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investing information, financial investing
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8/02/04 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Monday: ESI
Buy alerts issued: XL; DECK; ACCL; NLS
Trailing stops issued: None issued
Stop alerts issued: SSP
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:
- Stocks recover from new terror concerns & post gains, gets points for resilience.
- National manufacturing posts fourteenth straight gain.
- Low volume, timid leadership, and still below key resistance, yet, still alive for a follow through.
- Subscriber Questions: Forecasting major moves
Stocks recover to post gains but we would not call it impressive.
That market action was described various ways, impressive being one of the adjectives used. Impressive would have been a reach lower and then a strong volume surge higher with leading stocks breaking higher on very strong trade and the indexes smashing through resistance. Now that's impressive.
That was not the market Monday. It did overcome bad news and rallied positive on the close. Given the poor performance this year, that was solid action, just not impressive. Volume was low, few stocks broke out on strong volume, and those that did rally often showed anemic trade. It shows how the bar has been moved for a market that has struggled for seven months when impressive is used to describe a market that does not sell off on some bad news. We give it points for recovering; not long ago it would have cratered on such news. The real test is what it can do with this recovery. Will it seize the turn and power higher on volume or will it lose its way below resistance, unable to excite enough long term buying to sustain the move? In short we continue watching to see if the market can deliver a follow through session.
The cause of the trouble was, as you already know, a heightened terror alert based on captured data regarding strikes against US financial interests. Surprise, surprise, terrorists are here and trying to find ways to hurt us. After the initial selling and morning volatility on the news, stocks bottomed and started a slow, scratching climb back, indicating the market knows this. This was not an event but more information about an ever present threat. As opposed to a problem, the market kind of took it as a positive that we were able to obtain the information. There was not resounding surge higher, but the market held on, giving the news its just due, as stocks attempt to provide a follow through to last week's attempt at starting a new rally.
THE ECONOMY
National manufacturing posts another gain in July.
62.0, in line with expectations, and up from 61.1 in June. That is 9 consecutive months above 60 and 14 above 50, the level that shows expansion. Those 9 consecutive months is the longest stretch of growth for the sector since 1972-1973. New orders surged to 64.7 from 60.0. Current production rose to 66.1 from 63.2. Prices paid fell to 77.0 from 81.0, making 4 straight months of price declines. Employment showed some of the trend from the Chicago PMI, sliding to 57.3 from 59.7. Still, that is 9 consecutive months with employment above 50, showing a solid, steady expansion in the sector after 3 years of declines.
As with the regional reports, the national report shows the slowdown already abating. Manufacturing is more of a leading indicator than most of the June reports still hitting the wire. Companies feel confident enough to further expand production and hiring, and those are good signs for further growth downstream. It is not breakneck growth, but continuing solid, steady expansion. There are bumps higher and lower along the way as seen in June, but the trend toward growth remains for now even with once again surging oil prices.
Construction spending slide 0.3% in June.
June was slow in many respects with construction falling below expectations of a flat month. May was written down as well, however, to 0.1% from a 0.3% gain. Residential construction fell 0.6%, the first decrease since February 2003. Again this is further indication that the housing market, an early cycle sector (and in this case, even a recession cycle) in any event, is cooling as the economic expansion moves well into its second year.
THE MARKET
Stocks overcame some bad news and rallied for a positive close. SP500 and DJ30 cleared the 18 day EMA, moving past that pesky resistance from last week. That was the best news.
Volume was still well below average on the rebound. Good that it was not stronger on the selling, not so good that it could not really rally with stocks on their rebound. Indeed, volume on the entire rebound other than the last Tuesday bounce has moved lower and lower. That shows fewer and fewer buyers on the move up. Moreover, in almost every case, the volume on the big upside sessions was lower than the volume on the big downside sessions. Volume, one of the most important indicators of strength, is not showing a lot of buying strength.
Moreover, leadership was spotty with not a lot of volume breakouts. Rebounding stocks showed low volume as well. NASDAQ still has to deal with the 18 day EMA while SP500 and DJ30 have the 200 day SMA, 50 day EMA, and down trendlines to deal with in their immediate future.
