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Begin Part 2 of 2

Despite it all, economy is trying to bottom.

The worst case prognosis is never good. We cannot, however, forget that July was expected to be slower, and even in the slower economic period we have to note that manufacturing appears to be bottoming. The evidence: it is not falling as fast and it is not tanking. There continue to be pockets of strength. Take out technology spending and total business spending was up 0.2%. We hate to piecemeal things, but that just shows that there are pockets of improvement.

In addition, the stock market has refused to tank even as companies report that improvement has to be pushed out to Q4 and beyond. Remember, the earnings we are hearing now are still Q2 earnings on a calendar basis (they covered the same period more or less), and we all knew they would stink. As we have said over and over, bottoms are just that; they look crappy. But at the same time, the 'crappiness' is not getting a lot crappier. Some areas are even looking better. That is a bottom. We have heard a lot of the "never seen things this bad," "does not look any better," etc. from corporate execs. At the same time they admit that things are firming up, 'stabilizing' is the word most often used. Worst ever seen but stabilizing. That is a bottom. Now we just have to hope that the administration does not do the wrong thing and the Fed continues to do the right thing in trying to rectify the disaster it played a large role in creating while the economy tries to continue to piece itself back together.

THE MARKET

The major indexes slid lower in the molasses that has smothered the market. Volume expanded as more sellers entered the market. The put/call ratio moved up to 0.88, a high number that has led to interim rallies, but not the high levels to show real fear. There does not seem to be any fear at all.

The Nasdaq is the closest to sliding much deeper, but the Dow showed the same action it did last week before it started to sell: trading higher intraday and then being unable to break that interim resistance. It has a decent cushion above the near term support at 10,200. The S&P 500 is closer to its recent lows around 1170, and it could join the Nasdaq in breaking those lows. All three, but particularly the Nasdaq and the S&P, are in descending triangles that are bearish patterns (lower highs with constant lows); the breakdown comes when they break below the lows. That can lead to further downside and some decent put action.

It is hard not to, but don't forget to look beyond the major indexes. The NYSE A/D line was positive again today even as the major averages fell again. True, most stocks follow the major indexes, but more stocks are going up than down. They just are not the largest stocks. Paper, regional banks, S&L's, certain retail, building materials, auto parts, business services and a few other sectors continue to push higher in good patterns. They are not glamorous, but they are providing upside returns.

This is another sign that the economy is still trying to improve. These are companies that tend to be economic recovery leaders, and the fact that the collective of the market is pushing them higher means that there is still the belief that certain parts of the economy are recovering or were never really banged up that much in the first place (e.g., homes).

Overall market stats:

VIX: 23.77; +0.76. Flat volatility even as the S&P sold lower. As we said, a slow bleed.

VXN: 48.37; -0.07. Down on a down Nasdaq. More indication of no real correlation right now.

Put/Call ratio (CBOE): 0.88; +0.14. The largest move and the highest reading seen in a month, but still far from the 1.0 and better spike that starts to indicate real fear. Not there yet as the slow bleed continues.

NASDAQ:

Lowest close since April, and it is breaking down out of its descending triangle on another distribution day.

Stats: -45.64 (-2.3%) to close at 1978.89.
Volume: 1.464 billion shares (+19%). The fourth distribution day in seven sessions, usually a harbinger of further selling ahead. Down volume squashed up volume, 1.18 billion to 272 million shares. Below average, but rising volume on selling. Not as strong as the buying volume of three weeks ago, but there are no buyers right now.
A/D and Hi/Lo: Declining issues expanded their lead at 1.38 to 1 (1.02 to 1 Tuesday). New highs rose to 125 (+7; smaller issues again) as new lows jumped to 136 (+42).

