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Begin Part 2 of 2
Dow/NYSE:
The Dow was up 100 points but then gave over two-thirds back on light volume. It too may try to trim some of the heavy losses early in the week, but unless the fund managers come back as buyers, we expect some further testing.
Stats: +30.17 points (+0.3%) to close at 9949.75.
NYSE Volume: 949 million shares (-23.4%). Back below average on the gains and a significant drop on buying. There was not a lot of force behind those attempting to sneak in before any buying rally started. Up volume led 525 million to 375 million shares.
A/D and Hi/Lo: NYSE advancing issues managed a small lead on the session (1.24 to 1; declining issues led Thursday 1.9 to 1), but on the week the NYSE A/D line was down for the first time in quite awhile. New highs rose to 114 (+1) as new lows rose to 57 (+11).
The Chart: http://www.investmenthouse.com/cd/$dja.html
Tried to run over 10,000, hitting 10,036.94 on the high before folding back on the close. As with the Nasdaq, it has suffered heavy selling and may try to rebound further this week. Much depends on the fund managers, and volumes will tell us that fairly quickly. If it does attempt to rally from here before resuming its test, we would look at the 10,120 level, the July intraday low, to once again act as resistance if no volume comes into the picture.
S&P 500: The same action as the Dow, hitting 1141.83 on the high, but then unable to hold the majority of the gains. The S&P was bombed last week, and it looks as if it could try to rally to 1150, the closest lows, before resuming its test of the March and April lows (1081.19). Again we need to watch volume to see what the institutions are doing on any move higher or lower as that will key us in as to whether any move has backing.
Stats: +4.55 points (+0.4%) to close at 1133.58.
Volume: NYSE volume plunged to 949 million shares (-23.4%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
Summary: Tuesday marks the return of the fund managers to work and September, a historically bad month for stocks. There is not a lot of positive information flowing, and unless the economic news and company news is better than expected, pressure will remain on stocks. We will see volumes move higher because of more fund managers at work, and we have to take note of what they are doing. We anticipate perhaps a modest move higher and then a further plunge to the lows, hopefully all in one week. That would set the stage for a stronger move higher, but we have to be careful at what we pick to ride. We will continue to look for the strong stocks in good patterns as well as those that are in the position to give solid moves if not breakout and run 100% if the market really rallies. We are getting close to a time of change, but the indicators are only about 50% lined up; those are not good odds for a sustained move. A sharp selloff this week could rectify that situation and coincide with a full test of the lows as well. In our mind that would be the best scenario for sustained upside action.
THIS WEEK
Again, a busy economic and company news week. That will keep the market on edge along with the fact that fund managers are back and ready for business. We need to be ready to go where the fund managers take the market. As noted, an early rise in the week will be viewed as suspect; we would prefer to see serious selling down to the lows first.
What we are doing right now is watching those stocks that are holding up better in the recent selling. These will be the best movers when the market finds bottom and makes its next move. As noted, the biotechs are true leadership caliber stocks, and they have shown some better patterns these past couple of weeks. We all know that biotechs can run well, and they do not have the inventory problems that technology stocks have. In addition there are several drug, healthcare, and basic materials stocks that look good as well and are ready to move.
Right now the market has not shown us that it is ready to move higher. We would prefer to see a resumption of selling out of the gates Tuesday to get us down to the prior lows and then see the dollar continue to firm and then some better economic news (and we have many chances to do so). That would complete the big double bottom pattern we talked about back in April and give the entire market a firm foundation to really move higher with improving economic numbers. Remember, the market discounts better times in the future, and improving economic numbers this week (even if the consumer has been weakening) can be the trigger. If we get the good foundation and the right reports, then we can have a sustained move higher. Until then, we will play the downside to the lows to give us cash flow and money to invest on the upside when it comes.
Of course, what we want may not be what we get. So, we will also watch for a weak move up to the near term resistance levels as a continuation of Friday's bounce attempt. When the indexes ram into resistance and turn over, that is when we will reload the downside positions for the test of the lows.
Support and Resistance Levels
Nasdaq: Closed at 1805.43.
Resistance: 1817 (mid-August low). 1935 to 1940 stopped the last move higher. Much higher in the range, 1985 to 2013 is pretty congested.
Support: 1750 is next in line, but there is not a lot of support there. The low is 1619.58.
S&P 500: Closed at 1133.58.
Resistance: 1150. Then 1165 to 1170. 1183 is next, then 1200.
Support: The low is 1081.19.
Dow: Closed at 9949.75
Resistance: 10,000 may act as resistance. Then 10,120 and 10,200. After that, 10,400. 10,600 is strong resistance.