Despite the shortcomings, the market held on and held its ground. That still keeps it still looking for a follow through this week despite the setback of the increased terror alert. That would be a solid 1.5% minimum gain on a major index with surging, above average volume, and some great breadth of at least 2:1. Again, it is a positive that the market managed to shake off some bad news and rebound, something it most likely would not have done a couple of weeks back.
Again, it is time to be patient and let the market make its test at resistance and then see if it can rebound and provide a follow through. There are still many problems confronting stocks, but the market often thrives when things seem pretty hopeless. At the same time, if we see volume jump on a downside session, that is showing confirmation of a weak upside move that has run out of gas.
Market Sentiment
Problem is, there is not a lot of hopelessness, at least as measured by the sentiment indicators. The one we keep looking at is the bulls versus bears. Bulls have been waning some while bears have been rising some, but both are still in what would be considered bearish ground for the market. On some of the post-market wrap-up shows Monday it looked like a bull love in with nothing but praise for the market making a comeback after the terror trouble. Frightening indeed, and just another example of how bullish advisors are.
The counterargument is that there is a lot of money moving into mutual fund accounts. Further, there are signs of frustration and giving up in the market as the trading companies and many Wall Street firms show volumes way down despite rising volatility in the market the past two weeks. These are potential positives, but as noted last week, they are not the best timing indicators.
We remain concerned that there are enough bulls out there to quickly use up any upside breakout. Perhaps all of that new money will provide the ammunition that the bulls need to push the market to a breakout and beyond. That would, of course, go against the typical historical results these sentiment indicators show us.
VIX: 15.37; +0.05
VXN: 24.13; +0.82
VXO: 14.62; -0.78
Put/Call Ratio (CBOE): 0.79; +0.16
NASDAQ
Gapped lower but then rallied back on a bit better volume to post a slight gain. Still below the 18 day EMA, however.
Stats: +4.73 points (+0.25%) to close at 1892.09
Volume: 1.547B (+1.25%). Volume was up but it was not an accumulation session in our book. It was a rather weak comeback volume-wise, but it was also good to see volume did not expand on the early downside move. All in all, a wash. The way the market has been of late, you could view that as a win.
Up Volume: 729M (-270M)
Down Volume: 763M (+244M)
A/D and Hi/Lo: Decliners led 1.36 to 1. Breadth was never positive for NASDAQ as tech stocks struggled much of the session, particularly the smaller cap techs.
Previous Session: Advancers led 1.36 to 1
New Highs: 65 (+14)
New Lows: 90 (+24)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ eked out a gain for the session on slightly higher though below average volume. It remains below the 18 day EMA (1899) still after reaching toward that level Friday. The last two upside sessions have been on lower volume, something of a concern after the rebound caught hold last Tuesday. As we are waiting on a follow through session, a few slower sessions below the next resistance level are forgivable as the index takes a breather before resuming the rebound. We will see; again, it is time to be patient and let the index make the move if it will.
Tapped the 18 day EMA again on the high, backing off slightly, but still posting a gain. Volume was lower as it too slows some here at resistance while it looks for a follow through session to break it higher and continue the rally.
S&P 500/NYSE
Rallied past the 18 day EMA after two attempts last week, even surpassing the 200 day SMA on the high before sliding back to close below that key level.
Stats: +4.9 points (+0.44%) to close at 1106.62
NYSE Volume: 1.276B (-1.72%). Volume could not keep pace, trailing off for the second consecutive upside session. The lack of trade gave the break over the 50 day EMA less credence, and makes the 200 day SMA loom as a continued strong barrier.
Up Volume: 783M (+59M)
Down Volume: 474M (-75M)
A/D and Hi/Lo: Advancers led 1.51 to 1. Nothing spectacular here as the small and mid-caps struggled all session, lagging the large caps.
