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investment help, Breakout test
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3/14/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: PACT; ILA
Trailing stops: FFIV; DADE
Stop alerts: none issued
SUMMARY:
- Stocks trade flat until Genetech provides afternoon catalyst.
- Market henpecked by several economic rumors, off the cuff statements.
- Stocks head into Tuesday in basically the same shape, i.e. needing some upside volume and leaders leading again.
- Economic news begins Tuesday as stocks search for a catalyst.
Stocks retreating modestly when drug news provides upside spark.
An early bounce fell into a midday slump as buyers evaporated. Sellers were as hard to find as well, however, and the indices never slipped very far. In short it was a pretty quiet day to start expiration week: narrow range, low volume. In the early afternoon the market hit its low, formed a small double bottom, and bounced modestly, once more trying the upside waters. About 10 minutes into the bounce Genetech announced improved life expectancies for lung cancer patients with an Avastin/chemotheragy combination. That shot DNA higher and was a catalyst to send stocks higher.
The news did not unleash a massive buying wave. Sellers stepped aside as a few more buyers entered the market on the news. With the sellers out of the way those buyers pushed the indices to session highs on the close. No breaks through resistance on the close; there was not enough volume to make the move. Indeed, volume was lower than Friday's already low levels. Breadth was slightly positive, coming back from negative in early afternoon.
In short the recovery was nice but other than a decent rebound move late in the session, the move was without support as shown by the weak internals. That puts the indices basically in the same position heading into Tuesday as the close Friday, though with a bit more breathing room above the 50 day EMA. It could not make any serious bounce Monday, but expiration week still has to play out. We expect more volume to come into the market simply because of expiration. We will see if those stocks that eased back on low volume to test their breaks higher can capture some of that volume on the upside.
THE ECONOMY
There were several pesky stories out early Monday that may have had some impact, but the market was so mellow it was hard to tell what impact they had. Overall they added some to the continuing problems confronting the market, higher oil prices and Fed monetary policy.
OPEC: Saudi Arabia to push for increased production by 500K bbl/day.
Yawn. Oil was lower pre-market, but then climbed intraday in the face of yet another Saudi assurance it was going to keep plenty of supply on the market. Some say hurray, some say the Saudis are crooked, others say it does not matter.
The story with Saudi oil is that it is heavier oil and it is valued less. Most US refineries are not structured to crack the heavier oil. Thus when Saudi says it is increasing its production there is not a lot of stir in the market. Indeed, most of what such an announcement does is further separate the pricing of the different grades of oil. It had no impact on oil prices as they climbed right back up during the session.
The key remains how quickly the available oil can be converted into what wee need. Oil stocks are good as the weekly inventory reports have shown and as the Exxon CEO confirmed last week. Here in the US the problem is getting oil into the component parts we use such as gasoline. The market has bet that even with gasoline inventories above last year at this time at 5 year highs that demand will still outstrip supply.
Some might argue with demand high there would be a rush to build more refineries. Regulations make that hard to do, and those with the refineries are enjoying the high margins on their product that limited refining capacity brings. Why rush out and into the headaches that building new units entails? That is some of the thinking that goes into the mix in addition to how long prices are expected to stay high, the useful life of the refinery, etc. Liabilities related to the site linger long after the high demand for the product wanes.
China hints at moving quicker at 'adjusting' its currency.
Many have stated in public the need for China to float its currency and stop piggybacking on the dollar. There is some nationalistic sentiment to that argument as if somehow China is living off the US or something like that. The argument goes if China 'un-pegs' its currency to the dollar then it will hit its natural equilibrium level and allow the trade imbalance to come more into line vis- -vis market forces.
Sounds good but that also entails an overnight inflation jump in the US as China's currency rises versus the dollar. That would most likely cut down on our imports and indeed help balance the trade gap with China, but we would be losing a source of cheap goods for consumers at the same time. A mixed bag, and it is understandable to see why the US has allowed the textile quotas to expire as that will help offset the price jump if the yuan is allowed to float against the dollar as opposed to on its back (and the move was also likely a part of a deal between the US and China with respect to moving China to a float from a pegged status).
