us stock market, stock watch

Begin Part 2: Note - - Due to the illness of staff members, plays will beforwarded late this evening. Thank you for your understanding.

When I see history repeating itself when it is unnecessary, when I see squandered opportunity, when I see the prospect of our economy being crippled for at least a dozen years to come (and thus being unable to recapture the past glory for 20 more years as our consumption engine is now beyond its best, most productive years) if we repeat the same mistakes just as we are in the process of doing now, it concerns me that what should have been a mild slowdown becomes a major economic cesspool. I am writing about what I see, and I am trying to get smart people (our subscribers are extremely well read and educated) to act. I believe in letting a free market solve problems, but when the government causes the problems and then won't let the free market resolve them, we have to contact our government and scream for a sane, free enterprise approach.

So, I am concerned that we are taking foolish steps as our not too distant economic history shows. We could turn this downturn into a real problem for us and our kids. On the same hand, the economy is incredibly resilient. However, there must be a belief that there is a reason to invest in U.S., and when statements by our leaders such as the one I quoted Thursday night are made regarding fiscal responsibility with taxpayer money equaling raising taxes, there is not a lot of reason to invest right now. I remain confident about the future UNLESS our leaders continue to stumble over basic history lessons regarding the economy.

What do we need to get us out fast? Tuesday the Fed needs to cut rates 50 basis points. The claims Friday about how that would shock the market is malarkey. The market is showing us it needs help; it is begging for at least 50 basis points in rate cuts this week. What will happen? 25 basis points will be shaved off and the market will react negatively because that is not what is needed. A great shorting opportunity, but as the name implies, that is short-term. The damage could be long term.

What else? We have already discussed it: investment incentives on the business side, i.e., tax incentives. Investment tax credits, capital gains tax reductions, accelerated depreciation. That will get money flowing again into manufacturing and technology and we can jumpstart another innovation era before all of these bright minds are lost.

It is the prospect, a real one, of losing what 20 years has built that makes me gloomy. The economy is fine for now; problem is, everyone assumes that it will recover just as they assumed in spring of 2000 that it could not be taken down by the rate hikes. As history shows us and as we repeated again and again, that was wrong. History tells us that the rate cuts will work to start the economy. But, there are exceptions to the general rule, and for some inexplicable reason, the U.S. is taking the same steps it has in the past when the exception swallowed the rule. It is mind boggling, it is frustrating, and it is infuriating to see it happen. That is why, without directly stating it, there is a call to arms. Some clear thinking about the good of the country is what is needed, not the petty fighting going on now. We stand to be in good shape as the economy is trying to recover right now. Last thing we want to do is shoot it in the foot (or worse) as it tries to make its move. Yet, that is happening right now. Bombard your senators and representatives with emails and telephone calls. It is our money they are spending and our futures they are toying with. Let's hold them accountable.

THE MARKET

That was probably more than anyone wanted to hear or read. But every once in a while we have to look at the past to understand the future. Now let's look at the market on Friday to see what it is telling us. We don't want to sound too negative about the market, because we are going to get a reflex bounce out of all of this during the week, but overall, the trend is down as long as the dollar remains an issue. There are still some great upside plays out there, but we have to be realistic on our profit goals. 10% to 15% is great for now. To the downside there are opportunities, particularly if the indexes head down to the March and April lows once again.

A bad day on the market despite the light volume. As we saw on Thursday, even with a higher volume rally on the Nasdaq, the close below support was not enough to overcome selling on light volume. The Nasdaq and S&P are both under those July lows; the Dow is walking the tightrope, testing below support on Friday but recovering. That may be the mark that brands it for failure, however. It is not in trouble right now, but it is at risk. That old support now becomes resistance on the Nasdaq and the S&P, and the likelihood of a full test of the lows is high.

What we see in some leading stocks is churning similar to that in March of 2000 when the market was topping. Some leaders are hitting highs on low volume and reversing on higher volume. Friday investors ran to some defensive sectors, but even though a stock made a solid price gain, the volume was less than on the prior selling sessions. What does that mean? Some investors were running to 'safety', but most of the rotation was not to other sectors but OUT of the market.

Will the lows hold? We still believe they will, but we have the new caveat. It used to be as long as the economy held up; well, the economy seems to be continuing to improve. The issue now is whether the dollar gets under control between now and the bottom.

Before they hit the lows the indexes may try to rally; heavy selling usually leads to relief bounces. Outside of the winning sectors of late, we are viewing that as a chance to reload on puts as stocks approach resistance and then turn down from there.

Overall market stats:

VIX: 26.74; +2.91. Sharpest rise in a long time, but it just goes to show that even as the S&P dives, volatility is still low. There is not much fear even after today. It may spike up over 30 if the OEX heads toward the lows, but remember, reversals usually take a reading over 40, and even 50 or 60.

VXN: 52.02; +1.04. Heavier selling, but a smaller rise in the index. As with the VIX, it is way, way below levels that would be considered excessive and thus rally starters.

