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us stock market, trend trading stock
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9/27/04 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Monday: AAI
Buy alerts issued: ALTR; AFL
Trailing stop alerts: DKS; SSI; CHTT; SAPE
Stop alerts: IDEV
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/alertdly.htm
SUMMARY:
- Stocks continue where they left off, continue bearish action.
- Oil approaches, cracks $50/bbl, financial stations on 'oil watch.'
- August new home sales surge on lower mortgage (a.k.a. bond) rates.
- September selling well underway as indexes break another support level.
September selling continues as new week starts.
When the market struggles you can look at techs, chips and smaller caps and pretty much bet they are down. Monday they were all down. Small caps were in front early but by the close SOX had again staked its role as the downside leader. They were not alone, however. As noted, NASDAQ was heading south, gapping below its 50 day EMA and closing below the October 2002/March 2003 up trendline. SP500 cemented its move below the 50 day EMA on rising volume. DJ30 dropped through the 10,000 level and found itself back below its February/April down trendline.
Intraday action did not provide much inspiration either. Stocks traded in a range until the last hour, but it was volatile action. NASDAQ made 3 attempts to break over its gap down point. It failed each time, and after the third attempt the three strikes and you are out rule came into play. It and the rest of the market sold after lunch, and really tailed off after a last hour rally attempt rolled over. Once more the indexes closed on the low as they did last week, no longer able to post those late session rebounds. Not only is the price action bearish overall, it is even that way intraday.
Volume was up on NYSE, and though lower on NASDAQ, it was another distribution session on a major index, the second in four sessions on NYSE. Bearish intraday price action, bearish overall price action, breaking more support, and some rising volume. Those are a continuation of the symptoms of a sell off the market has flashed of late. The September selling has started and picked up some more speed.
THE ECONOMY
Oil cracks $50/bbl in late trade.
With Ivan knocking 500K bbl/day offline in the Gulf of Mexico, oil was already under pressure. When Nigerian rebels said they were mounting an all out offensive against the government, the pressure increased. That was enough to drive oil toward $50, and in the late trading session it actually moved through $50/bbl before backing off. The $50 level is acting as a magnet much as $100 does for stocks. It may recoil some from that level, but then start back up if no relief is in sight.
It continues to be one bad news story after another. Normally these stories would not cause such a furor. Problem is, the oil market is very sensitive to any problems, and with a lot of money tied up in oil futures, each story is met with a jumpy crowd ready to push the panic button. Thus the stories have a lot of weight in a very sensitive market.
In looking over the recent stories, the most likely catalyst to this last move was the sharp drop in US inventories last week. Oil, gasoline and distillates all fell, and fell considerably more than anticipated. The one that the US consumer is going to feel over the next few weeks is rising gasoline prices. A month back inventories were being built while the US driving season was nearing the end. Gasoline supplies have now contracted, and this past week prices jumped $0.05/gal on average. They are going higher in the coming weeks because gas supplies are falling. Unlike the last time oil spiked and gasoline prices fell, this time the gasoline supplies are falling. Simple supply and demand; falling supplies lead to rising prices in a constant demand environment.
The rising gasoline prices are the most immediate impact on consumers. Rising energy prices may or may not be passed on by goods and services manufacturers to consumers (in 1992 and 2000, price increases were not passed on). Without fail, higher gasoline prices at the pump impact the consumer. Best case is only pump prices rise. Worst case is those prices rise and producers hike their prices as well. The latter is still problematical; United Airlines raised its tickets $10 per leg but then immediately rescinded it.
Thus there will be rising gas prices in mid-October, just weeks before the national election. Given the timing you can bet that issue will be punted around in the debates. Bush can always say $50/bbl and the problems with Ivan are enough to open SPRO, but thus far he has been unwilling to do so, instead holding that back for more of a disaster situation (e.g., terrorists attack Saudi or other major production facilities. Indeed, it would take 30 million barrels or more to make a real dent in the fear over rising prices. At one point all it would have taken was an intervention or two; now it would take a clear message the SPRO was open and would remain open until prices cracked.
August new home sales surge.
Sales surged 9.4%, much better than the 1.4% gain expected. Lower mortgage rates were credited, and indeed lower rates are the main catalyst in the housing market's run. Looking at the trend for the past year and more sales rise noticeably as mortgage rates decline.
Of course last week existing home sales showed a 2.7% decline, and those make up 80% of the overall market. Thus we cannot make too much of the August surge in new home sales in the sense it is indicating some new rally in housing. Refinancing was up sharply last week and will most likely be higher this week. The housing market continues to perform at historically strong levels, helped by historically low interest rates.
Why are mortgage rates so low? We all know the Fed is raising short term rates, but long term rates are still falling as money moves into bonds as an alternative to stocks just now and also on worries that longer term the economy may not be as strong as the Fed seems to believe. The Fed is raising rates, but it has yet to have much effect on long term rates. This is the opposite scenario from when the Fed lowered short term rates in an attempt to bring longer term rates lower after all of the crises hit. It took quite awhile for long rates to soften.
