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us stock market, trend trading stock
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8/02/01 Investment House Daily
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SUMMARY:
- A Bank of England rate cut and better news from CEO's and analysts sends markets higher, but not quite high enough.
- Market improving despite commentators, but we could have a short term pullback here as indexes fail again at resistance.
- Economic news is bittersweet.
- Team Trades
Some good news for a change sends markets higher, but they just cannot quite crack resistance wide open.
The Bank of England got off the dime and cut interest rates, giving notice and hope that the Europeans are going to deal with their slowdown before it gets totally out of hand. That encouraged U.S. investors fearing a deepening European slowdown would exacerbate the U.S. economic problems. It is a start, but as we have seen with the U.S. rate cuts, it is just a first step.
On top of that Intel's CEO stated that the company anticipates increasing demand for PC's toward the end of the year. That was good news as well, though the CEO did say that U.S. economic conditions were still uncertain. Further good news for semiconductors: another statement that the train had left the station once again.
As we discussed Wednesday night, the semiconductors were already looking better; we had picked up on that and put in several chip stocks as plays, and they have done very, very well (e.g., RFMD, SMTC, KLIC). Semiconductors tend to lead things higher, and they have been showing signs of strength. The CEO and analyst calls were just what we were talking about the past two months when we said the economic conditions were improving and that at some point all of the sudden there would be good news hit, and then these stocks that had been forming up with signs of accumulation would start to take off. The flat bases many chips were forming indicated this accumulation, and here comes the good news.
Another decent session, but not quite enough.
The indexes continue to build slowly and solidly, without that high-octane, rocket launch higher that we have been seeing fail time and time again throughout the bear market. To us this is the best way to work out of the hole: a series of smaller, solid gains that build a good foundation and start to turn the tide at the same time.
Remember back when we were talking about hitting singles and doubles in the spring, not trying to knock the cover off of the ball? Short positive steps to build up the accounts. Well, the same applies to the market right now as it tries to work out of the bear in these early stages of the bull market. At some point there will be some big gains with massive volume, and those singles and doubles will turn into triples and home runs. But for now this solid, steady building is just what the market needs to set up a real, sustained move higher in the future.
Indeed, today's action was labeled a 'failed rally' by CNBC, citing the close off of the highs. Maybe, but then each day of this rally would be a failure; a failure just as the indexes marched higher and higher. So, we do not consider today's action a failure for that reason.
Still, today's action failed to resolve pending issues with near term resistance, and after a nice move higher over the past seven sessions, the indexes may be ready to take a breather. The Dow once again traded over 10,600 on the high, but closed below the down trendline and the 50 and 200 day MVA. The S&P 500 held on to close above the exponential 50 day MVA, but bounced down from resistance we had pegged at 1225. The Nasdaq finally cleared its 50 day MVA, but it too tapped at its down trendline on its high and pulled back. A pullback here would not be unusual or unhealthy.
Not that the action was bad: the indexes gapped higher and rallied, but then pulled way back intraday. They then turned back up and rallied in the afternoon to close in the top half of the session's trading range (except for the Dow). That is bullish action, but it may be overridden in the short term by the previous gains the indexes have enjoyed.
THE ECONOMY
The economic news was good on one hand, bad on the other. Wednesday's auto reports had some who have been waiting to talk bad about the economy saying that this was an indication that the consumer was weakening. Maybe, but as those same analysts were so eager to point out when the signs of a weakening economy were emerging that one number does not make a trend, it can be said that July's slight cooling (and it was slight) in auto sales does not market a change in the trend. Again, lower dollar sales do not mean that fewer autos were being bought.
Factory orders plunged 2.4% versus expectations of -1.1% and a prior 2.2% gain (revised down from 2.5%). This is a very volatile report, but it is another sign (along with the NAPM) that manufacturing is not yet ready to expand. It is not ready to tank, but it has not started to totally turn the corner.
Jobless claims fall much sharper than anticipated. Claims fell 23,000 to 346,000 new claims for the prior week, lower than the 390,000 expected and the 369,000 prior (revised up from 366,000). This is a continuation of the trend that surfaced three weeks ago. The four-week average was also at its lowest since April. Of vast importance, the continuing claims were down 81,000. They had been edging continually higher. This could signal the peak.
As we said a few weeks back, this action in the jobless claims is identical to that in past recessions and how the jobless market performed as the economy pulled out of the bottom. This looks positive to us, but we do have to note that summer numbers are more difficult because of the auto plant layoffs and rehiring as they retool for the new year. Still, this has all been taken into account in the experts' consensus numbers, so we feel the numbers say what the numbers say.
THE MARKET
Overall market stats:
VIX: 23.28; +0.30. Volatility edged higher on the up and down action today. No correlation to draw upon for now.