Support: 9775 to 9800 is potential support. The low is at 9106.54.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
9-4-01
Auto Sales, August (8:30): 6.1M versus 6.1M prior.
Truck Sales, August (8:30): 7.1M versus 7.3M prior.
Construction Spending, July (10:00): 0.0% versus -0.7% prior.
NAPM Index, August (10:00): 43.2% versus 43.6% prior.
9-5-01
Productivity-Revised, Q2 (8:30): 2.0% versus 2.5% prior.
9-6-01
Initial Claims, 9/1 (8:30): 395K versus 399K prior.
NAPM Services, August (10:00): 49.1% versus 48.9% prior.
9-7-01
Nonfarm Payrolls, August (8:30): -50K versus -42K prior.
Unemployment Rate, August (8:30): 4.6% versus 4.5% prior.
Hourly Earnings, August (8:30): 0.3% versus 0.3% prior.
Average Workweek, August (8:30): 34.2 versus 34.2 prior.
Wholesale Inventories, July (10:00): -0.2% versus -0.2% prior.
SUBSCRIBER QUESTIONS
Q: [With respect to the ARMS index] the day count range that you wrote about [4 days to 20 days on a close above 1.5 and 1 to 7 days on back-to-back readings above 2.0], is that calendar days or market (trade) days? The NASDAQ Composite Index data and many NASDAQ companies did not exist for us to chart back to 1974. Should this be applied only to Dow Jones Industrial-30 stocks?
A: The day count refers to market days. The ARMS index analyzes data with respect to the Dow and not the S&P 500 or the Nasdaq. The technology components of these two indexes can thus lead to different results than the Dow based on the ARMS index, especially in a situation such as this where there is a massive capital investment bust and chronic excess inventory. The index has only been around since 1966, and it cannot be back tested much further back as the data needed to calculate the index was not calculated.
TEAM TRADES
BJCT: Medical instruments and biotechs are two areas we are looking at in earnest as the market approaches the former lows. While the patterns may not be stellar, some are downright great and others are consolidating when most sectors have been selling. BJCT is in the medical instruments and it had formed a very solid pattern, a double bottom with handle. We had been watching some impressive volume spikes the past week, with another large spike on Thursday catching our eye as the stock traded flat in its handle. That shows us that buyers were snatching up shares as fast as sellers were selling them; in other words, after some quiet volume, the last sellers were getting out on Thursday's heavier volume selling in the major indexes, but unlike most stocks, BJCT was not selling off.
Friday it made its move around 12:25 CT when it cleared the handle high of 12.30. We issued an alert stating the buy point was at 12.43, and then went about getting in on some positions. A few minutes later, the stock was trading 12.40 by 12.49 to 12.50, so we put in a limit order at 12.50, wanting to get in on the move. That worked out easily for a change (of late we have had some trouble getting limit orders at the ask taken), and then the stock ran up to 12.90. As usual on a breakout, it pulled back to test the move, dropping to 12.60 for a trade or two, and then rebounding. That was the second chance to buy in. After that, the stock stair stepped higher the rest of the session. It ran over 13 and then suffered some strange trades around 12.80 late before it rebounded to close at 13. Could have been some market orders being filled as the stock jumped right back up. Good sector, good breakout, good volume. We will see if it can build on it.
THE PLAYS:
Reading the Plays: Please note that when we reference the 10, 18, and 50 day moving averages (MVA), those are exponential moving averages (EMA). The 200 day moving average is always simple (SMA). We will note when we reference a particular MVA differently, e.g., a simple 50 day MVA. Please click on the Yahoo and chart links for company and charting information.
New note for reading plays: A "prior high" refers to the high at the start of a base.
BEST PLAYS: Breakout for BJCT from last night's report! A buy up to 13.05, so at the closing price of 13 is close to our limit for buying on a breakout. IMCL looks great, squeezing tighter in its handle, and decreasing, below average volume. Action we like to see! SRCL made a fine move up in its rolling pattern, making it past resistance at its short term and 50 day MVAs; we are looking for that move up to the 50 range for the covered call play, if the stock tops out there and heads back down. We have gotten a nice breakout run (and test) from TSA. It posted a new 52-week high Friday on strong volume. For the coming week, see our favorites (besides IMCL and SRCL) in the Best Plays list.
Stocks from Thursday's report:
BJCT: Breakout!
BAX: Fell back to its 18 day MVA on lower volume. Can find support there, remaining in the handle of its cup base.
SRCL: Heading up in the rolling pattern.
