MVA (1240.81) are. Then 1285.
Support: 1200. Head and shoulders bottom and the breakout support from the double bottom pattern is right at 1182.
Dow: Closed at 10,502.40.
Resistance: The 200 day MVA was unbeatable again on Friday at 10,600.10. After that, the remains overhead at 10,603.56. The down trendline and 50 day MVA are at 10,723. It is not really clear up to 10,800, but that is the road it has made. 11,000 is possible resistance after that. Then 11,196.53 (the last top). After that, 11,350.
Support: 10,400. Then 10,200.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
7-2-01
Auto Sales, June (0:00): 6.4M versus 6.4M prior.
Truck Sales, June (0:00): 7.1M versus 7.2M prior.
Personal Income, May (8:30): 0.3% versus 0.3% prior.
PCE, May (8:30): 0.4% versus 0.4% prior.
Construction Spending, May (10:00): 0.1% versus 0.3% prior.
NAPM Index, June (10:00): 42.5% versus 42.1% prior.
7-3-01
Factory Orders, May (10:00): 1.5% versus -3.0% prior.
7-5-01
Initial Claims, 6/30 (8:30): 393K versus 388K prior.
NAPM Services, June (10:00): 47.0% versus 46.6% prior.
7-6-01
Nonfarm Payrolls, June (8:30): -40K versus -19K prior.
Unemployment Rate, June (8:30): 4.6% versus 4.4% prior.
Hourly Earnings, June (8:30): 0.3% versus 0.3% prior.
Average Workweek, June (8:30): 34.3 versus 34.3.
SUBSCRIBER QUESTIONS
Q: First of all, I would like to tell you how much I have learned from the summary each day that you write about and also the daily. You really know your stuff. I do have a couple questions too. If a stock makes a nice advance, but it is on less than average volume is that a bad sign that maybe the run is over? This is after a nice breakout and a pullback. Also if a stock breaks out on heavy volume and say does a pullback then resumes again making some gains then say breaks out on heavy volume again, how do you know when the base starts? I know it's not wise to buy into the
4th or 5th base breakouts. I understand the base suppose to last at least 7 weeks, but I don't understand when to determine when the base starts.
A: Thank you for the compliment. Stocks can move up on below average volume and just keep on going. Most of the time, however, the move can get into trouble. If a stock is heading to a new high but volume is low, that is a topping sign on that run. Think of it this way: a stock is like a rock being pushed up a hill. As the rock goes higher up the hill, those pushing get tired. They may quit or they need help. If no help comes in or they quit, the rock rolls back down the hill. Thus, if no buyers come in, eventually there are no more buyers and the stock will fall. This is really true if a stock is running up near a resistance level. After a strong breakout and then a test of that breakout, the stock can rise back up to the first high after the breakout, but if it does not get a volume surge along the way, it could run into trouble at the previous breakout high. If it surges over that level on strong volume, it is going higher. What I just described is a break to a new high after a test of the breakout. If it does occur on strong volume, this is not a new breakout of a base really, but another entry point after the test as the stock has shown it has a lot of buyers at this level. You can buy as the stock moves up off of support on higher volume after a test, or you can buy as it breaks over the high in the breakout run if it occurs on a volume surge.
When we talk about the number of bases, we are talking about full-blown bases that last at least 7 weeks. In some stocks it takes years before they base 4 or 5 times, running higher 100% or more, then forming a base where it corrects 30% or so, and then breaking out of that base. These bases can last 7 weeks, 2 months, 4 months, etc. depending upon the market. One pattern we are seeing a lot right now and one that we like a lot because it usually is setting up for a strong move ahead is the combination base such as the cup with handle followed by a flat base or an ascending wedge. EBAY did this as did RCII, ELON, BBY (it is overcoming that convertible offering, but doing well as it does), and FISV. What happened was the market started to improve coming out of April and into May, and stocks were breaking out. Then the correction occurred and the stocks pulled back, but held above their previous bases for the most part. They would not knuckle under, however, and now they are starting to spring higher. We love these patterns because they usually lead to big gains. NVDA is trying to do the same now, but its ascending wedge has turned into a pennant. Not as bullish, but we love the tight range on low volume over the last few sessions - - crouching for the move higher we believe.
Q: ANSS...nice call...bought the stock today @ 16.32. Read your comment to buy @ 17.08 on 176,000 shares. Huge volume today in excess of 300,000. My question: you have a target of 20. Do you wait 'til 20 to sell? Or do you take partial profits here? I don't know how you guys handle a breakout. Does the stock more than likely have to retest the breakout level, which in this case is 16.95? Input would be much appreciated. Also, related question: many times you have the stock a buy "on the breakout" to a certain level BELOW your target. Does that mean you sell the stock at that level regardless, or is it just a level at which you no longer want to buy the stock because the risk/reward is not that good?
A: Thanks. ANSS had a great move that we could not resist either. The stock raced almost to our initial target in one session. Strong moves like this can lead to some selling early the next session as the market maker was selling stock like mad at the close and will most likely need to replenish his inventory. He might open it down to get some sellers so he can buy, and then if the buyers are still there, send it right back up. If it moves back up over the previous close on strong volume still, that is bullish. At this point we are inclined to let it run to see if it will hit 20 and keep on trucking. If it stalls there, we have choices. We can ride it down to see if the test is successful, we can sell out here and then pick it back up if it starts to move higher again after a successful test (we can lock in a gain and then pick it up again for a potentially bigger advance), or we can sell half our position, let it test, and then decide if we want to buy more or not if the test is successful. This was a huge move in one session. Stocks that move 20% on a breakout can be big winners, but Friday was a bizarre day. We anticipate somewhat of a test after such a strong move, but we do not anticipate it to come all the way back to the breakout.
As for the 'buy up to' language, that refers to the fact that in most instances we don't like to chase a stock on that initial move 5% past the breakout point. If it gets away from us, we will wait for that test and then pick it up. If it tests and then moves up over that first breakout high, that is another buy point as it has already tested and is ready to move higher. In other words, it has proven itself and the 5% limit is no longer applicable.
NOTE ON THE ALERT SERVICE:
Our new alert service will be up and running later this week and we will be sending all subscribers information on the service. It will provide alerts to your email address whether computer, handheld, pager, or mobile phone when one of the plays hits the breakout buy point! It will provide the ticker, the price, the volume, the percent of average volume for the session, the pivot point, the pattern or play type, the target volume and our stop point. We will also throw in anything else that is necessary specific to that play! We are extremely pleased with the system and have been beta testing it among ourselves with great results on placing orders. Indeed, the service will pay for itself with a fraction of one trade. Again we will provide additional information and sign up details this week!
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 2 of 3
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us stock market
trend trading stock
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