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us stock market, swing trading stock
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10/23/04 Technical Traders Report
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Technical Traders Report Subscribers:
Part 3 containing new plays will be forwarded later today. Due to an emergency it will be delayed. We apologize ahead of time for this inconvenience.
MARKET ALERTS
Targets hit alerts issued Friday: None issued
Buy alerts issued: None issued
Trailing stops issued: None issued
Stop alerts issued: NOVN; PRAA
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:
- Once more the market turns back, answering a good session with selling.
- Several major obstacles to a longer term market advance.
- The October surprise has emerged.
- Chinese economy slowing, but at these levels it is hard to notice.
- Dow dives to new 2004 low, SP500 in pursuit, but NASDAQ and SP600 are surprisingly solid.
Solid move up, solid move down.
We have all heard the trite phrase 'two steps forward, one step backward,' but finding real life applications is not always that easy. Even the stock market with its strong upside days and strong downside days of late is not a perfect example. Indeed, for some of the market you could say it is more one step up and one step back or in the case of DJ30 even one step up and two steps back. The point: the market is having a very hard time finding itself in this time of uncertainty.
It is a market with two faces. The non-tech large caps are being pounded lower, particularly on DJ30. SP500 is selling, but unlike DJ30, it is still well above the lows for the year. That does not make it a picture of health, however, as it undercut its September low Friday, making a lower closing low and thus indicating more selling ahead. NASDAQ is still in good relative shape, easily holding support levels as it tries to make another run at the 200 day SMA and 2004 down trendline. Along with the small caps and even the SOX, it is still making two steps forward and one step back, or maybe 1 step forward and one-half step back to be more accurate. In any event, NASDAQ and the small caps, while moving in a halting manner, are holding up and building toward another break higher while the large caps are heading lower.
Earnings are on the menu now, but other problems linger.
Right now earnings are the focus, and overall they are disappointing. Sure there are hot earnings such as EBAY, GOOG, but there are also many disappointments such as MSFT, MMM, JPM and others. The news sends some stocks vaulting but others falling. In general, stocks are not rising as a result of the earnings announced thus far.
Earnings, however, are just the current menu. Overhanging the market is the same old triumvirate: oil, the Fed, the economy. You could also toss in the election and lingering terror worries. All of these have a direct impact on future earnings, and thus current stock prices. We discussed oil extensively last week, and the week before we looked at the Fed, and we never stop looking at the economy. Oil is starting to have its impact on an already slowing economic expansion. The Fed is raising rates into a slowing economy, but it is starting to balk even as inflation heats up thanks to poor policies of promoting demand before assuring the supply side of the economy could handle it. Always promote investment before demand; if you do it the reverse when there is a severe business side correction you get more dollars chasing fewer goods and there is no supply side investment to rapidly ramp up supply.
Those are some serious headwinds. The Fed may be talking about letting up but it is not talking about the cessation of the current rate hiking campaign. That is not good enough to allow the market to make a new breakout. Back in 1994 the Fed was in a rate hiking campaign and the market moved sideways for the entire year. Only when the Fed announced it was through did the market shake off the lateral move and rally once more. A Fed on hold is simply rate hiking delayed and thus serious market gains delayed. As long as the Fed has the glint of rate hikes in its eye the market finds it tough to fight the Fed.
The new problem with a familiar theme
As serious as the Fed is to the market's ability to sustain an advance (the 10 month sideways move this year is a clear example) there is a new problem, the insurance scams that smack of the corporate accounting scandals that helped keep the market mired in the long downtrend. The allegations have hammered large cap insurance stocks and brokers as well as some healthcare sectors that are part of the medical insurance game. SP500 has been thumped hard given the insurance and healthcare representation on that index. As noted, it broke below its late September low, making a lower low and setting the stage for further selling. DJ30 has been slammed from all sides, and AIG was one of the reasons. Of course MRK, PFE, MMM, HON, and friends have also buffeted the Dow in addition to AIG.
Hopefully the ramifications of this latest instance of fraud will be narrowly contained. As seen last week, however, it quickly spread to health insurers. Another drawn out scandal is something the market cannot handle. Maybe if the Fed was not in a rate hiking campaign, if oil was not spiking to $55/bbl, and the economy was not already slowing it could shake it off. Maybe it will anyway the way NASDAQ is acting. At a minimum, however, it makes the ability to rebound all the more difficult.
The October surprise?