VXN: 48.05; +0.24. Higher on an up day. Still no useful correlation at this point.
Put/Call ratio (CBOE): 0.55; -0.03. Put buying edged back today, but it is still well above the 0.4 complacency level, and it has been hanging out at 0.7 and better for a long time.
NASDAQ:
Gapped much higher on the Intel news and analyst comments, but had to pull back to test the move before rallying toward the close. A nice seven sessions, and we may see some pulling back here to regroup for another move at resistance.
Stats: +19.00 points (+0.9%) to close at 2087.38.
Volume: 1.680 billion shares (-5.77%). Volume dropped for the first time on a gain in quite a while, but it was still solid, average volume. Indeed, the volume continued to top any of the recent selling volumes. Up volume led 991 million to 653 million shares.
A/D and Hi/Lo: Advancing issues continued to lead, but at a smaller 1.04 to 1 rate (1.42 to 1 Wednesday). New highs fell to 132 (-7) as new lows also fell to 74 (-5).
The Chart: http://www.investmenthouse.com/cd/$compq.html
Another gap higher that was completely filled intraday, but the index recovered to close 16 points off of its high (2103.16). That is a level where the down trendline resides, and the index turned tail and ran the first time it touched it. It also marks the high in the 'hump' of the double bottom pattern. Still, the index did not cave in, however, and that is a good sign that it could break the level soon. The candlestick chart showed us a 'hanging man' doji, and after tapping at resistance and seven sessions of a solid rise, the index may be ready to take a break. Again, that would not unhealthy as long as the price/volume action remained positive, i.e., lower volume on the selling. Of course, we would also want to see the index hold at a higher low, preferably above 2000. A caveat: the index appeared to have topped three sessions ago and then powered higher. The market appears to be in transition, and it pulls some out of the norm moves when it does. In other words, if we see the moves we want, we will be investing.
Dow/NYSE: The Dow once again failed to hold above its 50 and 200 day MVA or 10,600. Third straight day, and one would think it was going to pullback after that. Nothing has been by the book of late, however.
Stats: Up 41.17 points (+0.4%) to close at 10,551.18.
NYSE Volume: 1.227 billion shares (-8.4%). Volume shrank today, so it is not one of those high-volume reversals. Still, it was above average, good for a day of gains but just not powerful. Up volume topped down volume 709 million to 489 million shares.
A/D and Hi/Lo: NYSE advancing issues continued to lead at 1.40 to 1 (1.43 to 1 Wednesday). Not bad, not great, but continuing the uptrend in the A/D line over the past two weeks. New highs rose to 143 (+10) as new lows rose to 31 (+6).
The Chart: http://www.investmenthouse.com/cd/$dja.html
For the third straight session the Dow was unable to hold above the 50 or 200 day MVA after again testing 10,600 (10,609.65 on the high). It did manage to clear the down trendline, but that was more due to sideways action than a strong move higher. Now this could either be a point where the index finally says it is going to pullback after failing to break above resistance at 10,600; normally, three tries and we would say it needed to take a breather, regroup, and try again. Much as with the Nasdaq, however, the Dow has formed a recent double bottom as it tested the year lows, and it may just be forming a handle here, i.e., a lateral move, before it breaks decisively higher on stronger volume. Either way, the index looks to be in decent shape to us.
S&P 500: The big caps did manage to hold above the 50 day MVA, but barely. The index gapped open almost to its session high (1226.38) and spent the rest of the session working its way to the low at 1215.31 before a last hour move. It was not a real bullish session; big gaps higher and then selling back to close are not bullish. Note how the index on its high brushed at the high in the double bottom pattern that has formed over the past month (1225.04) but could not make the move over that level. That is the level to beat at this point, but the index might pull back after the 50 point move over the past seven sessions before it does take that out. We want it to hold above 1208 if it does. After today's action, we are not so wild about the OEX puts.
Stats: Up 4.82 points (+0.4%) to close at 1220.75.
Volume: NYSE volume fell to 1.227 billion shares (-8.4%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
The big news will be the pre-market employment report due at 8:30 ET, that is, if nothing upstages it as what happened Thursday morning. Friday's tend to be quieter on the analyst front, so the economic news may be the big story of the day. The employment report simply gets too much emphasis for such a lagging indicator. It is not a forecaster of events, but it gets a lot of attention. It is expected to be weaker with all of the layoffs. Whatever. The weekly jobless claims are more interesting to us. The real report will be the NAPM services index. Remember that this is one that was starting to suffer and had everyone worried, but then last month it snapped back hard. July might not have been great, but we anticipate it will be a bit higher than expected.
