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us stock market, trade stock
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5/24/04 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Monday: None issued
Buy alerts issued: SONE; SNTS; SMF
Trailing stop alerts: None issued
Stop alerts: MICU
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:
- Market posts another gain on low, halting volume.
- Stocks continue to trade laterally as small and mid-caps try to take the lead.
- Subscriber Questions
More upside on low trade, still trying to clear near resistance.
Hopes were up early on Saudi's promise to deliver over 9 million barrels/day in June. Stock futures were strong and oil futures were down early. Stocks broke higher but when SP500 stalled once again at the 18 day EMA that took the wind out of the move. NASDAQ almost gave the gain back while the large caps did. A modest rebound in the afternoon helped all but DJ30 regain positive territory, but twice the rebound attempt was pushed back as the indexes could not hold a move over the 18 day EMA. This fade is pretty much typical of the action the past week: attempts to punch through the near resistance, but fading by the close. Not necessarily reversals as seen last Wednesday, but simply running out of gas when the few buyers are exhausted.
As noted last week, they are not breaking down even as they are not able to move higher, instead moving laterally with slight gains but on low volume. That is always dangerous as it shows no conviction, but lateral consolidations can be very good for stocks. In this environment, however, indeed as in all stock environments, just looking good (or maybe not as sick) is not enough. You always have to see the move and then see it stick. A lot of golf tournaments have been lost with comfortable leads on the last two holes. A lot of other contests have been lost when they looked ready to put in the record books. The stock market is even more likely to snatch defeat from the jaws of victory, and thus this move looks potentially constructive but also looks like a light volume test of near resistance.
With all of the near term problems confronting equities, it is hard to get too excited about the majority of stocks though some are making nice moves as they ignore the general malaise. As we continually say, however, the market ultimately finds its bottom at the worst looking times. On the financial stations they were saying that the markets could not move until something positive happens to break things higher. We note this is exactly what was said in late 2002 when nothing looked good and the gurus were saying we would have to see some strong economic data before stocks would move. The data came, but stocks had already made 50% of their move. Same as before the Iraq war as most said stocks would take off once the war started. No, stocks just needed certainty regarding the event, and that was reached before those first JDAM bombs hit Baghdad. For now the market has not shown us from a technical perspective it can make and hold a move.
THE MARKET
Small caps take a modest lead.
It was no major breakout session as the majority of stocks continued to struggle with near term resistance, but the small caps, after testing the 200 day SMA just a week back, have put together the start of a decent move. Unlike the large cap indexes, the small caps broke through the 18 day EMA and closed at the session high. Many of these smaller issues came back to life even as most analysts still say to look for large cap stocks to lead. As noted, there are signs the large caps are firming with SP500 and QQQ (both large cap indexes), holding over key support levels during this pullback and lateral move. Unlike the SP600, however, they have not broken over and held near resistance.
Again, not a major breakout (the Russell 2000 is still below its 18 day EMA though it did break and hold a move over its 200 day SMA), but one worth watching as the large cap indexes continue to move laterally below near resistance. Why? Because the market has performed better when the smaller caps perform better. Despite the talk of a large cap takeover, that has been the talk ever since the dividend tax package became effective, and it simply has not materialized even with that supposed incentive to own large cap, dividend paying stocks. It is true that large caps start to perform better as a bull run makes it past its first year, but they have yet to do that and many larger small caps continue to look better than most of the market.
As noted, those large caps are not breaking down despite a lot of near term concerns regarding oil and Iraq, as well as the longer term prospects of a Fed rate hiking campaign. They are not breaking out either. The technical action, however, suggests stocks are still more vulnerable downside. In the Fed's words, the risks of further downside tend to outweigh the prospects of upside growth. The market, however, has yet to show how it is going to deal with this set of problems, but we note that many stocks are making good moves regardless.
Market Sentiment
VIX: 18.08; -0.41
VXN: 24.33; -0.57
VXO: 18.31; -0.85
Put/Call Ratio (CBOE): 0.77; -0.35. After the options expiration and the hedging shuffling leading into that day, the overall number of puts traded dropped as the hedges were rolled over.
NASDAQ
Gapped higher again, rallied past the 18 day EMA, but then fell just below that level to close, showing some slightly higher yet anemic volume.
Stats: +10.89 points (+0.57%) to close at 1922.98
Volume: 1.425B (+3.3%). Volume moved higher but it was still so far below average it cannot really see that point from here. Two low volume bounces up to near resistance don't excite us much with respect to an upside breakout.
