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day trading, Breakout test
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2/28/05 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts: FFIV
Buy alerts issued: None issued
Trailing stops issued: INNO; PTEN; STLD; TSO
Stop alerts issued: SOX
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:
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SUMMARY:
- Stocks start week softer except volume jumps.
- Personal income falls, skewed by MSFT December dividend.
- PCE deflator jumps, bond market sells.
- Chicago PMI shows strong orders and production while employment jumps.
- New home sales take another tumble.
- Afternoon rebound takes some of sting out of higher volume selling.
- Still in position for a follow through, but distribution may trump it.
Soft open, modest rebound, more volume.
After the solid moves to finish last week positive we expected a bit of softness. As the indices approached the old highs the issue was whether they would consolidate a bit and then make a run at the breakout or roll over on higher volume. Monday stocks were indeed softer on the open. The problems started when the midmorning bounce off near support failed and the indices broke lower, seeking lower support levels. Volume was running higher and a distribution session was underway.
The recent big leaders were struggling, and that put the market under pressure in and of itself. Energy has had a blistering run, ballistic last week, and it was taking some lumps Monday. Homebuilders were suffering the same fate, but they were also tied to the interest rate increases in the bond market that was roiled by the PCE deflator that rose more than expected. With the big leaders of late under pressure, the rest of the market slid as well.
SP500 ended up testing the 18 day EMA, just above the 50 day SMA, and that is where the selling found its bottom. A nice hour and one-half rally into the last half hour swung SP500 ten points from the low, NASDAQ 16 points. It could not hold all of the rebound into the close, but in the end it really helped prop up the indices such as SP500 and SP600 that are trading right around their post-crash highs. That left them still set up to take on a breakout with a strong follow through session this week. A/D was not that bad, stocks held some support, and the recovery was decent.
The root of the problem could be some end of month adjustments, something last month showed with a hard dip and then rebound in one session right before the end of January. We heard some of this from floor traders handling some big orders, so there was some shuffling. Sharp volume often accompanies moves by big institutions and that could be the root of the rise in Monday trade. The afternoon recovery was a good indication this occurred as positions were sold in the morning and others were purchased, driving stocks back up in the afternoon. It was still distribution, however, and the third in seven sessions. With that we were not taking many chances with positions that were selling early.
THE ECONOMY
January income drops 2.3% versus December.
Expectations were for a 2.6% drop so there was much rejoicing. December income jumped on the MSFT dividend, and the comparison looked uglier than it was. Factor out MSFT and incomes rose 0.5%. Do the same for December and there was a 0.6% gain. Not bad. On the flip side, spending was flat versus the 0.1% gain expected and Decembers 0.8% gain. Lest you forget (and how could you with every economic article you read citing it), consumer spending makes up two-thirds of the economy.
The real impact was the PCE, the price index for consumer spending, rose 0.2% overall and 0.3% less food and energy. This is purported to be one of Greenspan's pet indicators, and the January core reading was the largest increase since October 2001. Year over year they were up 1.6%, the amount they rose in Q4.
That news is credited with the bond market getting its feathers ruffled and selling off. That boosted the 10 year note yield to 4.36%. The 'near' longer end of the bond market is finally tilting back upside, a better indication that the economy is not going to slip into stagnation down the road. The 30 year is still resisting rising yields, but that did not keep the news from hurting homebuilders. Low rates have fueled the housing market, and when inflation concern pops up the homebuilders have come under some modest pressure just as they did today.
The bond market's initial reaction was that it was potentially and inflation signal as well as
a signal that the Fed might be inclined to move faster with rate hikes, at least in intensity. We doubt we will see any inter-meeting moves; indeed that would be a major shakeup for the markets.
Chicago manufacturing beats expectations, posts strong gains in key sub-indexes.
The Chicago PMI beat expectations with a solid 62.7 reading (60 expected), pretty much holding the strong showing from January. This is some of the most real time economic data, and its continued very solid showing is good to see as the first quarter continues. Q1 could indeed be much stronger than originally expected. A 50 reading shows expansion. The Midwest has been expanding nicely for well over a year.
It was really nice to see the strength in production and new sales. Both logged a 68.5 reading; while not humming along, that level is very solid. Employment still lags, but its 5 point gain to 57.7 is very promising. Of course we have seen solid employment increases in the regional indices for a few months with no corresponding swell in the monthly jobs report. Manufacturing makes up a smaller part of the economy, and thus job creation there is not going to drive the overall jobs market. It certainly does not hurt, however.
The national ISM is out Tuesday, and it typically lags the regional indices. Last month Chicago was solid; thus we are anticipating a better reading from the national number this week as a lead in to the employment report on Friday.