Ever since the rumor spread that Osama Bin Laden was secretly held somewhere ready to be sprung on the electorate just before the election, speculation has ebbed and flowed about an 'October surprise.' Well, in our view the insurance lawsuits are the surprise. Not that the situation does not need cleaning up; the allegations are serious and cost us all billions in higher insurance premiums. It is the manner and timing of the announcement that is the surprise, or perhaps not.
Elliot Spitzer has admirably served his post, pursuing problems in the financial sector when the SEC was asleep at the wheel. He has also made some dubious allegations against northeastern utility companies about global warming. Those are not talked about much because they were such thinly veiled politically motivated lawsuits designed to win popular support for further political aspirations. It is no secret that Spitzer seeks the US Attorney General post in a democratic administration. Floor traders in New York are quite aware of this, and that is why they have been furious the past two weeks about the billions of lost market cap in these stocks that are mainstays in retirement accounts and pension funds.
Why not, they ask, meet with the NYSE first and let it know what is about to happen so the stocks could be halted and thus investors could make rational decisions with a bit of time as opposed to the split second decisions when the lawsuits were announced during market hours? That would not have changed the losses necessarily, but it allows for more orderly management of the situation. It is not uncommon at all for stocks to be halted 'news pending,' but of course, the watchdogs for the public have to inform the directors of the exchanges ahead of time. As many floor traders and brokers noted to us, it is ironic that Spitzer brings the suits in the name of the common citizen but then acts in a way that assures the common citizen will get hurt again. Not only did he pay more in insurance premiums, he now pays in lost wealth. After all, the investment class in America is now huge with more than 50% of Americans owning stock.
Why not meet with the companies at issue and work out a compromise? We are hearing from many insiders that with the outcome of the brokerage and mutual fund scandals and the evidence already accumulated, working out a settlement without filing lawsuits was a reasonable alternative to the carnage resulting from the surprise announcement.
Instead, the announcement appears made with the intent for maximum impact for Mr. Spitzer's career. Call us overly cynical, but this was timed to highlight more corporate malfeasance and knock the market back some ahead of the election. If the market makes new lows for the year and those villainous corporations can be singled out again, maybe you can swing a few more voters with the 'bad economy' argument and thus capture the US Attorney General post. We have feared a traditional terrorist attack before the election. How about a domestically engineered attack of a financial persuasion?
Don't think we would do it to ourselves? Again, maybe we are a bit cynical, but hey, we have seen the Fed raise interest rates supposedly to fight off inflation that was nowhere near but with a real bent on simply slowing the US economic dominance at the bequest and pressure of other governments and the ultra wealthy. All that cost us was trillions of dollars in retirement savings in the worst market crash since the 1920's and our technological lead we had invested and worked so hard to obtain. We have seen the Fed say there is no present threat of inflation even though it is clear there is inflation this time, inflation that is truly demand led (e.g., in the oil market) as opposed to other times in the past when the Fed said it feared inflation when OPEC merely hiked prices because demand was slack and OPEC wanted more money. Raising interest rates would not cause OPEC to raise production quotas, but the Fed used it as a reason to do just that, hurting our economy and helping others. Is there any reason a healthy dose of skepticism is not warranted, particularly in an election year when the two sides have spent a couple hundred billion dollars to gain or hold power? We see this as a political move, not by the big parties, but by someone making a play for their political future. More power to him. He has done good, but this sure does not appear to be the cleanest smelling fight he has started.
In summary, stocks have serious problems facing them, the kind of problems that historically cause the market to lag historical growth levels (nice way of stating it lost ground). Many say that once the election is over it will be able to rally. The election won't reduce oil prices or send the economy into a new expansion mode, and it won't mark an end to the Fed's rate hiking. The election and lawsuits may only be a near term drag, but those others are not. And who says the election will be over on November 2? There are several thousand lawyers circling the 'battleground' states ready to assure us that we won't know an outcome for a month or so after November 2.
Yet, despite all of that NASDAQ, the small caps, and even SOX are still solid, ready to try a move higher. They are a counterbalance to the very narrow DJ30. SP500 is in trouble but it is still well within its base for the year. It is a very tough fight at this point. The wall of worry is high, and that is often how the market rallies, but oil prices and the Fed are hard cases when it comes to the market's ability to rally.
THE ECONOMY
It was a week of up mixed economic data with better regional industrial manufacturing gains and lower jobless claims, but also lower leading economic indicator indexes. Friday ECRI more or less echoed the Conference Board's summary of leading indicators, showing a slight rise for the week, but another loss (an 81 week low, in fact) for the growth index. The leading indicators look 6 months down the road and have been lower 4 months straight. That indicates a continued slowdown in the economic expansion even though the nearer term regional manufacturing reports show increases. To reiterate, even though the leading indicators are sliding, at current levels they still suggest a continuing slowdown in the expansion as opposed to an economic contraction.
