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THE MARKET

The chip sector debate is a microcosm of the market. We have analysts divided as to what will happen with the sector, and the steady stream of conflicting reports buffets the sector up and down. The market is the same way with analysts and investors uncertain as to the economic future and thus stock prices. One thing we can take from this: when there is great debate over what is going on, there is usually a change in process. With six Fed rate cuts, a tax 'rebate', and more rate cuts to come, we continue to believe the change is to the upside. It is just taking awhile to work through the process.

Overall market stats:

VIX: 23.24; +0.43. A fractional move higher on a similar move in the S&P. Very dull action here at the lower end of the scale.

VXN: 47.49; -1.03. Down a bit on a conservative gain in the Nasdaq. Still not setting up any kind of correlation to forecast with right now.

Put/Call ratio (CBOE): 0.73; -0.02. The put activity held basically steady on the session, continuing its string in the higher end of the range. Even at this level it has not been able to spur any sustained rally. Just as the VIX is stuck in the low range, the put/call ratio resides in the high end of its range, but neither can overcome the other.

NASDAQ:

A climb back up over the previous lows, but volume was not impressive at all. The chip upgrade did not receive an overwhelming thumbs up, so we have to be cautious of a turn back down if more volume, i.e., buying interest, does not turn up. If it does not, the Nasdaq may have trouble crossing even 2000 on this move.

Stats: +25.78 points (+1.3%) to close at 1982.25.
Volume: 1.147 billion shares (-16.4%). Volume was very light on this gain, and without increased buying volume, we cannot look for too much just yet. Up volume led 798 million to 330 million downside shares.
A/D and Hi/Lo: Advancing issues finally took over again at 1.21 to 1 (decliners led 1.12 to 1 Friday). Nothing big, just about what you would expect on a gain on light volume. New highs jumped to 132 (+52) as new lows fell to 91 (-18).

The Chart: http://www.investmenthouse.com/cd/$compq.html

The Nasdaq climbed quickly back above the prior lows in July, but as noted the volume was hardly reassuring; there were not a whole lot of buyers out there. Again, there cannot be a lot of faith in a move back up to the top of the trading range at 2100. For now the index continues its descending triangle pattern, an overall bearish pattern that the index tried to break on Friday. Again, without volume the move lacks any staying power. It tapped one of its recent down trendlines on the high (1986.33), and it has to clear that point as well as the 18 day MVA at 2013.94 before it can move higher.

Dow/NYSE: A very lackluster day on the Dow, finally giving way to a moderate loss on light volume as the session closed. Basically a nothing session.

Stats: Down 0.34 points (-0.0%) to close at 10,415.91.
NYSE Volume: 843 million shares (-12.3%). Volume went nowhere and so did the index. Down volume led 419 million to 416 million shares. A deadlock.
A/D and Hi/Lo: NYSE advancing issues continued to lead at 1.16 to 1 (1.63 to 1 Friday). New highs fell to 176 (-10) as new lows fell to 37 (-14).

The Chart: http://www.investmenthouse.com/cd/$dja.html

Holding with a doji right above potential support at 10,400 and its down trendline, but the real focus continues to be on 10,200. Will the Dow muster a stronger move up from that level and take on the 200 day MVA (10,582.83) and 10,600? As noted over the weekend, it has made a higher low, but it needs to augment that with at least a move up to 10,600 once again; at least at that point the trading range is still in tact and not so much the descending triangle that is plaguing this index as well. Again it needs to generate volume to do it, something it has not done the past two sessions.

S&P 500: The big caps tapped the down trendline on the high (1193.82) and could not hold the move, but still managed to close up slightly. The candlestick chart was a doji right below resistance (the down trendline and 1200), and that can mean a turn back lower. The low NYSE volume certainly does not support the notion of a strong move up. The index needs to break the down trendline on strong volume for any chance at a run up to the resistance at 1225 in the trading range. Right now it has not shown us it can do this, so once again we are keeping those OEX puts on the burner.

Stats: Up 1.13 points (+0.09%) to close at 1191.29.
Volume: NYSE volume fell again, remaining well below average as the index tries to recover off of the July lows (843 million shares, -12.3%).

The Chart: http://www.investmenthouse.com/cd/$spx.html

TOMORROW

Tomorrow there will be some substance to take the place of the analyst speculation today, namely the July retail sales report that is released before the market opens. They are expected to be 0.4% lower than in June, and nothing we saw in July leads us to believe any different. July was a weak month where the economy failed to build on any of the gains or at least slowing the slide lower.

The overall market continues to show very little in the way of a desire to move higher: a very low volume attempt at reversing off of the July lows keeps the move of the last two sessions in jeopardy. After today's session there is not much to keep the Nasdaq or the OEX from sliding back down again below those July lows at which point we would go ahead and short the indexes. On the same hand the indexes, while weak, have not broken down yet. We don't like to get in too deep in the indexes unless they set up a definitive move. They are trying to bounce, and we would play the bounce if we could get some volume on the move.

