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Begin part 2 of 3

THE MARKET

Friday saw little change in the overall action. The large cap indexes surged all week as money rotated out of NASDAQ and smaller caps that had logged strong gains and led the market up through October. Money has not left the market for the most part, just shifting around to other areas that had not rallied as much. NASDAQ has virtually stalled at 1950 to 2000 since mid-October. SOX has become downright worrisome as it continues to below the 50 day MVA and many chip stocks are in corrections and threatening further downside.

One good thing about the Dow and SP500 taking over some leadership is that it allows the leading tech and small caps to form new, much-needed bases to set up the next moves. The market is not going to go far on the back of stocks with slow earnings and sales growth, but they make a good short term place to park money while the leaders correct. Again, that rotation is good for the market as it shows money is not ready to leave and is still seeking opportunity.

Problems arise when the Dow and other non-growth stocks take the prolonged lead, meaning that NASDAQ lags for a long period. In the market's past history this has led to declines. In 1986 DJ30 outperformed the market and that folded into 1987 that ultimately led to Black Monday. That is something to keep in mind, but if the leaders on NASDAQ and the smaller cap indexes (e.g., TSCO, NFLX, SINA, MXIM) form good bases over the next several weeks and then move up and breakout, you cannot ask for better market action.

Market Sentiment

VIX: 16.42; +0.26
VXN: 24.89; +0.36
VXO: 16.05; -0.20

Put/Call Ratio (CBOE): 0.8; +0.15. Jumped rather sharply on a basically flat session. Still, it was expiration so there were positions on both sides of the market being adjusted.

NASDAQ

Gapped higher, sold to the 18 day MVA but then managed to cut the losses as volume surged. Still made that higher low.

Stats: -5.16 points (-0.26%) to close at 1951.02
Volume: 1.888B (+9.51%). Strongest volume of the week, coming in above average but still well off of the highs for the month. Not really distribution as it was expiration Friday and NASDAQ managed to cut two-thirds of its losses on the session by the close.

Up Volume: 845M (-587M)
Down Volume: 993M (+719M)

A/D and Hi/Lo: Decliners led 1.13 to 1
Previous Session: Advancers led 2.11 to 1

New Highs: 171 (+40)
New Lows: 11 (-6)

The Chart: http://www.investmenthouse.com/cd/^ixq.html

The past two weeks saw NASDAQ make a lower high but then a higher low right on its heels. The Thursday surge gave NASDAQ a leg up on that lower high from the previous week. That action continues the uptrend, but as noted earlier in the week, the rate of ascent has slowed as NASDAQ has basically moved laterally for 2 months. The primary uptrend has broken and NASDAQ made the most serious test of the uptrend since it started in March. It could provide a rise into Christmas, but it is already showing the signs of correcting or at least consolidating as many leaders have fallen and are starting new bases. It needs the correction, and we would just prefer it to take it here in a mild form while the large caps outperform, setting up a good point to rally in the first quarter of 2004.

S&P 500/NYSE

Took a day off Friday, showing a doji on continued strong trade.

Stats: -0.52 points (-0.05%) to close at 1088.66
NYSE Volume: 1.59B (+1.96%). Another strong, above average volume session on the heels of the big gain Thursday on solid trade as well. Best volume in two months as SP500 surges on the back of the cyclical and energy stocks. A bit of churn Thursday, but that was mostly due to expiration.

Up Volume: 798M (-530M)
Down Volume: 756M (+547M)

A/D and Hi/Lo: Advancers led 1.07 to 1
Previous Session: Advancers led 2.95 to 1

New Highs: 369 (-83)
New Lows: 9 (+2)

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

After a lateral move for most of December, SP500 broke higher this week, surging Thursday on volume. Still has room to the upside though there is some resistance at 1100 before the 1150 to 1175 range that marks the early 2002 double top where the real overhead supply comes in and will pressure the index. Indeed it will most likely feel the pressure long before it gets there, i.e., near 1100. Right now there is not much to stall it out as it heads toward Christmas and money managers are reluctant to take money out of the market.

DJ30

Stats: +30.14 points (+0.29%) to close at 10278.22
Volume: 279 million versus 218 million

Still working higher in a 650 point move off of the 50 day MVA (9867). It has now reached the first headwinds of resistance at 10,259 (January 2002 high) and May 2002 (10,353), both precursors to the 10,600 March 2002 peak. There is major overhead supply at 10,500, the bottom of the range running from Q2 1999 to Q3 2001 before the big meltdown really started. It will need a pullback to test before too long as it and its stocks are getting extended. That would set up the run into that resistance at 10,500 to 10,600.

THIS WEEK

Two full sessions this week, Monday and Tuesday, with half days Wednesday and Friday. After the stronger expiration week volume, trade will dry up. As we have seen in the past, lighter volume allows a few buyers or sellers to move the market. As money has moved around the market and not out of stocks overall, we anticipate that it won't be leaving the market this week either. That does not mean a continued rise is necessarily in the cards; as noted, DJ30 is extended and is due a pullback. We do not, however, expect it to sell of hard.