The problem is, there is not a lot on the burner in 2005 to put the economy back on track. Q3 2004 will turn out much stronger than expected with GDP running 4.5% or even better. Q4 will show a solid advance as well with businesses taking advantage of expiring investment incentives. After that, there is not much to encourage additional investment despite some new small business tax breaks recently passed. Certainly not enough to offset $55/bbl oil and a Fed that is still in tightening mode despite some statements it might be on hold. As noted, until the Fed says it is done, the market assumes it is still in the rate hiking mode.
This week we receive more economic data reflecting consumer and business activity. Confidence is out Tuesday, durable goods orders Wednesday, and Q3 GDP along with the Chicago PMI Friday. Michigan sentiment rattled the market two weeks back, and it probably overstated a downturn. Overall, however, the data will likely not have a major impact on the market near term. That will be up to earnings, half of which have already been announced.
China GDP slowing, a bit.
Friday China reported its latest gross domestic product figures and they came in at a 9.1% growth rate just ahead of the 8.9% expected. Wow. That was, however, down from 9.6% in the prior quarter and 9.8% in the quarter before that. So, there is slowing, and some on the financial stations were saying that this is proof the Chinese government is engineering a 'soft landing'. It is proof of nothing. When you are growing over 9% per quarter a variation of 0.7% is not significant. More like a normal fluctuation. It is more an indication of spiking oil prices than a government engineered slowdown. At that level it will have no impact on oil prices or much of anything else with respect to commodities and materials prices.
THE MARKET
Thursday the techs led and Friday they led once more. Thursday upside, Friday downside. NASDAQ and the small caps joined the selling as well. For the past year, when they are up, the market is up. When down, the market is down.
NASDAQ, SP600 and SOX may have led the selling, but the significant drops were in DJ30 and SP500. DJ30 pushed to a new 2004 low, indicating that it is not done in forming the base that started this year. That means it is still in a downtrend and is still seeking the bottom before it can rebound. SP500 closed below its late September low, unable to make a higher low and continue building upon the rally off the August low that was the 2004 low. It is still 35 points above that bottom and thus still out of real danger in that regard, but it now must also find its bottom given that the buyers at the September low were no longer buying at that level on Friday.
NASDAQ sold as well, falling from a lukewarm test of the 200 day SMA. Big point loss, giving all of the Thursday volume gain back and then some. It is still holding above the 50 day EMA (1904), and that will be the important test coming this week. SOX gave back its gain as well, but held the 50 day EMA on the close. It continues in its lateral move after coming off the 2004 low in September. The small caps are also testing their 50 day EMA in yet another important test this week. This half of the market remains in good shape.
The point losses were harsh, particularly on NASDAQ, but the volume was lighter. Strong upside buying Thursday showed accumulation in technology stocks. Even though SP500 and DJ30 slipped further into trouble Friday, those buying NASDAQ stocks the prior session were not all dumping them on Friday. In short, more were interested in buying NASDAQ shares than selling them on Friday. Along with holding easily within the recent range, that was a silver lining to another session that met strong buying with strong selling.
The market is no doubt struggling under the load of oil, the Fed, more scandal, election uncertainty, and a slowing economic expansion. Just look at the dives in SP500 and DJ30. But for NASDAQ and SP600, the market would not be worth squat. Friday the tech buyers were not dumping their shares even as the large caps (including MSFT) sold off. That is an important point, but is it just a winning battle in a losing war? With all of those negatives facing stocks, NASDAQ's performance has been very solid. A very important week is ahead as it tests the 50 day EMA and tries to hold the line in the face of a weak large cap sector. Incidentally, you hear the one about the television pundits that have been touting large caps and warning against a small cap decline over the past 1.5 years? That in itself is the joke.
Market Sentiment
Bulls versus bears: Bulls hit 58.9% last wee, clearing the 55% level that is considered bearish. The large caps were already weak ahead of this and even the broad market sold off two weeks back as bulls approached 55%. Bears faded to 22.1%, just over the 20% level considered bearish.
The market never hit extreme sentiment readings at the August low. Bulls and bears converged at the end of August, but they never crossed over (very bullish) or made it into the range considered bullish. Volatility rose, but it only reached levels considered in the low range of what used to be the 'normal' range from 20 to 30. The put/call ratio was the only indicator that showed bullish characteristics, but in the past few years it has been more an indicator of short term rebounds than of bottoms.
