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us stock market, trend trading stock
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12/30/04 Technical Traders Report Update
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Technical Traders Report Subscribers:
* * New Year's Holiday Schedule * * *
Market open Friday: Alerts will issue as usual.
Given that the holiday falls on Saturday we are giving the staff the weekend off. Monday we will issue general market alerts regarding market action and specific stock alerts on stocks that are presenting good entry points to all subscribers.
Full reports will resume Monday night.
MARKET ALERTS
Targets hit alerts issued Thursday: None issued
Buy alerts issued: NGEN; SNDA; STK
Trailing stops issued: None issued
Stop alerts issued: None issued
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:
- Narrow range shuffle tries to produce a breakout but again fails.
- Chicago manufacturing cools a bit, jobless claims fall.
- Even lower volume as market flat lines.
- Analysts much too quiet. That means heads up next week.
- Subscriber Questions
Stocks walk in place ahead of year end.
Stocks were up and down all day, but the range was very narrow, trading just either side of flat. SP500 made two runs above 1215, one in the morning and a more sustained move in the afternoon, but late selling again pushed it below resistance on the close. Thus once again the indexes ended where they started.
Until the last 15 minutes the action was not bad as stocks fought back from some selling after the Chicago PMI was lower than expected and had rallied to session highs just as the late selling started. Oil was lower and then rebounded, but stocks climbed back anyway. The Wall Street Journal questioned the continuing rally in basic metals when it suggested China would be a net exporter of steel in 2005. Despite the selling in steel stocks the overall market doggedly recovered to positive territory. Mid-afternoon reports hit that Venezuelan oil workers had rejected their proposed contract and oil bumped higher; stocks slid a bit but then recovered once more. The upward bias was clearly evident as stocks continued to rise despite some headwinds blowing in periodically during the session.
Then the market on close orders were posted and there were simply too many sellers versus buyers on the next to last trading day of December and 2004. That position shuffling to lock in some gain and raise cash to move into other areas to start the year overwhelmed the upside bias. SP500 tanked, closing just off session lows. Same for the other indexes as the selling was across the board, large and small cap. It looked like a huge drop on the intraday chart, but when you consider SP500 traded in a 3 point range all day, you can see the late selling action was a tempest in a teapot (bet you never thought you would see that clich in a financial newsletter). Volume was lower, breadth was modestly positive, some leaders advanced on volume, but overall it was a sleepwalk session ahead of the new year.
THE ECONOMY
Chicago PMI backs off in December, still solidly expanding.
The 61.2 reading was less than the 63.0 expected and well off November's 65.2 reading. It is still well above the equilibrium point at 50, and marked the twentieth consecutive month of expansion in the Midwest region. The sub-indexes were also lower. New orders fell to 64.5 from 70. Employment was much lower, falling to 49.1 from 60.8; that pushed employment below the expansion point for the month. That lower number helped trigger a rally in the bond market. A positive was in the prices paid sub-index that saw prices drop to 84.4 from 89.8. Seems the lower energy prices helped here as well.
The Chicago PMI is considered a harbinger for the national ISM released next week. The softer activity in the Midwest may show up in the national number, but we also note that the New York and Philly reports were solid; a bit of a mixed bag may keep the national number status quo. That status quo is continued solid expansion in the US manufacturing sector that has been underway for almost two years. Solid but not equally impacting across the board in manufacturing as anyone will tell you.
Jobless claims fall closer to 300K, but no one is sounding the inflation alarm this time.
326K jobless claims last week versus the 335K expected and the 331K the week before (revised lower from 333K originally reported). After a three week climb in claims during a period that Challenger and other private jobs services noted an increase in layoffs, jobless claims have dropped sharply once more, heading toward the 300K level that the Fed fretted over in 1998 and 1999 as indicating a too tight job market.
