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us stock market, trade stock
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5/10/04 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Monday: None issued
Buy alerts issued: VSH
Trailing stop alerts: DAB
Stop alerts: Closed positions that broke support and could not recover as they will struggle even on a relief bounce. ARQL; ENDP; DVA; TEN
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/alertdly.htm
SUMMARY:
- Market gives the early downdraft, but no strong reversal.
- Market internals continue to hit extreme levels but not enough thus far.
- Getting ready for some kind of bounce.
- Subscriber Questions
Market delivers half of what was needed.
Futures were tanking pre-market and stocks followed suit on the open, gapping lower then rolling over even harder. SP500 sold down to the 200 day SMA and bounced, triggering a nice rebound led by NASDAQ and SOX as they rallied to session highs. Strong volume on the opening selling, a strong volume rebound off key support, strong downside A/D on the selling that backed off dramatically on the rebound, the sold out sectors (as measured by NYSE versus NASDAQ relative volumes) leading the charge back. Those are the attributes of a reversal session.
As noted in our afternoon alert, as long as they held up it was what the upside needed. That was not the case, at least not in a convincing sense. The strong surge was tested as expected, but the test when a bit too deep. Indeed, it went all the way to session lows on DJ30. Still, stocks held and started a late afternoon move. That move never really got off the ground, however, starting and stalling into the close. By the close the market saw the indexes managing to more or less hold near support, but without the big reversal move.
Maybe that will be enough with the semiconductors showing relative strength and some other big techs managing to close positive, all on strong volume. Certainly many of the sentiment indicators continued to show extreme readings, but sentiment indicators are not the last word in market moves. As with the price moves Monday, they necessarily leave you waiting to see if they are confirmed by really solid stock action. They are showing an oversold condition being built in, but they did not show a clear indication that the reversal had come as the market continues to suffer from interest rate hike fears and the outcome in Iraq.
Thus we closed out several positions that fell through support and were not recovering that support by the close. They may still rebound further, but after breaking that support, even on a relief bounce they will have a harder time bouncing. The best rebounds come from those stocks that never crack the support but bounce right off of it. Those are the strongest stocks on a market bounce, and we have been weeding out those that have been unable to hold their ground.
THE MARKET
Despite the tail kicking the past three weeks there were some positives to take away in looking toward a rebound. As noted, the indexes held on where they had to, managing to reverse early blow off and rally, though the rally did not take stocks through the close. Once again breadth was ugly, at one point -11:1 on NYSE and -6:1 on NASDAQ. Volume was sharply higher, something you want to see on a reversal session though it would mean more if the indexes had closed at their highs. NYSE volume again surpassed NASDAQ volume, the second straight session to do so after leading up to that the two sessions prior. That is an indication that the speculative growth stocks are finished selling and the other indexes are simply playing catch up, something they appear to have done.
That leads us to take another look at SOX, the Philadelphia semiconductor index. It has put five upside sessions back to back even as NASDAQ has slumped and SP500, DJ30, SP400, and SP600 have tanked. SOX was the first to peak and the first to hit, then break, the 200 day SMA. It was the first to undercut its March low. It has set up a classic potential double bottom with the right leg (the most recent selling) undercutting the left leg (the March low). Of the stocks that closed higher Monday, many were semiconductors. They have set up the move, now can they deliver?
The move up the past week has been baby steps off intraday reversal two Mondays back. There has not been a clear reversal and accumulation. Of course it has been bucking a selling market, and the ability to close positive during that selling shows strength. Is it enough strength to lead the market higher or is it just enough to get market technicians such as myself talking about how it is showing relative strength? It has tapped at the 18 day EMA (464.79) the past two sessions and has been unable to approach that level on the close. The 10 and 18 day EMA are the first lines of resistance in any downtrend; if SOX cannot crack through these levels with relative ease then the move has to be suspect because it still has the 200 and 50 day EMA overhead (480) that are the real first test of the move. The index is showing dojis below the 18 day; that indicates the 5 day move is running out of gas and will need some real buying to push it on through.
Market Sentiment
Sentiment indicators and market internals continued to paint a more bearish picture than in the past few months though overall bullishness still remains at high levels versus bearishness. Thus many view the sentiment as giving mixed signals. As we have noted before, this is not really a major bottom but a correction after a strong run in 2003. We don't need to see every sentiment indicator hitting highs. The more that do the better, but in order to get the VIX up to extremes you really do need a major sell off.
Right now the put/call ratio closed over 1.0 for the fifth time in the past two weeks. The Rydex index, traded by day traders, shows mostly bearish sentiment. These are two very potent sentiment indicators. They signal significant shifts in sentiment that often accompany a bottom, though they do not pinpoint the precise timing. For that we look to the market action and leading stock action once we see sentiment indications spiking. As noted, they are trying to hold the March lows and 200 day SMA, trying to reverse in some potential double bottom patterns. The sentiment indicators suggest a bottom is near, but now it is up to the patterns themselves to provide the volume breakouts.
VIX: 19.77; +1.64. Gapped higher and ran further, but still below the March high near 22.
