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money investment, investment help
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1/03/05 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Friday/Monday: YUM (Friday); PRFT (Monday)
Buy alerts issued: FFIV (Friday)
Trailing stops issued: HOLL (Friday); ARBA; AVID
Stop alerts issued: SNAD; TKR (Friday); STGS; AVO; OSTK; EMR; XXIA; MTSN; SGMS
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:
- Stocks start strong, quickly fade to selling as all the players return.
- National ISM rises past expectations, setting tone for an early 2005 expansion continuation.
- Small caps hammered as 2005 start flips what worked in 2004.
- As goes January . . . ?
New year starts similar to, yet different from, 2004.
The first session of 2004 started with a whimper as SP500 posted a loss on that first trading day. That did not stop stocks, however, from enjoying an early year surge before falling into the year long base as the Fed raised interest rates. Monday SP500 started down once more. Unfortunately, the loss was sharper than in 2004 (bigger price drop and higher volume) and NASDAQ and the small caps, winners on day one of 2004, were some of the worst performers Monday.
Volume jumped sharply (not unexpected, but trade was strong on NASDAQ) as stocks started with enthusiasm on news WMT sales had jumped , oil was falling sharply, and the dollar was rising. SP500 broke through 1215 with relative east. Not 10 minutes into the session, however, and stocks were then thrown back in a volume reversal as stocks pulled a classic surge and purge move. A long intraday consolidation failed in the last hour and stocks finished just off session lows. SP500 held above 1200 support while NASDAQ closed just below the top of its 2004 base.
Good to see them hold support, but never like a reversal after a strong open, particularly one this weak. Breadth was poor across the board as small and mid-caps sold through their 18 day EMA. The word among the floor traders was that an early buy program put a lot of money to work. When it shots its ammo there was no one there to fill the void. Stocks started to fall and we are told that some of the sales on the way down were from the same early buyer. Hope the rest of the year is not that wishy-washy.
In short it was not a great way to start the year as almost all stocks felt the bite of the seller. The question now is whether this was the start of a base to consolidate the October to Christmas run or just some early first of the year jockeying as money shifts around, finding those places it wants to be in starting a new year. The action was distributive, but just as the end of the year was skewed by few players and light volume, the first session was skewed by money moving and trying to find where it wants to go.
THE ECONOMY
ISM manufacturing posts a solid gain, exports start to take off.
Nationwide, manufacturing posted its nineteenth consecutive 50+ reading with December's 58.6 topping expectations (58.5) and November (57.8). New orders was the star, rising to a 10 year high at 67.4 (61.5 November). Generally, rising orders mean more activity in the future as manufacturers have to actually work to fill those orders. Prices paid, helped by falling energy prices, dipped to 72 from 74. Energy was not the great reducer of prices, however, as there was that price spike in December on some worries about US inventories and the cold that swept through the country. Thus we may see more easing in the next report as those energy prices ease once more. Indeed, oil was down $1.33/bbl ($42.12) Monday as oil starts to move back toward that key psychological $40/bbl level.
Employment was lower, falling to 52.7 from 57.6; still it was the fourteenth consecutive employment sector expansion. Employment continues to expand, but at a very moderate rate. Many of those jobs lost are gone for good. What these numbers show is a solid, steady recovery, but one that is not going to recreate all of the manufacturing jobs lost.
One of the bright spots in the report were exports. They surged to 60 and were basically on parity with imports. The weakening dollar is finally making US goods appealing to foreign interests. We have written on this before, but all of the talk about the dollar being too low is simply inaccurate. The dollar was too strong for too long and is now getting back toward levels where historically it has been in equilibrium with other currencies. The result is that we see exports rising and foreign investors coming shopping in the US for consumer goods as well as real assets.
This is the self-correcting mechanism that orderly currency drops bring with them: a weaker dollar that is feared to drive away investment ends up attracting the same and thus trade deficits start to remedy themselves. This presupposes an orderly drop, and thus far it has been. It is very similar to the other deficit worry many espouse, i.e. the federal deficit. You hardly hear a word about it, but the deficit is already $110B less than expected as the economic growth has generated more than $1 in tax revenue for every $1 in tax cuts. That is a historical fact that is not admitted by those against tax cuts as a way to stimulate the economy, but it is fact. If you increase economic activity, you increase tax revenues even if tax rates drop. With the trade gap, you create more exports when the currency drops as long as you the drop is orderly and stays within reason, meaning it does not dip too far below historically equilibrium levels. There is an old and true statement that no economy devalued its way to prosperity, and that holds for the US just as with any other country.
THE MARKET
What was working in 2004 took a hard hit Monday as the small, mid-caps, semiconductors and techs took the brunt of the selling. The small caps showed some signs they were extended in December, but blasted higher early last week in what appeared to be a move overcoming the early and mid-December stumbles. Monday they gave last week's move back in one stroke as the small and mid-caps lead to the downside. They were not alone as energy stocks sold hard and indeed, look much worse than the general sectors listed above.