With a weak overall market in at best a weakly defined trading range (and a range that is trending lower), we continue to look at plays that are much better defined either to the upside or the downside. Today we saw many stocks make the moves we were looking for on very solid volume. Despite the market, good patterns continue to have the best track record for providing consistent returns. As discussed above, it is not a buy and hold kind of market, and adjusting to what is out there is the key. Each report had several stocks that enjoyed solid moves today, and we issued a number of alerts. We would love for the indexes to break higher and give the entire market a lift, but that has not happened and until it does we will continue to take positions as the stocks hit buy points, sell when they hit targets or start to slow the move, and shut down plays that do not make our moves in a hurry.

Support and Resistance Levels

Nasdaq: Closed at 1982.25.
Resistance: The down trendline is at 1986.33, and the 18 day MVA at 2013.94. That entire range represents resistance. The 50 day MVA is at 2050.88.
Support: 1923, the point where the April gap started is possible support. After that it is a crapshoot. The low is 1619.58.

S&P 500: Closed at 1191.29.
Resistance: Down trendline at 1193. 1200 may also act as resistance now. Then the 50 day MVA at 1213.38.
Support: 1170 is some support. After that it is jumbled; 1150 has tried to act as some support or resistance in the past. The low is 1081.19.

Dow: Closed at 10,415.91.
Resistance: Still holding just above 10,400 on weak volume. Jumped through 10,400 Friday, but it has not really cleared that level as volume was weak. The 200 day MVA, the point that has stopped the index time and again, is at 10,582.83 and 10,600 continues to be resistance.
Support: 10,200. 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.

8-14-01
Retail Sales, July (8:30): -0.2% versus 0.2% prior.
Retail Sales ex-auto (8:30): 0.1% versus -0.2% prior.

8-15-01
Business Inventories, June (8:30): -0.3% versus 0.0% prior.
Industrial Production, July (9:15): -0.3% versus -0.7% prior.
Capacity Utilization, July (9:15): 76.6% versus 77.0% prior.

8-16-01
CPI, July (8:30): 0.0% versus 0.2% prior.
Core CPI, July (8:30): 0.2% versus 0.3% prior.
Housing Starts, July (8:30): 1.625M versus 1.658M prior.
Building Permits, July (8:30): 1.568M versus 1.568M prior.
Philadelphia Fed, August (10:00): -10.0 versus -12.2 prior.

8-17-01
Trade Balance, June (8:30): -$29.5B versus -28.3B prior.
Mich. Sentiment-Prel., August (10:00): 93.0 versus 92.4 prior.

SUBSCRIBER QUESTIONS

Q: We have had a number of questions on stop losses in this market, so this seems like a good time to discuss them a bit.
A: One of the problems with a stop loss in a choppy market is that the volatility intraday can take you out of a play when it then turns higher after a test lower. Of course, when you don't have a stop loss in place that intraday touch lower stays down and does not lead to a rebound. What to do?

If we are not going to be around to check on positions or at least be able to keep up with the market through a Palm or a call to the broker we will use stop losses to protect the downside. It won't save us from a disastrous drop and can actually hurt us if we have a stop loss in as a stop loss becomes a market order if the stock price gaps below our stop loss. In that situation we can be sold out on the lowest trade of the session as the stop loss order will be executed on the next trade after the stock starts trading. In that case a stop loss can hurt us more than no stop at all.

Then there is the stop limit which says I am willing to sell at X price but not lower. If the stock gaps below that point, no sale is triggered. If the stock subsequently rises to your stop limit price it will be activated. That is why we often use stop limits just below major support levels (50 day MVA, strong price support) because a stock that gaps through these levels often comes back to test them before tanking again. We don't get the worst trade, and we can get out at a better price.

While we put stop loss points on the reports at subscriber request, we do not use them in all of our positions. At least we do not always use pre-set loss points. We use mental stop loss points, i.e., knowing where we want to sell if the stock tanks on us. That way if we get an intraday test lower, we are ready to sell if we don't get a recovery, but in this market we don't necessarily pull the trigger automatically when a stock drops on light volume. At the end of the day before the close, we will look at positions. If one has tested low on high volume, has broken our stop point, and is not bouncing, we will then go ahead and get out if we see no redeeming features.

This can help us on the upside as well. We have many stocks hitting the buy point and then running up for 2 to 3 sessions, hitting or hitting close to our target price and then turning back down. We can get considerable intraday volatility even in the moves higher, but the close at the end of the session is higher. This allows us to hang in on those plays that are making the move we want even if the move is made in an up and down fashion. Then we can take 5%, 10%, 15%, whatever we are comfortable with. Using stop losses does not provide a lot of comfort in this market; we are looking a lot at 50 day MVA breaches as sell points or when a stock CLOSES below the breakout point from a pattern such as a wedge, cup with handle, double bottom, etc. If it cannot hold on the close above that point, it usually heads down further at least in the short term.

Good Investing!
Jon L. Johnson and The Stock Split Report Staff

All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners of Online Investment Services, LP or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.

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