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8/26/04 Technical Traders Report Update
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MARKET ALERTS
Targets hit alerts issued Thursday: ISSC
Buy alerts issued: PD; PMTI
Trailing stops issued: None issued
Stop alerts issued: JOYG; IR
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http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Stocks sleepwalk, unable to extend Wednesday gain.
- Market quiet ahead of GDP as more retailers talk of problems.
- Price/volume action remains positive as stocks slumber.
- Watching for slowing rally over the next week.
Stocks fade but volume does as well.
Stocks were sluggish after the Wednesday low volume rally, but volume was even more so. NASDAQ posted the lowest trade of the year after doing the same Monday. Definitely a slow time, but even so price/volume action remains positive, i.e., up on up sessions and down on down sessions. With such low volume and sluggish trade that observation seems rather 'nuanced' and overly 'sensitive'. When things are this quiet, however, you have to take the cues that are there.
The indexes were mixed on the ultra-light volume with the large caps outperforming small caps and techs. SOX was still a problem and a potential Achilles heel as it gave back Wednesdays modest rebound to the 18 day EMA. Otherwise stocks just tread water, holding most of the gains accumulated the past two weeks. They ignored one of the Iraq pipelines blazing again, they ignored a peace deal in Iraq, they mostly ignored some disappointing news in the retail sector. They even rallied back from the lows in the afternoon session. Still overall bullish action, but on a very muted, late summer-just-a-week-ahead-of-the-republican-convention level of trade.
The market has been able to rally into rising oil prices, apparently anticipating the drop in crude this week. While the overall action is still positive, it is on a mini scale. The real test is when the big volume comes back into the market. That most likely won't happen until after the republican convention next week and the Labor Day weekend. Thus we could see more of this drift higher on decent trade through the end of next week, but the gains lessening and the action flattening out. Again, think in terms of June.
THE ECONOMY
Q2 GDP second iteration Friday.
The second revision of Q2 GDP is expected to come in lower (2.7% versus 3%) based on rising imports (the trade deficit). Imports deduct from GDP because they are not produced here. This is fine if you are just interested in what we are producing in the US. The problem is, the data is used as some kind of gauge of overall economic health and activity. If you deduct imports (e.g., the autos, electronics, foods, clothing, etc.) that US consumers voraciously seek, you are discounting the purchasing ongoing in the US. It is a historical, economic fact that when the US economy is in good shape the US consumer sucks in goods from all over the world. Thus if imports are the culprit to a lower GDP, we and most likely the market will not view a decline as such a problem. Indeed, we think inventories are being overlooked in this projection. They have been rising both through increased production and a slowdown in buying. When they rise GDP rises as well. Thus there may be more of an offset to imports than is being taken into account.
Will this impact the market? Doubtful unless it is way out of line either way. Expectations have been dropping, but we don't see the kind of activity that would lead to a big upside surprise. To be sure if it is less than expected the howls of economic slowdown will echo in the campaign, but the facts remain: the economic activity this year (and GDP for the prior 4 quarters) is better than that in 1996 when President Clinton was running for re-election. Considering that the economy came to a standstill after 9-11 and the massive additional costs associated with anti-terror preparedness (private and public) and the wars in Iraq and Afghanistan, this is an incredible feat and a testimony to the power of tax cuts that put money back in the hands of those that run the economy. Growth levels not seen in 20 years is no fluke. Things tend to get out of perspective in election years on both sides, and it always pays to look at the bigger picture so whoever wins we don't toss out what is working along with what is not. Without the stimulus our economy would be in serious trouble.
Retail sales remain on sluggish side.
A raft of retail earnings warnings hit the market before the open and took the wind out of the Wednesday resumption of the rally. FRED missed, DG missed, ULTE (electronics) missed. Strike one, two, three. SBUX reported sales grew 8%, a big disappointment when SBUX has been easily growing sales 12% and more per month. That put a chill on the action before it even started.
All but SBUX, however, have had terrible charts. Just because a few retailers do not make their marks does not mean all of retailing is in the tank. Not all retailers are the best. Not all execute the best. Not all will last. That is true for any sector in the economy. There are leaders in sectors and there are laggards. Retail has it leaders, and they are primarily the specialty shops. JCP is a department store, a generally poor retail area, but it is a market leader because it executes. In super good times everyone does well. In bad times the best manage to get by. In between there are big winners, good shows, and losers. We are not writing off retail because some of the laggards are lagging.
That does not mean retail is surging. WMT and TGT are not surging. As discussed before, there is some movement away from deep discounters given the economic improvement. That accounts for some of the erosion in their sales, but there is also a real slowdown this summer in retail in general. It is not a rollover, just slowing after a good 2003 and start of 2004.