The theory is that if the employee pool gets too tight, employees will demand higher wages or they will leave, and then there will be more dollars chasing the same amount of goods and services, and then you have inflation. Problem is, there is nothing but Fed theory to back up this idea, and we all saw the result of Fed theory bereft of empirical data back in 2000 when the market crashed and the economy fell from lofty heights into recession in a couple of quarters.
At this juncture even with unemployment falling to 5.4% and jobless claims approaching 300K, does anyone now think wages are going to drive prices higher? None that we are hearing, even from those proponents of this theory in the past. One of the many lessons learned from the 1999-2000 Fed fiasco is this: if you apply a remedy to a problem that does not exist, the remedy can cause a much worse problem.
Online holiday sales stronger than thought.
This past week we have discussed the dynamic of retail sales over the past few years and how the old measures are proving to yield inaccurate results. Gift cards and online sales are often forgotten or ignored in the weekly rush to look at how WMT sales performed.
They should not be ignored. Online holiday sales were revised higher to a 29% increase over 2003, or $14.8B. That is still something of a drop in the bucket, but when you compare that to same store sales growth, it is definitely the growth area. Gift cards are another huge area of sales that are not even recorded until later. We surmise it will be a short time before the rule is changed as to when the cards can be recorded as sales, i.e. from redemption back to the time of sale when the money changed hands.
THE MARKET
A real sleeper of a session. There was some moderate excitement as SP500 broke through 1215 a couple of times, but it was not worth sending out an alert heralding 'large caps break resistance!' given the very narrow trading range and the extremely low volume. When you looked at an intraday chart the moves looked dramatic, but when you looked at the actual point range the only dramatic thing was how narrow the range was.
For the most part stocks have gone to sleep ahead of the new year, and it will only get quieter Friday. Everyone wanted an early close Friday, but the NYSE takes the position that it wants to give investors all of the time possible to make their last trades for the year. As you can see from the action late Thursday, those few that were actually active Friday made their final trades late in the day as they closed positions to lock in gains and free up cash for next week. Accordingly, tomorrow looks to be an incredibly slow day as Thursday was used to square month end and year end positions.
Market Sentiment
Bulls versus Bears: Lots of talk the past two days about bulls versus bears, something we started chewing on over a month ago. The reason for the fresh talk is that bulls hit a long term high, coming in at 62.9% the past month, well ahead of the 55% level that is considered a bearish indication. Bears also hit a bearish indication level at 19.6%, below the 20% level that is historically the swing point with respect to extreme readings.
Thus both the bulls and the bears are now at extreme levels that are considered bearish for the market. Why? The theory is that if the vast majority is bullish they are already in the market. Two points. First, this is definitely an indicator to be aware of, but it is a very poor timing indicator. In other words it can be out of whack for a long time before a correction occurs. Second, there is about $1B per day flowing into equity mutual funds; that indicates that not everyone is in the market yet. It does show, however, that everyone wants to be in the market. It is just a matter of time before a correction occurs (as it always is), and we watch price/volume action and the action of leaders to tell us when a breakdown is starting.
VIX: 12.56; +0.94
VXN: 17.94; +0.22
VXO: 12.86; +0.39
Put/Call Ratio (CBOE): 0.86; -0.04
NASDAQ
Scratched out a slight gain as it gave up 4 points late.
Stats: +1.34 points (+0.06%) to close at 2178.34
Volume: 1.408B (-7.2%). Volume dried up even more as tech stocks held steady at a new high for the year.
Up Volume: 873M (+47M)
Down Volume: 435M (-231M)
A/D and Hi/Lo: Advancers led 1.21 to 1. Swung from negative to positive early in the session and held on to the close even with the late sell off.
Previous Session: Decliners led 1.15 to 1
New Highs: 168 (-11)
New Lows: 5 (-2)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ added a very modest gain to its recent run through the prior 2004 high (2154), but the action was so slow and so quiet it means little. Indeed, the entire move this week has been on such light volume that it will be a whole new game next week when the big players return to the market.
