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day trading, Breakout test
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12/09/04 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Thursday: None issued
Buy alerts issued: CMTL
Trailing stop alerts: None issued
Stop alerts: INTL; TIWI
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/alertdly.htm
SUMMARY:
- Rocky start, big reversal, so-so volume.
- Jobless claims rising again as government and private reports in sync.
- More data showing slowing Asian growth.
- Volume mixed as stocks test support and shorts cover, setting stage for a bounce. Will buyers show up?
- Stocks set for an upside Friday to end the week, but likely not to show explosive strength.
- Subscriber Questions
Market reverses off support after early downside momentum carried on weak chip news.
The XLNX and ALTR sales and inventory warnings Wednesday night set the stage for a weak start. It was not just a soft open, but a hard downside move as the recent volatile and negative trade flexed its muscle a bit more. We said in the pre-market alert that the early action would separate the strength from the wannabes, and indeed the stronger stocks held near support and rebounded later while the rest fell and could not get up.
In addition to the chip news, which was bad enough, there were more weekly jobless claims, oil was rising again, and Asia was reporting some more weak data. The futures promised a lower open and stocks delivered.
Stocks sold to the next support and started to undercut on both NASDAQ and SP500. Not by much, however, before shorts started to cover. That is pretty typical action when you see selling in the indexes that drops them below a key support level. That is when you would think that the bottom was going to fall out, but unless the market is very weak, the shorts tend to step in and cover at that point; if the rebound fails at former support, then you have trouble with the old 'kiss goodbye' that sends things even lower.
Thursday stocks rebounded and retook support, getting a bit more of a goose than just short covering after a pretty steep drop. Turns out that NXTL and FON are talking merger, and the market loves M&A activity. Moreover NSM offered a pretty decent earnings report, a good counter to the sackcloth and ashes pundits were spreading after the XLNX/ALTR warnings. That gunned the rally a bit more than usual with NASDAQ showing a 30 point reversal.
It was not all candy and roses. NASDAQ volume was lower, and you want to see volume ratchet up on a reversal in order to show buyers fighting to get back in at 'bargain' prices. SP500 volume rose respectably, however, and that may be enough to do the trick. Breadth was crummy, indicative of short covering, though breadth tends to lag when the market reverses. Chips were still weak despite the rebound, and small caps continued to lag with a 0.1% decline. Lots of good recoveries, but not a clear bell ringing for everyone to hear. Many of our positions held and rebounded well, setting up the next move higher. Leaders are the key, and if they can continue on volume, the move is in good shape.
THE ECONOMY
Weekly jobless claims show a trend higher.
The past three weeks jobless claims, after a nice drop toward 300K, have trended higher, back toward 350K. Thursday's 357K continued the mini-trend, much hotter than the 335K expected and topping the 349K for the prior week. This is not necessarily a precursor to trouble, but we note that the private and public surveys are in sync with one another, something that was not the case when the jobs picture was actually improving on both the household and non-farm payroll sides. The private polls were showing strength while the government surveys were mediocre.
Now that they are both in sync and to the upside, we see the non-farm payroll side of the equation continuing to show mediocre improvement ahead as the big companies continue to pare their payrolls in the quest to improve the bottom line in their maturing businesses. Those that believe GE, JNJ, and other big corporations create the jobs are simply wrong; as their businesses mature, they need less employees and indeed actively seek to cut them whenever they can. It is the new businesses that create the new technologies and services that grow exponentially and need more help. Thus while we would really like to see a steady 250K non-farm jobs created per month, right now we are still at the point where a lot of smaller businesses have yet to hit their prime and start really creating the new jobs. As seen in the 1990's, that will come as the businesses born in the recession/recovery become the new household names.
Asia definitely slowing.
Japan's Nikkei hit a 5 week low Thursday as another weak economic report hit the market, this time a poor machine orders tally. China reported industrial production up just 14.8%; poor guys, barely struggling along with 15% growth. In context, it was the lowest output in 18 months. China is still seeking that soft landing. One can only hope its leaders are not looking at the Fed's late 1990's - early 2000's playbook. The entire world would suffer from that 'soft landing.'
THE MARKET
NASDAQ and SP500 slightly undercut their support, but that brought in shorts to cover and buyers looking for a bargain. A fairly solid large cap rebound led the way back, pushing SP500 back near its recent high on stronger volume. It looks pretty darn solid. NASDAQ is not bad either, rallying back as well after holding the late November trading range, but volume backed off. It still has not been able to wash away that Tuesday high volume downdraft, but it held where it had to.
Breadth was negative on the rebound, indicating that the big boys were leading but not many were following. The shorts were covering and now we need to see the longs buying into the move as well, taking the torch from the short coverers. Again, many strong stocks held and rebounded as well, a positive for the market to continue the rebound. It was not clear, however, that the buyers were taking over late given NASDAQ trade. That is something that will play out the next few sessions, though Friday, while it will most likely be an upside session, may not give us any clear answer as to how Thursday holds up as volume may be lower.