As for the market action, as discussed above, the patterns tend to indicate some pulling back in the near term. We are not looking for heavy pullbacks or selloffs barring some bad news, but more of a slip back to near term support. Of course, the indexes have turned right back up after showing topping signs this past week, a sign that there is some real buying strength in the market. In short, the market is looking better, has hit some interim resistance and might pullback, but its action has been very positive and it may just shake it off and move up again. Being a Friday after seven sessions of good gains, most likely not.
Since the market is showing resiliency just when it looks a bit overdone, we continue to look for those plays that are, on a daily basis, breaking higher. At the same time we are going to look at taking some profit on those stocks that have made nice moves for us over the past few sessions, either selling part of our positions outright (probably all for our option positions), or selling some at or in the money calls on the positions and buying them back when they hit support and start to bounce again. If we get a gap higher in the morning once more, we will wait and see if it can hold. If it starts to fade we will implement the selling plan to lock in some profit. We may regret it given the market is doing better, but if it shows us another strong move higher, we will get more opportunities to make very good money on this rally.
Support and Resistance Levels
Nasdaq: Closed at 2087.38.
Resistance: 2100 to 2105 is the down trendline. The middle of the double bottom pattern is 2105.15. Then 2160 to 2200. Then 2250.
Support: On any pullback we want to see 2040 to hold. After that, 2000. First test of the bottom is at 1934.67. The low is 1619.58.
S&P 500: Closed at 1220.75.
Resistance: 1225, the middle of the double bottom pattern. After that, 1240 to 1250.
Support: We would like 1208 (the 18 day MVA) to hold on any selling, but it is not solid support. 1170 held on the recent test. The low is 1081.19.
Dow: Closed at 10,551.18.
Resistance: For the third time stalled at 10,600. The 50 day MVA and 200 day MVA are at 10,562.05 and 10,576.96, respectively. That has been solid resistance of late. If the index can ever clear those levels, 10,750 is the real test.
Support: 10,400. 10,200 still looks to be the most solid support. 10,120.89 is the recent July low. After that there is 10,000 to 9992, the middle of its larger double bottom pattern.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
7-31-01
Personal Income, June (8:30): +0.3% actual versus 0.2% expected and 0.2% prior.
PCE, June (8:30): 0.4% actual versus 0.3% epxected and 0.3% prior.
Chicago PMI, July (10:00): 38.0% actual versus 42.5% expected and 44.4% prior.
Consumer Confidence, July (10:00): 116.5 actual versus 118.5 expected and 118.9 prior (revised higher from 117.9).
8-1-01
Auto Sales, July (8:30): -6.0%
Truck Sales, July (8:30): 7.4M versus 7.6M prior.
Construction Spending, June (10:00): -0.7% actual versus +0.1% expected and -0.2% prior (revised down from 0.3%).
NAPM Index, July (10:00): 43.6% actual versus 44.5% expected and 44.7% prior.
8-2-01
Initial Claims, 7/28 (8:30): 346,000 actual versus 390k expected and 369K prior (revised from 366K).
Factory Orders, June (10:00): -2.4% actual versus -1.0% versus +2.5% prior (revised from 2.3%).
8-3-01
Nonfarm Payrolls, July (8:30): -50K versus -114K prior.
Unemployment Rate, July (8:30): 4.6% versus 4.5% prior.
Hourly Earnings, July (8:30): 0.3% versus 0.3% prior.
Average Workweek, July (8:30): 34.3 versus 34.3 prior.
NAPM Services, July (10:00): 51.0% versus 52.1% prior.
TEAM TRADES
WEN was covered on the Daily Wednesday night as it tests the breakout from an ascending wedge-type pattern that formed at the end of a flat base. We didn't look at the stock until twenty minutes before the market closed, but it looked ready to try for a move over the July (breakout) high of 27.93. Volume was up to 560,200, which was well over average, and above the 500K we wanted for the move. WEN had pulled off its high of 27.59, but the move looked solid so we decided to put in an order for at least partial positions, with a stop loss at the 18 day moving average in case the move tanked (26.75).
With the stock at 27.47, the options were trading at 2.90 by 2.70. We decided to put in a bid at the bid, 2.70. If we did not get the hit, we would wait to see what the stock did in the morning. However, WEN started to make a move higher (to 27.50), volume 635,000, so we upped it to the ask since it was near the end of the day. This was an aggressive play; the buy point over the recent high is at 28.06. We put in a stop loss at 2.20 (just about 25% below the purchase price).
The ask moved up to 2.95 shortly after, and that is where they stayed as WEN closed the day at 27.52. Volume was at 680,000. We will look for a continued move up and over the high.
End Part 1 of 2
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us stock market
trend trading stock
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