The big question is whether 2005 actually sees a shift from these 2004 winning areas, a base where leaders pullback and consolidate their gains before resuming their upside move, or just an early year jostle as money managers stumble over each other as they redirect their focus. We note that a shift that has been talked about with respect to small caps for over a year, but has yet to materialize. Indeed, except for a good part of energy that has weakened and appears to have started a new correction/base already after a strong 2004, most of the big indexes and leading sectors are still in their uptrends. Monday was a reversal on volume that showed some distribution (high volume selling), but given it was the first session of the year with money scrambling around, it does not mean an end to those uptrends.
Market Sentiment
VIX: 14.08; +0.79
VXN: 19.5; +0.92
VXO: 14.2; +0.62
Put/Call Ratio (CBOE): 0.78; +0.12
NASDAQ
Sold down to the 18 day EMA, slightly undercutting the top of the 2004 base, as volume jumped above average.
Stats: -23.29 points (-1.07%) to close at 2152.15
Volume: 2.225B (+62.48%). Volume raced back above 2 billion and well above average as tech stocks turned from an early bounce and sold off. That indicates the new year started with distribution. Sharp corrections are part of any rally. They are expected and not deadly if they are met with some continued accumulation.
Up Volume: 620M (-68M)
Down Volume: 1.523B (+873M)
A/D and Hi/Lo: Decliners led 2.34 to 1. Very weak breadth across the board as tech stocks were sold to take gains to start the year.
Previous Session: Advancers led 1.07 to 1
New Highs: 158 (+1)
New Lows: 9 (+6)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Tech stocks were one of the leading point losers, and it was spread across the board to both large and small caps. They sold back to the 18 day EMA (2151) and held with a modest late rebound. That easily maintained the uptrend though it did undercut the early 2004 high that marked the left side of that base (2154). If you look back at the rally from the August low, NASDAQ has traveled 431 points. During that move it has three breathers, four if you count December where it moved mostly sideways. It would not necessarily be a bad sign for it to continue its lateral move here. Indeed, after the hard drop Monday back to near the highs from December, it would do it well to move sideways, regroup, and then start the breakout move again.
NASDAQ 100 matched the overall NASDAQ loss in percentage terms. It tanked below the 18 day EMA but held within the 4 week lateral move in December. That lateral move was not enough consolidation apparently; NASDAQ 100 needs to stem the selling here, maintain its lateral move, and then use that as the new launching point. Not an auspicious start.
SOX turned from the 200 day SMA (430.93) once more, unable to find any support from buyers. What few buyers there were to end 2004 were overrun by sellers that pushed the chip index back to its 50 day EMA (422.69). Once more semiconductors tried the 200 day and once more the air was too rare. Once more they were unable to help out the rest of the market. Some things changed Monday, e.g. the distribution in techs and small caps; other things did not, namely the semiconductor index failing at the 200 day.
SP500/NYSE
Ran through 1215 early once more and then rolled over and gave that level up once more. Still holding the 18 day EMA, and as with NASDAQ, this is roughly where it needs to hold the line and continue that breakout move.
Stats: -9.84 points (-0.81%) to close at 1202.08
NYSE Volume: 1.504B (+91.3%). Volume surged back above average as the large caps thudded down to the 18 day EMA. A good breakout from the base and a good run; sharp pullbacks are part of rallies, particularly at the changes of months, quarters, and years.
Up Volume: 325M (-63M)
Down Volume: 1.148B (+758M)
A/D and Hi/Lo: Decliners led 2.68 to 1. Pummeled from all sides as the small and mid-caps sold hard as well. Another market 'internal' that was quite weak Monday.
Previous Session: Advancers led 1.19 to 1
New Highs: 180 (-100)
New Lows: 10 (+4)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Failed at 1215 once again, falling to the 18 day EMA (1202) on rising, above average volume. The rising trade was a given after the low holiday trade, but the above average levels indicate it was something we can totally discount. We have seen on many occasions where volume rises on selling in the midst of a solid upside run; as long as the index corrects this and resumes its trend or then consolidates with some more orderly trade it can go about its business. We don't want to put too much into this action given it was the start of the year and money was on the move, but we don't want to ignore it either.
Small caps were hit a good whack Monday, falling through the 18 day EMA (324.64), closing near the session low. They had struggled in early and mid-December with some hard selling bouts and almost made a lower high. Compared to other indexes that did not look like anything. With the strength of the small caps, however, the action was notable. It has been jumpy, and a lateral move at roughly the 320 level would do it some good by allowing the sellers to get out and set up the next move. Recall it just broke out from its most recent base in early November, so it does have relatively fresh legs at this juncture.
DJ30
The blue chips received some help from WMT, rallying to match the late December highs early in the session. They too, however, could not hold the move for long, turning lower and selling to the 18 day EMA (10,714) on the close. Volume rallied to average; no heavy selling on the blue chip index, but it did fall back into the 2004 base (10,754).