Put/Call ratio (CBOE): 1.07; +0.11. Closed above the 1.0 level that can signal enough fear for a reversal. In short, options traders as a whole are usually wrong, and when the put buyers swing into the lead, that is just about the time the market turns. Sometimes one day does it; other times it takes more such as in the spring with three closes over 1.0. With the VIX so low, it may take a series of closes over 1.0 as the indexes test lower and fear continues to ramp higher.

NASDAQ:

Stats: -63.31 points (-3.3%) to close at 1867.01.
Volume: 1.299 billion shares (-19.5%). About all you can say for Friday was that the selling was on lower volume. Incredibly low volume for a double witch Friday. 1.068 billion downside shares to 212 million upside shares. It was not a technical distribution day, but the sellers were in the vast majority. As we saw Thursday, even an up day on higher volume can mean little when the bias is down.
A/D and Hi/Lo: Declining issues jumped their lead to 1.95 to 1 (1.05 to 1 Thursday). New highs fell to 109 (-7) while new lows surprisingly fell to152 (-51).

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

The Nasdaq was already below the July lows at Thursday's close and it gapped even lower Friday. It tried to rally, but after 30 minutes the jig was up. It sold off hard, and established a downtrend for the rest of the session. Even a last half hour rally attempt was sold off in the last 15 minutes. It was selling pure and simple. The index closed just below a potential support level at 1870, but that is potential at best. From here to the low at 1619.58 it is relatively a clear shot, or about another 15% downside. After such a week of selling (down over 4%) we will most likely see a reflex bounce at some point, but we had one on Thursday. Monday may be too soon for the next attempt. Things never move up in straight lines, and they don't fall in straight lines either, though the downside moves are sharper. It is now below every short term down trendline you can draw from the May high.

Dow/NYSE:

Avoided closing below support on Friday, but we think it is marked at this point for a further slide. It will try to bounce, but the trend is down.

Stats: Down 151.74 points (-1.5%) to close at 10,240.78.
NYSE Volume: 982 million shares (-7.9%). Volume dropped on the selling, usually a good sign. On a recovery back over support, however, we would have preferred to see volume ramp higher for a solid reversal. That was not the case. Down volume crushed up volume 784 million to 185 million shares. Well below average, but the sellers were out.
A/D and Hi/Lo: NYSE declining issues took back the lead at 1.68 to 1 (1.21 to 1 Thursday). A pretty abrupt change in direction that we will have to watch to see if last week was a peak or whether it will continue its broad uptrend. New highs fell to 175 (-2) as new lows rose to 67 (+9).

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

The Dow was looking better and better, making higher lows and refusing to cave in. Friday it failed to make a higher low but it did recover to close above support at 10,200 (10,180.93 on the low). That is the action you like to see, but the repeated testing of this level (increasing in frequency), the lower low, and the lower high are not good signs. Moreover, the S&P has joined the Nasdaq below the July support levels. That is a lot of drag on the Dow. It may try to bounce first, but the downward pressure from the other two indexes looks as if it could very well drag it down as well. What looked positive Thursday for this stronger index has been clouded. The July low is 10,120.89. Maybe the implausible will happen and that level will hold and give rise to a high volume rebound. We will have to see it. For now we continue to look for another break below 10,200 to add to short positions.

S&P 500: The S&P made the most of its break through the July low, testing 1156.07 on the session low but still closing at its lowest level since April. Volume was light on the NYSE, but as we saw with the Nasdaq, that did not stop further selling. The index will no doubt try a re-test of the 1165 to 1170 area (the July intraday lows) some time this week, but unless something changes to counteract the dollar effect, we do not see that test being successful to the upside. We are very open to a break back through that resistance, but we also have to be realistic. That level will become resistance now, and there is distribution ongoing in the indexes. Thus we think it will test lower before any serious rally attempt can be made. That will give us more downside action with the OEX put plays as we had on Friday.

Stats: Down 19.69 points (-1.7%) to close at 1161.97.
Volume: NYSE volume contracted on the selling, but that was little relief as sellers overwhelmed buyers and the index was unable to recover to close above the July lows.

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

THIS WEEK

After years of jawboning the markets, tax hikes, rate hikes, and then rate cuts, and tax cuts, we come to what has shaped up to be a very important FOMC meeting. For awhile there it looked like it would be an afterthought, a meeting that was going to happen but was not going to be that important in the overall picture. With what the market is signaling now, however, this meeting is very important. If the administration is not going along, the Fed has to be more aggressive to help the economy.

Will it? We would love to say 'yes,' but the Fed has been behind the curve all the way, missing clear signals of disaster until they bit its collective butt. 50 basis points would not scare the market as some say, but would reassure the market that the Fed is acting aggressively to fix what is broken. Maybe a short blip downward, but the overall reaction would have to be positive longer term. Problem is, the market will most likely get 25 basis points and that will be a disappointment. Not that investors expect 50, but the market is showing it needs more than what is expected, that is, more than the 25. That 25 is factored in and the market is still distributing and buckling under support. Unfortunately, Greenspan et al won't act aggressively until the market breaks the March lows. And once again, that will be too late to act to help stave off real trouble.