We could see the housing market continue its strength, at least holding current levels, if the economy continues to cool and stocks naturally do the same (stocks would sell before the economy shows obvious slowing). What we saw after the 2000 stock market collapse and the 9-11 attacks was 'cocooning', e.g., home improvements, second/vacation homes, etc. If the market cools it would not take much for many investors to revert to home improvements as a method of storing or enhancing wealth. With home prices at historic highs in many places, that may ultimately result in unanticipated losses. Thus far, however, that has yet to be the case in most of the US.
We will have more on housing later this week as more data comes in that will help flesh out where we are in the cycle.
THE MARKET
Little change from last week as stocks moved lower again, breaking the next support levels as the indexes head down. Volume was mixed, rising on NYSE, down on NASDAQ, but overall fairly light and below average. No major distribution, particularly on NASDAQ, but overall continued erosion with bearish price action.
Breadth was again weak, and volatility rose, but is still way down in the range, not far off 14. Large caps to small caps endured selling once more with many indexes breaking the next support levels. In spite of the selling, many leaders are still holding up quite well, trying to buck the general selling. We are not talking necessarily about oil stocks that are rising on the back of oil, but stocks from many sectors that are holding above near support as the overall market fades. If they continue to ignore the overall market selling, when bottom is hit, they will be ready to post the strongest advances.
Thus, the selling is not engrained through the market. At the same time, however, in order for this to be a better test that sets the bottom of the base there will have to be some serious downdrafts to get all of the sentiment indicators on board. Those stocks currently hold the line will be seriously tested and many will fail or sell more than you care to ride; after all, typically three-fourths of all stocks follow the overall market direction. With VIX still low and bullishness still high after never hitting even close to extremes as this rally began, there is still downside ahead.
Market Sentiment
VIX: 14.62; +0.34. Volatility is still well below levels even remotely indicating selling would be over, even the lower levels hit earlier this year on the modest bottoms.
VXN: 21.92; +0.82
VXO: 14.3; +0.16
Put/Call Ratio (CBOE): 0.99; +0.05
NASDAQ
Gapped below the 50 day EMA and closed below the October 2002/March 2003 up trendline, but on lower volume.
Stats: -19.6 points (-1.04%) to close at 1859.88
Volume: 1.333B (-2.14%). Volume backed off further below average, continuing the string of lower volume selling that was sparked by the high volume reversal and sell off last Wednesday. While not undergoing distribution currently, that reversal was a strong one and did the damage.
Up Volume: 267M (-126M)
Down Volume: 1.054B (+120M)
A/D and Hi/Lo: Decliners led 2.56 to 1. Breadth got quite ugly as many non-tech small caps trading on NASDAQ sold along with the techs.
Previous Session: Decliners led 1.06 to 1
New Highs: 46 (-18)
New Lows: 78 (+35)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Gapped below the 50 day EMA (1879) and then tried three times to recover above the gap down point (1871). It failed each try, and on the third strike it headed lower. A late bounce attempt was quite weak, and it too rolled over as NASDAQ closed near its session low. NASDAQ had managed to rebound from its October 2002/March 2003 up trendline (1866) intraday, but the last hour rollover closed it below that longer term trendline that set the bottom for this entire move. That trendline was broken in August, but NASDAQ managed to recover. It has the same task ahead of it, but we anticipate NASDAQ has some more selling ahead of it before it finally resolves this breach on this particular downleg. In the process of breaking that trendline NASDAQ also closed below the its early August high. When NASDAQ broke that high just below 1900 three weeks back, that was a positive development for NASDAQ, shifting it into a near term uptrend. This failure keeps alive the 2004 downtrend and indeed puts further downside in NASDAQ's future.
After failing at the 200 day SMA last week, NASDAQ 100 has suffered as well. It broke its 50 day EMA as well Monday, gapping lower, testing the break intraday, and then fading back once again to close. Some support at 1375 (closed at 1385) could slow the fall, but as with NASDAQ, it broke below the early August peak, sending it into a near term downtrend to match its overall downtrend.
SOX plunked further, continuing its move down from the 50 day EMA failure. It closed just over 375, but we do not anticipate that acting as significant support.
S&P 500/NYSE
Large caps broke back below the 50 day EMA on rising volume as they continue to weaken after failing at the March/June down trendline last week.
Stats: -6.59 points (-0.59%) to close at 1103.52
NYSE Volume: 1.259B (+0.67%). Not a major surge in volume, and right at average, but still rising on the selling. That is the second distribution session in the past four. Distribution is higher volume selling and indicates that the big money managers are dumping some of their holdings. When they sell their stocks, it is hard for the market to hold up.
Up Volume: 310M (-360M)
Down Volume: 941M (+374M)
A/D and Hi/Lo: Decliners led 1.79 to 1. Was much worse earlier in the session.