Market Sentiment
VIX: 12.88; -0.31
VXN: 19.84; -0.17
VXO: 13.23; -0.49
Put/Call Ratio (CBOE): 0.83; -0.06. Still at a high level, typically a good indication of uneasiness that can contribute to climbing a wall of worry.
NASDAQ
Cracked through into the late November lateral range and then reversed to post a gain. Volume was not there, however, to indicate a true key reversal day.
Stats: +2.9 points (+0.14%) to close at 2129.01
Volume: 2.309B (-4.19%). Two upside sessions following the Tuesday high volume down session, and both upside days have been on declining volume. Not the best response to the volume selling, but there are other attributes, such as holding key support. We will have to see if the buyers come back to the table.
Up Volume: 1.14B (+193M). Very evenly matched, understandable given the sell off and reversal.
Down Volume: 1.126B (-322M)
A/D and Hi/Lo: Decliners led 1.27 to 1. Decliners still held sway after the reversal and positive close. This was not a really negative indication as the index just made it to positive to close and given that breadth typically lags on a reversal session.
Previous Session: Advancers led 1.26 to 1
New Highs: 96 (+25)
New Lows: 30 (+9)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Edged lower through support at 2100 and that brought in the short covering that pushed techs back up. It did not hurt that NSM reported a decent earnings quarter to give some extra life to the rebound, though the NSM earnings were hardly blockbuster. It was a session where NASDAQ did what it had to do, i.e. hold near support and work to reverse that Tuesday dump lower. It needs more upside volume on the continued move, but we also note that volume has been really strong the entire month, mostly on upside sessions. Thus another solid volume upside session Friday would go a long way to solidifying the recovery from the early week selling. Seeing NASDAQ leaders rebounding on volume off of near support would be a very good sign of strength as well.
NASDAQ 100 was the leader again on NASDAQ, posting a 0.5% gain versus 0.1% for NASDAQ overall. Large caps have shown the leadership of late, and with short covering Thursday, large caps were the logical focus for the upside move, particularly in the absence of the semiconductors.
Speak of chips, they were down Thursday on warnings but managed something of a recovery when NSM released it earnings report mid-session. They recovered off of their lows that tested the simple 50 day MA on the low, but could not fill the gap below the 18 day EMA. Managed to hold some support at 425, but still plenty of work to do.
SP500/NYSE
Best action of the session, slightly undercutting support and then rebounding to close near the session high on stronger volume. It was a large cap day.
Stats: +6.43 points (+0.54%) to close at 1189.24
NYSE Volume: 1.624B (+6.58%). Lower volume than the start of the month that saw the breakout from the November consolidation, but stronger than the recent selling volume. Very good price/volume action off of an important support level.
Up Volume: 946M (+120M). Better spread of upside to downside volume than on NASDAQ.
Down Volume: 655M (-28M)
A/D and Hi/Lo: Advancers led 1.17 to 1. Advancing issues pulled out the day late in the session even with the small caps basically holding flat.
Previous Session: Advancers led 1.49 to 1
New Highs: 141 (+53)
New Lows: 46 (+6)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Again, very solid action with the test of near support at the 18 day EMA (1178.82) and 1175 (second top in early 2002 double top) and then a volume rebound that topped the late November trading range and put the index back in breakout posture. Much better price/volume action than on NASDAQ as the large cap index flexes a bit, trying to establish itself as a leader after letting NASDAQ and SP600 do the work up to this point.
The small caps look weary. They rallied when the others did not, and they have had a hard time participating in any upside of late. Wednesday they gained ground, but it was tepid. Thursday they were selling sharply before rebounding with the market for a basically flat close. It is set up to rebound, holding the mid-November lateral range and on just its second test of the October breakout. Room to run but it needs to show some of that life shown earlier in the move.
DJ30
Good volume recovery as the blue chips tested the bottom of the range near 10,400 (10,418 on the low) and rebounded for a decent gain. No breakout from the range, but a good volume recovery that sets it up for another test of 10,600 at the top of the 4 week range. Good recoveries from the likes of UTX, IBM and GE added some punch to the recovery.
Stats: +58.59 points (+0.56%) to close at 10552.82
Volume: 279 million shares Thursday versus 247 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
PPI and Michigan sentiment will dominate the economic news along with the usual suspects, e.g. oil and the dollar. They will have some influence on the market early as the FOMC meets next week to raise rates again, but unless there is a big move either way the impacts will be fleeting. The large caps act as if they want to make another new high for 2004. The large cap techs may join them. Technology overall may not as the semiconductors and small cap techs (as with the small caps in general) still appear to be struggling. For once they may be the indexes dragged along by the others.
Good recoveries in many stocks Thursday, no recoveries in others. Again, the stronger leaders and the wannabes were being separated out in the test and rebound. The market is still in the uptrend, coming off a November consolidation and break higher. Leaders are doing the same. We are thus looking for leaders coming off tests of support that are still early in the move as well as new breakouts. The market still has to show us it wants to add more onto this Christmas rally, and leaders rebounding on strong volume is one of the clearest signals. Thus we watch them and if they are moving on volume we buy into them.
