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Begin Part 2 of 2

THE MARKET

The market is just not ready to buy off on the improving economy scenario just yet, not with AMD and EMC warning of really poor earnings to come this month. They could buy into lower earnings, but the big drops are more than they are ready for. Have to adjust to the idea that yes things are very bad. But, for many areas of the economy, they are at their worst right now. It is just a matter of getting through this period without major damage for the next move higher.

That is the 'interesting' part. The indexes have retraced their moves off the bottom and are at a point where they could find support and move higher. We have talked about the chart patterns compared to other bear markets earlier. The indexes are still above those critical levels (at least if we are looking for a move higher from here), but look as if they want to at least test those levels again. The Nasdaq looked poised to move higher on Tuesday afternoon, but after today and the warnings after the bell from AMD and EMC, it is going to move lower in the morning. The Nasdaq has about 100 points to play with here. Not ready to move higher just yet without some more testing of that 1970 to 1990 level. The Dow and the S&P 500 appear to be ready to do the same.

What we are doing is continuing to be patient and just stay away from the vast majority of tech stock, especially those in bad patterns. They are jerked back and forth based on the news of the day, and we are going to have a lot of news the next few weeks. There are some leading techs in specific areas and with specific catalysts (pre-splits, rolling ranges) that make good longer term targets and also shorter term trades, but we have to realize there are a lot of other sectors out there that we need to look at for growth. We have been talking about them the past few weeks and they are well-represented on the reports.

The gloomy tone can make you miss some really good investment opportunities even as the economy starts to recover. We continue to see stocks that respond well in economic upturns continue to move up (e.g., builders, some financials, education). Those lead and we cannot let the tech gloom keep us from making smart investments that will pay off for us.

Overall market stats:

VIX: 22.72; +1.77. Volatility rose, but is still very low. Not helping at all right now.

VXN: 49.44; +4.30. Sharp jump, and it will jump higher tomorrow, at least intraday if not up to the close. Still, however, it is at levels that are just off the low of the year.

Put/Call ratio (CBOE): 0.66; +0.02. No surge in put buying on the selling, something that has usually accompanied all sharp selling bouts. We will see if it responds better tomorrow as the selling picks up tempo.

NASDAQ: While there was no damage on Tuesday, today was a different story as the Nasdaq went from looking ready to try a move higher to a big question mark.

Stats: Down 60.69 points (-2.8%) to close at 2080.11.
Volume: 1.304 billion shares. Up from Tuesday, but still well below average volume. 1.088 billion to the downside versus 199 million to the upside. No buyers today.
A/D and Hi/Lo: Decliners really took charge today at 1.72 to 1 1.15 to 1 Tuesday). New highs actually rose to 64 (+9) as new lows rose to 76 (+27).

The Chart: http://www.investmenthouse.com/cd/$compq.html

This was a dismal day from the sentiment standpoint. After an ugly round of selling up to lunch, the selling started again on the close. Closed at the low and then pummeled after hours, it looks like a lower open. At some point the bad news is going to be priced in. It is getting there now as investors get the final adjustment in expectations. But is there going to be a big rally? Well, we want to see it hold at the 1973 level on the low if not higher. If it does there is very good odds that the better economic news will carry some of the tech sectors higher, e.g., software, retail, smaller banks, builders, drugs, health services, etc. But, the key will be ignoring the old leaders for the most part. We talked about ones we were watching last week. Those will suffer tomorrow on the heels of AMD and EMC. We are going to watch for where this index finds bottom. If it runs below 1973 on high volume, we will have to see just how far it wants to test (1900 to 1861). We still like the analysis that the index has reached its lows and this is just a test of the move off of the bottom; consistent with other similar bear markets. We have to see how it reacts to the non-Nasdaq warnings from EMC and AMD.

Dow/NYSE: The stall turned into selling, and the Dow faces 10,400 once again.

Stats: Down 91.25 points (-0.9%) to close at 10,479.86.
NYSE Volume: 932 million shares. Significantly higher than Tuesday, but still below average volume. 616 million to the downside and 306 million to the upside.
A/D and Hi/Lo: NYSE advancing issues fell behind, but not horribly, at 1.23 to 1 (1.18 to 1 Tuesday). New highs rose to 99 (+4) as new lows rose to 51 (+31).

The Chart: http://www.investmenthouse.com/cd/$dja.html

The Dow did its selling early in the session, and then bounced from 10,460 to 10,500 as it tried to once again find support at 10,400. Selling in the last 15 minutes knocked it back from 10,500. The Dow is trying to hold above 10,400 once again, the point of the April test of the move out of the double bottom. If that does not hold, we look at 10,250 as a pretty solid level of recovery. We still stick to our scenario that the indexes have hit the lows and are now testing those lows as the worst of the earnings seasons becomes reality. Again, major the indexes are not reflective of the overall market as the A/D line remains relatively healthy even on what appeared to be a rougher round of selling.

S&P 500: The S&P beat a hasty retreat from the 50 day MVA off of Tuesday's doji pattern. Volume rose but remained still well below average. If it does not accelerate, that gives more confidence the recent lows will hold (1203), but as with the other two major indexes, there is not a lot of room to maneuver. Again, we the reaction to heavyweights AMD and EMC will tell more of the story as the big caps have struggles to rise, but have been rising until this correction that tested the move off of the bottom. It would appear that the real test is just ahead.

Stats: Down 15.21 points (-1.2%) to close at 1219.24.
Volume: NYSE volume rose to 932 million shares, but still below average.

The Chart: http://www.investmenthouse.com/cd/$spx.html

Summary: One thing to note. Thus far the volume has been lower on the selling than the recent buying. The key will be if the market can work through the selling related to the recent earnings warnings fast and without piercing the near support levels. It is also important to remember what is happening overall: we are right in front of what are going to be the worst earnings reports in a long time and a very high level of pessimism even as the economic numbers are making their turn.