The large cap techs continue their lateral move above the 18 day EMA (1607) as they set up for the next leg higher. They will go into next week with a 4 week lateral consolidation under their belt, a good rest and near term base to rally from.
SOX again traded above its 200 day SMA (431.48) on the high, but again could not hold above that resistance level on the close. It showed a doji on the candlestick chart just as it did mid-month when it stalled out at this resistance. This time it has pinched into a tighter range, and it will make a more definitive move this coming week. A higher low near the 18 day EMA (427.81) or 425 price support would set it up for another try at the 200 day.
SP500/NYSE
Toyed with breaking through the 1215 level, doing so twice during the session. With no volume it was subject to modest buy and sell programs, and on the close that was enough to push it back down below resistance.
Stats: +0.1 points (+0.01%) to close at 1213.55
NYSE Volume: 827.272M (-11.47%). Low, sleeper volume pretty much ensured that SP500 would be unable to hold onto the break above 1215.
Up Volume: 438M (-79M)
Down Volume: 368M (-16M)
A/D and Hi/Lo: Advancers led 1.42 to 1. All indexes advanced at roughly the same pace and breadth matched that move.
Previous Session: Advancers led 1.33 to 1
New Highs: 261 (+17)
New Lows: 2 (-6)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Rallied to 1216 on the high and stalled, fading in the last 15 minutes to close where it started the session. That is a tombstone doji on the candlestick chart, and the name says it all with respect to its potential implications for the index. Given the narrow range, however, we doubt there are serious implications attached to the pattern.
Second day of lateral moves at the all-time high following the strong Tuesday move off the 18 day EMA (324.40). Nothing really to take away from this session other than the small caps continue to hold their own despite predictions they are going to fade.
DJ30
Eased back toward the 10 day EMA (10,766) on lower trade. PFE indicated sales of Celebrex were millions of dollars lower the past two weeks, and that mildly pressured the stock and the index. It is easing back to test the breakout over the 2004 high (10,759). Thus far it looks fine, but in this light volume environment that can be deceiving.
Stats: -28.89 points (-0.27%) to close at 10800.3
Volume: 142M shares Thursday versus 162 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Friday will most likely be extremely slow with the bond market closing early, no scheduled economic data, and most money managers already long gone for the holiday weekend. Volatility within a narrow range is what we expect; if there are any mangers out there wanting to take off positions, their actions could again push the indexes up and down within that narrow range.
Thus we are not anticipating doing much with respect to many positions. If a stock is trading close to its target we will consider taking some gain. Of course, there are always individual movers in any market just as seen today. We are compiling an extensive watchlist of stocks setting up for moves, and on Monday we will be watching the market and which way the big money takes these stocks. That will give us the flexibility to issues alerts as to the stocks that are in good shape and that the big money moves into. As the holiday falls on Saturday, we are going to use this method for all subscribers on Monday once more.
Have you noticed how quiet the analysts have been with respect to upgrades, downgrades, etc? Sure some calls have been made, but most are away from the office. In addition, the companies themselves have been very quiet with respect to the upcoming earnings season that starts in just under two weeks. You can bet that will change next week when everyone is back in the office.
Thus next week there will likely be competing pressures on the market: low volume rise into year end in line with the continuing trend and continued money flowing into equity funds versus earnings warnings and portfolio adjustments to start the new year. That is why we want to stay flexible as the money flowing into equity funds and the money freed up late Thursday is put back to work. We have a feeling that some of that money is heading toward some big cap techs such as SUNW, EMC, YHOO, ORCL and others that have set up nice patterns, putting the finishing touches on in December. Again we will stay flexible and go where the money starts flowing to start the year.
Support and Resistance
NASDAQ: Closed at 2178.34
Resistance:
2250 - 2260 from January/February 2001 highs and lows.
2282 from 5-2001 high.
Support:
January high at 2154 (early 2004 high) and the 10 day EMA (2161).
The 18 day EMA at 2148
2110 - 2112, the top of the November consolidation.
Price support at 2090.
