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us stock market, trade stock
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5/17/04 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Monday: None issued
Buy alerts issued: None issued
Trailing stop alerts: None issued
Stop alerts: Cleared out stocks that were not holding key support. CULS; CVNS; RWY; RDEN (this one reversed sharply on us).
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:
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SUMMARY:
- Weapons of mass destruction spark a rebound?
- New York manufacturing takes an unexpected tumble.
- Market struggling to hold on, but does reasonably well swallowing bad news.
- Subscriber Questions
Stocks absorb more bad news, manage to hang on once more.
The Monday news ticker was pretty grim. Interim Iraqi president killed in a terrorist bombing. USJ Holdings, a large Japanese bank, reported a loss when expected to report a gain and that tanked the Nikkei as well as Korea and other Asian markets. There was also the Indian election where the pro-communist party won control and cast doubt on the future of the burgeoning Indian free enterprise market.
It was bad news on top of oil price spikes and a general market malaise where stocks have held key support but have yet to do more than that. Prices gapped lower, attempted a modest quick recovery, and then really sold. NASDAQ undercut the recent lows as did SP600 and SP400. It was seriously ugly with volume jumping on the early tape.
Then two things happened. It was announced that a roadside bomb used in Iraq employed an artillery shell filled with sarin gas. Sarin is a known poison gas that Hussein used against the Kurds and Shiites. It is also a poison that Al Qaeda is purported to now possess the knowledge to create. Nonetheless, the market seemed to read into this that there are weapons of mass destruction in Iraq and that somehow this was good news (e.g., supports President Bush's claim of WMD in Iraq, that is good for Bush campaign, and Bush being purportedly better for the market).
Almost simultaneously SP500 hit the 200 day SMA, the third test in six sessions, and the result was a bounce. Not the roaring shot back up seen Wednesday, but another definite bounce off that level. Volume was up as it did but the rebound did not continue to surge, and indeed, closed in the lower half of the intraday range. In short, key support held again, but the rebound was less enthusiastic.
THE ECONOMY
After posting record highs in April, manufacturing activity in New York eased. Expectations were for a slowdown to 34.2 from over 36, but activity fell to 30.2 from a revised lower April (34). Before we all panic about a slowdown, April was a record and the lower result in May is still with the overall solidly rising trend. Indeed, manufacturing showed further improvement. Of course we need to remember that employment is a lagging indicator. All of this hype about the jobs report was about a lagging indicator. It was considered anomalous given the time it took for jobs to return (though as our readers know, based on the market recovery indicator it was right on, even ahead, of schedule). In any event, we don't want to start looking at a lagging indicator and conclude that the economy is fine. Leading economic indicators due out later the week will tell more of the important story about the future potential for the economy as opposed to the rearview mirror look provided by employment data.
THE MARKET
The market technical pattern is weak or at least still trying to transition as noted over the weekend, and when you mix in bad news on a struggling market, that makes it next to impossible for the market to improve technically. This is particularly true after it has made two reversal attempts the prior week and is still trying to establish some upside momentum.
Again, it is some credit that it did not collapse, that SP500 was still able to hold the 200 day SMA. NASDAQ, however, undercut last week's lows so its rally attempt is effectively dead. NYSE volume, though below average, was also higher, and that it technically distribution (higher volume selling), something that also often kills off rally attempts (particularly before any follow through).
We keep talking about the SP500 holding the 200 day SMA (1079) because it is the one index that has not broke this significant support level. Indeed, just about every market watcher we know brings this up in any market discussion. This is the third test in six sessions, however, and as we note in our seminars, it can be a bad thing for a stock or index to spend too much time at key support. It was a great rebound off that level last week, and with two jumps off that level with the last on strong volume and a positive close, it looked as if the sellers were beaten.