NASDAQ is set to muddle through, but with many of the leading stocks moving through bases and still correcting into new bases, a strong gain is not likely. SOX remains important as it struggles at the 50 day MVA and many semiconductors have rebounded from the early week selling but are still below potential resistance in the form of broken support. These stocks need to continue and form bases as well, and there is some downside with these, though it is not the downside as seen in the long downtrend. They will fall and then start to move laterally if they are going to base. With chip sales increasing and business capital spending growing solidly, we do not anticipate that they will melt down, just sell down some more and then start basing laterally.

We are not going to chase extended cyclical stocks but will look for opportunity from some downside plays that are set up nicely as well as some smaller cyclical plays that are set up well and some of the smaller techs and even chips that are set up to move higher as the market continues its rise this week

Support and Resistance

NASDAQ: Closed at 1951.02
Resistance: Price resistance in the 1950 range has still not been totally broken. The March/August up trendline (1981). November high (1992), December high (2000). The January 2002 double top (2044 to 2099).
Support: The 18 day MVA (1938). The 50 day MVA (1920). 1875 to 1880 is the bottom of the November range.

S&P 500: Closed at 1088.66
Resistance: 1100 represents some early 2001 lows. Minor resistance at 1115. 1150 to 1175, the early 2002 double top.
Support: The December to June upper channel line at 1084. 1080 from February 2002 lows. November high (1061.40-1064). The 10 day MVA and the 18 day MVA (1075, 1069).

Dow: Closed at 10,278.22
Resistance: 10,353 from May 2002 high. 10,600 (March 2002 peak).
Support: 10,259 (January 2002 high). The 10 and 18 day MVA (10,093 and 10,004). The November high (9903). The October high (9850). The exponential 50 day MVA (9827).

Economic Calendar

12-23-03
Personal Income, November (8:30): 0.3% expected, 0.4% October
Personal Spending, November (8:30): 0.8% expected, 0.0% October
Q3 GDP, final revision (8:30): 8.2% expected, 8.2% prior.
Michigan sentiment revised, December (9:45): 91.0 expected, 89.6 prior.

12-24-03
Durable goods orders, November (8:30): 0.6% expected, 3.3% October.
Intial jobless claims (8:30): 355K expected, 353K prior.
New home sales, November (10:00): 1.11M expected, 1.105M October.

SUBSCRIBER QUESTIONS

Q: In your recommended trades, you say to open a position when a stock hits a specific price and volume. If it hits the price but not the volume do you still go ahead and open a position or not?

It depends upon a few factors--at what time of the day the stock hits its buy point, what the market is doing when it does, how the stock is behaving intraday, and just what the volume action is. We typically don't like to grab any positions in the first half hour or so of trading because this is when the market makers are trying to determine the price of a stock and its options. Until that is done it is prudent to wait to avoid any more risk than necessary (entering a position right off the bat just to have it come back on you). Even if volume buy points are met at that time, unless it looks like a solid breakout or there is some especially good news, we will tend to wait and let the move test before getting in. If that happens within the first half hour, the stock shouldn't get too far ahead that we can't get in before it becomes over-extended.

The second factor to consider is the market trend. Since most stocks will follow what the market does, if that's positive, then we might enter the play with partial positions (anywhere from one-third to one-half of what we plan to put into a position). That gets us in but provides a buffer if things don't go well. On the other hand if volume continues to rise along with a positive market, and then hits our target volume we can move in and complete the position by picking up the remaining shares/options. If the market is not performing well we usually tend to avoid taking even partial positions if the buy point but not volume in any significant amount is reached. That tends to be riskier. If the buy point and volume target is reached against the backdrop of a negative market we may decide to watch unless the move seems particularly strong, because we have seen stocks take off in that scenario just to pull off their highs and close nearer the lows. That can depend upon how the stock's sector is/has recently been performing. If the market is sluggish or struggling of late and we see a stock gap higher, we will definitely wait and see if the move can hold up.

Third, observe what the intraday trend for volume is. Is it consistently increasing, and how quickly? If we see a stock jump up over the buy point on a breakout move early, we look to see if the volume looks 'on track to make its target. Sometimes that is an easy call; many times when a stock makes a breakout, volume will shoot up early and be running near the target. Other times it is a stealth move with volume slowly accumulating throughout the session. Then in the last hour you realize the volume is there. We like to see a big surge that takes it 30% of the way there. So, we either look at time and sales or talk to our broker to see if there are a lot of block trades. Big breakouts from solid patterns are usually driven by institutions, and if we see a lot of 10,000 share plus trades, we have a good idea the big boys are buying and we follow them. If we see 5,000 share trades, even though they are not block trades, on a $50 stock that means someone is putting up $250,000; that is big money making a big call. If we see this kind of action we are usually buyers.

Finally, how is the stock price acting in relation to the volume? Does the stock shoot higher but then spend the rest of the session giving back the gains? Early volume may be strong, but if it starts the inevitable test of the first move and does not every find support and start a rebound, we will often let it go and wait for it to set back up.

Thus, outside of the first half-hour of trading, and if the market is positive, we certainly can consider entering with partial positions before the volume target is matched. Just look for a good move with volume steadily increasing for a stock in a well-performing sector.

End part 2 of 3

us stock market
trend trading stock