Monday will most likely bring out some negative analyst comments, and they may target unexpected or at least previously untargeted sectors. After the Ford news, the analysts will feel free to target other sectors that have been doing unjustifiably well in their minds. Which ones? Who knows? Trucking, auto parts, business services?

Even with some negative analyst calls, the S&P will at some point try to test the resistance and the other indexes will join in a reflex bounce. If it happens late Monday and early Tuesday, that is a setup for the fall on the FOMC announcement. We will use it to line up short positions on the indexes and other put plays. Last time we made this play we waited for the news to break and then quickly entered positions. We had our brokers on the ready. That way if the Fed really shocks us and cuts 50 points we don't get steamrolled.

After the Fed meeting and 25 basis points, we feel there will be more selling toward the previous lows, and we will take advantage of that when the opportunities arise, primarily when the stocks rebound and then crest out at the down trendlines or other resistance. That is playing the trend, and it works well. Then we watch to see if the March and April lows hold.

Remember, the market is our indicator. Thus, the key to any move will be the volume. Are buyers or sellers backing up the move on higher or lower volume? Overall of late there has been distribution, i.e., net selling of shares. If that keeps up, the trend is lower and we set our trades accordingly. When the market feels things are right, it will give us the signal we need in the form of a reversal and subsequent follow through with stocks breaking out of nice bases. In the meantime there are still some solid upside plays that can earn us 10% to 15% on a relatively quick move. We take that and be happy, knowing many funds try to make 10% in a year. On the downside, we take the action as it comes, and it can come very fast. Fear is so much more powerful than greed. That is why the market can cascade lower for several sessions while up moves tend to be slower. If fear continues to ratchet up (remember the put/call closed over 1.0) and the VIX starts jumping to extremes we need to start watching closely for a reversal. That will signal itself, however, so we do not need to by sitting by the computer all day in wait. Right now the market is telling us it does not like the weak dollar, not one bit. And if something is not done, it is ready to head lower to prove it. For now the market does not like weak greenbacks or Greenspan.

Support and Resistance Levels

Nasdaq: Closed at 1867.01.
Resistance: 1940, the July lows, will be the level to beat on the way back up. 1985 to 2013 is pretty congested.
Support: Right at possible support at 1869, but the momentum is down further even if it does manage a reflex bounce. The low is 1619.58.

S&P 500: Closed at 1161.97.
Resistance: 1170, the July lows, may prove to be resistance on the rebound. The down trendline from last September is right at that level as well. Then 1200.
Support: 1150 has tried to act as some support or resistance in the past. The low is 1081.19.

Dow: Closed at 10,240.78.
Resistance: 10,400 could be some resistance, but mild. 50 day MVA is at 10,495.75. 10,600 is strong 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.

8-20-01
Leading economic indicators, July (10:00): 0.3% expected versus 0.3% prior.
Treasury budget, July (2:00): -$1.5B versus +$5.1B prior.

8-21-01
FOMC meeting results (2:15): 25 basis points expected. 25 basis points prior.

8-23-01
Initial jobless claims (8:30): 380,000 prior.
FOMC minutes, June 27 (2:00)

8-24-01
Durable goods orders, July (8:30): -0.5% expected versus -2.0% prior.
New home sales, July (10:00): 910k expected versus 922k prior.

TEAM TRADES

With the Dell and Ford news, the indexes were primed to head lower. The Nasdaq and the S&P were the ones we were most interested as the Nasdaq had already breached support and closed below it while the S&P was ready to do the same. On the open the indexes gapped lower. At the open we watched the OEX gap lower and work its way toward the buy point. It did not slow down as it broke 600, so we issued the alert and moved in for the put options. The spread was around $1 on almost all markets, and we went ahead with a limit order at the ask of 15.50. We did not want to get cute and miss the trade. That worked out okay and then shortly thereafter the stock tested the break below 600, moving over it but then tanking. We had taken positions early before the test simply because the index did not even paused at 600 on the way down. It then rolled over and fell to 594, just below the initial target. As the market was in selling mode, we left it alone. It then recovered and moved to 596 where it turned and started back down. We were ready to issue an alert, but held off because we believed the index had to rise in response to the big drop, but felt the momentum was still down. That turned out to be true. It then moved down to 595 again and just hung around there. Given the double witch and remembering Friday, we decided to take partial profits at that point and sent an alert out first. That way we lock in some profits in case it reverses, and we still have more upside if it continues to fall. It did just that, dropping in a downtrend all afternoon. Then in the last hour the drop pick up the pace as the index tanked. The options were over 22 and we thought about closing them out, but we decided to let them run. Well, when a selloff jumps down, it has more of a rebound. Same with a strong move up: it will run up hard, but then have to come back. The index bounced and rallied toward the close, but it could not get back over 595 on the close. A good sign for Monday. If it falls further, we will consider taking remaining profits at 590 if it hits there and bounces once again.

us stock market
stock watch