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us stock market, trend trading stock
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3/13/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts issued Friday: None issued
Buy alerts issued: MICU
Trailing stops issued: None issued
Stop alerts issued: TUTR
MARKET SUMMARY
Stocks surge higher but fail to attract real buying volume.
Friday was relief. Relief from a week of high volume stock selling. SP500 and DJ30 tanked on the week, crashing out of their flat consolidations as investors dumped large cap stocks. They also dumped techs and small caps as well, so it was not an isolated event. The large cap tumble was, however, somewhat spectacular.
There was also relief that the economic news was not that bad. Fears were running higher that the Michigan sentiment report would surprise to the downside. It was not, the trade gap was less than expected, and business inventories rose once again. The news did not spur the rally, just avoided derailing it.
Stocks started higher, fought off some early volatility, fought off a modest afternoon selling attempt, and spurted home to close at session highs. Amazing breadth. Just as all sectors were sold in the distribution, all sectors rose Friday. The index price gains were impressive. NASDAQ gained over 2% as DELL, KLAC, CSCO and other 'old NASDAQ' large caps led the charge. There were very, very few breakouts from solid patterns, however. After a week of dumping, the predominant action was a recovery bounce off the floor as many stocks have some wounds to lick after the recent lashing.
Heavy, broad selling through support, a strong price surge rebound, few breakouts, and much weaker trade. These are all characteristics of a meteoric relief bounce that shoots all of its ammunition up in a blaze of glory. The lower volume is the tip off. The sellers stepped aside after getting their licks in, and bargain hunters (and some short covering) moved in. The lower volume coupled with the super price gains shows the sellers left and allowed the fewer buyers to bid prices higher and higher. Unless more buyers come in and decide to buy into the stocks after such a ferocious bounce on low trade, the move runs out of gas as resistance and fails. So far all it is showing is a rebound given the significantly lower trade levels. It could be the start of a bottom, but at this point it has to develop quite a bit more.
THE ECONOMY
Michigan March preliminary sentiment reading falls less than expected.
The preliminary reading for March came in at 94.1, down from 94.4 in February and the 95.0 expected. Once again the Michigan sentiment poll is a bit out of line with the other sentiment polls. The prior two months the preliminary Michigan sentiment numbers showed a tanking confidence level while others showed it was holding up. The final revisions changed that significantly. The past two weeks the other polls have shown weakening. Now Michigan comes in better than expected. Is it leading the trend or is it just suffering through winter in the great north.
Both current conditions and expectations fell a couple of points. The current is the stronger, a change from six to nine months back when expectations were leading. They are still at levels well above where consumers would start to pull back. More important is the high price of gasoline; that will have more impact on the consumer simply because more disposable income is used to buy fuel.
Even though it was lower than expected, the whisper on the street was fearing a worse number given the flagging IBD and WSJ polls. When it came in respectably the market was encouraged. It may still be out of step with the other polls, but on Friday it was the right medicine.
Business inventories inch higher.
Wholesale inventories earlier in the week showed a modest rise, and business inventories did the same, but much less than expected. 0.1% was well below the 0.4% expected and the 0.3% from December. Just as jobs are expected to expand, inventories are expected to expand as well. They have increased for 5 consecutive months, but still lag sales. Indeed, the stock to sales ratio was 1.33:1, i.e., it would take 40 days at the current sales rate to deplete inventories. As with the wholesale inventory numbers, that is very thin. It would not take much supply disruption to cause consumer problems. Businesses continue to produce a bit more product, but there is no rush to rebuild as they prefer to keep overhead low.
THE MARKET
The bounce we were looking for showed up with some fury Friday. Stocks were racing higher but there were not loads of breakouts or solid rebounds off support on strong trade. The key element in the rebound to show it was more than relief from the prior selling was not there. The fact that there were few stocks making a breakout move is indicative of the state of the market. Stocks have been roughed up and still need some time to recover and finish off their bases.
