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us stock market, trade stock
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8/16/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Monday: ELAB
Buy alerts issued: ISRG; WBSN; MBT; TRA
Trailing stops issued: None issued
Stop alerts issued: NKE; CNF
SUMMARY:
- Stocks manage the rebound they were hinting at, but no volume.
- New York manufacturing shows dramatic contraction.
- Taking another shot at a rally, starting this one on low volume.
- Subscriber Questions
Geopolitical concerns lift, stocks do same.
A lot of positive adjectives were used to describe the Monday stock market action. Explosive, strong leadership, solid surge; sounds like the one line quips touting the latest Hollywood offering. It was no doubt a strong price gain. The small caps and NASDAQ were leading, and when they lead, the market moves upside. After struggling last week SP500, SP600, DJ30 and others managed to hang on, trying to piece together a bounce. With no trouble at the Olympics and Chavez winning the Venezuelan referendum, some of the worry from last week lifted and stocks rallied early.
Unlike other early rallies of late, stocks managed to hold the gains into the close. There was some short covering and some longer term buying as some leadership that had pulled back to support during the selling did in fact explode higher. Indeed the move was very broad, a good start for a rally attempt, but volume was very low. NYSE volume topped Friday trade, but that is like saying you can beat your grandmother at racquetball. Friday volume was very modest moving into what was viewed as an uncertain weekend.
This may indeed be the start of a more serious rally. SP500 and friends indicated last week a rebound was possible and Monday they delivered the first step. They still have to deal with more serious resistance and come up with some buy side volume late this week or next week to show the move has some legs with a follow through. That is something it has been unable to put together since the last one in May that led to the last bounce to the end of June before the selling turned really nasty. Thus once more the market starts the ball rolling on another rally attempt. Once more it has started quietly, at least in terms of volume. Once more it is a matter of seeing some real buying on volume start at the end of the week.
THE ECONOMY
New York PMI plunges.
In July the NY regional report was the first to show that the June slowdown looked transitory. In August the NY report is the first one to make you wonder about the July report. A 12.6 reading (32.3 expected, 35.8 prior) was a 2004 low. New orders fell to 14.9 from 28.6. Shipments hit 11.9, down from 34. Prices paid dipped to 49.6 from 56.4, something you would expect with a slowing business environment. Employment rose to 17.0 from 13.1, but as we know, employment is lagging.
All in all this was a disappointing performance, taking back the July gains completely. The market ignored it for the most part, either a sign of new found strength or foolishness. We heard stories of it being a new index and therefore not getting much credence. We don't buy that. It was ignored because stocks had sold in response to and anticipation of weak economic data. They were ready to bounce.
The regional and national manufacturing reports were the sole highlights of the July economic data. If they backslide and show renewed weakness, the prognosis for the rest of the economy is not as positive. There will continue to be stimulus from the last of the business tax incentives, but after that the prospects are softer moving into 2005. The market continues to price in weaker stock earnings, and those earnings are made or not on a continued strengthening economy. Perhaps Monday was the start of the next rally that shows all of this has now been priced in. To suggest that as a real possibility at this point strains some credulity.
THE MARKET
It looked as if stocks would try a rebound move based on last week's action, and Monday they made the first step, a solid price gain. Volume was disappointing at best, coming in well below average once more, scrambling to beat Friday's low trade. At least NYSE was able to post some rising though below average volume on the upside session. NASDAQ once again showed lower volume on a gain.
Indeed, NASDAQ volume was quite low, particularly when compared with NYSE. That NASDAQ/NYSE volume ratio can be an indication that a market is getting sold out: when the speculative NASDAQ volume is a lower and lower percentage of NYSE volume, the selling is getting close to an end. Problem is, Monday was an upside session; you want to see the narrowing percentage on downside moves to give an accurate read. About all you can say for this volume was it was too low to mean a lot so early in the move.
That is important. Rallies have started on low volume before yet found it at the right time. May's rally started the same way: low volume drift higher that found stronger volume at the key moment to mark a follow through that showed there was more than just short covering. It is not the only rally in history to start that way. Thus as with all rally attempts, that leaves us looking toward the end of the week to early next week for a high volume repeat of the Monday action. That shows the next wave of buyers have moved in and allows us to move in to upside positions with a bit more confidence.
Not that there were no good price and volume moves Monday. As we discussed last week, this selling saw some strong stocks ease back to support and set up for the next move higher even as most of the market sold off further. The strong hold up at support and then when conditions are favorable, they head back up, mostly unfettered by the overhead supply that the rest of the market has built up during the prior selling. Monday saw some leadership caliber stocks make those types of moves. They were not the only stocks moving as breadth was excellent, but again, most stocks have a lot of nasty overhead supply after descending for most of the year and having broken through the bottoms of their bases. If the market shows follow through, they too can continue the move, rebuilding their patterns as the market moves higher. They will most likely require another test, however, either deep or in the form of a handle, to really make the break higher. As noted last week as well, the timing for such a scenario is good as well.