VXN: 27.91; +2.41, Gapped over the downward sloping 200 day SMA, clearing the March high. It is still very low overall but at its highest in the last 5 months.
VXO: 19.74; +0.67
Put/Call Ratio (CBOE): 1.28; +0.27. Fifth close over 1.0 in the past two weeks. When several sessions stack up in relatively quick succession, that typically indicates that a near term bottom is being put in.
NASDAQ
Gapped down toward the March lows, undercut them on the intraday selling, then started rallying back. Close, but not a clear cut reversal session at this key level.
Stats: -21.89 points (-1.14%) to close at 1896.07
Volume: 1.907B (+15.71%). A substantial volume jump, pushing trade back above average, but it was not a blowout session. If the index had really turned and rallied on strong buying we would have expected to see at least 2B shares. Technically another distribution session, but as noted over the weekend, the distribution sessions have done their damage, and the recover mitigates he selling volume.
Up Volume: 479M (-120M)
Down Volume: 1.381B (+344M)
A/D and Hi/Lo: Decliners led 3.51 to 1. Was -6:1 at one point so it 'recovered' by the close. Continues a string of negative breadth as the index sells. -6:1 is an extreme measure.
Previous Session: Decliners led 2.83 to 1
New Highs: 12 (-18)
New Lows: 205 (+107)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Blew out the March intraday low (1896.91) on the session low (1880.32), then managed to rebound to close near that level. This reversal after a very negative open had the potential to set a bottom as the index undercut prior lows and then turned and rallied right back to session highs. Unfortunately, it was unable to hold those highs. It did not completely reverse, but it again struggled heading into the close as the buyers that helped turn it back up started equivocating. As it stands NASDAQ held at a key level, managing to reverse an undercut of the March low. It still has to show us a strong upside session followed by another strong gain Friday or early next week to give this move any significance.
S&P 500/NYSE
Continued the selling but managed to reverse off of the 200 day SMA. Nice reversal on volume, but did even a worse job in holding the solid rebound off that level.
Stats: -11.58 points (-1.05%) to close at 1087.12
NYSE Volume: 1.912B (+15.98%). Just missed the high volume session of the year, but for the second session NYSE volume eclipsed NASDAQ volume. As discussed prior, when NYSE volume starts exceeding NASDAQ volume, that indicates much of the speculation has been wrung out of stocks. Right now the NYSE stocks are selling off as the last holdouts are taken down. Once that is done the market can rally. As noted, it is there, but it has to show us the move.
Up Volume: 276M (+94M)
Down Volume: 1.619B (+165M)
A/D and Hi/Lo: Decliners led 8.78 to 1. -11:1 at the worst levels during the session, another really ugly day of selling, and as noted over the weekend, these severe readings are often additional indications of a bottom being put in place.
Previous Session: Decliners led 12.29 to 1
New Highs: 7 (-20)
New Lows: 860 (+147). New lows are exploding higher on the NYSE. As with the breadth indications, this has reached an extreme level.
The Chart: http://www.investmenthouse.com/cd/^spx.html
Just about the picture perfect action we wanted with the quick rush down to the 200 day SMA (1077) and then a crisp reversal off that level accompanied by high volume. The only part lacking was a complete reversal that held the session high, i.e., rallying to close on the high for the day. It closed right at the March intraday low for what that is worth. Basically you have the same set up now as seen on the other indexes, a potential double bottom where SP500 undercut the left leg and has started to rally back on strong volume. The move is set up, but can it overcome the drags of a rate hiking campaign of unknown amount and the continued raft of problems coming out of Iraq?
DJ30
The blue chips were sold as well, undercutting the March low (10,007) and the 200 day SMA (10,006) on the low (9932.74) and then rebounding on very strong volume. This index did an even poorer job of holding the rebound as it gave up the 200 day SMA on the close. Not a lot of lasting buying power off of the early plunge lower.
Stats: -127.32 points (-1.26%) to close at 9990.02
Volume: 272 million Monday versus 228 million Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
No scheduled economic data, and the main stock story is the Cisco earnings after the close. Thus stocks will again trade on their own as they ponder interest rate concerns and the new pictures that will be coming out of Iraq, the symbols of the US travails there. These are the two areas that appear to be holding the market back as stocks could not capitalize on a good early downward surge and rebound Monday. Someone asked after the close if Cisco's earnings could turn the market. Cisco has provided a spark in the past when it seemed unlikely, but we took the question as a rhetorical one that was a bit tongue in cheek as well.
In reality, the overall question of turning the market is relevant, though Cisco is not going to be the sole cause if it does. The market is set up for a rebound given the patterns on the major indexes. At the least it is getting to an oversold condition with several extreme internal readings along with some extreme sentiment readings. Also, an undercut of the 200 day SMA is usually good for a bounce attempt.
Indeed, the pessimism on the financial channels was pretty high during the session and after the close. We heard some pretty melodramatic phrases used to describe the selloff during the day. After hours it got better with questions about how far the selling would take stocks, questions regarding whether there could be a recovery given summer was just ahead (something that we noted as well), and appearances by prominent bears for market analysis. That all spells a bounce of some sort coming. Indeed, Robert Prechter of Elliot Wave International even noted that by the time he gets called to appear on the financial stations to give the bear view a bottom is usually already approaching.