As noted Thursday night, SOX indicated the move up was coming as it held support Wednesday and threw off a doji Thursday, again on that support at 475. This is the neckline in something of a head and shoulders pattern that started in November. It made a double top then, rallied to a higher peak in January, then formed a lower peak in February that rolled over into the recent selling. 475 is the key support level for this index. Obviously it needs to hold here and form the rest of its base.
SOX chart: http://www.investmenthouse.com/ci/^sox.html
This bounce may take a few days to dissipate even if volume stays low. A rally back up to the support just broken, another test lower, then we see if the bottom sets in and the indexes start to move more or less laterally and complete their bases. NASDAQ and SP500 may even fall below the Thursday low before they are ready to do that. Again, we view how SOX behaves as the key to the other indexes; it rallied ahead of them and it sold ahead as well. Now it is trying to hold an important support level, and that helped spark the Friday move.
As we discussed a month back, this basing process could last 3 months or more. It still needs to test this low and show it holds, but we have a feeling that after the Thursday selling we have seen the bottom of this base. There will be another scare lower before its over, but that will be the next test lower where NASDAQ and SP500 undercut the Thursday low. Then stocks turn higher, complete the base, and start to break higher. Before it makes its move we will see the stronger stocks completing their bases and making their breakout moves.
Market Sentiment
VIX: 18.3; -2.37
VXN: 25.3; -1.28
VXO: 18.72; -2.99
Put/Call Ratio (CBOE): 1.05; -0.15. Second close over 1.0 on the selling. Not only the second but the second consecutive session and it occurred as the market rebounded. There was some covering of earlier puts adding to this total, but when you consider how strong the move higher was and the number of calls involved, this reading was still a good indication of high levels of downside speculation whether new positions being taken or ones recently taken being unwound.
NASDAQ
Gapped higher and rallied to the close. Impressive point gain, pathetic volume.
Stats: +40.84 points (+2.1%) to close at 1984.73
Volume: 1.709B (-24.04%). Impressive drop off in volume. The sellers stepped aside and the buyers moved in, but their strength was much less than the prior sellers. The big point gains were due to lighter trade allowing and unopposed buyers to bid stocks higher and higher.
Up Volume: 1.401B (+842M)
Down Volume: 781M (-811M)
A/D and Hi/Lo: Advancers led 3.06 to 1. Impressive. Upside breadth still remains very strong when the market rallies.
Previous Session: Decliners led 2.6 to 1
New Highs: 62 (+9)
New Lows: 10 (-15)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Interim support at 1950 held and NASDAQ made its bounce. It is in between support and resistance (1990 - 2000) now, and we are looking for it to continue the bounce up toward 2000, perhaps even to 2015 to 2025 (exponential 50 day MVA at 2027) on this move before it runs out of steam and makes the next test to set the bottom. NASDAQ has made three equal legs lower on this run, and that is often all it takes to start a meaningful rebound. Meaningful pullbacks, however, often have two deeper sell offs to drive up the fear. We will have to see how it performs volume-wise on the way back up on this bounce. Again, many tech stocks need extra time to complete their bases.
S&P 500/NYSE
Sharp bounce off that old May 2002 top at 1106, but volume failed to move here as well.
Stats: +13.79 points (+1.25%) to close at 1120.57
NYSE Volume: 1.391B (-26.24%). After that huge volume sell off Thursday volume would most likely have been lower in any event, but it did not even scratch average on the rebound whereas volume was above average on three of the four selling sessions.
Up Volume: 1.2B (+946M)
Down Volume: 877M (-735M)
A/D and Hi/Lo: Advancers led 2.78 to 1. Small caps and large caps joined together in harmony, rallying across the board. Breadth was as strong on the upside as the downside.
Previous Session: Decliners led 2.69 to 1
New Highs: 78 (+5)
New Lows: 18 (+1)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Held that May 2002 top at 1106 Thursday, pausing in mid-plunge to hold that level. Sometimes people are baffled at why a stock or index holds at some point that looks like a level it plucked out of thin air. Look back to old tops and trendlines and you get a feel for where an index has held and how many times. Tops are often better than bottoms, but that is not always true. Trendlines, even old ones, are important. SP500 has 1125 and then the exponential 50 day MVA (1130) as a one-two punch. Has an outside shot at the simple 50 day MVA (1137) on a bounce, but we don't see it getting much higher than that. Unlike NASDAQ and SOX, SP500 has tumbled from its rather flat triangle and does not have the nice slope down to support. More of a double bottom scenario if indeed NASDAQ and SOX are ready to make their bottoms.
