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day trading, Breakout test
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4/05/04 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Monday: None issued
Buy alerts issued: TELK; AZR; ANSR
Trailing stops issued: None issued
Stop alerts issued: MOLX; NPRO; TECD; DJX
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Sluggish session delivers strong last hour kicker.
- ISM Services hits another record high.
- Market continues gains ahead of earnings season
Soft open, strong close as market continues improved action.
Volume may have been lower, but after the big jump Friday it was likely to be low on a holiday shortened week. Indeed, until the end of last week this volume would have been considered pretty solid given the sleepy trading ongoing before this last jump higher. That did not stop stocks from advancing. A somewhat choppy morning turned positive but then moved laterally for the rest of the session. In the last hour volume started ticking higher and then stocks came alive in the last hour in a ballistic move. Volume moved in, but it was hardly enough to close the indexes on stronger trade. Still we once again see some transition in the market from hard selling to start March (distribution) to accumulation (up sessions on rising volume) and bullish intraday action (open soft, close strong).
That will be the key moving forward. This rally has already gone further than we anticipated as it has been able to ride the positive currents in the market. These include few earnings warnings, positive expectations revisions, improved price/volume action, and early leaders that have stepped up to the plate to lead stocks higher. This is helping other stocks build their bases; as noted last week, many stocks have turned off the bottoms of their bases to start forming the right side. If the indexes pause at the prior highs (SP500 is just 8 points from a new high) and fade back, that gives those stocks time to form their handles and shake out the last sellers. That sets the stage for the breakout when the final sellers get frustrated when their stocks and the indexes stall at the prior highs. In order to avoid another harsh pullback, these sellers go ahead and bail out. When they are gone the last selling pressure is removed. Stocks are already in strong hands, and in order to buy them from those investors the price has to go up. That is how you get breakouts, and the market is doing a very nice job of setting up this scenario. Basically it is our original scenario, but it has been moved up in terms of the price: stocks have rallied more and pulled back less, setting up the base at a higher level.
THE ECONOMY
Services sector taking off.
We have discussed the past month how many commentators were saying the economy had peaked, the tax cuts had taken their shot, and growth was going to slow. It was easy to find evidence to support that notion with durable goods orders backing down for a couple of months, slow job growth, flagging sentiment. As we often discuss, however, trends have their ups and downs. Economic growth has been strong without question. It has eased some after the start of the year as companies invested heartily in Q4 thanks to some increased expensing provisions in the tax cuts. That naturally slowed some in Q1 as the spending could not maintain its pace and because companies tend to make expenditures as late as possible.
Last week several March reports hit the wire, and they were solid. ISM manufacturing beat expectations. Consumer sentiment beat expectations. Job creation beat expectations. Monday ISM services showed its strongest gain since the report's inception, posting 65.8 versus expectations at 61.0. It was also the twelfth consecutive expansionary reading. Employment rose to 53.9 from 52.7. New orders rose to 62.8 from 60.3. Very strong on the heels of a very strong trend in the service sector.
Gold falling, dollar rising.
We noted in the weekend report that the dollar jumped 36 basis points against the euro as soon as the employment data hit. That strength continued Monday as prospects, or at least the appearance, of a Fed rate hike turned sooner than later. The dollar increases because as interest rates rise the US dollar becomes more attractive for those seeking interest returns as opposed to capital gains. That makes it attractive to foreign investors as a store of value along with the strength inherent in the US.
At the same time gold is falling. Gold and other commodities had been rising. With the Asian and US recovery, it is easy to see why commodities are rising. Gold, however, has been cited as rising in anticipation of inflation. With jobs jumping and interest rates running higher as a result, gold has turned lower. Maybe gold is falling because rising interest rates are interpreted as resulting in less risk of inflation the same as if the Fed raised rates to avoid overheating. Maybe. Or, maybe gold was rising in part because of a belief the US economic recovery was going to fade and it was being used in another traditional role, i.e., a store of value. It is probably a part of both, but with the suddenly stronger economic data coinciding with the gold reversal, it is clear the most recent drop has a lot to do with economic strength. Thus once again we don't read too much into the gold rise as being a harbinger of inflation that many say it is.
Another look at the Fed.
Will the Fed have to act soon? The futures contract has a quarter point hike fully priced into the August contract, the earliest meeting where the Fed has enough employment reports following the March report to make a decision on rates. That shows at least correct thinking about what the Fed has said: it wants to see a sustained increase in job growth before it pulls the trigger. The odds of it doing so that close to the election, however, are narrow, and more than one former FOMC member says it is not going to happen then.
