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Begin part 2 of 3
THIS WEEK
The FOMC meets for a one-day meeting Tuesday to determine interest rates for the next month (September brings on another meeting). Fed funds futures indicate a 25 basis point rate hike is a lock for that meeting, but the September meeting is now down to about a 12% chance from a 100% chance just a couple of weeks back. The Fed can ill afford to not raise rates lest it send a nervous, 'we don't know what the hell we are doing' message to the market. While that is the case, it is one thing for the market to suspect it versus the Fed to make a bald faced admission to that effect.
The Fed is thus locked into a 25 basis point hike based on Greenspan's testimony to Congress just a few weeks back as well as the need to get some maneuvering room for down the road. It most likely should not raise rates. If the Fed had not already started hiking rates, it would not start now based on these numbers; that is the irony of how the Fed paints itself into a corner, and even though it leaves itself an out by saying it will look at the economic data as it comes out and make decisions based on that data, it cannot renege on its statements so shortly after they were made. There is no 'maestro' percentage in that. This is just another reason why the Fed should set a target, get to the target immediately, then act as necessary from there. It has room to maneuver and can make a big impact, symbolic or otherwise, but its moves from that point. The 'go slow' policy is Chinese water torture.
The market won't like the rate hike given that it now views the economy as in serious trouble. It is not, but this is part of the perception change that the market needed in order to break the Polly Anna view it has had toward the economy and the market itself. We are expecting a further downside close to those near support levels highlighted above for each index. From that point we anticipate a relief bounce to commence where stocks move up to test the break below the 2004 base.
That sets the next stage for a test lower once more. We would like to see that rebound last a few weeks, getting back up to resistance, toy with a breakout, but then fail. That bounce would take us into September, and then the last leg of selling would make that of-noted September/October bottom. Seems pat, but as we have seen, this is a more pat year than prior 5.
For this week the market is in no man's land. By that we mean the market has made a solid break in one direction and is more than half way to the next level that will cause a move the other way. In this case it is those support levels discussed in the individual index sections. In general that makes entering new downside plays at this point higher risk. There are always quite a few exceptions to the general trend.
In addition, there are leading stocks we have been watching that have raced ahead but are now pulling back and testing those moves. With the indexes approaching near support and setting up an oversold bounce, these stocks can provide us nice upside for a trade or even more. We need to be careful on these, however, if looking for longer term investments. The market will need another break lower even after it rebounds here. That move lower will tend to take most stocks with it as fear levels prompt investors to dump everything and ask questions later. Thus, we take the gain that is there, and when it and the indexes start running into trouble, bank it and prepare for the downside move. On stocks you want to keep, covered calls are not bad at that point either.
Support and Resistance
NASDAQ: Closed at 1776.89
Resistance:
The October 2002/March 2003 up trendline at 1818
The 10 day EMA at 1840.
The 18 day EMA at 1872.
The May 2004 lows (1876 closing, 1865 intraday) may prove to be some resistance.
The 50 day EMA at 1921
The 2004 down trendline at 1952
The 200 day SMA at 1980
Support:
July 2003 highs at 1755.
1750
June high at 1677.
S&P 500: Closed at 1063.97
Resistance:
May low at 1084 (closing) to 1076 (intraday).
1096 to 1100.
The 10 day EMA (1090)
The 18 day EMA at 1097
The 200 day SMA at 1108
1125 was key price support.
The March/April down trendline at 1124
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:
1062 - 1058 from November 2003
1048-1040 from September 2003
1010 - 1015 from June/July 2003
Dow: Closed at 9815.33
Resistance:
May low at 9852 intraday, 9906 closing
10,000 is the March lows and a psychological level.
The 10 day EMA at 10,041.
The 18 day EMA at 10,088.
The January/April down trendline at 10,176
The 50 day EMA at 10,177
The 200 day SMA at 10,233
Late April, June 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:
November 2003 highs: 9900 intraday, 9858 closing.
9500 from various price points in late summer to fall 2003.