Stats: -53.58 points (-0.5%) to close at 10729.43
Volume: 270 million shares Monday versus 141M shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
They say as January goes so does the market. That held true in 2004 and it has held true 29 of the past 34 years when the market was up those first five sessions of January. Of the 5 years that it did not, 4 were purportedly war years. January was off to a poor start as the early money push higher did not entice other funds to put that new cash to work. It is not just the first day, but supposedly the first 5 trading days of the month. In other words, this week.
Bad thing for the market is that stocks ran pretty well to this point and were starting to struggle a bit as it hit the holidays. Stocks may need more of a breather here before continuing. Would that doom 2005? After all, we are at war as well. We have not performed an in-depth analysis of this first week weathervane but suspect that when this occurs there is a reason the market is up in that timeframe and why it continues to move higher, e.g. an economic recovery with continued earnings recovery. We do know that in some of those years earnings even fell back following strong surges and the market still finished the year positive. Basically the market rises if it continues to anticipate earnings appreciating at a pace that supports higher stocks prices.
While it is fun to read the tea leaves in that manner, what it really puts us back to looking into the future by looking into the best price discounter there is, and that is the action in the stocks themselves. We want to determine if there are more buyers than sellers over the recent history to know if stocks are being accumulated or slowly sold. We want to see if a good chunk of leaders are still moving ahead on strong volume. We look at how far the market has run and where it is with respect to the number of bases during the run and how far it is above its 200 day SMA. Even the strongest trends have to end at some point, and they start distributing with a lot of day to day volatility as they do.
Thus Monday is something important to watch from a price/volume perspective as stocks sold on volume, reversing an early move above resistance, at least on SP500. There have not been a lot of distribution sessions to this point, and it was also the start of a new year following a nice run from November (from August if you look at NASDAQ). In short, the distribution can be explained; stocks have to respond by holding their trends, however, or otherwise moving laterally and setting up the next move higher in that trend.
We want to also be on the lookout for earnings warnings for the earnings season that is just a short week away. Monday there were surprisingly few warnings with most of the action coming from analysts and brokerages. Very quiet on the earnings front thus far, but we can expect some warnings this week. That will be something else the market will have to swallow along with the Monday distribution. It will give us a better idea of how much strength still underlies this nice uptrend.
We are again going to stay flexible in approaching new positions. Monday was not a banner day for starting much to the upside. We held off rushing into positions in the early surge, suspecting something along the lines of what happened; not the extent of the selling, but an early run that was tested leading to a rebound. Now we have to see how the market swallows this volume reversal and what comes out, so to speak, showing some strength. Many leaders sold back Monday, but many remain in their uptrends. We will look for good action from the leaders, i.e. rebounding on strong trade, as an indication of how the market is handling the Monday volume decline.
Support and Resistance
NASDAQ: Closed at 2152.15
Resistance:
2250 - 2260 from January/February 2001 highs and lows.
2282 from 5-2001 high.
Support:
January high at 2154 (early 2004 high) is trying to hold.
The 18 day EMA at 2151 is also trying to hold.
2110 - 2112, the top of the November consolidation.
Price support at 2090.
The April high at 2079
The 50 day EMA at 2093
2050, prior resistance and the June high.
S&P 500: Closed at 1202.08
Resistance:
Q1 1999 lows at 1215
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
1200 acted as resistance on the last trip higher, so we are looking to it as support on the test.
The 18 day EMA at 1202
1180 to 1185, the top of the November consolidation range.
The 50 day EMA at 1179.66
1175 second high in that double top that spanned late 2001.
Dow: Closed at 10, 729.43
Resistance:
10,754 is the February high
10,975 - 11,000 from Q4 2000, Q1 2001
11,350 from the May 2001 highs
Support:
The 18 day EMA at 10,714
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 10,530
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.
January 03
Construction Spending, November (10:00): -0.4% actual versus 0.4% expected and 0.3% prior
ISM Index, December (10:00): 58.6 actual versus 58.5 expected and 57.8 prior
January 04
Auto Sales, December: 5.2M expected and 5.1M prior
Truck Sales, December: 8.3M expected and 7.8M prior
Factory Orders, November (10:00): 1.0% expected and 0.5% prior
January 05
ISM Services, December (10:00): 61.0 expected and 61.3 prior
January 06
Initial Jobless Claims, 12/31 (08:30): 330K expected and 326K prior
January 07
Non-farm Payrolls, December (08:30): 175K expected and 112K prior
Unemployment Rate, December (08:30): 5.4% expected and 5.4% prior
Hourly Earnings, December (08:30): 0.2% expected and 0.1% prior
Average Workweek, December (08:30): 33.8 expected and 33.7 prior
Consumer Credit, November (15:00): $6.0B expected and $7.7B prior
End part 1 of 3
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