The bad news pushed it lower again, however, and it was not able to make the breakaway move. Now it is hanging around in a bad neighborhood. Think of it this way: you are driving around town, take a wrong turn and end up in a bad area. You turn around and get the hell out of there and are no worse off for the foray, perhaps a bit wiser. But what if you are either totally clueless when it comes to directions or you even see something on the wild side that you like, and you end up right back. Either way, the more you hang out in that area, the better odds something bad can happen. Call it lying down with dogs, hanging out in a bad neighborhood, or whatever trite expression you want: if you cruise in a risky area, the chances of getting hurt increase. SP500 is cruising in a dangerous area, and its turn right back to test again is not the kind of strength that typically would take it higher even though it managed to hold that level once more.
We said before that bottoms are often born out of bad news, and there is certainly a lot of that flying around in addition to overall market weakness. The market has to be able to attach itself to some certainty about the future and the Iraq picture is still muddled just as we were told and suspected it would be ahead of the handover. There has to be some certainty established as to Iraq, and six weeks out from the handover it is not there. Thus the market enjoyed a nice rebound last week that had the look of a reversal, but it is having to fight tooth and nail to make it stick, and the distribution Monday on NYSE does not bode well for a follow through as the market continues to wrestle with the shorter term troubles even as the longer term outlook remains solid as the economic and earnings reports (the solid guidance) show.
Market Sentiment
Volatility continues to creep higher though it is nowhere near levels that would be considered a reversal. Now that it is creeping higher it may have to hit the more traditional levels of 'fear' to mean much. In other words, VIX over 30.
The TRIN (NYSE short term trade index) spiked incredibly once again as it did in January and late March, hitting 4.46 on the high and closing well over 2. Closes over 2 are considered rare and supposedly indicate a rebound ahead. It presaged a bounce in late March and early April, but it was not a lasting bounce. We look at this, but it is also a sentiment indicator as it is based on trader moves just as the put/call ratio. It still takes a back seat to the nuts and bolts of price and volume.
Bulls versus bears. The number of bulls versus bears continues to narrow with bulls now down around 45% and bears up to 26%. Bulls are at the midpoint between bullish and bearish indications (35 is bullish, 55 is bearish), and bears are still to the modest side (20% is bearish, 50% is bullish).
The sentiment indicators are improved and combined may be good in helping a bounce. The problem with sentiment indicators, however, is similar to oversold measures: the market can be oversold but simply get more oversold before finally making a rebound.
VIX: 19.96; +1.49
VXN: 29.19; +0.15
VXO: 21.03; +2.1
Put/Call Ratio (CBOE): 1.22; +0.25. Another close over 1.0, a continued sign of heavy downside hedging and speculation, but as of yet it has failed to trigger a reversal. Indeed, the overall put/call ratio still has not closed above 1.0, but it did rebound to 0.96 Monday.
NASDAQ
Gapped lower, undercut the recent May lows, and managed to cut 11 points off the low by the close.
Stats: -27.61 points (-1.45%) to close at 1876.64
Volume: 1.532B (-0.02%). Volume remained low and well below average as NASDAQ gapped down for another round of losses. It is noteworthy that even with all the bad news volume remained well below average. No distribution just no one wanting to buy tech stocks.
Up Volume: 200M (-86M)
Down Volume: 1.318B (+93M)
A/D and Hi/Lo: Decliners led 3.23 to 1. Was very ugly early with nearly -10:1 breadth.
Previous Session: Decliners led 1.87 to 1
New Highs: 19 (-12)
New Lows: 139 (+63)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Big gap lower right above the recent intraday lows (1878), then wasted no time in selling to 1865 on the low. Managed another rebound to shave 11 points off the low. The index continues to try and rebound from selling. The only problem is that the index is trending lower even as it does as each comeback comes up short. Technically the undercut of the Wednesday low kills the rally attempt. About the only thing it did not do was distribute (sell on rising volume). The break below the recent lows again opens to door to more selling. According to black and white technical analysis, that typically means a further drop followed by a rally that then requires a test of the new low hit on the continued drop. If that holds it can move back up without as big a concern for a quick collapse. Of course that all depends upon the volume accompanying such moves as that shows whether there is net selling or buying. Right now NASDAQ is as weak as we said it looked over the weekend, and it is hanging its hat on SP500 and SOX that did not undercut their recent lows. Indeed, SOX has already made the lower low and is now coming back to test that level though it still has more downside to complete the test.