Previous Session: Advancers led 1.72 to 1
New Highs: 65 (-6)
New Lows: 41 (+13)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Finally cleared the 18 day EMA (1104), but stalled at the 200 day SMA (1107) after trading over that level late session. Volume was not sufficient to punch through that level, and for a rebound from early selling, it was hardly impressive. Indeed, with declining volume every session of the rebound except for the turnaround session last Tuesday, there is not much reason to get really excited about the move. Accumulation has been lacking on the entire move upside other than the initial session where short covering would have dominated. It can still deliver a follow through session, but it will have to show us a strong one given this lower volume move higher on the heels of higher volume selling in July.
The small cap SP600 cracked the 18 day EMA but that was about all it did. Lagging all session it was dragged higher late in the session by the other indexes. It still does not look that healthy after that last hard drop that put some more work into a potential head and shoulders pattern.
DJ30
Posted the best move along with SP500 (0.4%), clearing the 18 day EMA (10,142) as it continued the rebound off of the test of the May lows near 9900. On the high it tapped the 50 day EMA (10,208), a level marked by price resistance as well from late April, early June, and early July. It backed off from that level as it closed. Volume backed off as well, something it has done every session since the Tuesday higher volume bounce. All of the volume, even on the stronger volume up sessions, has been lower than the prior week's selling volume. Thus this rebound shows fewer buyers on the gains than the sellers on the downside sessions. DJ30 has serious resistance ahead of it from the down trendline (10,185) and the 200 day SMA (10,229). Moreover, the 50 day EMA has crossed downward through the 200 day SMA, an indication that, if it holds a test, typically indicates further downside. Without volume on a follow through attempt it does not have much chance of breaking through those levels.
Stats: +39.45 points (+0.39%) to close at 10179.16
Volume: 177 million shares Monday versus 197 million shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
The market has had a day to digest the new terror threat, and now it can get back to what it was doing last week, i.e., trying to put a dent in the resistance and continue its rebound. It managed to rebound in the face of some bad news. With lukewarm volume to go with the move, it looked a lot as if the market was simply trying to put on a good face. The declining volume all the way up is really screaming at us, punctuated by the lack of effort on the Monday rebound from the early selling on the terror threat.
The market can still pull out a victory here, showing a follow through session Tuesday or Wednesday, but it has to rally hard in both price and volume, the latter the missing link in the move thus far.
Monday plays were moving in every direction, but not many were showing volume. We tried to lay off those without solid trade behind them; in a market near resistance but trying to move against that resistance, you can get a few head fakes as from price moves that are not supported by volume. We held off on some that maybe we should have moved into, but their volume was questionable up to the close so we held off. Whether the market delivers a scintillating follow through or just runs out of gas once more and rolls over, there are many potential plays. Again, we are going to remain patient, look for the volume moves, and really move in when the market shows overall volume heading in a particular direction. The lower volume move to this point is a primary concern for us right now.
Support and Resistance
NASDAQ: Closed at 1892.09
Resistance:
The 18 day EMA at 1900
The 50 day EMA at 1938
The 2004 down trendline at 1954
The 200 day SMA at 1982
2024 is the June high.
2050 represents some prior price points and has stopped NASDAQ the last three times it has tried that level.
Support:
The May 2004 lows (1876 closing, 1865 intraday).
The October 2002/March 2003 up trendline at 1821
July 2003 highs at 1755.
S&P 500: Closed at 1106.62
Resistance:
The 200 day SMA at 1107
The 50 day EMA at 1113
1125 was key price support.
The March/April down trendline at 1126
1142-1146 are the June highs.
The April and January highs (1150 to 1155).
1159 (February highs) and 1160 to 1175 the highs in that double top that spanned late 2001, early 2002.
Support:
1096 to 1100. 1096 held on the Monday low.
1087 is the March low.