Market Sentiment
VIX: 17.57; -0.41
VXN: 26.72; -0.74
VXO: 17.56; -1.21
Put/Call Ratio (CBOE): 0.85; -0.17. those three closes over 1.0 the past three weeks helped push spur the rebound discussed Saturday. Now they have provided the start of the bounce and it is up to price and volume to show us that longer term buyers are entering to carry the move further.
NASDAQ
Nice price gain but low volume as NASDAQ makes a pretty typical rebound move in a continuing downtrend.
Stats: +25.62 points (+1.46%) to close at 1782.84
Volume: 1.3B (-3.72%). The picture of late summer volume, coming in even lower than Friday's light volume. Mondays in the summer can be deceptive, and as noted above, rallies can start on light volume and build into a strong follow through. It has some building to do.
Up Volume: 1.001B (+255M)
Down Volume: 226M (-356M)
A/D and Hi/Lo: Advancers led 2.09 to 1. Solid breadth all session.
Previous Session: Decliners led 1 to 1
New Highs: 30 (+17)
New Lows: 119 (-116)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Saturday noted that this was a good point to mount a rebound toward the 10 or 18 day EMA, and NASDAQ started work on that move Monday. Volume was woeful as both large and small cap techs rebounded. Nothing like 300 downside points to spark a rally, and NASDAQ has done so. Now it needs to show something more as it approaches the 10 day EMA (1797) and then the more significant 18 day EMA (1825). It is going to need more serious trade if it is to have a chance toward the 18 day EMA. Even the late July bounce enjoyed above average volume to start the move. Techs can drift to the 18 day, but if volume does not pick up, they are likely to get slapped back hard at that level.
NASDAQ 100 rallied an identical percentage as both the large and small caps enjoyed a nice price session. Volume was lower, on the QQQ as well. Not instilling a lot of confidence in the move, but if SP500 and the small caps continue to rebound on some volume NASDAQ could come around. It has AMAT earnings Tuesday, and those will play a pivotal role in the index' action.
S&P 500/NYSE
Nice move after that week long lateral consolidation at the November 2003 highs. Volume needs to get better here as well.
Stats: +14.54 points (+1.37%) to close at 1079.34
NYSE Volume: 1.206B (+2.68%). Volume rose but was still way below average on the gallop higher. Truly a late summer Monday. It will need to grow trade as it takes on more serious resistance, but it has time to do that after this initial surge. We don't want to obsess on the low volume; it has time to build into strong volume on a follow through. We just note that it was not a great volume start to the move that would have shown that the shorts were hell bent on getting out and fueling a stronger move.
Up Volume: 1.086B (+465M)
Down Volume: 115M (-418M)
A/D and Hi/Lo: Advancers led 3.48 to 1. Impressive breadth as the small caps led the way higher.
Previous Session: Advancers led 1.42 to 1
New Highs: 36 (+8)
New Lows: 49 (-61)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large and small caps used the lateral move last week to set the foundation for a rally attempt. A solid start sans volume, though it did improve on the session. SP500 and SP600 both cleared near resistance at the 10 day EMA (1077), but that was the easy part. The 18 day EMA (1084) is next, and in these downtrends that level often acts as the stopper. This one does have something going for it other than just a straight drop and then rebound: it has that lateral move setting up the break higher. That gives it some legs on this move if it can come up with volume on the follow through move.
The small caps paced the market gainers, though they were unable to break higher from their lateral move last week. Still have to cross 270 and then take out the 18 day EMA (271.98). They have made the road quite hard with that head and shoulders breakdown.
DJ30
Similar action from the blue chips: holding in the lateral move last week, then rallying Monday with a strong price move. Cleared the 10 day EMA (10,115) and last week's range, but volume came in lower similar to NASDAQ. It still has the 18 day EMA (9988) as the important immediate resistance. It is in good position to mount a move, and as with the other indexes, it has some time to show the volume.
Stats: +129.2 points (+1.31%) to close at 9954.55
Volume: 176 million shares Monday versus 183 million shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
The CPI and industrial production are released Tuesday, and they are important numbers. In addition, AMAT reports earnings after the close. The data can influence the market, particularly if AMAT is very good or is more disappointing news.
The main thing the bulls want the market to avoid is another quick higher volume reversal session on the heels of a low volume rally. That typically shoots a hole in the rally attempt and sets off another stage of selling. After the lateral move last week the indexes are in better shape to mount a rally that lasts more than one session, but NASDAQ is still in a nasty downtrend, and thus the specter of resumed selling remains.
Again, the market does not need to post another gain Tuesday or Wednesday. It can rest on its laurels if it does so with continued lower volume and does not fall back below the recent lows. Then it needs to deliver another strong upside sessions sometime from Thursday through Tuesday, a session showing strong volume for a change. That will show us that there is a resumption of the short covering along with some upside buying where the buyers actually start driving the action.