Even with the selling to start October, there is still no significant concern in the market as measured by the traditional sentiment indicators. Yet, there seems to be plenty of worry that is keeping the market from advancing, aborting each attempt to make a strong break higher. Perhaps it needs a sharp sell off to turn that concern about uncertainty into full fledged bearishness, but we do note that in long, drawn out bases such as the current one, the action is more wear them out versus scare them out. At some point the investor is simply ground up by the long base. We note that in the year long 1994 base (the last time the Fed embarked upon an extended rate hike before the 1999 disaster) the VIX only reached 20 on its high before the market embarked upon its most dramatic run ever. That was similar to this 'wear them out' base.
VIX: 14.54; -0.31
VXN: 20.36; -0.29
VXO: 14.99; -0.11
Put/Call Ratio (CBOE): 0.83; -0.02. While it may not be the automatic indicator it was in times past, we note that there were three consecutive closes above 1.0 on the CBOE and two such closes on the overall put/call ratio. The response from those indicators is typically delayed a week or so. Thus we have an eye out this week after a NASDAQ test of the 50 day EMA.
NASDAQ
Gave back all of the Thursday gain and more, but held easily over the 50 day EMA on lighter trade. NASDAQ 100 was the downside leader with MSFT struggling after its earnings.
Stats: -38.48 points (-1.97%) to close at 1915.14
Volume: 1.752B (-13.93%). Volume remained well above average, but dropped significantly on the selling. A small silver lining, but with NASDAQ still holding in its recent range and above support, a key distinction.
Up Volume: 369M (-1.131B)
Down Volume: 1.372B (+861M)
A/D and Hi/Lo: Decliners led 2.07 to 1. The selling intensified as NASDAQ large caps joined into the overall large cap selling of the past few weeks.
Previous Session: Advancers led 1.63 to 1
New Highs: 91 (-8)
New Lows: 56 (+1)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
After tapping toward the 200 day SMA (1960) Thursday, NASDAQ rolled over and gave back a chunk of gains. Volume was lighter on the selling, and if you have selling that is what you want to see. Unlike the other large cap indexes, NASDAQ is still holding its higher lows since the August bottom and is showing mostly solid price/volume action. A very important test of the 50 day EMA (1904) is ahead this week with the October 2002/March 2003 up trendline (1896) backing up that support level. NASDAQ remains in its lateral move for the month between 1900 and the 200 day SMA, showing amazing resilience as the large cap indexes sell off on insurance and other problems. The question remains whether NASDAQ can anchor the market and reel the large cap indexes back in after the insurance lawsuit selling runs its course.
NASDAQ 100 was the weaker tech sector, leading in percentage loss and slightly undercutting the 200 day SMA (1440) on the close. Interesting to note that QQQ volume was lower as well as overall NASDAQ volume.
SOX reversed the Thursday gain, managing to hang onto a few points of the gain. More importantly, it held the 50 day EMA (393.68) in the face of selling in BRCM and XLNX after those stocks failed to excite investors with earnings. Chip equipment stocks performed better on the heels of some strong KLAC earnings and outlook. It remains in its 7 week trading range between 375 and 410. Making a higher low here at the 50 day EMA would be a very good indication.
S&P 500/NYSE
The large cap index sold through the September low as those buyers in late September were not willing to step in given the insurance lawsuits on top of the other problems. Volume was lower, about the only positive for this move.
Stats: -10.75 points (-0.97%) to close at 1095.74
NYSE Volume: 1.469B (-12.17%). Volume was still above average, but it fell to the lowest level of the week outside Monday. Good to see but a very thinly plated silver lining.
Up Volume: 438M (-645M)
Down Volume: 980M (+403M)
A/D and Hi/Lo: Decliners led 1.77 to 1. the selling was not as strong as the gains from Thursday.
Previous Session: Advancers led 2.11 to 1
New Highs: 126 (+9)
New Lows: 45 (0)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Dropped through 1101, closing well below that level on lower though above average volume. This slide is another in a month long drop after SP500 rallied through the last down trendline from the year to start October. An undercut of a prior low is always significant in that the buyers at the prior low are no longer willing to step in again. They tried to hold the index up Wednesday and Thursday with reversals off of the session lows. That was not enough to overcome some mediocre large cap earnings and the widening concerns about the Spitzer lawsuits. Next support is 1090 (March lows), then 1080 (May lows), then 1060 (August lows). It is always possible this undercut leads to another rebound, but it has not showed that kind of resilience yet.
The small cap SP600 reversed all of its Thursday gains and once again finds itself near the 50 day EMA (287.45) and looking for another hold at that level. A hold at this level would help NASDAQ hold the line as the large caps work through their hangover.
