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us stock market, trend trading stock
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8/27/01 Investment House Daily
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SUMMARY:
- Indexes trade up and down on no volume.
- No follow through today, but semiconductors do well.
- Indexes tap resistance levels and pullback. Resting or resuming the downtrend?
- Existing home sales fall again.
- Subscriber Questions
- Team Trades
Up and down trading.
A lot of upside and downside action today. In other words, the market was very mixed. Regional banks continued to sell down, but semiconductors continued to move up. Part of that was related to Cisco's announcement last week and also some speculation about possible announcements of firming pricing on Wednesday at MU's traveling road show.
Volumes were light to the upside, even in the semiconductor sector (less a few rare examples such as MCHP), a typical Monday. Downside things were not so pleasant. The regional banks, one of the stalwarts of the market, continued to tank, today on even higher volume. After riding many of them higher the past few months we saw the change last week and flipped the plays to the downside. The hammering continued today as another strong sector is biting the dust. Will the semiconductors take their place and rally even more?
No follow through today.
Monday is a tough day to ask for follow through, and the indexes did not come close. Volume light, A/D line negative, gains turned to losses on the major indexes. Far from the 1.5% or better gain on higher, above average volume we want to see. Still, this was not really a bad day after Friday's big gains. Hard to repeat such a performance the next trading session even if it takes a weekend break.
That leaves us on follow through watch the rest of the week, with such a move preferably coming Tuesday through Thursday. That gives the strongest signal. What it signals is that institutions are back in the market buying once again after starting the buying last week. If we get it that is a signal the rally could continue with more vigor. That gives a better outlook for the market as a whole, but it is not a guarantee that the market is out of trouble. As noted last week, any market move needs leadership, and leaders usually are those in good patterns that are clearing resistance and have plenty of upside. Semiconductors are showing life (yet again), but the patterns are less than stellar. That leaves them subject to profit taking and selling to 'get even' after the rally continues higher. We have seen that action sink many promising rallies over the past year.
Some trouble even on a light volume session as indexes tap resistance and pull back.
Selling on lighter volume is always best if there is going to be selling. As we have seen over and over the past year and longer, however, weak volume selling after some gains can lead to more vigorous selling. This is particularly true when the indexes hit resistance and start to sell. Today all of the major indexes moved higher, but then ran into resistance levels and pulled back.
The Nasdaq tapped one if its short term down trendlines as well as the July lows and recoiled back from there to close negative. It showed a very tight doji as well, and that can mean a turn the other way after upside sessions. The Dow ran into its 50 day MVA and reversed as well. The S&P 500 tapped close to its down trendline from May (though it fell a bit short of it), and it too turned lower on the session.
Perhaps today was simply a digestion of the gains from last Wednesday, topped by Friday's big jump higher. As the markets are in a continuing downtrend, however, we cannot simply hope that the tide has turned on one big day. That is even truer given that Friday was not really what we consider a confirmation as it came too close to the Wednesday reversal to give us any kind of sense that institutions are ready to buy for the longer haul. With all of the institutions out there today, the tape can be painted for a few sessions by a minority of big buyers. We need to see the buying on a more sustained level, and that is why we wait for that follow through day and like to see multiple follow through sessions.
So, the indexes have to prove it to us that they are ready to move higher. The Nasdaq undercut a lot of the market foundation when it undercut the July lows and the S&P followed it lower (though the S&P did recover). The Nasdaq is still below those levels and is in fact butting its head up against them right now. If it fails, the downside risk for the S&P once again rises, and the downtrends would most likely continue. As we have seen all year, until those downtrends are broken with some solid volume, they tend to rule trading.
THE ECONOMY
Existing home sales fall again.
The housing market may remain strong looking year to year, but existing home sales fell 3% from June. That is the second straight monthly decline. The bulls say 'look how strong it still is,' and there is some allure to that argument. That did not help the market, however, as it immediately sold down on the news and had to fight its way back to positive territory later in the session (of course, it lost that move as well). Remember, when the economy was starting to fail in spring 2000, weaker numbers were met with the same 'yes it is less, but it is still so strong' analysis. Weakening is weakening, and in combination with the slowing building permits, mortgage applications, weak durable goods orders, and slowing consumer, it is noteworthy. Just as the economy does not turn up on a dime, a slowdown just does not appear one day. It starts to show itself, but there is denial at first before acceptance.
The economy is still fighting to rise higher. The Leading Economic Indicators have been moving higher the last three months, a sign of improved economic activity 6 to 9 months down the road. Some of its pillars, however, are weakening. If other legs cannot start pushing decisively higher, the recovery drags out even further, and the downside risks rise at the same time.
THE MARKET
Mixed day with some sectors rising while the indexes and stocks overall fell. Familiar action. The market was marking time today as it hit its near term resistance and tries to decide if it will break that resistance and follow through on this attempted reversal. It appears that it will need another catalyst to do so.