Previous Session: Advancers led 1.25 to 1
New Highs: 124 (-19)
New Lows: 59 (+28)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Failed in its attempt to hold the 50 day EMA (1109). The large caps ran into a wall near 1125 - 1130 last week, a point of price resistance as well as the March/June down trendline. From there it has popped the 200 day SMA (1117), the 50 day EMA, and is now heading to the 50 day SMA (1101) as well as some price support at 1100. It also violated its early and late August peaks on the move. Will most likely try a bounce or slow at 1100, but we do not think that will be the end of this selling.
SP600 failed at key resistance last week at the April peak, the left shoulder in its 6 month head and shoulders pattern. After a weak bounce Thursday and Friday to the 10 day EMA, it rolled over again Monday, breaking through the 18 day EMA (286) in the process. Next support near 282.50 and 280 with the 50 day EMA and 200 day SMA.
DJ30
The blue chips continued to sell lower, being the first index to hit its down trendline this month and then selling off after it looked ready to try and make a stand. It could not make the stand obviously, and it popped the 200 day SMA, 50 day EMA, and now the February/April down trendline along with 10,000. 9900 to 9800 appear to be the next levels it will test, but it could be lower.
Stats: -58.7 points (-0.58%) to close at 9988.54
Volume: 199 million shares Monday versus 204 million shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
The indexes started lower again Monday, and it does not look as if it has finished this leg. Sure it will rebound some as it moves lower, but the overall move right now is lower. This is the move we anticipated and one we said had to happen before the market could put a bottom to this base.
It is still not there yet, having just made this rollover and breaking the late July, early August peak. It will have to come back further to raise sentiment levels high enough. Bulls are high, bears are low, volatility is low. It has a long way to go, but if stocks start selling sharply toward the August lows, those sentiment indicators will start to reverse rapidly as investors adopt a 'oh great, here we go again' after it looked as if the indexes were ready to break higher with SP500 and the small caps making fairly close approaches to their 2004 highs.
We thus anticipate an overall downward bias though there will be rebound attempts as always. After some more selling Tuesday stocks may try to rebound some from the next potential support levels, e.g., SP500 at 1100ish. As noted above and before, there are still stocks holding their ground, and we will let those continue; if we see weakness, however, we will shut them off and look for the next opportunity. Even leaders can have a few off sessions and then rebound, but you never know they will recover if they break some support on rising trade.
We continue to look for downside plays to take advantage of. After a week of selling there are still some in good position, but many are going to need a rebound to test the move lower just as breakouts test their breakouts. That makes for a good entry point, one of our favorites whether upside or downside. Often in these situations we take a partial position on the first move and then add to it at the next opportunity, e.g., when a rebound fails and starts back down. We feel there is still plenty of downside on this move, but it typically is not a straight line, at least not until a real collapse is underway. We will pick our shots and move in when the time is right, but keep in mind that the bias is downside and we can let positions move with that general bias until there is a sharp move that signals a change.
Support and Resistance
NASDAQ: Closed at 1859.88
Resistance:
The October 2002/March 2003 up trendline at 1866
The 50 day EMA at 1879
Gap up point at 1894
The 2004 down trendline at 1903
The 200 day SMA at 1965
Support:
The 50 day SMA 1854
July 2003 highs at 1755
S&P 500: Closed at 1103.52
Resistance:
The 50 day EMA at 1109 could not hold.
The March/April down trendline at 1115
The 200 day SMA at 1117
1125 to 1130 stalled the last move.
1130 is the March/June down trendline.
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 represent price support.
May low at 1084 (closing) to 1076 (intraday).
1080 (May and July lows).
1062 - 1058 from November 2003
Dow: Closed at 9988.54
Resistance:
The 50 day SMA at 10,109
The 50 day EMA at 10,162
The 200 day SMA at 10,295
The February/June 2004 down trendline at 10,290
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:
10,000 is trying to hold as support, but thus far failing.
9900 is some support from the May and July lows.
9783 to 9793, the August lows.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
September 27
New Home Sales, August (10:00): 1184K actual versus 1155K expected and 1082K prior (revised from 1134K)
September 28
Consumer Confidence, Sep (10:00): 99.5 expected and 98.2 prior
September 29
GDP-Final, Q2 (8:30): 3.0% expected and 2.8% prior
Chain Deflator-Final, Q2 (8:30): 3.2% expected and 3.2% prior
September 30
Personal Income, August (8:30): 0.4% expected and 0.1% prior
Personal Spending, August (8:30): 0.1% expected and 0.8% prior
Initial Jobless Claims, 9/25 (8:30): 340K expected and 350K prior
Help-Wanted Index, August (10:00): 38 expected and 37 prior
Chicago PMI, September (10:00): 58.0 expected and 57.3 prior
October 01
Auto Sales, September: 5.1M expected and 5.2M prior
Truck Sales, September: 8.1M expected and 8.2M prior
Michigan Sentiment-Revised, September (9:45): 96.0 expected and 95.8 prior
Construction Spending, August (10:00): 0.4% expected and 0.4% prior
ISM Index, September (10:00): 58.3 expected and 59.0 prior
End part 1 of 3
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