It has been awhile since we saw that, and again, that lateral move last week helps set up the move a bit better. NASDAQ and SOX did not make the same move, however, and thus they still remain a big hole in the market attempts to stabilize and set up and continue the move higher. The market, particularly NASDAQ, was getting oversold, and the lateral basing action last week helped establish a launch pad. Good surge, now we see if it has any fuel. For now, any bounce is still an oversold bounce until we get a follow through session. It does not hurt, however, that there were some leaders making good moves (price and volume), setting the pace for the rest of the market.
Support and Resistance
NASDAQ: Closed at 1782.84
Resistance:
The 10 day EMA at 1797
Gap down point at 1822.
The October 2002/March 2003 up trendline at 1824
The 18 day EMA at 1825 is going to be strong resistance.
1830 - 1850 (July lows) and the May 2004 lows (1876 closing, 1865 intraday) may prove to be some resistance.
The March 2004 lows (1897 - 1989)
The 50 day EMA at 1890 is key resistance.
The 2004 down trendline at 1945
The 200 day SMA at 1976
Support:
July 2003 highs at 1755.
Late July 2003 top at 1735.
June 2003 intraday highs at 1686 to closing range at 1644 to 1677 (mid-July low here as well).
1600.
S&P 500: Closed at 1079.34
Resistance:
May low at 1084 (closing) to 1076 (intraday).
The 10 day EMA at 1077 is cracked and SP500 is now testing 1080 (May and July lows).
The 18 day EMA at 1084
1096 to 1100 represent price supports and the 50 day EMA (1101).
The 200 day SMA at 1109
The March/April down trendline at 1122
1125 was key price support.
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 9954.55
Resistance:
The 18 day EMA at 9989 is a first real test.
10,000 is the March lows and a psychological level.
The 50 day EMA at 10,115.
The February/April down trendline at 10,125
The 200 day SMA at 10,240 is going to be key whenever it makes it back there.
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:
9783 to 9793, the August lows.
9625 - 9660 from September 2003.
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 16
NY Empire State Index, August (8:30): 12.6 actual versus 32.3 expected and 35.8 prior (revised from 36.5)
August 17
Housing Starts, July (8:30): 1900K expected and 1802K prior
Building Permits, July (8:30): 1950K expected and 1945K prior
CPI, July (8:30): 0.2% expected and 0.3% prior
Core CPI, July (8:30): 0.2% expected and 0.1% prior (revised from 0)
Industrial Production, July (9:15): 0.5% expected and -0.3% prior
Capacity Utilization, July (9:15): 77.5% expected and 77.2% prior
August 19
Initial Jobless Claims, 08/14 (8:30): 335K expected and 333K prior
Leading Economic Indicators, July (10:00): -0.1% expected and -0.2% prior
Philadelphia Fed, August (12:00): 30.8 expected and 36.1 prior
SUBSCRIBER QUESTIONS
Q: I have heard that it is best to look for stocks with an average volume of 500K before investing in them. I often see stocks on the report with a lower average volume. Is there a reason?
A: There is an idea circulating that a stocks has to have 500K average volume in order to 'safely' invest in the stock. The idea stems from a desire to avoid getting whipsawed if selling starts; it takes fewer sellers to change the direction of a stocks with lower daily average volume.
We basically use a 100K average daily volume as a minimum level. Why? Because institutions typically use this level as a cutoff point as well for stocks they will consider. They want to be able to accumulate shares slowly and quietly, and a 100K average is pretty much the minimum.
One of the things you will notice about a lot of stocks we like to follow are market leaders, i.e., stocks that are showing strong earnings and sales growth and are also in position to break higher, free and clear of any overhead resistance. This is not always the case for the plays, but we do prefer these. If you eliminate all stocks with an average volume less than 500K, you are effectively eliminating some of the up and comers that are market leaders and can truly make staggering runs in a bull run. We love new issues that have formed their first base. Often these stocks are not trading at a 500K daily volume clip, but they have the potential to post excellent returns for us. It is fact that newer issues tend to outperform the rest of the market once they go through their first base. We don't like to eliminate those from the equation.
Indeed, these stocks can go from low volume to high average volume once the rest of the market 'discovers' them. Moreover, we are not typically buying stocks as they languish in the bottom of a base where a big order on our part would alter the price. We are looking for others to start buying the stock, pushing that volume to a breakout level. That shows us there is great demand for the stock by the very ones we want to follow, the institutions that control most of the money and can really make a stock take off. We want to see this volume when we move in because it shows us the big money is buying and it allows us to buy without inflating the price. Stocks can look ready to move, but until they do make the break on volume they could languish at that level or break lower. We want to see the move and see it on volume. When we see good accumulation and then a strong breakout, we don't fret too much over stocks with 100K or better average volume.
End part 1 of 3
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