Up Volume: 945M (-49M)
Down Volume: 456M (+127M)
A/D and Hi/Lo: Advancers led 1.66 to 1
Previous Session: Advancers led 1.77 to 1
New Highs: 60 (+24)
New Lows: 64 (-14)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Showing its second doji after its second consecutive gap higher to the next resistance point. Friday NASDAQ gapped up to the 10 day EMA. Monday it was the 18 day EMA (1927). This keeps NASDAQ over the March lows (1896.91), but the low volume bounce to this resistance does not instill a lot of confidence in a breakout. It is still below the 200 day SMA (1950) and the 50 day EMA (1964), and it will need a lot of buying to break those levels. It is not selling off, but it is not attracting upside trade to drive it higher. Indeed, the doji at the 18 day EMA on continued low, below average volume suggests it may start back down from this point.
QQQ tried to move through the 200 day SMA (35.34) but rolled back by the close to miss that level. It too gapped higher though its volume was lower on this gain than Friday. Still holding easily over the March low (34) and trying to put together the left leg of that double bottom.
SOX is still very troubling. As one reader noted, several big name semiconductors have shown a crossover of the 50 day EMA through the 200 day SMA. That shows prices falling faster near term than the long term trend, and these downside crossovers often signal further weakness. SOX itself has shown this same action the past two weeks. NASDAQ has not shown this action, but it is within spitting distance.
S&P 500/NYSE
One of the last 'strongholds' for the market, edging higher Monday but on low trade and once again finding intraday resistance at the 18 day EMA.
Stats: +1.85 points (+0.17%) to close at 1095.41
NYSE Volume: 1.227B (-2.32%). Not much gain, not much volume as once again SP500 moved laterally on very low trade. The only average or better trade in the past 8 sessions was on last Wednesday's downside reversal. It has managed to hang on after that reversal (it is hard to say it 'recovered'), but it still finds immediate resistance at the 18 day EMA.
Up Volume: 823M (-17M)
Down Volume: 376M (-26M)
A/D and Hi/Lo: Advancers led 2.6 to 1. Once again very solid breadth. This often coincides with solid small and mid-cap advances, and that is exactly what happened Monday with the small and mid-caps leading the market.
Previous Session: Advancers led 2.01 to 1
New Highs: 31 (+7)
New Lows: 27 (-2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Rallied again to test the 18 day EMA (1101) only to stall out and retreat to the 10 day EMA (1095). Walking laterally over the 200 day SMA (1082), held up by that support yet compressed by the 18 day and some resistance at 1106. That can be the set up for a strong move as the pressure builds. SP500 continues its attempt to form the right leg to a double bottom, but there has been no sharp rebound from the 200 day SMA test. It tried the reversal, lost momentum, then tried to reverse to the downside, but that lost momentum as well. Still trying to form up an upside move here, but it basically has little help from NASDAQ, DJ30 or SOX in doing so.
DJ30
DJ30 stopped the plunge when it got to the 200 day SMA (10,046). It started moving laterally below that level, and that also puts it below the March lows (10,007) similar to NASDAQ. It has made several intraday tests of the 200 day, each time falling back to close, giving up much of the gain. Volume is still below average, but moved higher Friday and Monday as DJ30 churned below the 200 day. Much of the loss was attributable to MO and its continued tobacco problems, but each session there is some issue in trouble; the point is the index is unable to make headway toward this key level. It has not shown its hand, but the inability to retake the 200 day and the March lows is no sign of strength regardless of whether the index is moving laterally or not.
Stats: -8.31 points (-0.08%) to close at 9958.43
Volume: 187 million Monday versus 180 million Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
Oil had its shot to move the market with the second hashing of the Saudi production news, and it had the same effect, i.e., nothing very positive. Tuesday consumer confidence for May is released, and the economic data will have another shot at moving the market. Probably won't do it either. The problem is not the economy as it stands now, but the impact of a Fed rate hiking campaign. Some say, similar to the start of war, once the first hike is made the market can get over it and start to move upside again. A problem for the economy, however, is the higher energy prices and their impact; that has as much effect upon economic growth and thus earnings and stock prices as Fed rate hikes. The Iraq handover is still hanging over the market as well; Bush will try to shed light on that this evening, but with no networks carrying it any light shed will be more like candlelight. It is still pretty far from the actual handover date to get any comfort level of certainty on that event.