Jobless claims rise as storms come ashore.
Jobless claims rose to 343K versus the 335K expected (333K the week before). The labor department says half of the rise was due to hurricane Charley. The 4 week average smoothed things out and came in at 336,750, still well below 350K. Jobless claims continue to weaken even with last weeks storm related gain. Thus we are anticipating a better jobs picture in the August report issued next week. We are still talking with several sources, but we believe it could be quite a surprise on the upside with some July revisions as well.
THE MARKET
Stocks started soft and tried to rally, but only managed a mixed close. There were no more sellers, just fewer buyers as the lower volume shows us. As stocks started the rebound Wednesday, we wanted to see a continuation of the move. That they stalled so soon indicates that the slower creep higher similar to the June move may be starting. Certainly there is less interest by the big players given many are leaving New York City for the convention, taking a long Labor Day week. That will most likely keep volume light and thus there will be some volatility upside and downside.
During this time we still want to see price/volume action continue its improvement, i.e. up on the up sessions and down on the down sessions. That is a necessary shift in the market that shows net buying of stocks as opposed to the overall unloading of stocks up until this month. Remember, we still view this as just part of a continuing bottom forming and that this rally will give way to another test that will get the sentiment indicators higher and flush out the last hopefuls that wanted this to be the rally that takes it out of the base.
Market Sentiment
Volatility slipped slightly as the market stalled its move. Again, we are looking for the current rally to start topping when VIX hits near 14. In June the rally started to stumble as VIX approached 14. It took the entire month to do the damage that stopped the move, but at the same time we watch the price/volume action to see if stocks are starting to distribute, another and very important indication the rally is stalling, and VIX is a solid backup to that indicator. This is particularly true given the relationship that VIX has set up with the indexes.
VIX: 14.91; -0.07
VXN: 21.6; +0.19
VXO: 14.87; +0.24
Put/Call Ratio (CBOE): 0.84; +0.06. The ratio hit 3 closes over 1.0 prior to this latest rally. It has done its job for now. On the next drop we will be looking for volatility to jump higher once more, this time in conjunction with rises in other sentiment indicators, something that did not happen the last time.
NASDAQ
Techs took the brunt of the selling but volume was significantly lower. The buyers left and there was no one to push them higher.
Stats: -7.8 points (-0.42%) to close at 1852.92
Volume: 1.193B (-9.9%). Lowest volume of the year as techs stalled after breaking over the 1850 resistance Wednesday. Again, solid price/volume action.
Up Volume: 360M (-732M)
Down Volume: 807M (+607M)
A/D and Hi/Lo: Decliners led 1.45 to 1
Previous Session: Advancers led 2.08 to 1
New Highs: 50 (+7)
New Lows: 35 (-14)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Wednesday looked as if the rally was resuming, but the stall Thursday may indicate the rally is slowing. Still in good shape as it sits over 1850 after breaking over that the prior session. Still has serious resistance ahead at the 50 day EMA (1875) and then the 50 day SMA (1896). Looking for NASDAQ to rally up toward 1900 as the next serious test, but it really needs to work toward 1950 to set up the next downside move. Of course, the market does what it wants, and we need to keep close eye on the price/volume action as it continues the move. That will be our primary key to ascertaining how far the index will move. For now it is showing solid price/volume action though at an overall low volume level.
The large cap techs have already rallied to the 50 day EMA (QQQ showing the same action), showing a doji at that level. This bears watching. The large caps have tried to lead this move as the small caps are struggling. The doji indicates a possible loss of momentum at the 50 day. We do not want to see volume jump Friday if the indexes start selling from this point.
S&P 500/NYSE
Large caps showed a doji as well after the Wednesday break higher, holding right at the 50 day SMA on very low volume.
Stats: +0.13 points (+0.01%) to close at 1105.09
NYSE Volume: 1.02B (-14.14%). Not the lowest volume of the year, but a substantial drop as the index walked in place. Still showing vastly improved price/volume action but also at a very low level.
Up Volume: 553M (-327M)
Down Volume: 447M (+149M)
A/D and Hi/Lo: Advancers led 1.24 to 1
Previous Session: Advancers led 2.34 to 1
New Highs: 104 (-1)
New Lows: 15 (-1)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Stalling at the 50 day SMA (1105), trading in a very narrow range for the session, unable to extend the Wednesday resumption of the rally. Thus the resumption is not that impressive, and with the weekend ahead and the convention next week, it is likely not to get much higher. Large caps are trying to assume a leadership role. For them to do that they will need to get past the 200 day SMA (1111) and toward 1125 to set up the base better. We note that the index stalled at the 50 day EMA earlier in the week before the Wednesday break higher. Now that the large caps are at the simple 50 day MA, a bit of a stall is not out of the norm.