Overall market stats:
VIX: 22.44: +0.15. Barely budging at the low end of its range. Some sentiment indicators (short interest) are showing extreme levels, but this measure of fear is not.
VXN: 47.22; -0.48. The Nasdaq sells off but volatility falls. There is no indication from this contrary indicator that investors are scared which is what we are looking for from this index.
Put/Call ratio (CBOE): 0.60; +0.04. Rising minimally on some selling after spiking to 1.07 last week. The close over 1.0 is what we look for, but it can take more than one episode. Indeed, the rally attempt cooled off the fear this was indicating, and with other sentiment indicators still too complacent, it will most likely take a test of the lows to get this and the other indicators heading to extremes again.
Sentiment indicators are secondary. They can show signals of what to expect when they reach extremes. They do not replace primary indicators such as price and volume, especially when the sentiment indicators are mixed as they are now.
NASDAQ:
Indecision marked the session, along with a bounce down from the resistance of the July lows.
Stats: -4.39 points (-0.2%) to close at 1912.41.
Volume: 1.195 billion shares (-20%). Volume slid to the fourth lightest of the year on another slow Monday. Down volume led 644 million to 540 million upside shares. Light volume on selling is good, but we cannot take much solace in that right now given the proximity of resistance. Need a strong up volume day on a solid gain.
A/D and Hi/Lo: Declining issues moved back in front 1.25 to 1. Not powerful, but the day was not one of conviction either way. New highs rose to 80 (+3) while new lows fell to 90 (-10).
The Chart: http://www.investmenthouse.com/cd/$compq.html
After reversing off of 1817 on the low last Wednesday, the Nasdaq tapped at the July lows (1934) on its high today (1933.94) and sold off 20 points to the close. That is hefty selling after tapping at resistance, and that is not a good sign. We have seen a doji to start this move, a run higher, and now a tight doji at resistance after a 115 point move. Perhaps it is consolidating and testing that level. Given the break below that level, however, we have to be ready if the index cannot break above the resistance and give us that stronger follow through session. It really needs both to shake off this downtrend. Semiconductors are trying, but they don't have a lot of help (the SOX hit our targeted resistance today and pulled back from there). The trend is down, and today's action did not break it.
Dow/NYSE:
Remains above its short term down trendline, but it fails for the second session to take out the 50 day MVA. Not in bad shape, not in great shape.
Stats: -40.82 (-0.4%) to close at 10,382.35.
NYSE Volume: 851 million shares (-20%). Identical percentage drop on the NYSE as the Nasdaq. Down volume led 480 million shares to 360 million upside shares. A pretty quiet, even day between buyers and sellers. Good for consolidation after Friday's big move (it helps that it is above its short term down trendline).
A/D and Hi/Lo: NYSE declining issues were back in the lead today at 1.3 to 1 (advancers led 1.73 to 1 Friday). New highs fell to 133 (-23) as new lows fell to 35 (-3).
The Chart: http://www.investmenthouse.com/cd/$dja.html
We said over the weekend that the Dow was still trying to clear 10,400, and today it did pull back below that level. It is dealing with the 50 day MVA (10,454.91) also as the index hit 10,441.37 on the high late in the session, and then just crumpled 60 points in the last hour to close at the lows. Not great action at a resistance level, but it was on lower volume, and again, the Dow is still above that down trendline. If the Nasdaq cannot conquer its resistance at the July lows, however, the Dow is at risk to the downside as well. It has yet to show strength to the upside to breakout; serious resistance is ahead at 10,500 and 10,600. It needs the help of the entire market on some follow through sessions later this week. Today was a very slow day on light volume. We will see if that is a prelude to a further rally move or just another run to resistance.
S&P 500: The big caps hit 1186.85 on the session high, struggling higher towards the down trendline at 1190 we pointed to over the weekend. As with the other indexes, it tried to make it, and then turned lower in the last hour, turning negative on the 8 point drop to the close. As with the Nasdaq, today's move continues the downtrend from May. As it was rather moderate selling on low volume, we are still looking for the follow through sessions this week in response to last Wednesday's reversal session. It has to break that downtrend, and we want to see it hold above the July lows at 1165 in any respect. Note that it suffered the largest percentage loss of the three majors. That is unusual, and it may signal that the S&P is not ready to follow through but will test those July lows once again.
Stats: -5.72 points (-0.5%) to close at 1179.21. The big caps suffered the highest percentage loss of all the indexes, something that is unusual.
Volume: NYSE volume fell 20% to 851 million shares.
The Chart: http://www.investmenthouse.com/cd/$spx.html
Summary: No definitive move today, something that could be expected after such big gains on Friday. The indexes remain in a more bearish posture after the session even with the reversal and the big move Friday. They have yet to show they are ready to break the downtrends and move higher.
That could be on the horizon, but it may come after a further test lower. The ARMS index is again at +1.50. That is again a historic high and a level that was hit in March just four days before the Dow touched bottom and started to rally back. That is an overall positive for the market, but it does not tell you when the move will occur. Moreover, unlike March, there is not a spike in volatility and other fear indicators (though the put/call ratio did move higher last week). With the indexes reversing last week and Friday's good move, there is potential for that follow through session this week. That keeps us hopeful but not breathless in anticipation.