DJ30
After the spectacular collapse the blue chips were bouncing as well Friday. It made it back to some resistance at 10,250 on lower though still above average volume. Volume was much lower than the selling volume earlier in the week, however. Similar to SP500, DJ30 fell straight down from a lateral base. It does not have a nice cup forming. It too may form a double bottom pattern, bouncing up to 10,400ish on this move before falling back.
Stats: +111.7 points (+1.1%) to close at 10240.08
Volume: 223 million versus 292 million Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
More meaningful economic data this week with some regional manufacturing reports, industrial production, and the leading economic indicators. On top of that the FOMC holds a one day meeting Tuesday. There won't be as much speculation as to what this meeting holds. No rate change and no change in the statement. Greenspan has talked of improving jobs coming, but the Fed is not going to even consider raising rates until the monthly non-farm payrolls is blowing it out for several months straight.
There is a lot of talk about how job creation has to pick up the pace, and it does for a number of reasons, the most important of which is to get everyone who can work a good job a good job to work. From the market's perspective, however, modest but steady job growth, a surging economy, and low interest rates are close to nirvana.
Now if the incentives that have started the economic recovery are removed, if the 'loopholes' that allow US corporations to compete abroad are removed, and taxes are increased on the segment that creates the jobs, then the market won't have as favorable a climate. Greenspan even says don't raise taxes, but the Senate just passed a budget that failed to make the tax cuts permanent. On the good side, the Senate says the tax cuts must be paid for with spending cuts; that is great IF they will realize what is more important and cut spending. If they don't, it will take 60 votes to make the tax cuts permanent. The House won't buy the latter part, but they would go for budget cuts more readily than the Senate.
The terror attacks are being linked to Al Qaida, and that has some saying the market will sell this week. We are not buying that. We expect the market to try and continue the Friday bounce early this week. You don't want to see it turn immediately over after one session, but move higher up to support and then linger there, trying to hold. Then it turns over in a week or so and makes another test lower. In sum, the scenario is a further move higher to resistance or a slight move through resistance, an attempt to hold at those levels, then a turn lower that makes the next deeper test to set the bottom of the consolidation.
That leaves us looking at some rebounds from the selling that look ready to die below resistance. It may take a few sessions for them to develop. Every investor sees what is happening and gets excited about what is going to come and you tend to jump the gun on the first move. Typically it takes time to set up, even on these downside moves that are failing at resistance. That is why we often go into them piecemeal; we see the rollover starting and take a partial position (half or so). If it tanks from there we have a nice drop to make us money. More often than not it lingers a bit, tries to pop through, then rolls over. We are patient, and when we see that second move we add to the position.
We also are scoping out those stocks that held up well during the selling, either forming handles or testing an earlier breakout. Those can give us nice runs in a further rally even if that rally turns south again. We need to be selective with new positions, but sticking with those that held up well in the selling we eliminate a lot of the risk. It is still time to be patient as well with these plays. Patience overall is needed in this market as it works through its base.
Support and Resistance
NASDAQ: Closed at 1984.73
Resistance: 1990 to 2000, the top of the late 2003 base. The 10 day MVA (2000). The exponential 50 day MVA (2028). The simple 50 day MVA at 2060. The March/December up trendline (2110).
Support: 1950 provides some support but has been cracked. Mixed tops and bottoms at 1900.
S&P 500: Closed at 1120.57
Resistance: 1125 is the first resistance on a bounce. The exponential 50 day MVA (1130). The simple 50 day MVA (1138). The 18 day MVA (1138). The January high (1155). Next is 1159 (February highs) and 1160 to 1175 the highs in that double top that spanned late 2001, early 2002.
Support: 1106 is a May 2002 top and represents some early 2001 lows. 1075 from a December consolidation.
