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us stock market, understanding the stock market
Begin part 2 of 3
THIS WEEK
Monday is a market holiday. A market often shows its stripes ahead of a holiday weekend. If there is concern it will close off its highs or close negative as short term investors close out positions to limit exposure. If it rallies hard in the face of a long weekend, it is a sign of confidence to maintain positions and even add to them as the holiday approaches.
Friday was also an expiration Friday, and how a market closes on expiration is often taken back some the following session(s). The expiration magnifies the trend as positions opposite it are rolled over or closed. When the fuel from the expiration is over, the market tends to revert more to the norm and that means taking back some of the expiration induced action. That could also set up some pullbacks from the late week breakouts, choice buying opportunities.
What fuel is there from here? Little in the way of economic reports this week, but earnings will be kicking into high gear the next two weeks. We have discussed the past week how in an uptrend or recovery the first wave of solid earnings reports are met with buying, but then later reports fail to produce upside and the market even pulls back. This season started rough (e.g., INTC), but some other key names have come through big (IBM, GE, JNPR). That has sparked this new jump higher. Even if earnings continue to surpass expectations, however, that expectation will be built in quickly and the later results will most likely be met with some selling. That is the typical pattern, but we are quick to note that it is not a major selloff we are talking about. When the uptrend is solid the underpinnings for a continued move higher are there; the market needs to pullback to consolidate gains even as it moves higher.
NASDAQ started a good break higher after its first post-breakout consolidation. That opens the door for more upside as it continues its trend higher even as earnings barrage the market. That should help drive our current positions closer to their targets where we will continue to lock in gains in anticipation of the next pullback. We continue to also take partial gains and let the rest run higher; we have many positions where we have already taken some gain and are letting them work higher. After this new leg starts showing signs of peaking we can decide if we want to close out more (with options, for certain) or let them pullback and add to positions when they test support and start back up.
There are also many stocks still in excellent patterns that are or are ready to breakout. While we view a pullback coming in a couple of weeks to test the earnings run, many can still breakout and run well and give us a nice 'cushion' for a pullback where we can decide if we want to add to the positions.
Support and Resistance
NASDAQ: Closed at 2140.46
Resistance: First upper channel line at 2140. 2200 then 2300 represent tops from Q2 2001.
Support: 2115 acted as slight resistance as NASDAQ consolidated. The second peak in the December 2001/January 2002 double top (2100). The lower peak in the January 2002 double top (2044). The 10 day MVA and the 18 day MVA (2090, 2058). The March/August up trendline (2050).
S&P 500: Closed at 1139.83
Resistance: 1150 to 1175, the early 2002 double top.
Support: The 10 day MVA and the 18 day MVA (1122, 1113). 1106 is a May 2002 top. 1100 represents some early 2001 lows. The former upper channel line at 1089. The 50 day MVA (1085).
Dow: Closed at 10,600.51
Resistance: 10,580 (upper channel line) is still pulling on the index. 10,620 (March 2002 peak) starts the swath of overhead supply that runs up to 11,000.
Support: The 10 and 18 day MVA (10,507 and 10,431). 10,353 from May 2002 high. 10,285 the March 2003 up trendline. The exponential 50 day MVA (10,160).
Economic Calendar
1-21-04
Housing starts, December (8:30): 1.983M expected, 2.07M November
Building permits, December (8:30): 1.86M expected, 1.863M November
1-22-04
Initial jobless claims (8:30): 340K expected, 343K prior.
Leading economic indicators, December (10:00): 0.2% expected, 0.3% prior.
SUBSCRIBER QUESTIONS
Q: Thanks for the GREAT Alerts & Newsletter commentary. I am now much wiser and MUCH richer too. Keep up the great work. On many occasions, you include the comments "Doji may indicate a change in the pattern." Many times I have a hard time understanding whether you mean that the new direction will be up or down. The reason I am confused is that for example we are in a LONG play and the stock has come back (say 4%) to test the breakout and now a DOJI occurs on high volume. Now does that mean that the change in direction will be up or down?
A: Congratulations on your success. We strive to provide the best investment, trading, financial and economic data, but it is up to the investor to act and take advantage of the opportunity. Great job. Also, great question. When the market is in an overall uptrend, and particularly the stock we are playing, we like to let part of our position on stocks that are making a strong surge continue to run even after they've hit the initial target. Most stocks will follow the market, so if there is a strong uptrend we are more confident with that strategy. Once a stock makes the move we want and hits its target price, taking half of the position off the table and letting the rest run can make the most out of a strong move while already locking in some nice profit. We can then look for the next entry point for the stock if it remains strong and is proving to be in a longer term uptrend. That way we have protected some nice gain and are already ahead when a leader shows us it is ready for the next run. Why look elsewhere if it can make us more good money in a timely fashion (i.e., compared to other strong stocks it is a good place to have our money)?
We issue alerts on stocks that have reached target, and will note at that time if we are leaving part of the position, stock or options, to continue to work in the uptrend. We'll also let you know in the continuing watchlist. We really have to see how the stock is moving when it hits the buy point, e.g. the volume, whether it is a new breakout higher, etc. For your own decisions look at whether the move is peaking after a ballistic shot higher or if it hits the target after a consolidation and blasts higher on a new breakout. The former would indicate taking the position off the table if the stock could fall a long way to near support and give back much of the gain. In the latter we would let it run even more before taking some gain, but would look at taking a partial position when the run was slowing, letting the strong trend work for us.