9250. More solid support from the June through August 2003 consolidation.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
August 9
Wholesale Inventories, June (10:00): 0.6% expected and 1.2% prior
August 10
Productivity-Preliminary, Q2 (8:30): 2.0% expected and 3.8% prior
August 10
FOMC Meeting (2:15): Expecting a 25 basis point rate hike.
August 11
Treasury Budget, July (2:00): -$60.0B expected and -$54.2B prior
August 12
Business Inventories, June (8:30): 0.5% expected and 0.4% prior
Export Prices ex-agriculture., July (8:30): -0.1% prior
Import Prices ex-oil, July (8:30): 0.0% prior
Initial Claims, 08/07 (8:30): 340K expected and 336K prior
Retail Sales, July (8:30): 1.1% expected and -1.1% prior
Retail Sales ex-auto, July (8:30): 0.4% expected and -0.2% prior
August 13
Trade Balance, June (8:30): -$46.5B expected and -$46.0B prior
PPI, July (8:30): 0.3% expected and -0.3% prior
Core PPI, July (8:30): 0.1% expected and 0.2% prior
Michigan Sentiment-Prel., August (9:45): 98.0 expected and 96.7 prior
THE PLAYS
Good moves Friday: ACCL; ICOS; ITW; LM; MXIM; OSIP; WAT; POSS; WAT; XRAY
Best Plays:
1) ALD: Turning down after a failed 50 day EMA test.
2) LDG: Falling from the 200 day SMA on a volume surge.
3) RAI: Ready to rebound from a very nice pullback.
4) AEOS: Very nice test of the 50 day MA and rebound.
5) MXWL: Ready to turn lower once more.
NEW PLAYS:
Downside:
Play Date: 08/07/2004
ALD (Allied Capital--$24; -0.22; optionable): Credit services
http://biz.yahoo.com/p/a/ald.html
STATUS: Put. ALD is trying to put together a double bottom, but it is running into trouble on the way back up to complete the second leg. It surged off of 22 up to the 50 day SMA (24.94) but was bounced back. Volume jumped as it turned back down Wednesday. Money flow looks bad, and it looks it turned down right at the down trendline formed from the April and June tops. Volume backed off the last two sessions of the week; we want to see volume jump up again on the move through 24, then ride it down toward 22 for a solid 45+% gain.
Volume: 392.7K Avg Volume: 810.491K
BUY POINT: $23.88 Volume=1M Target=$22.23 Stop=$24.72
POSITION: ALD UE - Sept. $25p (-65 delta)
http://www.investmenthouse.com/ct/ald.html
Play Date: 08/07/2004
LDG (Longs Drug Stores--$21.05; -0.05; optionable): Drug stores
http://biz.yahoo.com/p/l/ldg.html
STATUS: Put. Tried to form a cup with handle base January through July, but ran into trouble in the handle. LDG had pulled back to the 200 day SMA (21.77) in the handle, but that support gave way in the last week of July on heavy volume. It rebounded Monday to the 200 day, but then it ran out of steam. Friday volume shot higher as LDG tried the 18 day EMA on the high (21.60) but rolled over. Looking for it to break through some support at 21 and give us a nice move down toward the May low for a 44%ish gain.
Volume: 653K Avg Volume: 340.083K
BUY POINT: $20.94 Volume=400K Target=$19.38 Stop=$21.65
POSITION: LDG UX - Sept. $22.50p (-62 delta)
http://www.investmenthouse.com/ct/ldg.html
Play Date: 08/07/2004
NOC (Northrop Grumman--$51.89; -1.16; optionable): Aerospace/defense
http://biz.yahoo.com/p/n/noc.html
STATUS: Put. A failing breakout in progress. NOC made a low volume breakout in early June from a 13 week base, rallying to 55. It never attracted much volume on the move, and that doomed the move. It spent two weeks trying to hold the 50 day EMA (52.77), but Friday fell through that support on rising, above average volume. It may try to come back and test the move a bit after the thud through that level, but we are ready to enter some positions on a further fall from here on continued solid trade.