While the recovery was disappointing, we anticipate the market will attempt a rebound shortly. SOX is trying to hold, NASDAQ hit its March low, and the other indexes have fallen to their 200 day SMA. Coupled with the negative internal readings and rising pessimism, the conditions are primed for at least another relief bounce. Thus chasing a lot of downside positions from here on most stocks is risky. Now if SOX cannot continue its rebound after 5 modest upside days, it is set up to sell, and it and some chips can give us some downside action. While the rest of the market could provide a relief bounce without the semiconductors, it would not last. If the chips fall, a relief bounce in the rest of the market will find limited upside, and that too will provide more downside opportunities after stocks bounce back from this sharp selling and then later stall at resistance.
Much depends upon how stocks respond from here. As we have stated, the indexes have made the sharp drops to test the 200 day SMA and below, setting up potential double bottom patterns. If upside volume pours in anticipating a resolution to Iraq and the interest rate hikes, the upside move could be substantial as stocks move toward completing their bases. If it does not appear, the market continues to struggle.
Support and Resistance
NASDAQ: Closed at 1896.07
Resistance: The 200 day MA (1940). The 10 day EMA (1946). The April closing low at 1978. 1990 to 2000, the top of the late 2003 base. The simple 50 day MA (1991) and 50 day EMA (1991). 2050 represents some prior price points and has stopped NASDAQ the last time it tried that level. Breakout from the pattern is 2080. 2089 is the February closing high. 2112 is the early January high.
Support: Mixed tops and bottoms at 1900 not totally broken. The March low (1896). 1850 below that.
S&P 500: Closed at 1087.12
Resistance: 1096 to 1100. 1106 is a May 2002 top and represents some early 2001 lows. 1112, the weekly up trendline from the early 2003 lows. 1118 is the April closing low and the 10 day EMA (1111). 1125 stalled the last bounce attempt. The exponential 50 day MA (1123) and the simple 50 day MA (1125). The April and January highs (1150 to 1155). Next is 1159 (February highs) and 1160 to 1175 the highs in that double top that spanned late 2001, early 2002.
Support: March low (1087). 1075 to 1070 from the December consolidation. The 200 day SMA (1077).
Dow: Closed at 9990.02
Resistance: 10,250. The 10 day EMA (10,230). The exponential 50 day MA (10,347) and simple 50 day MA (10,350). 10,570 is the April high. Price consolidation at 10,600 level. 10,747 is the February high.
Support: 10,000 and the 200 day SMA (10,006) are not totally broken. 9900-9850. 9650; 9585.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
5-12-04
Trade balance, March (8:30): -42.6B expected, -$42.1B February.
Treasury budget, April (2:00): $46.8B expected, $51.1B March.
5-13-04
PPI, April (8:30): 0.3% expected, 0.5% March.
Core PPI: 0.2% expected, 0.2% March
Initial jobless claims (8:30): 325K expected, 315K prior.
Retail sales, April (8:30): 0.1% expected, 1.8% March.
Retail sales ex-auto (8:30): -0.2% expected, 1.7% March.
5-14-04
Business inventories, March (8:30): 0.4% expected, 0.7% February.
CPI, April (8:30): 0.3% expected, 0.5% March.
Core CPI (8:30): 0.2% expected, 0.4% March.
Industrial production, April (9:15): 0.5% expected, -0.2% March.
Capacity utilization, April (9:15): 76.7% expected, 76.5% March.
Michigan sentiment, preliminary (9:45): 96.5 expected, 94.2 prior.
SUBSCRIBER QUESTION
Q: How do I calculate the volume and price point to buy into a cup with handle base breakout?
A: A cup with handle base roughly looks like a half circle open to the upside (the cup) and then a lateral and slightly lower 'handle' where the stock fades from the right lip of the cup (the fade is measured by the intraday lows). In rising markets this pattern has produced a lot of winners for us over the years. Basically it is just another accumulation pattern that weeds out those that bought it at the peak (the left lip of the cup) through a process of pulling back in price as well as the time to form the base. The final stage of 'weeding' occurs in the handle. After the stock looks as if it is going to move past the old high at the left lip of the cup it stalls and starts to fade once again. Concerned the stock is going into another swoon, the last sellers that just want to get their money out of the stock go ahead and sell out. If volume stays low during the handle shakeout we know the selling is light and we can have an upside breakout.
You have to be patient, however, and wait for the stock to show you it is ready. That means the right buy point. To calculate a buy point for a cup with handle pattern, you want to look for the stock's high price in the handle. By high price we are talking intraday as opposed to closing. Sometimes you get huge intraday spikes one session, and if that happens we will toss that one out as an aberration. After the stock has faded and established its high point in the handle, you add $0.10-$0.13 to that high. This will be the breakout, or pivot, point. Volume on breakouts from cup with handles and double bottoms should be approximately 1.5 times the average daily volume for the stock. If you see the stock moving through the buy point on this strong trade, it is a buy.
End part 1 of 3
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