SEIC: It was not a day for put plays.
Indexes: We are looking for some possible weak moves up early this week from the indexes; the QQQ showed a doji after falling for three days, but with the 10 day MVA at 37.75 (likely resistance, if not at Friday's intraday high of 37.03), we are not looking at upside positions. Instead, look for a move below 35.75 for less aggressive positions.
Previous plays:
MHK: Formerly in a pennant pattern, the stock made a strong move back up Friday and looks ready for a breakout. Buy point is 45.58 on volume of 383,000, stock and/or November $40 calls to buy.
APPB: Cut short the breakout, showing a doji on lower volume.
ANSS: Still holding above the 18 day MVA in the ascending wedge.
MME: Stopped out of this stock as it plunged to 21 on strong volume.
APOL: Retraced Thursday's nice move, selling back down below the 50 day MVA.
ITRI: The pattern still looks good while the stock holds above support on lower volume.
IXX: Broke the 50 day MVA, but low volume means it might hold at 18. We are out of the play until we see a strong move back over the 20 range.
MCHP: Looks ready to hold support above the 18 day MVA for now as volume stays low. The stock is forming an ascending wedge pattern off the August high of 38.70.
FRED: At support and looking ready for another leg up. It has been averaging 3-4 points on the previous 2 runs.
K: Keeping a watch on it as it tests the breakout; it is volatile right now.
SMTC: Holding with a doji at support on low volume (pulling back from its recent run up to 39.61).
PATH: Holding above the 18 day MVA as volume continues the low levels, but we'd sure like to see that move up soon. If it breaks support, we are out of this one for now.
TIER: Shaking it out and may be ready to move back up after testing its breakout.
Best Plays:
1) CAO: Breaking out and still a buy.
2) SCOR: Ready to move up in its handle.
3) MHK: Moving into breakout.
4) PPDI: Ready to roll back up.
5) PSFT: Put play.
New: A breakout!
CAO (Csk Auto--$8.55; +0.55; optionable (CAO): Auto Parts Stores
http://biz.yahoo.com/p/c/cao.html
STATUS: Breaking out of a double bottom with handle. We would have liked to have caught this one a day earlier, but it remains a buy on the breakout from here up to 8.80, and aggressive players can ride the momentum higher if the stock looks ready to top that limit price (5% above the buy point). It is a nice-looking pattern, with the low in the second dip in the pattern just undercutting that of the first dip, a desired technical feature of a double bottom. Broke out Friday on good volume (109,600; avg. 61,318). Shows super money flow and buying. Target: 10
BUY POINT: Up to 8.80 on the breakout, with add-to or new positions after a test of the breakout pullback to 8.38 (the buy point). Stop loss: 8
POSITION: Stock and/or November $75.0 calls to buy (CAO KU; low open interests; delta 0.68 at the time of this writing).
http://www.investmenthouse.com/cd/cao.html
Updates:
A cup with handle:
SCOR (Syncor Intl--$36.54; -0.11; optionable (SQR): Drugs Wholesale
http://biz.yahoo.com/p/s/scor.html
STATUS: Settling back into support (10 day MVA, 36.54) on low volume, falling further Friday to 192,200 (avg. 391,000). SCOR is in a cup with handle base with a prior high of 44.09 from April. The stock showed a doji at the 10 day, so looks ready to make the turn back up. Aggressive players can look at taking positions on a move up from here, though our buy point for the breakout is just over this month's high at 39.78. SCOR shows strong money flow. Target: 46-48
BUY POINT: Aggressive: Over 37.10 (intraday high) on rising volume. Breakout: 39.91, on minimum breakout volume of 587,000. Stop: 37.50
POSITION: Stock and/or October $35 calls to buy (SQR JG).
http://www.investmenthouse.com/cd/scor.html
Formerly in a pennant pattern:
Another rolling pattern. We are seeing lots of these in the current up and down market action:
PPDI (Pharmaceutical Prod Dev--$30.16; -1.02; optionable (PJQ): Health Services
http://biz.yahoo.com/p/p/ppdi.html
STATUS: PPDI rolls from 30 to 34 and even 37.50. It found support at 30 Friday, after moving back down from the 34 range over the last 8 days. Showing a doji on low volume (well below average and decreasing since the end of July), the stock can make another run back up from here. For a move back up to the 34 level, we can play either straight stock, options, or a covered call. We will look at buying stock and/or call options when it hits the buy point, then selling the stock and options we bought outright at the top of the run or selling covered calls on the stock as PPDI rolls over for a move back down to 30. It can always break the resistance and run higher to 37.50, but for now we will look for the topping action there. Volume was 222,400 (avg. 813,363).