Indeed, with the 10 year treasury yield rising to 4.22%, the market is taking care of the Fed's dilemma. That is exactly how the situation should work. The Fed crashed the economy by running ahead of real rates and unnaturally siphoning off money supply in 1999 and 2000. That killed the economy; of course the market crashed before the economy because it is the best economic indicator there is. All the way down in the contraction the Fed was behind the real rate of interest. We wrote again and again how there was no stimulus provided by the rate cuts because the Fed was behind the curve, keeping rates higher than the market would set them. Now it is doing what it should be doing: following the lead of the market, not leading the market. It should bump interest rates higher behind real interest rates, thus allowing the economy the money it needs to expand. By bumping the rate higher, it gives confidence to foreign and domestic investors it is not just asleep and then one day wakes up and raises rates in a series of big moves that, once again, suffocates the expansion. A gradual rise in rates with plenty of rest between hikes would give the markets a real boost of confidence, but again, the market is doing the work for the Fed right now.
We also need to remember that the Fed has been letting money supply fall the past 6 or more months. Contrary to popular opinion, it does not have the pedal to the floor on stimulus. Rates may still be at 1%, but if the money supply is smaller, low rates don't have the same impact. That is another reason the recovery had such a hard time getting off the ground: you have to have money available in order to take advantage of low rates. Money supply was still low, banks were still on restrictive lending status, and thus there was no rush to get to money. Right now the Fed is holding rates lower, at least from the short term end, but with the tighter money supply longer term rates are rising on their own. Thus the picture is not the inflationary one that many are painting.
THE MARKET
With Alcoa kicking off earnings this week, stocks continued their pre-earnings advance that started two weeks back with NASDAQ testing and holding its 200 day MVA. Just as it was ready to roll back down to test, the rally received a major B-12 shot with the jobs report Friday, gapping higher on strong trade. It continued the momentum Monday, adding a strong price gain that is mostly attributable to the last hour melt up.
Volume backed off so this was not another strong session along the lines of Friday. Bullish intraday action was the hallmark as the market held its ground the entire session then rallied sharply late. In addition to low volume, breadth was anemic once more, particularly on NYSE as interest sensitive stocks continued their underperformance. Small caps lagged all session, and that also put a drag on the A/D line though they hit another all-time high on the session in the last hour rally.
Thus even with SP500 7 points from a new closing high, the session was not as strong. From our view it is going to be hard for the indexes to all plow to new highs. The transition from hard selling has been brief and not complete. There have been a couple of strong upside sessions, but it is hardly sustained at this point. What is happening is that the model is being shifted higher. We were looking for a test starting toward the end of last week, but the jobs report broke that up quite easily. Now we could see NASDAQ continue up toward 2100 and then form a handle or that right shoulder to a reversed head and shoulders pattern, and then deliver the breakout. It still needs that pullback to let the leaders in this move come back to test their breakouts and also let the next wave of stocks that are just now moving up to form the right side of their bases test back and shakeout the last sellers (the handle). That will set up a strong position to breakout as long as the price/volume action continues its solid improvement.
Market Sentiment
We heard a trader talking about the low VIX and how that was showing complacency in the market. Now the VIX surged from 14.40 to an intraday high of 22.67 in March and has rolled back over in this market rally. Short term that could be providing some signal that the bounce is running out of some steam near the old highs. As discussed above, that is a logical place for it to take a breather, pullback on some profit taking, and set up a breakout. This is something of a confirming indicator to that action, but we note that it is always secondary, and the VIX has been low for months and months, so we don't want to read too much into it. It does, however, correspond with what we have been discussing regarding the rebound then pullback to test.
VIX: 14.97; -0.67
VXN: 21.11; -0.24
VXO: 13.88; -1.68
Put/Call Ratio (CBOE): 0.67; -0.01
NASDAQ
Bullish intraday action, closing on the high in a late surge. Volume backed off, so it was a pure momentum run following the Friday gap higher.
Stats: +21.95 points (+1.07%) to close at 2079.12
Volume: 1.76B (-20.51%). Volume fell well off base, lower than late last week, higher than the start of the week. Thus not the lowest volume we have seen but definitely not showing continued accumulation. Volume would not have had to top Friday, but a respectable 2B would have gone a long way.
Up Volume: 1.309B (-570M)
Down Volume: 437M (+156M)
A/D and Hi/Lo: Advancers led 1.63 to 1. Very modest breadth given the gains.
Previous Session: Advancers led 2.26 to 1
New Highs: 274 (+20). A steady increase in new highs but nowhere near the levels from last summer.
New Lows: 17 (+8)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Two weeks of gains up off the 200 day MVA (1903) finds NASDAQ near resistance at 2089 up to 2110. While there was great accumulation Friday, it still has not shown a complete transition to solid price/volume action. It is not selling on stronger volume, but the accumulation has still been spotty. We continue to anticipate a test in the near future, but as discussed above, the framework for that test has shifted higher as NASDAQ has moved higher. A test of the near resistance may start that lateral and lower action, either forming a handle that drops near the 2050ish level or a right shoulder down to the exponential 50 day MVA (2004.71).
S&P 500/NYSE
Less than 8 points from a new 52 week high as SP500 continues with a momentum move as well after two solid accumulation sessions.