DJ30
New 2004 low, continued weakness, etc. DJ30 continues to sell as it is battered at every turn by a new big name from a different sector that gets whacked. For DJ30 it is not just AIG in the insurance sector getting hammered, but drugs, tech, financial, defense, etc. Sometimes an undercut of a prior low brings about a quick reversal. Indeed, DJ30 is still at some support from the 2003 October and November highs. If that does not hold you have to start looking at 9600 to 9500.
Stats: -107.95 points (-1.09%) to close at 9757.81
Volume: 258 million shares Friday versus 272 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
Stocks are half way through the earnings season, and at this juncture the results have been unable to drive stocks higher. NASDAQ stocks are holding their own, but that is hardly a glowing result. Earnings are simply reflecting the economy: improvement in the future but not great improvement and in many cases not up to consensus expectations. With the other continuing clouds on the horizon discussed above, that is simply not enough to drive stock prices significantly higher up to this point.
This week mostly likely brings another important test for NASDAQ, SP600 and SOX. All of those indexes are holding above their recent lows and the 50 day EMA. They are basically the last in line, the counterbalance to the Dow and SP500. They are performing solidly despite the periodic harsh selling session following a strong break higher. It will be up to these indexes to hold the line and make the advance.
If the test holds that means further near term upside. Longer term they will still need the large cap indexes to finish selling and then start a rebound; a divided house finds it hard to rally significantly. Further out there is that slowing economy to deal with; stocks are definitely working through pricing that in right now.
Friday saw some whipsaw action in what where some good stocks as a few more leaders sold on strong volume. With the lower overall volume we were looking for some rebound action, but it was not coming Friday. There will likely be more downside follow through this week as NASDAQ, SP600 and SOX further test their support. They will have to hold at that point and start the rebound. If they do, there will be a lot of leaders that have pulled back to support and are ready for buys.
What we need see from those stocks is a rebound on rising volume to show the buyers are stepping back in. The market is divided with large caps pulling lower while techs and small caps are really trying to rally. It is imperative that we see the leaders moving back up on strong volume to move into them given the division in the market and the overhanging factors. You can bet that on some further downside in SP500 and DJ30 there will be an oversold bounce coming, and we don't want to mistake light rebound volume for long term position taking. If it is an oversold bounce, we let it run its course then use that to exit struggling positions or on leader wannabes that just are not making the cut. If we see volume coming into leaders across the board, we start adding positions and see if NASDAQ, SP600 and SOX can lead the way.
Support and Resistance
NASDAQ: Closed at 1915.14
Resistance:
October gap up point at 1952
The 200 day SMA at 1960
January/late June down trendline at 1963
October high at 1971
Price resistance at 2050
Support:
The 50 day EMA at 1904.81
The low of the September range at 1900
September gap up point at 1894
The October 2002/March 2003 up trendline at 1896
The 50 day SMA at 1885
S&P 500: Closed at 1095.74
Resistance:
September low at 1101
The 50 day EMA at 1112.63
The 200 day SMA at 1119.62
1125 to 1130 is prior price resistance, and 1128 is the September closing high.
The March/June down trendline at 1126
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).
1064 (August low).
Dow: Closed at 9757.81
Resistance:
9783 to 9793, the August lows.
9980 to 10,000.
The 10 day EMA at 9959 (stopped the Tuesday move)
The 50 day EMA at 10,094
The February/June 2004 down trendline at 10,225
The 200 day SMA at 10,275
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:
9625 - 9660 from September 2003.
9500 from various price points in late summer to fall 2003.
9250. More solid support from the June through August 2003 consolidation.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
October 25
Existing Home Sales, September (10:00): 6.54M expected and 6.54M prior
October 26
Consumer Confidence, October (10:00): 93.8 expected and 96.8 prior
October 27
Durable Goods Orders, September (8:30): 0.5% expected and -0.3% prior
New Home Sales, September (10:00): 1150K expected and 1184K prior
October 28
Initial Jobless Claims, 10/23 (8:30): 335K expected and 329K prior
Help-Wanted Index, September (10:00): 37 expected and 37 prior
October 29
GDP-Adv., Q3 (8:30): 4.3% expected and 3.3% prior
Chain Deflator-Adv., Q3 (8:30): 1.6% expected and 3.2% prior
Employment Cost Index, Q3 (8:30): 1.0% expected and 0.9% prior
Michigan Sentiment-Rev., October (9:45): 88.0 expected and 87.5 prior
Chicago PMI, October (10:00): 59.0 expected and 61.3 prior
End part 1 of 3
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