FRIDAY

The employment numbers are out tomorrow, but they will be overshadowed by the earnings warnings. Still, they probably won't help as the unemployment rate will more than likely, but watch for non-farm payrolls to rise against expectations of a fall. Seasonal and service sector will be the reason. These reports reflect what has already happened. Employment lags the economy, but at this point that may not matter.

There is not a lot of upward momentum for the morning session, and Friday is even stranger given the mid-day market closing. We will watch for breakouts of those solid sectors and those momentum plays for upside. We will even look at some put plays on stocks that are showing a failed test of resistance, but we are not going to get too wild to the downside as the indexes are close to levels that could act as support. That is why we look for those stocks that have breached support, tested it, and are looking to head lower from there.

We are heading into earnings and as we saw today, there is a lot of news out there that has to work its way through investors. With the economy improving and companies most likely at the bottom, we remain positive on the market as everyone else is negative. We are not 'trading' the market as much right now; we are buying quality stocks breaking out (whether pre-announcement split plays or whatever) or making momentum runs (pre-splits). When the momentum plays show any sign of topping we sell or put a stop loss underneath. On the solid breakouts in sectors that are doing well (builders such as BZH and LEN, smaller financial, retail, software), we are buying the breakout and then selling calls AT THE PRICE WE BOUGHT THE STOCK (that is, in the money) when they top out and start the test. If the breakout fails, we sell the stock as it pierces the pivot point or stop loss point and then buy back the calls or let them simply expire. That protects us from the downside as we have sold the intrinsic value plus time, and that pretty much is greater than the fall back to the pivot point. We have locked in the profit as the stock has made its breakout run and starts to test the breakout. If it bounces up off the breakout, we buy the calls back and let it run up and do it all over again the next time it starts to top. We cover this strategy in detail in the Covered Calls and Protecting Your Downside seminar, and it is a GREAT way to protect your stock buys in a market that is trying to get its feet under it. Buy the leaders as they breakout and then protect yourself.

Support and Resistance Levels

Nasdaq: Closed at 2080.11.
Resistance: 2160 to 2200. Then 2250.
Support: 2100 did not try to hold. That puts us looking at 1990 (1973 on the low side), roughly where the index gapped higher in April and where it most recently turned.

S&P 500: Closed at 1219.24.
Resistance: 1240 to 1250.
Support: 1200 is where we would like to see it hold. Head and shoulders bottom and the breakout support from the double bottom pattern is right at 1182.

Dow: Closed at 10,479.86.
Resistance: 10,600 (the 200 day MVA is at 10,593.85). Still resistance at 10,700 and again it is not really clear up to 10,800. 11,000 is possible resistance after that.
Support: 10,400. Then 10,200 to 10,250.

Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.

7-2-01
Personal Income, May (8:30): 0.2% actual versus 0.3% expected and 0.3% prior.
PCE, May (8:30): 0.5% actual versus 0.4% expected and 0.4% prior.
Construction Spending, May (10:00): 0.1% versus 0.3% prior.
NAPM Index, June (10:00): 44.7% actual versus 42.5% expected and 42.1% prior.

7-3-01
Factory Orders, May (10:00): +2.5% actual versus 1.5% expected and -3.4% prior (revised from -3.0%).

7-5-01
Initial Claims, 6/30 (8:30): 399K actual versus 393K expected and 392K prior (revised from 388K).
Auto Sales, June (0:00): 6.4M versus 6.4M prior.
Truck Sales, June (0:00): 7.1M versus 7.2M prior.
NAPM Services, June (10:00): 52.1% actual versus 47.0% expected and 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.

TEAM TRADES

BORL: We bought BORL on the breakout at about $12 a few weeks back and let it form its subsequent ascending wedge and breakout of that pattern. It rallied to $15.75 on 6-29 and showed a doji. We should have sold at the end of that session, but did so early the next session as the stock opened just a bit lower and started to sell more. It tanked more on Tuesday and then today fell again on higher volume, but showed a tight doji that tapped the 18 day MVA on its low. That is an indication that the move back up will start, particularly as that held above the ascending wedge breakout. We put in an order to buy the options back at 1.70 (they were bidding 1.65 by 1.90). We got the fill later in the session, and now we will be ready to play the move back up. If it breaks down, we will exit. A variation on what we discussed in the summary session above.

BVF: BVF closed at 43.42 with a tight doji Tuesday, at support in its cup with handle pattern. Thursday the stock opened right there and moved up and was at 44.38 by 9:15, on volume of 105,000. Now previous volume had been a low 376,800 (avg. volume is 665,000), but that was higher than that of the session before, and the stock looked like it might move. As we looked at Thursday's intraday chart, the stock stalled and dropped back to test the 44.20 level, and by 9:43 was holding there on volume of 230,000. So, volume was at least moving up decently by this time. Things became more interesting when the stock popped up to 44.35, but then watched the stock drop back to test just 44.04 (44 marks price support early in the base).

We were thinking of taking some positions on a move up form there, but decided to see how the stock would move later in the session. With 15 minutes left in the session, the stock was back down to 44.31, with volume at 561,000--a better entry point if we did get in. Now volume was above average and higher than Tuesday's volume, and this was looking like the start of a breakout move. It was one of the better movers in the session as we reviewed the board, but still no breakout yet. So, we decided to split the baby with a partial position. We put in an order for the stock at 44.45 and that was done with about 10 minutes before the close. The stock closed at 44.48. We are anticipating the breakout a bit, but we liked what we saw a the end of the session and will complete the position with the breakout. Averaging up.

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Good Investing!
Jon L. Johnson and the Technical Traders Team

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