Dow: Closed at 10,240.08
Resistance: September/November up trendline (10,400). The exponential 50 day MVA (10,454). The 18 day MVA (10,477). 10,710 is the March 2003 up trendline. The January high (10,705).
Support: 10,000 to 9900-9850.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
3-15-04
New York PMI, March (8:30): 38.9 expected, 42.05 February.
Industrial production, February (9:15): 0.4% expected, 0.8% January.
Capacity utilization, February (9:15): 76.4% expected, 76.2% January.
3-16-04
Housing starts, February (8:30): 1.930M expected, 1.903M January.
Permits, February (8:30): 1.903M expected, 1.920M January.
FOMC meeting: 2:15 results.
3-17-04
CPI, February (8:30): 0.3% expected, 0.5% January
Core CPI: 0.1% expected, 0.2% January.
3-18-04
Initial jobless claims (8:30): 343K expected, 341K prior.
Leading economic indicators, February (10:00): 0.1% expected, 0.2% January.
Philly Fed, March (12:00): 29.5 expected, 31.4 February.
SUBSCRIBER QUESTIONS
Q: What do the following mean? SOX, VIX, VXN, VXO
A: SOX ticker for the semiconductor (chip) index
All three of the following measure market volatility:
VIX The VIX, or volatility index, is a measure of the range of trading on S&P 500 options, a key measure of market expectations of near-term volatility conveyed by stock index option prices. It is a secondary indicator in that when volatility climbs, stocks tend to bottom and reverse. As an indicator, we look to see if the VIX is working in an inverse relationship to the direction of the averages. In other words, when the VIX spikes up higher (in the upper 20's to low 30's), we want to see the averages beaten back. When the VIX is in the low 20's, we want to see the markets on a run up. If this pattern starts repeating itself, the VIX can be a reliable indicator.
VXN measure of the volatility of the Nasdaq index
VXO same as the VIX except for OEX options (S&P 100)
THE PLAYS:
Thursday night play results:
PD: Solid bounce but could use a bit more trade.
PTNR: Good volume again, ready for the break higher.
TLCV: Volume was not there as it edged higher Friday.
TMTA: Volume dropped off here as well but still very solid.
New Plays:
Upside:
Play Date: 03/13/2004
FOSL (Fossil--$33.50; +1.43; optionable): Watches, accessories, etc. Splits 3:2 on 4-9-04.
http://biz.yahoo.com/p/f/fosl.html
STATUS: Breakout test. FOSL exploded out of a 6 month flat base in late February, rallying to 35 in a tremendous surge. It has spent the past two weeks coming back to test the move, holding at near support on the 18 day MVA (32.41). Volume was low on the pullback until the end of the week when it hit support and rebounded. Excellent money flow leading higher and a relative strength breakout.
Volume: 299.062K Avg Volume: 228.468K
BUY POINT: $33.82 Volume=310K Target=$39 Stop=$32.35
POSITION: FUA FF - June $30c (83 delta) &/or Stock
http://www.investmenthouse.com/ci/fosl.html
Play Date: 03/13/2004
OMNI (Omni Energy Svc.--$6.99; +0.49; no options): Oil and gas equipment
http://biz.yahoo.com/p/o/omni.html
STATUS: Cup w/handle. After a long 3 year base, OMNI surged in late 2003 to 7. After clearing that long base it has formed a nice 11 week base to digest those gains. It has formed over the 50 day MVA (5.76) as the base formed, a very good indication of support. Accumulation is excellent at 5 to 1. After drying up during the bottom of the base, volume has returned as OMNI has moved up the right side of the cup, then has tapered as it tested back to form the handle. Just the action you want to see. Excellent money flow is already moving higher and relative strength is ready for the breakout. Nice looking pattern.
Volume: 427.824K Avg Volume: 522.403K
BUY POINT: $7.22 Volume=784K Target=$8.65 Stop=$6.71
POSITION: - Stock (no option chain)
http://www.investmenthouse.com/ci/omni.html
End part 1 of 2
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us stock market
trend trading stock
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