Another consideration has to do with timing. If we are using options we always have to consider the time decay for options we have purchased. Can we let it drop again and make a test of the move and rally back without losing time value? If we are getting within 60 days of expiration we tend to close it out. If there is plenty of time and there looks to be plenty of upside ahead, we can take half the gain and let the rest work for us, but we still have to be careful not to let it fall too far back given the limited time we have on option positions.
THE PLAYS
Good movers Friday: AIRN; ATYT; AVX; CYBX; DTPI; ERES; MERQ; NOVA; NOVL; OHI; ONNN; ORBK; PEGA; PHTN; SSPX; STXN; SYMM; TKLC; TQNT; VNWK; ZMH
Plays from the Thursday night report:
ASIA: Edged back from the breakout on lower volume. Still solid.
FCS: Could not give the breakaway move.
PWAV: Starting the breakout move on some decent volume.
SSPX: Huge volume surge as the stock broke higher. It faded off the high but still a solid move.
New Plays:
Play Date: 01/17/2004
BRNC (Braun Consulting--$3.15; +0.16; no options): Sales, marketing, customer service, etc. business solutions
http://biz.yahoo.com/p/b/brnc.html
STATUS: Ascending triangle. BRNC broke sharply higher in early June and rallied up the 50 day MVA (2.74) to 3. After that solid move it turned into the current 9 week base holding above the 18 day MVA (2.94) and a constant top at 3.15. Volume has been surging the past two weeks with some big volume spikes. Accumulation is is excellent at 4 to 0 and money flow is surging ahead of price. A good move Friday toward a breakout, and we are looking for continued strong volume on the next move. Breakouts from these patterns can be explosive, and we want to be ready.
Volume: 156.634K Avg Volume: 58.936K
BUY POINT: $3.24 Volume=112K Target=$4.21 Stop=$2.97
POSITION: - Stock (no option chain)
http://www.investmenthouse.com/ci/brnc.html
Play Date: 01/17/2004
CTE (Cardiotech Intl.--$5.94; +0.39; no options): Drugs
http://biz.yahoo.com/p/c/cte.html
STATUS: Cup w/handle. CTE is making the breakout move from a short but very nice 7 week cup with handle base. The base has formed after a strong breakout from a 3.5 month flat base in early November, consolidating that strong move higher. It peaked at 6.50 and has formed this base. Accumulation is outstanding at 5 to 0 (five up price weeks on rising volume to 0 down price weeks on rising volume). Money flow is moving up ahead of the price, and the stock is starting to follow with a strong move Friday on very strong volume, the strongest in 6 weeks. Looks ready to rumble.
Volume: 306.4K Avg Volume: 131.773K
BUY POINT: $6.12 Volume=198K Target=$7.45 Stop=$5.69
POSITION: - Stock (no option chain)
http://www.investmenthouse.com/ci/cte.html
Play Date: 01/17/2004
FMTI (Forbes Medi-Tech--$3.12; +0.3; no options): Biotechnology
http://biz.yahoo.com/p/f/fmti.html
STATUS: Cup w/handle. Volume surged for FMTI as well Friday as it started the breakout move from a 14 week base sporting strong 5 to 2 accumulation. This stock really came to life in the summer and went up almost fourfold before slipping into the current and much needed base. Money flow is surging up ahead of price in a very orderly base. It made us money before and now we are looking for it to make us some solid cash once more.
Volume: 747.11K Avg Volume: 151.938K
BUY POINT: $3.22 Volume=228K Target=$4.05 Stop=$2.98
POSITION: - Stock (no option chain)
http://www.investmenthouse.com/ci/fmti.html
Play Date: 01/17/2004
IRM (Iron Mountain--$41.4; +0.1; optionable): Document storage. Forecast to announce a split on 2-27-04 in conjunction with earnings. This date has not been confirmed, but based upon our research this is the date for the release.
BACKGROUND: Last announced a 3 for 2 split on 12-6-01 at a stock price of $45.58. The annual shareholder meeting was on 5-22-03 at which time no additional shares were authorized, but company has sufficient shares for a 3 for 2 split.
http://biz.yahoo.com/p/i/irm.html
STATUS: Testing the breakout. IRM exploded out of an 8 month base to start the year, and is making a very nice test of that move, tapping toward the 18 day MVA (40.92) on very low, below average volume. The accumulation in base is a solid 8 to 4, setting up a good breakout and foundation for a good run. This first test of strong breakout from a solid base, an excellent time to move into a position. We want to see volume jump back up as it does.
Volume: 171.3K Avg Volume: 327.98K
BUY POINT: $42.22 Volume=492K Target=$50.72 Stop=$41.25
POSITION: IRM GH - July $40c (65 delta) &/or Stock
http://www.investmenthouse.com/ci/irm.html
Play Date: 01/17/2004
MKTY (Mechanical Technology--$6.46; +0.05; no options): Scientific & technical instruments
http://biz.yahoo.com/p/m/mkty.html
STATUS: Cup w/handle. We have been watching MKTY form up, impressed by the excellent 5 to 0 accumulation in the 10 week base. We felt it was going to form a handle, and it is starting to do that. Thursday it fell back rather sharply, but volume was much lower. Friday it showed a very tight doji over the 10 day MVA (6.26) as trade fell to average. A nice looking base that formed along the 50 day MVA (5.60); that along with the stellar accumulation shows institutional support. Money flow is excellent. Now we wait for the pullback to end and the stock to break higher on strong trade.
Volume: 103.742K Avg Volume: 110.744K
BUY POINT: $6.68 Volume=175K Target=$8.12 Stop=$6.21
POSITION: - Stock (no option chain)
http://www.investmenthouse.com/ci/mkty.html
Begin part 2 of 3
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us stock market
understanding the stock market
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