BUY POINT: 30.50, on rising volume. Potential resistance at 32-32.50. Stop: 28.75 (just under the July low of 29.25).
POSITION: Stock and/or October $27.50 calls to buy (PJQ JY).
http://www.investmenthouse.com/cd/ppdi.html
Ascending wedge:
FDO (Family Dollar--$30.00; +0.70; optionable (FDO): Retail
http://biz.yahoo.com/p/f/fdo.html
STATUS: In an ascending wedge that formed after the stock broke out of a short cup with handle and then corrected back to its 50 day MVA before bounding back to upper resistance at the 30 range. The stock closed right there Friday, popping back over the short term MVAs (closed below those Thursday) but volume was indeed low at 739,700 (avg. 1.1 million), just like it was the previous 2 sessions. We will have to see that at much higher levels for a breakout, and FDO can pull back again in the pattern if it doesn't get it Tuesday. In that event look for support at 29.50 (18 day MVA). The stock is showing decent buying and high relative strength. Target: 35-37
BUY POINT: 30.43, on minimum breakout volume of 1.5 million. Stop: 28.90
POSITION: Stock and/or October $25 calls to buy (FDO JE).
http://www.investmenthouse.com/cd/fdo.html
THE PORTFOLIOS: Each report, we look at these to see which is in a buy position. We don't cover them all each time, just the ones that look ready to pick up a few shares.
THE LEADERS:
New Leaders: ESRX, ACS, NVDA, DGX, EBAY, FRX, PSFT, ADVS, BMET.
Previous Leaders in which we are still interested: ADBE, SEBL, VRSN, VRTS
BMET: Slipped back below the 18 day MVA (showing a doji) as volume fell back.
ACS: Stopped the selling and showed a doji, just up from the low, which tapped support at the July/August lows up trendline.
EBAY: Made a stronger move up Thursday, and coasted Friday up to the 10 day MVA but volume was lower. Can move back down from here; it can catch support on continued low volume anywhere between 55 and the August low at 52.50. The 200 day MVA is at 50.
A put play: We are looking at a put play here since this new leader stock has already dropped below the 200 day MVA.
PSFT (Peoplesoft--$34.48; +2.53; optionable (PQO): Application Software
http://biz.yahoo.com/p/p/psft.html
STATUS: Yes, it made a gain Friday, but the move was on lower volume, and PSFT tapped the 10 day MVA on the high (35.16) but could not cross over the resistance. Strongest resistance is at 35, and on a move down from here the stock can make its way back down near the July low (29.80-30). That support looks pretty decent, considering that the stock sold down to it Thursday on stronger volume, then bounced slightly. However, if the Nasdaq intends to sell down from here, PSFT can drop as far at the 22.19-22.25 range before finding any kind of consistent support. Volume was down to 8.1 million (avg. 7.8 million).
BUY POINT: 34; on a move up to test 35, possible entry points on a move back down from the resistance (the "kiss good-bye") in market selling.
POSITION: October $45 puts to buy (PQO VI).
http://www.investmenthouse.com/cd/psft.html
UP & COMERS PORTFOLIOS:
LNCR, BJ, LOW, HI, THQI, BBBY, IGT, CHS, KG
BBBY: Still looks weak, and from here can fall to 27 (200 day MVA), but is too close for a downside play.
LOW: Was back above the 50 day MVA Friday.
CHS: Bounced from the 10 day MVA on strong (but lower) volume. That can change Tuesday, and CHS may try to break out over the August high of 38.50. If not, it has good support at 36 on a pullback.
KG: Was holding above the 18 day MVA, but fell below it Friday on low volume.
MEMBER PORTFOLIO: New portfolio as selected by the subscribers. Some of these stocks are still struggling to move higher in their bases, and will likely continue to trade in close ranges just like the market. We'll be ready to catch them when they are ready to move. The new list: BRCM, CHKP, AMAT, JNJ, MSFT, AOL, HGSI, BUD, PXLW.
Old members: BRCM, CHKP, CSCO, EMLX, IDTI, INTC, JDSU, MVSN, NT, PWER, SUNW, VTSS
JNJ: Tapped near 52 on the low then bounced to the closing price of 52.71. Volume was stronger but still below average (and the stock is below its 50 day MVA).
BUD: Fell to the 50 day MVA at 43. Needs to hold there.
Good Investing!
Jon L. Johnson and The Daily Staff
All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners of Online Investment Services, LP or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.
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