S&P 500/NYSE
Managed to hold the 200 day SMA once again and bounced but closed in the lower half of the range as the bounce lacked the same strength as last week.
Stats: -11.6 points (-1.06%) to close at 1084.1
NYSE Volume: 1.43B (+7.04%). Still below average but rising on the selling, another day of distribution.
Up Volume: 205M (-419M)
Down Volume: 1.204B (+510M)
A/D and Hi/Lo: Decliners led 2.19 to 1. Improved from -4:1 but similar negatives hanging over the market.
Previous Session: Advancers led 1.3 to 1
New Highs: 15 (-1)
New Lows: 107 (+10)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Tapped the 200 day SMA (1079) on the low and managed yet another rebound. Volume was up as it rebounded, but it closed well in the red, 11 points off the high. The higher volume is typically a good thing to see on a reversal, but the sag off the high for the session is not a strong reversal. A lot of pressure building on SP500 to hold, and everyone is watching it. Distribution before a follow through session often kills a rally attempt even though SP500 did not undercut its Wednesday low (1076) on the Monday selling. At the minimum the rally attempt is under severe pressure with NASDAQ undercutting its rally low.
DJ30
The blue chips were also subjected to the selling and again look pretty ugly. After retaking the 200 day SMA (10,024) on the Wednesday reversal it blew lower Monday on rising though still below average volume. This is the lowest close since last year and the further distribution opens the door to further downside. It is close to the October and November closing highs (9812 October, 9858 November) that could act as some support, but it looked ugly Monday.
Stats: -105.96 points (-1.06%) to close at 9906.91
Volume: 200 million Monday versus 175 million Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
Housing starts and permits are out Tuesday, but global events are overshadowing economic for now. The Iraq handover is still uncertain in terms of what will happen in the interim and what it will look like. Six weeks out is too far for the market's crystal ball. Maybe 3 weeks out will be enough or it may take two weeks out. The market does not wait for the event, but it has to have some concept of certainty of its own. That does not mean we are all comfortable with what is going on just as most were not comfortable with the potential economic recovery back in October 2002 or the start of the war in March 2003. The market got to its comfort level and started to rally while most of us mortals were still struggling with all of the doubts that typically seem their worst as the market starts a move higher.
The rally attempt is not over, but it has taken on water. The sentiment indicators continue to ratchet higher but they can continue to do so for another few weeks before the market makes its move; sentiment indicators send up warning flares but they are not timing devices. We stand ready, but the price and volume are not coming through right now. Patterns in many big names do not look good. That does not mean all patterns are junk as many stocks are holding up quite well, refusing to give up support. The NASDAQ big cap names, however, are in terrible shape; it will be hard for NASDAQ to make a meaningful move if those that account for its gains are in ugly downtrends. There can always be a rebound in relief from these negative sentiment readings, but thus far the market has not transitioned back into accumulation since this last leg lower. SP500 is hanging and even NASDAQ rallied back from its lows and thus could still rebound from here. The sentiment indicators make us watch closely, but the price/volume action and patterns have not signaled anything yet.
CSC and A posted solid results and good guidance after hours and enjoyed nice pops. To this point, however, good earnings and guidance have had transient effects, certainly not helping the overall market near term. Ultimately these will be among the catalysts that drive the market higher after the resolution of the near term worries, but the current events have to reach a level of certainty for the market, i.e., will oil prices peak and then start to fade, thus sparing the recovery. We don't expect the market to rally on this news, but with SP500 still hanging onto the 200 day SMA and the sentiment indicators continuing to log extreme readings, we remain watchful for some high volume upside. It is noteworthy that even with all the bad news volume remained below average.