Volume: 1.515M Avg Volume: 1.093M
BUY POINT: $51.68 Volume=1.6M Target=$49.62 Stop=$52.89
POSITION: NOC UK - Sept. $55p (-85 delta)
http://www.investmenthouse.com/ct/noc.html
Upside:
Play Date: 08/07/2004
ENWV (Endwave--$10.20; -0.10; no options): Telecom equipment
http://biz.yahoo.com/p/e/enwv.html
STATUS: Cup w/handle. ENWV is simply ignoring the selling, working on low volume handle to its 21 week base. Accumulation in the pattern is an outstanding 9 to 1 (9 up price weeks on rising volume to 1 down price week on rising volume), showing net buyers of the stock during the base. It is working laterally along the 10 day EMA (10.01) in a narrow range at its own pace, preparing for the breakout once the rest of the market finishes its sell off.
Volume: 134.192K Avg Volume: 81.454K
BUY POINT: $10.78 Volume=175K Target=$12.88 Stop=$9.98
POSITION: - Stock (no option chain)
http://www.investmenthouse.com/ct/enwv.html
Play Date: 08/07/2004
MATR (Matria Healthcare--$25.53; -0.22; no options): Home health care
http://biz.yahoo.com/p/m/matr.html
STATUS: Cup w/handle. Working on a 3 week handle to its 21 week base that has set up nicely along the 200 day SMA (22.77). It is now working over the 18 day EMA (25.10) as it forms the handle, setting up for the breakout. Solid 6 to 4 accumulation and money flow surging through the roof. Nice doji showing on the candlestick pattern Friday, and that potentially indicates it is ready to try the move.
Volume: 136.788K Avg Volume: 166.418K
BUY POINT: $26.64 Volume=250K Target=$30 Stop=$24.94
POSITION: - Stock (no option chain)
http://www.investmenthouse.com/ct/matr.html
Play Date: 08/07/2004
RAI (Reynolds American--$71.64; -1.12; optionable): Tobacco
http://biz.yahoo.com/p/r/rai.html
STATUS: Test breakout. RAI exploded out of a 16 week flat base in May, formed another quick cup base, broke out, and is now testing that breakout move. Solid 4 to 2 accumulation in the short cup, and we really like the price action of late: very low, below average trade as the stock moved laterally in late June to the last week in July before exploding higher. It is making a nice orderly and low volume pullback to the 10 day EMA (71.32), holding that level Friday as the market sold off. Looking for it to resume the breakout move on a shot of solid volume. This one can run well, and we are looking at a nice, relatively quick move higher, using options to leverage our gain.
Volume: 907.2K Avg Volume: 1.772M
BUY POINT: $72.22 Volume=2M Target=$79 Stop=$70.89
POSITION: RAI KN - Nov. $70c (62 delta)
http://www.investmenthouse.com/ct/rai.html
CONTINUING PLAYS:
Play Date: 07/27/2004
AEOS (American Eagle Outfitters--$30.83; +0.30; optionable): Teen apparel stores
http://biz.yahoo.com/p/a/aeos.html
After Hours: $30.81
STATUS: 50 day EMA test. A strong, high volume breakout in late July from a base on base pattern that combined a short double bottom with a flat base. AEOS is now testing that breakout, tapping the 50 day EMA (29.49) on the Friday low and rebounding for a gain. This is one of the apparel retailers that is posting strong sales gains. Retailers in general were hit last week, but AEOS' ability to hold the 50 day and rebound in the face of Friday's selling is an excellent sign. Looking for an above average volume move through the 10 day EMA (31.14) to enter new positions.