Stats: +8.76 points (+0.77%) to close at 1150.57
NYSE Volume: 1.397B (-13.21%). Volume fell below average and to its lowest level in four sessions. Still ahead of much of the late March volume, however. Price/volume action has definitely turned for the better on NYSE, something that was lagging NASDAQ.
Up Volume: 894M (-211M)
Down Volume: 485M (-8M)
A/D and Hi/Lo: Decliners led 1.19 to 1. Breadth remains very weak on NYSE, hurt by many interest sensitive stocks that are suffering since the jobs report and the jump in bond yields.
Previous Session: Advancers led 1.11 to 1
New Highs: 259 (-84). New highs fell on a gain. Coupled with the weak A/D line once again, this move looks to be running out of gas.
New Lows: 39 (+11)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 has recovered almost all of its losses, never giving much more than a 5% pullback during March. That was not the best action and makes a breakout problematical. While NASDAQ is in pretty decent shape, SP500 has not blown off enough froth. At a minimum we are looking for a pullback to the simple 50 day MVA (1133), and 1125 would be even better (exponential 50 day MVA at 1124).
DJ30
Volume dropped off as well for the blue chips as they continued the breakout from that short double bottom with handle that formed in March. It too is zeroing in on its old high (10,738) after a modest pullback. The momentum could carry it further toward the lower channel line at 10,575 and then some price points at 10,675. There is a range of resistance, however, from 10,500 to 10,750 where DJ3 will find resistance if it cannot continue to get more volume. Price/volume action has not really made the transition on DJ30, but it is improving. After more of a momentum move we expect the index to reverse and come back to test the simple 50 day MVA (10,461) or even the exponential 50 day MVA (10,371).
Stats: +87.78 points (+0.84%) to close at 10558.37
Volume: 182 million shares versus 243 million Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
The economic data tones down after the ISM services report delivered a positive picture Monday. Now it will be . . . earnings. After the close there was some upbeat guidance from Kellogg and BSX, but there were also warnings from the likes of BRKT. Positive was rewarded, negative was punished and punished hard. With the market having rallied back up near its prior highs, there won't be much room for results that do not beat expectations.
Stocks have posted a nice rally ahead of earnings. Maybe they were anticipating jobs a bit, but they were also using the pullback to build in expectations about this earnings season. Earnings will have to be very good to push the indexes to new highs after such a run.
Earnings seasons have shown pretty typical action the past year. The first reports are met with roses and the market runs higher, then by mid-month it peaks and either starts selling off or gets choppy and then sells off. Last July and October that was the pattern even when stocks sold ahead of the earnings (though minor pullbacks in an overall uptrend to be sure). January stocks rallied into earnings and continued to rally to mid-month where they got choppy and then the market rolled over into the current correction. This time stocks have again run into the earnings news with even more vigor than in January. Obviously the correction in NASDAQ gave them the running room.
Thus we could see a further pop toward the old highs on NASDAQ, and that may even carry SP500 to a new high if earnings are as good as predicted. We see no reason to doubt that. Thus we get some more upside out of earnings but over the next 8 to 10 sessions the move peaks out and makes the test we are looking for. That test allows some of the earnings hype or rush to be take out. If earnings are solid and guidance remains solid (hiring plans will also be scrutinized), then the overall attitude of the market looks good. After that test the fluff will be out and then stocks can try a breakout. This will be an important time. Summer is approaching, and a pullback then breakout and run would set up the market in good shape to weather the summer doldrums.
Support and Resistance
NASDAQ: Closed at 2079.12
Resistance: 2089. 2112. 2154 is the January high.
Support: The simple 50 day MVA (2021) is possible. Then a jumble of support merges near 2000. The exponential 50 day MVA (2004). 2000, the top of the late 2003 base. The 10 and 18 day MVA (2008, 1996). Some prices from the recent March consolidation attempt (1943). Mixed tops and bottoms at 1900. The 200 day MVA (1903).
S&P 500: Closed at 1150.57
Resistance: 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: 1125, still a key level. The exponential 50 day MVA (1124). The 10 day MVA (1128). 1106 is a May 2002 top and represents some early 2001 lows. 1096 to 1100. 1075 to 1070 from the December consolidation.
Dow: Closed at 10,558.37
Resistance: September/November up trendline (10,575). 10,600. 10,747 is the February high.
Support: The simple 50 day MVA (10,461) is possible. The exponential 50 day MVA (10,371). The 18 day MVA (10,344). Then the 10 day MVA (10,364). 10,000 to 9900-9850. 9859-9855 is the next real support.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
4-05-04
ISM Services, March (10:00): 65.8 actual, 61.5 expected, 60.8 February.
4-7-04
Consumer credit, February (2:00): $7.7B expected, $14.3B January.
4-08-04
Initial jobless claims (8:30): 340K expected, 342K prior.
Wholesale inventories, February (10:00): 0.3% expected, 0.1% January.
End part 1 of 3
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day trading
Breakout test
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