The dollar responded early by rising, something it is expected to do if the yuan is floated at least with respect to the US dollar. The theory is the float will allow the trade balance to recover and that will strengthen the dollar as trade gaps shrink and any supposed risk associated with the deficits wanes. While history shows that these imbalances self-correct if currencies are not tied to one another, the correlation between a weak dollar, interest rates, scurvy, and the plague is tenuous at best. Again, the real problem is the immediate inflation jump when Chinese goods jump as the yuan rises versus the dollar.
THE MARKET
Stocks bounced modestly on lower volume, moving up as you would expect after a 50 day EMA test, but volume was not there, rendering Mondays move a relief bounce for now. It took a late rebound sparked by good news from Genenetch to even get stocks higher. They started stronger but lost direction, turning in a mixed performance mid-morning and falling negative in the early afternoon. But for the DNA bounce there would have been only a failed early bounce attempt.
Even with the DNA bounce volume was lower and breadth basically flat. Volume did tick a bit higher as the market recovered in the last hour but trade was still very slow. Expiration trade has obviously not kicked in yet. The mid-caps moved off the 18 day EMA, leading the market gains as it continues to show the best strength during the recent pullback. Perhaps they along with the small caps will lead higher from here. After a rough week of falling back, many oil stocks are still holding at near support. That strength suggests the sharp pullback may have run its course.
All of this still has to play out with some expected volatility over the next couple of sessions along with some stronger trade. Volatility finally showed up late Monday, and we can expect more to come. What we want to see is continued strength in the leaders that are testing their moves. As long as they hold their position they keep the stage set for a rebound from this selling, at least for those stronger stocks.
Market Sentiment
VIX: 12.39; -0.41
VXN: 18.35; -0.22
VXO: 12.62; -0.34
Put/Call Ratio (CBOE): 1.01; +0.02. Some jostling has already started in the options market with the put/call ratio remaining high for a fourth straight session. Two closed above 1.0, the level suggesting a bounce is coming, and two closed in the high nineties, an indication during 2004 that a bounce was ahead. Options expiration skews this some, but the put activity was climbing higher already last week.
NASDAQ
Edged higher off the Friday selling, but it took that late bounce to push it back up to some support at 2050. Volume was low once more as NASDAQ showed it is still basing.
Stats: +9.44 points (+0.46%) to close at 2051.04
Volume: 1.73B (-3.89%). Once more very low volume, well below average as NASDAQ continues its basing. Bases with low volume are good, but the price drop last week through the 50 day EMA indicates there is more basing still to come.
Up Volume: 1.059B (+537M)
Down Volume: 646M (-608M)
A/D and Hi/Lo: Advancers led 1.14 to 1. Advancing issues did recover from negative thanks to that last hour surge, but this light showing means little.
Previous Session: Decliners led 1.21 to 1
New Highs: 54 (0)
New Lows: 83 (-9)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Modest rebound that came late in the session to push NASDAQ back above some support at 2050. NASDAQ spent most of the session near flat, and the late rebound to close at the session high is always a good indication. That was about it, however. Low volume, weak breadth, still below the 50 day EMA; in short, it continues its basing pattern to start the eleventh week of the base.
Unlike last week, NASDAQ 100 and NASDAQ were neck and neck Monday. Overall NASDAQ 100 looks more prepared for an upside move as it tapped at 1500 support on the low once more and rebounded to the close. That is an important support level for this pattern.
SOX held above the 50 day EMA (424.89), posting a small bounce after tanking to that level Friday. Despite that Friday thud lower it is still in the 16 week reverse head and shoulders base.
SP500/NYSE
The last hour recovery pushed SP500 nicely off the 50 day EMA but volume is still not yet indicative of a renewed swell of buyers. A decent start, and it is still in position to show us more.
Stats: +6.75 points (+0.56%) to close at 1206.83
NYSE Volume: 1.443B (-0.33%). Volume fell well below average on the Friday selling, and it remained lower Monday as SP500 recovered some of that lost ground. Buyers did not surge back in Monday.
Up Volume: 989M (+465M)
Down Volume: 432M (-453M)
A/D and Hi/Lo: Advancers led 1.12 to 1. But for the mid-cap strength breadth would have been negative.
Previous Session: Decliners led 1.53 to 1
New Highs: 82 (0)
New Lows: 32 (-7)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 did start the rebound Monday but as noted, it lacked any power as volume remained below average volume and breadth was marginal. It did accomplish some positives; it held above 1200 once more, it rebounded where it should have, it closed the session at the high. Those are nice, but it will have to put some trade behind that move and break on through the February highs at 1212 to start it on its move to try a new post-crash high once more.