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

Breaking down out of its descending triangle on higher but not runaway volume. Possible support at 1868, but it is weak. If investors can get scared enough they can sell this index down hard and perhaps give us a reversal ahead of the April lows. There is not other real catalyst at this point. One thing to note: a lot is made of breaks below support. They are important no doubt. But they can also lead to rapid selloffs and rapid recoveries as sellers jump in, everyone gets scared, and then buyers jump in big time. As we said, we may just get a slow bleed from here. We will get one or the other. We are, however, looking to play the break to the downside as it continues. We will look at some one-day plays along with multi-session plays, capturing the intraday moves as well as the overall move lower. We prefer the latter, but as long as we are watching, we will take advantage of the intraday moves as well. Then we watch for where it bottoms or looks as if it is, close the positions and then see what the next move is, and then act from there.

Dow/NYSE: The Dow tried to rally again but failed again, turning a gain into a bigger loss. Familiar action as it sold on higher volume for the third session out of the last six. Not a good batting average, but it is still fairly comfortable above 10,200.

Again the NYSE showed a positive A/D line. Smaller stocks and forgotten stocks performing as we are seeing on the reports.

Stats: Down 66.22 (-0.6%) to close at 10,345.95.
NYSE Volume: 1.063 billion shares (+10%). Distribution day 3 in the last 6 and four in the last 11 sessions. Down volume did take over up volume today at 608 million to 448 million shares. The Dow looks better than the Nasdaq, but we should not ignore the distribution.
A/D and Hi/Lo: NYSE advancing issues were positive again, but the lead shrank to 1.12 to 1 (1.57 to 1 Tuesday). Not bad action still in face of the large cap selling. New highs fell to 192 (-10) as new highs rose to 34 (+4).

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

The Dow is showing some similar action: testing 10,500 on the high the previous two sessions (10,469.74 today, 10,478.81 Tuesday) and then reversing intraday and closing negative. It did this at the first of the month at 10,600 and fell back to 10,200 to test that support again. It is not close to making a higher low here, and if it does start to sell further in this round, we have to see if it makes a lower low or if it can keep the string of rising lows alive. Rising volume on the selling makes this less likely, and the real issue is whether it holds above 10,200. The selling volume has not been heavy, there is some cushion above near term support at 10,200, and as we noted earlier, the indexes just are not giving up despite all of the bad news that keeps coming out. We will see how it handles this test and hopefully it will give a stronger move that an investor can use. For now we are looking for a test of 10,200 as our DJX puts indicate. A break below 10,200 is a real shorting time for us.

S&P 500: Tapped the down trendline on the high (1191.21) and then turned lower for the session, closing near the lows in bearish action. Volume on the NYSE expanded, and like the Dow it gave the third distribution day in six sessions. Kind of an ugly little head and shoulders pattern above support at 1170 with the left shoulder being a very wimpy shoulder; that can mean the fall will be more abrupt if the pattern completes, i.e., breaks below the support level on a closing basis. We are looking to short the OEX again if the index breaks below that support.

Stats: Down 8.71 points (-0.7%) to close at 1178.02.
Volume: NYSE volume continued to rise (1.063 billion shares, +10%). Distribution near support. That sets us on high alert.

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

TOMORROW

Housing starts, building permits and the Philly Fed report make things interesting in the morning, but as of yet, some slightly positive economic news has thus far not sparked any interest. Of course, slight improvements are individually not the tonic the market needs. Slight improvements are okay, but they need be in the clear majority for investors to open the wallets. That has not happened yet, and with the Fed coming up on Tuesday, investors just may not be too anxious.

The FOMC meeting will no doubt keep many investors on the sidelines. Twenty-five basis points is widely expected though there is talk of 50. We would like to see that talk of 50 ramp up, and it will to some extent ahead of the meeting. That would be a good shorting opportunity, but with a buyers strike prior to the meeting, we may get the shorting opportunity before then as the Nasdaq continues to bleed lower. That is what we are looking for as well as a play on the meeting itself. Many analysts remain sanguine about what the economy is doing and are comfortable with 25 basis points, but we don't like some trends we are seeing such as the bond market. Still, 25 basis points is all we will get once again unless Greenspan wants to surprise the market. That would be a hard sale to the interest rate hawks.