Volume: 1.629M Avg Volume: 1.7M
BUY POINT: $31.32 Volume=2.3M Target=$36.32 Stop=$30.78
POSITION: AQU KF - Nov. $30c (63 delta) &/or Stock
http://www.investmenthouse.com/ct/aeos.html
Play Date: 08/04/2004
GIVN (Given Imaging--$33.65; -1.12; optionable): Medical appliances
http://biz.yahoo.com/p/g/givn.html
After Hours: $35.05
STATUS: Cup w/handle. GIVN was down Friday, gapping lower to close at the 50 day SMA. Volume was higher but still below average, and the pattern remained in tact. Still a nice 17 week base sporting excellent 6 to 1 accumulation (6 up price weeks on rising volume to 1 down price week on rising volume); that shows net buyers of the stock during the base. The base also formed along the 50 day EMA (34.15), another indication of solid support for the stock. Money flow continues surging ahead of price, and it is showing some 'get ready' spikes the past two weeks. Just being patient and letting it show su the breakout move.
Volume: 275.709K Avg Volume: 299.838K
BUY POINT: $36.05 Volume=431K Target=$41.15 Stop=$34.32
POSITION: QPG KG - Nov. $35c (56 delta) &/or Stock
http://www.investmenthouse.com/ct/givn.html
Play Date: 08/03/2004
PMSI (Prime Medical--$7.01; -0.21; no options): Specialized health services
http://biz.yahoo.com/p/p/pmsi.html
STATUS: 50 day EMA test. Undercut the 50 day EMA (6.99) Friday, but then rallied back to hold that level on the close. Volume remained low and well below average. Basically PMSI was another stock that ignored the hard selling in the market. PMSI continues to work on a handle to a choppy, 12 week base that is part of a much larger pattern. The recent handle shows a lot of accumulation despite its choppiness, with up price weeks leading down price weeks 5 to 0. Outstanding money flow is still surging higher ahead of price. After this test we are looking for a strong volume move to delvier the breakout.
Volume: 39.269K Avg Volume: 105.12K
BUY POINT: $7.64 Volume=160K Target=$9.15 Stop=$7.15
POSITION: - Stock (no option chain)
http://www.investmenthouse.com/ct/pmsi.html
Play Date: 08/02/2004
TDS (Telephone & Data Sys.--$74.65; -1.05; optionable): Wireless telecom
http://biz.yahoo.com/p/t/tds.html
STATUS: Flying plateau. Friday TDS sold with the rest of the market, but it did not implode. It instead fell to the 18 day EMA (74.71) on the close on some slightly higher but still below average volume. This move looks more like a shakeout than the start of a sell off, but we will have to see if it can hold here and deliver a high volume upside move. It is moving through a two week plateau consolidating the July breakout from a 19 week cup with handle base sporting excellent 6 to 1 accumulation (6 up price weeks on rising volume to 1 down price week on rising volume). Money flow remains strong, and relative strength is ready to make the breakout as well. Need to see it turn back up and move through the buy point on stronger volume.
Volume: 204.6K Avg Volume: 219.091K
BUY POINT: $77.04 Volume=265K Target=$82.12 Stop=$75.05
POSITION: TDS KO - Nov. $75c (64 delta)
http://www.investmenthouse.com/ct/tds.html
DOWNSIDE:
Play Date: 08/04/2004
MXWL (Maxwell Technologies--$9.27; -0.26; optionable): PC based hardware
http://biz.yahoo.com/p/m/mxwl.html
STATUS: Put. MXWL was not quite ready to roll over when we put it on the report, but after a test of the 18 day EMA (9.73) Thursday and Friday, it looks ready now. It set up better with this test. MXWL suffered a massive drop in late June and early July took it to the 200 day SMA (11.09) and then down even lower. Volume has remained below average as it rallied back to the 18 day EMA last week. Still under distribution, and we are waiting for MXWL to roll lower this week. It turned over Friday after a test higher, hitting the buy point just before the close, giving us no time to move in. Looking for a continued move lower.
Volume: 49.002K Avg Volume: 67.647K
BUY POINT: $9.24. After a test of 9.81, 9.68 on the way back down. Volume=95K Target=$8.05 Stop=$9.82
POSITION: QMW UB - Sept. $10p (-63 delta)
http://www.investmenthouse.com/ct/mxwl.html
End part 2 of 3
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