May low at 1084 (closing) to 1076 (intraday)
1050 - 1060
Dow: Closed at 10,179.16
Resistance:
The January/April down trendline at 10,185
The 50 day EMA at 10,208
The 200 day SMA at 10,229
Late April peaks at 10,478 to 10,512
10,570 is the early April high
Price consolidation at 10,600 level
10,747 is the February high
Support:
The 10 day EMA at 10,118
May low at 9852 intraday, 9906 closing
November 2003 high at 9858.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
August 2
Construction Spending, June (10:00): -0.3% actual versus 0.0% expected and 0.1% prior (revised from 0.3%)
ISM Index, July (10:00): 62.0% actual versus 62.0 expected and 61.1 prior
August 3
Auto Sales, July: 5.6M expected and 4.9M prior
Truck Sales, July: 7.7M expected and 7.1M prior
Personal Income, June (8:30): 0.3% expected and 0.6% prior
Personal Spending, June (8:30): -0.1% expected and 1.0% prior
August 4
Factory Orders, June (10:00): 0.5% expected and -0.3% prior
ISM Services, July (10:00): 61.5 expected and 59.9 prior
August 5
Initial Claims, 07/31 (8:30): 340K expected and 345K prior
August 6
Non-farm Payrolls, July (8:30): 243K expected and 112K prior
Unemployment Rate, July (8:30): 5.6% expected and 5.6% prior
Hourly Earnings, July (8:30): 0.3% expected and 0.1% prior
Average Workweek, July (8:30): 33.8 expected and 33.6 prior
Consumer Credit, June (3:00): $4.0B expected and $8.2B prior
SUBSCRIBER QUESTIONS
Q: Looks as if a major collapse in the market is coming. The indexes have broke below the 200 day moving average and DJ30 has closed below a key level. Don't you feel a major drop is on the way?
A: There could be, but because of all of the intervening variables to impact that market as it makes a tumble or gain, it is for practical purposes impossible (and unnecessary) to forecast just how major a collapse or upside breakout will be. We prefer to look at where the market currently is relative to its history and what the market and its leading stocks that took it to this level are doing right now. That gives us the best idea of where the market is heading in the near term and how strong the move is. We can add to that and make assumptions about the strength of that direction and how far it goes based on the current news environment and whether the stories are ones that will dissipate quickly or are with us for awhile. The terror threat and oil prices are of that latter category as they have no quick resolution though the oil problem is shorter term than terrorism.
It is difficult, however, to put those assumptions into actual numerical terms. For example, in 2000 we were certain that the Fed's actions were going to cause a recession and of course an associated market correction. Given the strength of the rise, the correction was going to be harsh; how harsh was anyone's guess, and indeed that is what we heard a lot of. Early on many said that it would not be deep, but by the time it bottomed the big names on the street were betting it was heading much lower still. At that same time, we were writing that it looked as if the market was bottoming to us, again based on the index action and also the action of some key stocks that were emerging as leaders. We did not know if it was 'the' bottom, but something to the upside was forming that could give us a nice run and make us money. Indeed, in early 2003 when the market was testing that initial move off of the bottom and many were forecasting a resumption of the downtrend, we were saying there was ongoing accumulation and that an upside breakout was coming. Leading stocks such as EBAY and TSCO were telling us this.
The key is that we were looking at what the market was telling us at that time as to whether the climate was improving or worsening for long side investing. Predictions were for a further decline. Most investors had enough of stocks and were not interested (those contrary sentiment indications were running high). Yet the indexes and many stocks were showing accumulation. Right now the indexes have spent 7 months basing. Key technology and semiconductors broke the bottoms of their bases. The other indexes have struggled to stay off of their year lows. Many leadership stocks that brought the market to this level are struggling or even breaking down. Some new breakouts make it, many do not. The market is struggling to hold up with little ongoing accumulation and narrow leadership. It is leaning toward further weakness but is at an important juncture. If SP500 and the other large cap indexes break their bases to the downside, that opens the door to the next support level.
In the big picture, the market is basing, but it is struggling to hold up. It is not a good environment for long term upside investing; at least the market has not shown us this yet. Beyond that, how 'major' a downside move will be is for the history books after it occurs. We want to recognize what the market is telling us and direct our investing actions accordingly. As to how far a downside or an upside move can go is dependent upon the big money. We do know that the market tends to move further, up or down, than anyone thinks it will go when a strong, deep rooted move initially starts. After that it is guesswork and we leave that up to others.
End part 1 of 3
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investing information
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