We may see another attempt to rally up to 1940 or so on the Nasdaq before it falls again. If we do see the move higher in the morning and it stalls at 1940 and starts back down, that will be an entry point for shorting. It may not even try to move up; a good entry point in that case is to see the first fall, let it try to recover, and when it starts to fall again, enter there.

Despite the selling on higher volume, the market remains quiet, and we always approach quiet markets cautiously. The indexes have been moving down a lot the past two weeks. The Nasdaq just broke below support, but after more than a week of selling, will the selling pick up now that support is broken or will the buyers try to rally it? There is not a real catalyst other than the several sessions of selling. For now the bias is still to the downside for the indexes and we are going to play the percentages while realizing the distribution has not been as heavy as it could have been. That means we will short the indexes when they give us the play, make the upside plays when they present themselves (the right sectors), and be happy with some decent profits in the 10% to 15% range (higher on options), banking them when we get them.

You may notice that we have been creeping higher on our stop loss points as the market continues its choppy action. We are putting them just below the pivot points or if near term support is close, just under that. That means we are not necessarily waiting for a 7% drop to sell; if the breakout reverses on us and it breaks the pivot, we don't want to let it fall hard on us. Again, we use a lot of mental stops, i.e., knowing where we want to sell and then being alerted to when the stock hits that point we decide if we want to actually pull the trigger or not.

Support and Resistance Levels

Nasdaq: Closed at 1918.89.
Resistance: 1940, the July lows, could now prove to be some resistance if there are no buyers still. 1985 to 2013 is pretty congested.
Support: Very hard to pick right now, but 1868 is a possibility. The low is 1619.58.

S&P 500: Closed at 1178.02.
Resistance: 1200.
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 10,345.95.
Resistance: 10,400 could be some resistance, but mild. 50 day MVA is at 10,510.79. 10,600 is 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): 0.0 actual versus -0.2% expected and 0.0% prior (revised down from 0.2%).
Retail Sales ex-auto (8:30): +0.2% actual versus 0.1% expected and -0.2% prior. NOTE: without autos and energy, retail sales were UP 0.6%.

8-15-01
Business Inventories, June (8:30): -0.4% actual versus -0.3% expected and 0.0% prior.
Industrial Production, July (9:15): -0.1 actual versus -0.3% expected and -0.9% prior (revised from -0.7%).
Capacity Utilization, July (9:15): 77% actual versus 76.6% expected and 77.2% 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.

TEAM TRADES

TTWO made a strong move early today on some good volume, hit the buy point, and then reversed on us. It is software and as that is tech it was a play that was more aggressive, but it looked like a good move up to 24 was a pretty decent bet. A quick 10% move post commissions would be nice. Most funds try for that in a year. The stock raced up early on some good volume, but we were smart, we were not biting in the first half hour. Sure enough it hit 21.60 and turned back down. Now we would wait for it to find bottom, turn back up and make a good trade. The stock retreated to about 21.15 and then started back up. The buy point was 21.50. Did we wait to see if it would retake the buy point (there was a reason for that: clearing the July highs)? Of course not. We saw it bounce and spike higher and got in. The stock hit 21.44 and then reversed. Hard. It plunged to 20.90 and leveled off. It traded sideways for two hours and then broke down. Okay, we were not going to get hammered on this one so we looked for near term support once more, and the 10 day MVA was just under 20. That was about 7%. So we had two levels there, the 10 day MVA (some support) and 7%. We set a mental stop there. The stock danced with it but did not break down. What do we do now? If it bounces back up to 21.50 and cannot make the break, we are not going to mess around but just get out and think we were lucky. One thing we hate more than anything is a breakout that immediately turns on us. If it does not bounce, we don't necessarily have a failed play if it hold in the recent range, but it has lost its pop that we were looking for.

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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