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financial investment, Breakout test
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10/04/04 Technical Traders Report
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Technical Traders Report Subscribers:
***NOTE: A powerful storm has knocked power off line for several hours at the Daily headquarters. At the same time several computers went down. We are attempting to retrieve and reconstruct the data, but may be unable to do so as our battery backup system is now running low. We apologize for this and will do our best to issue the play tables and new plays, but the outlook at this point is not promising.
If we are unable to do so, we will be issuing intraday alerts regarding new plays on Tuesday. We will include as much description in the alerts as possible.
MARKET ALERTS
Targets hit alerts issued Monday: VRNT
Buy alerts issued: SYNA; AVO; OPTV; ECL
Trailing stops issued: KCP
Stop alerts issued: EYE; JCP
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/alertttr.htm
SUMMARY:
- Good news starts stocks higher, but fade off highs after testing next resistance.
- Factory orders fall for first time in 4 months.
- Fed sticking to its guns, says soft patch is over.
- Stocks surge to resistance, ready to take a rest.
Another positive session gets a bit weary by the close.
Plenty of good news started stocks moving pre-market, continuing the rally from last week. Asia was strong, SEBL (software) reported business was much improved, the Wall Street Journal reported the economy was out of the soft patch, and the Fed speak touted sustained growth and low inflation.
Stocks took to the news and rallied sharply for 30 minutes. NASDAQ broke over the 200 day SMA, took a look around, and headed back under. It was a similar story for the other indexes, but all managed to hold positive on the close though near session lows. After the solid surge to end last week, this run to next resistance was the next logical upside objective. When it was hit the buyers stepped back to take a breather and survey the move.
While NASDAQ hit the 200 day SMA and faded, SP500 continued its move above the March/June 2004 down trendline, putting some distance on that break. It stalled below the June highs, but with continuing solid volume it was still a good session. Volume has definitely surged during this rebound, and even though stocks closed well off their intraday highs, Monday was yet another accumulation session. After a bit of a breather stocks will be set to continue the move if they don't show renewed selling on even stronger volume. After this move and given the leadership, the latter seems less likely even with the modest sentiment beginnings when the rally started.
THE ECONOMY
Business investment falls in August.
Factory orders fell 0.1% in August, well below the modest 0.1% gain anticipated and the 1.7% recorded in July (July revised upward from 1.3%). Factor out civilian transportation, however, and dales rose 1.3%, an indication that the factory expansion, despite a slowdown, is still indeed expanding. The ISM last week showed the slowest factory sector in almost a year, but also the sixteenth consecutive month of expansion.
Thus the factory picture has not changed much: a slowing expansion, but an expansion nonetheless. The fly in the ointment other than plummeting aircraft orders (-42.9%) was non-defense capital goods spending less transportation. This is considered a proxy for business spending, and it fell 0.8% after rising 0.6% in July. With Q4 now here and many companies looking to take advantage of the $100K expensing and accelerated depreciation, we anticipate this slowdown will be short-lived.
Wall Street Journal, Fed says things moving along just fine.
Well, it has appeared in print, so it must be true. A WSJ article Monday stated the economy had moved out of the 'soft patch' from the summer, citing various reports that in our opinion still leave the question open, at least based on the empirical evidence cited. The current manufacturing data still appears mixed, indicating expansion but no clear re-acceleration of the economic progress, particularly at a level along the lines of 2003.
That did not stop the Fed from prognosticating that the economy was in good shape either. One governor reported that the economy was at or close to the point of sustainable growth that was also free from any notable acceleration in inflation. Gee, we have hit nirvana and did not even know it. We agree that inflation is not accelerating overall (other than the usual suspects of healthcare, education and energy which, of course, impacts none of us), and agree that the economy continues to expand for now, but we have not observed any indications of a substantial pickup in economic activity that would suggest the soft patch has ended and that unequivocal expansion was here to stay. That is why the Fed's continued goal of increasing rates once again has it in a hard spot: a slowly expanding economy that still needs tender care yet also the need to get interest rates back to a level to give it some ammunition in the case of another financial emergency.