Support and Resistance
NASDAQ: Closed at 2129.01
Resistance:
January high at 2154 (early 2004 high) stalled the move once more.
2250 from 2001 highs and lows.
Support:
2110 - 2112, the top of the November consolidation.
The 18 day EMA at 2104
Price support at 2090.
The April high at 2079
2050, prior resistance and the June high.
The 50 day EMA at 2035
October high at 1971
S&P 500: Closed at 1189.24
Resistance:
1200 stopped the last move.
Q1 1999 lows at 1215
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
1180 to 1185, the top of the November consolidation range.
The 18 day EMA at 1179
1175 second high in that double top that spanned late 2001 is trying to hold.
January highs at 1158
The 50 day EMA at 1156
1142-1146 are the June highs and the October high (1142).
1128 to 1125 the September closing high.
Dow: Closed at 10, 552.82
Resistance:
10,570 is the early April high
Price consolidation at 10,600 level
10,747 is the February high
Support:
The late April, June peaks at 10,478 to 10,512
10,400, the bottom of the recent range.
September high at 10,342
The 50 day EMA at 10,337
The 200 day SMA at 10,237
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
December 07
Productivity-Rev., Q3 (08:30): 1.8% actual versus 2.0% expected and 1.9% prior
Consumer Credit, October (15:00): $7.7B actual versus $6.0B expected and $13.6B prior (revised from $9.8B)
December 09
Export Prices ex-ag., November (08:30): 0.4% actual versus 1.0% prior
Import Prices ex-oil, November (08:30): 0.7% actual versus 2.7% prior
Initial Jobless Claims, 12/04 (08:30): 357K actual versus 335K expected and 349K prior
Wholesale Inventories, October (10:00): 1.1% actual versus 0.5% expected and 0.5% prior
December 10
PPI, November (08:30): 0.1% expected and 1.7% prior
Core PPI, November (08:30): 0.2% expected and 0.3% prior
Michigan Sentiment-Prelim., December (09:45): 93.5 expected and 92.8 prior
Treasury Budget, November (2:00): -$53.0B expected and -$43.0B prior
SUBSCRIBER QUESTIONS
Q: Firstly, thanks for the great newsletter. I have been reading your newsletters for years now and I have learned a lot. I combine your suggested trades with my own picks forming style of my own that is maturing as time goes by.
My question is regarding the HI volume pullback we saw on Tuesday. In the past, last yearend's rally is a good example, I remember you all cautioning the readers that the distance from the current price to the midterm and longer moving averages was getting too great. I think you had a rule of thumb that I cannot remember. Anyway, I thought this was crazy until I saw this 'correction' occur on indexes and individual stocks
time and time again.
What is that rule of thumb for the indexes and could that be a contributor to the Tuesday sell off? Not knowing the % I have been concerned that the visual distance was growing too great. That plus the inability to really crack resistance made me tighten the stops. Please
comment. Thanks!
A: Stocks repeat patterns again and again though many refuse to believe they are caused by the same factors. One of the strongest influences on the market is emotion, either greed or fear, and stocks and the indexes set up patterns that show this greed and fear year after year, decade after decade. Many people think that with the information age investors are smarter and will react differently than in the past to the same criteria. Some do. They learn how to recognize the same patterns and what signposts to look for. Most do not. Every year new investors hit the market, eager to make their fortunes. They don't have the experience and have not invested the time to learn or to follow someone who knows what to look for. Thus the majority of the market continues to make the same mistakes year after year after year.
When indexes get too extended, when the buyers are exhausted, then they will correct. It is usually a combination of factors that sets up the correction, but one rule of thumb to look at as you have noted is the percent rise above the 200 day SMA an index has made. If it gets too far ahead of the average it will start to struggle and then correct. We look at other factors as well such as distribution sessions, leadership action, and sentiment indicators, but one thing to always keep in mind is simply the magnitude of the rise.
With respect to SP500 and DJ30, historically they start to struggle when they rise 10% above the 200 day SMA. They start to correct when they get 15% above that key level. As for NASDAQ, it historically starts to struggle at 15% above the 200 day, and begins correcting at 20% above that support. In the late 1990's NASDAQ would run 25% to 30% over the 200 day SMA before it would correct, but after the bust it has reverted to the historical levels. We remember in late 1999 and early 2000 that NASDAQ was 50% and more over the 200 day SMA and we were looking hard for signs of real trouble. They started showing up in February and March with massive volatility and rapid fire, alternating distribution and accumulation sessions. The season was changing, moving into a long winter.
At the recent highs, DJ30 was just 4% above the 200 day; SP500 was 6.7%; NASDAQ 10.7%. All of these are well within the general rule of thumb, and with overall good price/volume action, good leadership, and a solid uptrend, there was not a lot to sweat out. The market is still in the recovery stage from the base and can obviously rally higher as they breakout from the 2004 base. By contrast, at the January 2004 peak NASDAQ was 21.6% above its 200 day SMA. Correction time.
End part 1 of 3
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day trading
Breakout test
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