TOMORROW
Consumer confidence is out one-half hour into the trading session tomorrow. It is expected to rise 1 percentage point over July. We hope it does just that; the consumer might not be able to rescue the economy on its own, but if it is not strong, there is not a lot of hope. Confidence has been hanging in there, but there has not been much of late to give a boost in confidence as the market continues its slow slide and job cut announcements keep coming. Continuing claims are also ticking up once more. How long can confidence hold up or even increase when the outlook does not improve? Looks as if we may find out with this slowdown.
We have not changed our view that the economy will recover. Don't draw that conclusion from our recent discussions. Things were improving, but now the dollar is much weaker and that has hurt across the board. Still, the dollar is trying to form a bottom here, and that is giving everything a breather. If it can find strength and move higher, that restarts the climb of the market along with it. If it does not, we have some more testing to do. It is more a factor of time to recovery versus whether there will be a recovery.
It might be worth seeing the confidence numbers tomorrow before jumping in too deep. The home sales hurt today, and it took a few hours for the market to recover and turn positive after the news. Consumer confidence is a bigger number. If it drops appreciably, that could hurt, while an in-line number might lift a bit of weight off the market and let it move higher. The overall key is whether the indexes break their downtrends in a follow through or continue their downtrends. Right now it is kind of a guilty until proven innocent; the indexes are in a downtrend and the presumption is down until they change the direction.
With the indexes at resistance and down trendlines, we are looking to likely downside candidates if the indexes cannot rally on the confidence numbers. The regional banks have provided good puts of late, and we will look at some index options again as well.
On the upside we will continue to look at those small to mid-size stocks that have the good patterns that set up and give us the breakouts. We may not get the big 25% and more moves over a few sessions, but we get nice 10% to 15% pops. On those moves it is important to get in early and not chase them too far. If a stock is moving 10%, you don't want to get in after 5% of the move is gone. Buy at the buy point and then let it move up and sell at the target or when the move seems to be running out of steam, i.e., when it slows its move after a few days. We don't necessarily like to invest this way, but the market has not shown it will allow us to do much else to generate cash flow.
As for long term investments, because the market is still trending down, how do we know that what seems cheap today won't be even cheaper in a week or more? Buying just because a stock seems cheap has hurt for a year. Buying JDSU at $20 because it seemed cheap and then riding it down to $7.50 because it is a long term investment does not make anymore sense than riding an option down to zero. For long term positions we have to look at the good patterns again, and play the breakouts and keep our stop losses in mind in the event the move does not work out. That way we protect our downside if things get ugly again while we invest in the best looking stocks in the market.
While we do that we keep an eye out for follow through or a continuation of the downtrend. The ARMS index has a strong history of being right (it signals a bottom in the Dow coming in 4 to 20 days), so we will watch any further selling closely to try and pick up on turning points before the March and April lows. The fact that this indicator is showing this reading ahead of the prior lows somewhat confirms our belief that the March and April lows were in fact the lows for the market. If we get a follow through or two this week, that would be a great combination. Now that looks pretty decent after all. Now all it has to do is show us.
Support and Resistance Levels
Nasdaq: Closed at 1912.41.
Resistance: 1935 to 1940, the July lows, will be the level to beat on the way back up. Much higher in the range, 1985 to 2013 is pretty congested.
Support: 1820 and 1785 are potential support or at least a bounce level. The low is 1619.58.
S&P 500: Closed at 1179.21.
Resistance: 1183 is still holding as resistance. Then 1200.
Support: 1150 has held as support before. The low is 1081.19.
Dow: Closed at 10,382.35.
Resistance: Still trying to clear 10,400. The 50 day MVA is at 10,454.91). 10,500 is stronger. 10,600 is strong resistance.
Support: 10,200, then 10,120 as well. Then 10,000 to 9992, the middle of its smaller double bottom pattern in March and April.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
8-27-01
Existing Home Sales, July (10:00): -3.0% from June.
8-28-01
Consumer Confidence, August (10:00): 117.5 versus 116.5 prior.
8-29-01
GDP-Prel., Q2 (8:30): 0.0% versus 0.7% prior.
Chain Deflator-Prel., Q2 (8:30): 2.3% versus 2.3% prior.
8-30-01
Initial Claims, 8/25 (8:30): 400K versus 393K prior.
Personal Income, July (8:30): 0.3% versus 0.3% prior.
PCE, July (8:30): 0.1% versus 0.4% prior.
Help-Wanted Index, July (10:00): 58 versus 58 prior.
8-31-01
Michigan Sentiment-Rev., August (9:45): 93.3 versus 93.5 prior.
Chicago PMI, August (10:00): 40.5% versus 38.0% prior.
Factory Orders, July (10:00): -0.5% versus -2.4 % prior.
End Part 1 of 2
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