THE MARKET
The overall rally was over in the first half hour as NASDAQ hit the 200 day SMA and SP500 climbed into the June consolidation range. That was enough to stall the move, but it did not bring in a bunch of sellers. Stocks sold back most of the rest of the session as things got a bit overbought on the solid rebound move. The managed to hold positive on that stronger volume, officially logging another accumulation session.
With the pullback from the session highs, particularly at the next important resistance after a solid surge, that suggests a bit more backfilling to do after the rally. Even though stocks sold most of the session after the initial surge, there was not major pillaging by sellers. What we saw appeared to be near term profit taking by hedge funds and some more aggressive funds banking some gains after a nice surge to a logical resistance point.
Now that NASDAQ has hit the 200 day SMA, a level that is a logical resistance point and one we looked at when this rally started in August, we do have to ask if this is the point it turns over. When we set out that scenario we also said it would depend upon how strong the rally was. It looked to have folded two weeks back with the Wednesday reversal from a breakout attempt, selling on stronger volume. It did the improbable, however, bouncing back on even stronger volume, then breaking out on heavy trade late last week.
That is a sign of strength we did not anticipate, and it looks to have turned the tables on the selling as buyers entered with even more vigor than the sellers. Thus this pullback to test the move should come on lighter trade as the buyers, stronger in number, take a breather and let the short term sellers have their say. If volume stays modest we anticipate a successful resolution to the pullback.
Market Sentiment
VIX: 13.41; +0.66
VXN: 19.61; +0.7
VXO: 13.11; +0.56
Put/Call Ratio (CBOE): 0.86; -0.11
NASDAQ
Gapped higher, ran to the 200 day SMA on the high and then gave back half the gain on some solid volume.
Stats: +10.2 points (+0.53%) to close at 1952.4
Volume: 1.865B (+1.42%). Volume edged higher as NASDAQ added another gain on rising volume. Though it gave back half of the gain, still an accumulation session.
Up Volume: 1.279B (-266M)
Down Volume: 568M (+284M)
A/D and Hi/Lo: Advancers led 1.53 to 1. The pullback from the high took breadth from 2:1 back to 3:2. Still solid and not bad for a session where it stalled.
Previous Session: Advancers led 2.42 to 1
New Highs: 192 (+49)
New Lows: 26 (-6)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Gapped higher, tapped the 200 day SMA (1964), then faded to the close. Volume remained solid all session as it shows a tombstone doji on the session. After such a gain and having risen to the 200 day SMA, this is a natural position for it to take a breather. Accumulation has outpaced distribution volume-wise since the rally renewed. Thus we expect a pullback to fill the gap higher (back to 1942) or a bit lower, and then it will be ready for another run at the 200 day. May take a few sessions to set back up. As long as volume turns lighter on the pullback it remains in solid position.
Gapped higher as well, moving further beyond the 200 day SMA (1441), then fading toward the close. QQQ volume backed off on the gap higher and doji, but still a solid, above average volume session.
SOX continued its rally as well but as with the other indexes was unable to hold the lion's share of the gain, giving back 8 points. Still holding above some support at 400. A test of that level that holds and feeds into a rebound would be a good buying point.
S&P 500/NYSE
Large caps rallied further, solidifying their move above the down trendline. Volume was solid though lower on this extension of the breakout.
Stats: +3.67 points (+0.32%) to close at 1135.17
NYSE Volume: 1.536B (-3.38%). Volume backed off but remained well above average as SP500 posted another gain on this solid run off of the 50 day SMA.
Up Volume: 1.014B (-347M)
Down Volume: 493M (+278M). Up volume was still well ahead of downside volume, and indication there was not much selling enthusiasm as it came back.
A/D and Hi/Lo: Advancers led 1.44 to 1
Previous Session: Advancers led 2.94 to 1
New Highs: 416 (+71). Small caps helped push another solid new high session. It is getting to a very solid level.
New Lows: 10 (-6)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Solidified its move above the March/June down trendline (1130) after cracking that level Friday. Volume slipped a bit more, the second session of lower NYSE volume on this move. Still, upside volume is way, way out ahead of the downside volume as SP500 sank to test the 50 day SMA the prior week. It ran up into the June highs (1142 to 1146) intraday (1140) and then faded back. As with NASDAQ, this is a natural point to take a breather after a good surge. Want to see it hold at or near the recent September highs (1128) on the test back.