One of the laggard groups Thursday, but managing to hold the 200 day SMA (277) and the 50 day EMA (277) on the close. Still very weak in its head and shoulders pattern, trying to break it up but facing a lot of resistance at 280. It has helped lead the way to this point, but the large caps are trying to take over. We will see if the large caps can lend a hand.
DJ30
Similar to NASDAQ, the blue chips managed to hold near support (the 50 day SMA at 10,149), showing a doji on the close. More so than NASDAQ or the other indexes, however, DJ30 looks poised to continue its upside move toward 10,250, the critical level on this move (200 day SMA is at 10,251). The blue chip large caps could be ready to assert some leadership and make a run at cracking 10,250. We would be surprised if they could hold a breakout, instead trading up to that level and then breaking through only to fall back. Again we will have to let it show us its strength. The price/volume action is good but the overall volume is low, the common malady of the market. That makes the entire move suspect.
Stats: -8.33 points (-0.08%) to close at 10173.41
Volume: 132 million shares Thursday versus 172 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
GDP will be the dominant early market news, but the bigger picture will be the convention and the weekend ahead of it. We hear that many NYSE floor traders are leaving early and are going to skip next week, ostensibly to avoid the hassle of all of the extra traffic, etc. related to the convention. There is also that quiet worry about New York and the last big convention before the election. Security is tighter than a fish's rear end, but there is nothing like waking up and finding out that nothing happened.
So Friday we expect another light trading session. Even with this lower and lower trade we still see price/volume action improving. Friday it will once again be hard not to top the previous session's trade given the low level. Thus we could see some mild distribution if the hedge funds want to get out of stocks ahead of the weekend. Two up weeks and then the convention may be more than they want to risk. We won't be too concerned about that unless it starts to get out of hand, i.e., volume jumps significantly on some 1%+ losses.
Thursday the 'old economy' stocks made some of the best moves, but those were scattered. Leadership is muddled at best right now as the indexes work through the basing process. It will take another drop lower to push the strongest to the forefront and when they start breaking out we will know who the next leaders are. For now we are still looking at solid patterns that are performing or setting up well, but at this juncture we are keeping close tabs on the overall market price/volume action. If the distribution starts we are going to have watch positions closely and cut away quickly on those that start to distribute and break support.
Support and Resistance
NASDAQ: Closed at 1852.92
Resistance:
May 2004 lows (1876 closing, 1865 intraday) may prove to be some resistance.
The 50 day EMA at 1876 is key resistance.
The March 2004 lows (1897 - 1989)
The 50 day SMA 1896
The 2004 down trendline at 1934
The 200 day SMA at 1971
Support:
1850 (July lows).
The October 2002/March 2003 up trendline at 1833
The 18 day EMA at 1833
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).
S&P 500: Closed at 1105.09
Resistance:
The 50 day SMA at 1105 still holding.
The 200 day SMA at 1111
The March/April down trendline at 1121
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:
The 50 day EMA at 1099
1096 to 1100 represent price support.
The 18 day EMA at 1092
May low at 1084 (closing) to 1076 (intraday).
1080 (May and July lows).
1062 - 1058 from November 2003
1048-1040 from September 2003
1010 - 1015 from June/July 2003
Dow: Closed at 10173.41
Resistance:
The 200 day SMA at 10,251
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:
The 50 day EMA at 10,107
The February/April down trendline at 10,109
The 18 day EMA at 10,057
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 24
Existing Home Sales, July (10:00): 6.72M actual versus 6.81M expected and 6.92M prior (revised from 6.95M)
August 25
Durable Orders, July (8:30): 1.7% actual versus 1.0% expected and 1.1% prior (revised from 0.9%)
New Home Sales, July (10:00): 1134K actual versus 1300K expected and 1211K prior (revised from 1326K)
August 26
Initial Claims, 08/21 (8:30): 343K actual versus 335K expected and 333K prior (revised from 331K)
Help-Wanted Index, July (10:00): 38 expected and 38 prior
August 27
GDP-Preliminary, Q2 (8:30): 2.7% expected and 3.0%
Chain Deflator-Preliminary, Q2 08:30): 3.2% expected and 3.2% prior
Michigan Sentiment-Rev., Aug (9:45): 94.0 expected and 94.0 prior
End part 1 of 2
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