So we know the same problems are still there, and thus it is still a matter of watching the major indexes for signs of strengthening or weakening. Much of the key remains with SP500 and somewhat NASDAQ 100, but we are also watching the small caps closely. Looks as if the market is still a ways from a more defining move, but we continue to see stocks form up nice patterns and make solid moves. During this time of market chop there is more associated risk, but the better patterns tend to hold up overall as we have seen. Quality patterns with quality breakout moves show that there is buying even in this market, and those stocks tend to hold the line better and indeed prosper.
Support and Resistance
NASDAQ: Closed at 1922.98
Resistance: The MA in a near term downtrend are always a resistance level. 18 day EMA (1928); 200 day MA (1951). The April closing low at 1978. 1990 to 2000, the top of the late 2003 base. The simple 50 day MA (1971) and 50 day EMA (1964). 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: 1900 has acted as recent support. 1890, the gap up high at on Tuesday. The April lows (1880, 1878) trying to hold. 1850 below that. Some price tops at 1777, 1750.
S&P 500: Closed at 1095.41
Resistance: The 10 day EMA (1095) not totally broken. 1096 to 1100. The 18 day EMA (1101). 1106 is a May 2002 top and represents some early 2001 lows. The exponential 50 day MA (1113) and the simple 50 day MA (1117). 1125 stalled the last bounce attempt. 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: The 200 day SMA (1082). April lows (1079, 1076). 1075 to 1070 from the December consolidation. 1058 - 1060 from November tops.
Dow: Closed at 9958.93
Resistance: The 10 day EMA (9,999). March low (10,007). The 200 day SMA (10,046). The 18 day EMA (10,073) and 10,250. The exponential 50 day MA (10,224) and simple 50 day MA (10,252). 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.
5-25-04
Consumer confidence, May (10:00): 94.0 expected, 92.9 April.
Existing home sales, April (10:00): 6.45M expected, 6.48M March.
5-26-04
Durable goods orders, April (8:30): -0.8% expected, 5% March.
New homes sales, April, (10:00): 1.2M expected, 1.228M March.
5-27-04
GDP, Q1 second revision (8:30): 4.5% expected, 4.2% prior.
GDP chain deflator (8:30): 2.5% expected, 2.5% prior.
Initial jobless claims (8:30): 335K expected, 345K prior.
5-28-04
Personal income, April (8:30): 0.5% expected, 0.4% March.
Personal spending, April (8:30): 0.2% expected, 0.4% March.
Michigan revised sentiment, May (9:45): 94.2 expected, 94.2 prior.
Chicago PMI, May (10:00): 62.0 expected, 63.9 April.
SUBSCRIBER QUESTIONS
Q: Please explain to me what short trading is. Rough information, buy and if it goes down you make money. Such as, how do you acquire at $5.00 and if it goes to $4.00 you are ahead.
A: Shorting a stock is also called 'selling short'. You are selling first, buying later. When you sell short, you are basically borrowing shares of a company and selling them at the current market price. Your plan is that the share price is going to fall. If they do fall, the shares can be bought back at a lower price with the difference between the sell price and the buy back price being the profit on the play. Using your example, to short 100 shares of a $5.00 stock, a short sale order is entered with a broker, who has (or may not have) stock available to borrow for short sales (you can ask that shares you own in a stock not be sold short, something VERY important with the new dividend taxation laws). The stock is then sold pursuant to your short sale order. Short sale rules require short sales to be made on an uptick; in other words, you cannot step in when the stock is in a freefall. You will have to return the shares, but first you wait for the price on the stock to fall. It begins to drop and finally hits $2.00 a share and you think that's as far as it will go, so at this point you buy back the 100 shares for $200. You turn the stock back over to the broker, but pocket the difference between the sell price and the buy back price ($500 - $200). Your profit is $300. It is the same as buying low and selling high, just doing it in reverse order.
Short selling has unlimited risk in that the stock can keep rising and rising. Thus unless you exhibit experience to your broker you may not be able to do it. Add on to that the fact that downside action can be rapid and volatile, and if you can't keep a keen eye on a short position like this it could get away from you quickly. However, educated (and unemotional) investors can take what the market gives, and short selling on stocks without option chains can be profitable in an established downtrend. We prefer to do that (playing the downside in this case) by buying puts. With puts, our risk is defined and limited to the amount invested, and no more.
End part 1 of 3
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