SP600 (small caps) rallied again, clearing 300 and a new all-time high before falling back on the close. Held the gain and another new high, but it too needs a breather back toward 287 (June high) down to the recent September high (293), hold, and then start back up.
DJ30
The blue chips still struggled, rallying with the market but unable to clear the February/June down trendline (10,273) on the high before falling back and scratching out a small gain. It along with NASDAQ are the only indexes that still have another 2004 down trendline to cross. Dow remains locked in its base, unable as of yet to take out the September highs (10,363) or the down trendline.
Stats: +23.89 points (+0.23%) to close at 10216.54
Volume: 253 million Monday versus 267 million shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
ISM services is out at 10ET, but at this point investors are shifting focus toward the Friday jobs report (the second debate on domestic issues is that very night) and then earnings that kick off with AA and GE next week. There has been a good run up to this point ahead of earnings after selling on a more active than usual warnings season. Investors either believe things will be better than the early warnings indicate, or they have just factored in this news and believe a recovery is underway once more. We say investors 'believe' this, but it is more of action rather than conscious thought as markets tend to move before the outcome is clear.
Now if stocks take a breather over the next few sessions ahead of earnings, that could work well in the market's favor. Stocks give back some of the gains, take out some of the fluff and set themselves for another run at the next and very key resistance. Stocks may pay less attention to the specifics of the economic reports and instead look at the general trend; that is expected to be a steady though not spectacular continuation of the expansion.
The economic focus will be on jobs near term, despite it is a lagging economic indicator. The reason is the implications for the presidential election. Some argue the market is keying in on the race, but if Bush 'lost' the debate, the market still managed to rally the next two sessions. Jobs are not the indicator for a continued expansion, but they provide tremendous ammunition for the debate, mostly for Kerry. If they are great it is a fluke; if they are as anticipated, it is not enough. Again, this is short term, and the weekly indications are all over the map thanks to the storms. Thus the number itself is going to be very suspicious, though we are hearing there are some big revisions for back months coming. It will be interesting as usual, but it won't tell us about the economy in the future, and the current month is a mess.
For Tuesday we are looking for a pullback to continue to test the recent moves. We want volume to remain light as it does, showing lighter volume as it trades lower. SP500 should hold near the down trendline and NASDAQ to fill the recent gap. That may take two to three sessions, but then it will be set up to make another move.
Support and Resistance
NASDAQ: Closed at 1952.40
Resistance:
The 200 day SMA at 1965
January/late June down trendline at 1977
Price resistance at 2050
Support:
Recent September high at 1921
The 2004 down trendline at 1899
September gap up point at 1894
The 50 day EMA at 1885
The October 2002/March 2003 up trendline at 1873
The 50 day SMA 1857
S&P 500: Closed at 1135.17
Resistance:
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:
1130 is the March/June down trendline.
1125 to 1130 stalled the last move and could be some support.
The 200 day SMA at 1119
The 50 day EMA at 1111
The 50 day SMA at 1103
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 10,1216.54
Resistance:
The February/June 2004 down trendline at 10,273
The 200 day SMA at 10,298
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 10,158
9980 to 10,000 held as support Tuesday.
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.
October 04
Factory Orders, August (10:00): -0.1% actual versus 0.1% expected and 1.7% prior (revised from 1.3%)
October 05
ISM Services, September (10:00): 59.0 expected and 58.2 prior
October 07
Initial Jobless Claims, 10/02 (8:30): 335K expected and 369K prior
Consumer Credit, August (3:00): $6.0B expected and $10.9B prior
October 08
Non-farm Payrolls, September (8:30): 150K expected and 144K prior
Unemployment Rate, September (8:30): 5.4% expected and 5.4% prior
Hourly Earnings, September (8:30): 0.3% expected and 0.3% prior
Average Workweek, September (8:30): 33.7 expected and 33.8 prior
Wholesale Inventories, August (10:00): 0.8% expected and 1.3% prior
End part 1 of 3
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financial investment
Breakout test
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