SP600 small cap index bounced with the overall market, but it still closed below near resistance at 331 - 332 as well as the 10 day EMA (329.87). It needs to break back through this level on volume. The mid-cap SP400 rebounded off its 18 day EMA (668.38), having held that level and price support also at that level last week. It is set to resume its move and if it can take the small caps with it, the market will do better.
DJ30
The blue chips were held in check Monday on a general lack of interest. A bounce off support at 10,754, the early February high kept it in play for a rebound this week to move it back toward the December and January high (10,868). It is in good position to rebound off this key earlier support.
Stats: +30.15 points (+0.28%) to close at 10804.51
Volume: 237 million shares Monday versus 243 million shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
The economic data parade starts Tuesday with the NY regional manufacturing index for March, retail sales for February, and January business inventories. The former two are the more recent data and thus will have more impact on the market. After a week of no data that allowed speculation about oil prices and interest rates to rule, the market will get its fix for government data.
That data will add to a week packed with undercurrents. The selling last week on rate and oil fears, the hold at the 50 day EMA, expiration week; those are just some of the spice added to the mix as stocks try to shake off the selling and recapture the recent breakout move.
The key for the market is leadership and whether buyers are ready to step back in and buy more of those leaders now that they have pulled back to test their recent moves. If they do the market has good prospects to move back up from this test near important support at the 50 day EMA for SP500, SP600 and the 18 day EMA for SP400. NASDAQ does not look ready to make an upside move, but SOX could do so given it sold on the INTC news but has held the 50 day EMA and its pattern.
NYSE stocks are still in position to rebound toward their recent breakouts. They have to have the buyers return, and that means a catalyst in the face of continued high oil prices and interest rate/inflation fears. Stocks broke out despite high oil prices and then sold off just as the hype peaked around oil. They have given back the gain, but that peak in oil hype may lead to a near term retrenchment in oil and give the market some room to rebound and try the breakout once more.
Support and Resistance
NASDAQ: Closed at 2051.04
Resistance:
2050-54, prior resistance and the June high is stronger
2066 to 2070, the bottom of the January lateral move.
The 50 day EMA at 2068
The 50 day SMA at 2070
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:
2047, the June high is minor support.
2040 is some minor support.
2023, an early October 2004 peak.
2000
The 200 day SMA at 1992
S&P 500: Closed at 1206.83
Resistance:
The 10 day EMA at 1209
Q1 1999 lows at 1215
December high at 1218.
October 1999 low at 1233
May 2001 interim peak at 1266.
Q2 2001 peak at 1310.
Support:
1200 continues to hold on the close.
1196, the mid-January high and the early December peak in the left shoulder.
The 50 day SMA at 1195 and the 50 day EMA at 1197.
1185, the top of the November consolidation range.
1175 second high in that double top that spanned late 2001.
Dow: Closed at 10,804.51
Resistance:
The 10 day EMA at 10,826.
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 EMA at 10,705
The 50 day SMA at 10,676
Price consolidation at 10,600 level is a key level.
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.
March 15
NY Empire State Index, March (08:30): 19.9 expected and 19.19 prior
Retail Sales, February (08:30): 0.6% expected and -0.3% prior
Retail Sales ex-auto, February (08:30): 0.8% expected and 0.6% prior
Business Inventories, January (10:00): 0.9% expected and 0.2% prior
March 16
Current Account, Q4 (08:30): -$183.0B expected and -$164.7B prior
Housing Starts, February (08:30): 2030K expected and 2159K prior
Building Permits, February (08:30): 2070K expected and 2132K prior
Industrial Production, February (09:15): 0.4% expected and 0.0% prior
Capacity Utilization, February (09:15): 79.2% expected and 79.0% prior
March 17
Initial Jobless Claims, 03/12 (08:30): 315K expected and 327K prior
Leading Economic Indicators, February (10:00): 0.1% expected and -0.3% prior
Philadelphia Fed, March (12:00): 20.0 expected and 23.9 prior
March 18
Export Prices ex-ag., February (08:30): 0.7% prior
Import Prices ex-oil, February (08:30): 0.2% prior
Michigan Sentiment-Preliminary, March (09:45): 94.9 expected and 94.1 prior
End part 1 of 3
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investment help
Breakout test
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