New home sales take a tumble.
They were down in November, roared back in December, and then tumbled again in January, dropping 9.2% (1.106M annualized unions). Bad weather got the blame once more, and no doubt it played a role. That makes two sharp drops in three months, however, and that is hard to ignore. Expectations were for 1.13M which was already well below Decembers 1.22M. Up 9% in December, down 9% in January.
Of course the overall housing market remains very strong. Last week's existing home sales number fell but it was still the seventh strongest month on record. Even with the drop, new home sales are still strong as well. The worry is the trend, and with mortgage rates starting to creep higher finally, the housing market is going to lose some of that strength. We always hate to ignore clear signals of slowing: volatility in the numbers is a sign of a change in direction. The housing market has been strong for a long time and it is likely not going to collapse in short order. Indeed, a more staid, stable easing would be best for everyone.
THE MARKET
Once more when the indices were reaching for the next level they were slapped back on higher volume. Stocks opened soft, tried to rebound, but were then sold off again to lower support on some rising volume. Instead of a follow through stocks gave more of a rollover. But for that afternoon rebound that left SP500, SP600 and SP400 in decent shape it would have been much worse. With the rebound they still hold their patterns and have a shot at the follow through this week.
Market Sentiment
VIX: 12.08; +0.59
VXN: 18.07; +0.73
VXO: 11.86; +0.59
Put/Call Ratio (CBOE): 0.69; -0.12
NASDAQ
A doji below the 50 day EMA on rising, above average volume. Unlike the other indices, NASDAQ still has a lot of work ahead of it before it approaches its January high.
Stats: -13.68 points (-0.66%) to close at 2051.72
Volume: 2.156B (+20.83%). Big jump in volume after a abnormally low volume Friday. Volume on NASDAQ has been overall lower, and this jump is not a welcome turn as NASDAQ tries to work through its base. It is not the end of the base and it may just represent some end of the month shuffling, but NASDAQ needs to get back to some better price/volume action to show accumulation in the base.
Up Volume: 812M (-156M)
Down Volume: 1.316B (+550M)
A/D and Hi/Lo: Decliners led 1.4 to 1. Improved markedly off the -2:1 showing earlier in the session. Rather modest negative breadth put a bit of a better face on the session. The large cap techs sold harder than the overall index.
Previous Session: Advancers led 1.87 to 1
New Highs: 146 (+22). Still low, but another internal indication that the action was a bit better than the volume indicated.
New Lows: 60 (+20)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Tried to move through the 18 day EMA (2061) toward the 50 day EMA (2070), but that morning rally attempt failed. The nice thing was it rebounded off the low (2038) and closed above some support at 2050. Not a pretty session but we liked the rebound back over support. Problem remained the volume; not a good enough rebound to wipe away enough of the losses to be considered a reversal from a test lower. That leaves NASDAQ still with work to do as it starts its ninth week of the consolidation .
The large cap techs (NASDAQ 100) lost 1% versus the NASDAQ 0.66% drop. Never came close to the 50 day EMA (1533) but did manage to hold support at 1500 on the low and rebound. It rebounded 13 points from the low to the close, cutting its losses nearly in half. Not bad but still needs work in its base.
SOX showed relative strength early but then it showed relative weakness (-1.5%). It held above the 10 day EMA (431.86) and managed to bounce and recover some of the losses as did the rest of the market. Still in position to continue the move and this may have been some retrenching.
SP500/NYSE
Highest volume of the year as SP500 stalled at the brink of trying for a new post-crash high. With the rebound in the afternoon, that high volume indicates there was something else going on.
Stats: -7.77 points (-0.64%) to close at 1203.6
NYSE Volume: 1.796B (+17.94%). Big jump in strong trade as SP500 sold lower and then managed a modest rebound. It was the last day of the month and some of this very high trade indicates some portfolio shuffling to end the month. We will know soon enough with how the index trades off 1200.
Up Volume: 551M (-657M)
Down Volume: 1.223B (+921M)
A/D and Hi/Lo: Decliners led 1.55 to 1. Pretty modest downside breadth, thanks to the rebound in the afternoon.
Previous Session: Advancers led 3.38 to 1
New Highs: 317 (-34)
New Lows: 36 (+14)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Sold down to the 18 day EMA (1198), holding over the 50 day SMA (1194) pretty easily and then staging the afternoon bounce with the rest of the market. The large caps still closed well off even flat, but they also managed to recover and hold above 1200, the near support level. Big volume and the afternoon recovery suggest some end of month shuffling, but as we noted over the weekend and most of last week, until the market shows us the follow through we have to play defense. That said, SP500 still looks set up well to take on the recent high near 1218 though it may make another test or tap lower before it does. Want to see the volume fall back on that unless it is a big reversal that turns positive.