The April high at 2079
The 50 day EMA at 2087
2050, prior resistance and the June high.
S&P 500: Closed at 1213.55
Resistance:
Q1 1999 lows at 1215
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
The 10 day EMA at 1207
1200 acted as resistance on the last trip higher.
The 18 day EMA at 1200
1180 to 1185, the top of the November consolidation range.
The 50 day EMA at 1177
1175 second high in that double top that spanned late 2001.
Dow: Closed at 10, 800.30
Resistance:
10,975 - 11,000 from Q4 2000, Q1 2001
11,350 from the May 2001 highs
Support:
10,754 is the February high
The 10 day EMA at 10,767
The 18 day EMA at 10,704
Price consolidation at 10,600 level
10,570 is the early April high
The late April, June peaks at 10,478 to 10,512
The 50 day EMA at 10,511
10,400, the bottom of the November/December range.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
December 28
Consumer Confidence, December (10:00): 102.3 actual versus 94.0 expected and 92.6 prior (revised from 90.5).
December 29
Existing Home Sales, November (10:00): 6.94M actual versus 6.75M expected and 6.76M prior (revised from 6.75M)
December 30
Initial Jobless Claims, 12/25 (8:30): 326K actual versus 335K expected and 331K prior (revised from 333K)
Help-Wanted Index, November (10:00): 36 actual versus 37 expected and 37 prior
Chicago PMI, December (10:00): 61.2 actual versus 63.0 expected and 65.2 prior
SUBSCRIBER QUESTIONS
Q: The other day one of my option positions really took off, giving my some really nice gains. I placed a trailing stop on those positions to ensure I wouldn't lose those gains. When I checked those positions at the end of the day, I found that I had been stopped out. I checked the price graph for the underlying stock and found that it had increased (without any downside spikes) all day long.
It appears to me that the market maker artificially lowered the "bid" price just to take me out. When I checked CBOE, I noted that my trade was the only one that day. So, if no one else was selling, how could my trailing stop get hit? I'm wondering what material benefit the market maker received by reducing my gain?
A: The market maker received a substantial material benefit. He bought at an artificially low price and most likely unloaded it right afterwards or a day or so later. This is a major problem with stop losses, particularly with options, simply because it is very hard to monitor.
In theory your stop order is not supposed to trigger until there is a trade at that level (or lower if a stop loss order which is a market order). In other words your stop should not be triggered unless an option trades at your stop price or lower (if a stop limit, generally it would have to trade at your price). That can cut both ways; we have had a stop in that was not triggered when we wanted it to be triggered simply because no options traded until a lower price. We learned the hard way that a stop loss will work against you when you think you are being safe and putting in such an order. It can also work against you just as you outlined: you think you are being safe and preserving gain in the event of a problem arising. Instead the price is manipulated lower, you are taken out, and then the price rises again.
Both have happened to us. We have been the victim of a market maker running a price down and taking out a position where we were utilizing trailing stops. It has been blatant at times as buying remained strong, but the price was dropped and immediately moved back up in an instant after we were taken out. Other times it has been more of a result of the ebb and flow of the market, but that certainly wasn't the case with your options.
It is not only options. We have lost good stock positions on NASDAQ stocks where just after the stop is put in the price runs right down and takes us out only to move right back up. It is frustrating to think you are doing the smart thing only to get stopped out. You preserved the gain, but you wanted to use it if there was a real problem. When there is a real problem, however, the stop loss usually does not help you either. If bad news comes out and your stock gaps lower, you are taken out at a much lower level than you wanted; then the stock rebounds some in a relief bounce and you get the worst trade of the day. What a great feeling.
With very liquid stocks and options this is not really a problem. Only when fewer options are traded do you really get burned. Thus we mainly keep mental stop points using alerts or otherwise to keep us abreast of the moves and then decide if we want to sell out (enter a sell order) or let the position ride. It is very important to realize that stop losses are nowhere near the safety net they are made out to be or believed to be by many.
End part 1 of 2
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