Support and Resistance
NASDAQ: Closed at 1876.64
Resistance: 1900 is potential resistance. The MA in such a move lower are always a resistance level. 10 day EMA (1922); 18 day EMA (1943); 200 day MA (1945). The April closing low at 1978. 1990 to 2000, the top of the late 2003 base. The simple 50 day MA (1977) and 50 day EMA (1978). 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: The April lows (1880, 1878) trying to hold. 1850 below that. Some price tops at 1777, 1750.
S&P 500: Closed at 1084.10
Resistance: 1096 to 1100. The 10 day EMA (1100) and 1106 is a May 2002 top and represents some early 2001 lows. The 18 day EMA (1107). 1125 stalled the last bounce attempt. The exponential 50 day MA (1118) and the simple 50 day MA (1120). 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: April lows (1079, 1076). The 200 day SMA (1079). 1075 to 1070 from the December consolidation. 1058 - 1060 from November tops.
Dow: Closed at 9906.91
Resistance: The 200 day SMA (10,025). The 10 day EMA (10,077). The 18 day EMA (10,161) and 10,250. The exponential 50 day MA (10,284) and simple 50 day MA (10,289). 10,570 is the April high. Price consolidation at 10,600 level. 10,747 is the February high.
Support: 9900-9850. 9650; 9585.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
5-17-04
NY Empire State Index, May (8:30): 30.21 actual, 34.0 expected, 34.03 April (revised from 36.1)
5-18-04
Housing starts, April (8:30): 1.98M expected, 2.007M March.
Permits, April, (8:30): 1.96M expected, 1.976M March.
5-20-04
Initial jobless claims (8:30): 326K expected, 331K prior.
Leading economic indicators, April (10:00): 0.2% expected, 0.3% March.
Philly Fed Index, May (12:00): 31.0 expected, 32.5 April
SUBSCRIBER QUESTIONS
Q: As always your extended weekend write up provided very interesting and insightful reading. When you are talking about number of weeks on up volume vs. down volume what is normally period of time you are looking at 4 - 8 weeks or longer?
A: The measure of up weeks to down weeks is basically tallying the number of weeks a stock or index rose on rising volume and the number it fell on rising volume. The idea is to get a rough idea of whether money is moving into a stock or out of a stock. Often when stocks base they get quiet both in price moves and in volume after the initial sell off. It is difficult in such lazy action to ascertain day to day whether money is moving in or out. Thus we look at the weekly charts to show us whether there is net buying or selling of the stock. If a stock gets to the end of the base and there are more down weeks on rising volume then that is a good indication that money was most likely moving out of the stock during the base. You will often see these stocks move up to breakout and then fold. The few that were buying and drove the price higher were not enough; once demand was sated the bid left and the stock falls. Often it never even makes the breakout attempt.
Your question goes to the duration of a base. We look at accumulation/distribution on a base basis. Stocks tend to form patterns that can be accumulation or distribution patterns. We count the weeks to ascertain if there truly is accumulation or distribution. Typically the shortest a base can be to weed out the sellers is in the neighborhood of 7 weeks. Not set in stone, but much shorter and it is not really a base but more of a test of another move or simply just not enough time has elapsed to really get rid of the overhead supply. That is the key to any base, getting rid of the easy sellers that bought in at the last high and want to get out 'even.' Those have to be removed or so overwhelmed by the buyers that they are swept away in the buying.
Thus we look for roughly seven weeks of basing and count them up to see which is greater. A simple majority is all it takes, but it is always good to see really strong accumulation in conjunction with other indicators. The idea of technical analysis it to give you an edge. Thus the more indicators that are stacked in your favor the better. Of course as seen the past few weeks, news will trump patterns in the short term.
End part 1 of 3
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