SP600 sold as well, and it tapped the 10 day EMA (327.27) on the low and rebounded into the close. Its rebound was one of the best, recapturing more ground on the rebound than it ended up losing on the session. It gave back the closing high but it still is working pretty well in its handle to the 12 week base.
DJ30
The blue chips stalled without making any further progress toward the prior high at 10,868. Unlike the small cap index, it lost more on the close than it recovered on the attempted rebound. Volume rallied back above average, not the strongest of the month but solidly above average. It got the stronger trade we were looking for, but of course it was to the wrong side. Still in the pattern but looks as if it will need help from the other indices before it can make the breakout move.
Stats: -75.37 points (-0.7%) to close at 10766.23
Volume: 288 million shares Monday versus 247 million shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
The ISM is the big economic cheese Tuesday as the market tries to recover from the Monday higher volume selling. Again, SP500 and SP600 are in pretty good position to make the stand and try again for new post-crash and all-time highs as the case may be. Breadth was not that negative and the rebound was decent.
Again, until it shows us the break higher on volume, however, the market character has not changed and we are being more defensive with our positions. We may have closed some out Monday that will recover, but with rising volume on the early selling we were not going to get too far out on a limb. We will continue to look for strong upside opportunities, but we want the market to get through this pullback and show us some strong upside volume. Might take another session of testing, and if it is on lower volume and the losses are contained that will be a positive for another run at the recent highs.
Support and Resistance
NASDAQ: Closed at 2051.72
Resistance:
2066 to 2070, the bottom of the January lateral move.
The 50 day EMA at 2070
The 50 day SMA at 2088.55
2110 - 2112, the top of the November consolidation.
January high at 2154 (early 2004 high)
2250 - 2260 from January/February 2001 highs and lows.
2282 from 5-2001 high.
Support:
2050-54, prior resistance and the June high is stronger
2047, the June high is minor support.
2023, an early October 2004 peak.
2000
The 200 day SMA at 1985
S&P 500: Closed at 1203.60
Resistance:
Q1 1999 lows at 1215
December high at 1218.
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
1200 held on the Monday close.
1196, the mid-January high and the early December peak in the left shoulder.
The 50 day SMA at 1194
The 50 day EMA at 1190 is potential support.
1185, the top of the November consolidation range.
1175 second high in that double top that spanned late 2001.
1157 is solid support from January through March consolidation tops.
The 200 day SMA at 1142
Dow: Closed at 10, 766.23
Resistance:
10,868 from the December 2004 high.
10,975 - 11,000 from Q4 2000, Q1 2001
11,350 from the May 2001 highs
Support:
10,754 is the February high
The 50 day SMA at 10,660
The 50 day EMA at 10,635
Price consolidation at 10,600 level is a key level.
The late April, June peaks at 10,478 to 10,512
10,400, the bottom of the November/December range
10342 the early September peak.
The 200 day SMA at 10,321
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
February 28
Personal Income, January (08:30): -2.3% actual versus -2.6% expected and 3.7% prior
Personal Spending, January (08:30): 0.0% actual versus 0.1% expected and 0.8% prior
Chicago PMI, February (10:00): 62.7 actual versus 60.5 expected and 62.4 prior
New Home Sales, January (10:00): 1106K actual versus 1125K expected and 1218K prior (revised from 1098K)
March 01
Auto Sales, February: 5.5M expected and 5.4M prior
Truck Sales, February: 7.9M expected and 7.6M prior
Construction Spending, January (10:00): 0.4% expected and 1.1% prior
ISM Index, February (10:00): 57.0 expected and 56.4 prior
March 03
Productivity-Rev., Q4 (08:30): 1.5% expected and 0.8% prior
Initial Jobless Claims, 02/26 (08:30): 310K expected, 312K prior
ISM Services, February (10:00): 60.0 expected and 59.2 prior
March 04
Non-farm Payrolls, February (08:30): 225K expected and 146K prior
Unemployment Rate, February (08:30): 5.2% expected and 5.2% prior
Hourly Earnings, February (08:30): 0.2% expected and 0.2% prior
Average Workweek, February (08:30): 33.8 expected and 33.7 prior
Michigan Sentiment-Rev., February (09:45): 94.3 expected and 94.2 prior
Factory Orders, January (10:00): 0.0% expected and 0.3% prior
End part 1 of 3
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day trading
Breakout test
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