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10/13/01 Technical Traders Report
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MARKET ALERT SERVICE
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SUMMARY:
- Indexes make a comeback once again after poor retail sales numbers and another anthrax scare.
- Lower volume as indexes approach their 50 day moving averages after another good rally may indicate another rest this week and the building of more patterns.
- War is escalating on both fronts and remains the greatest source of negative outside influence.
- Consumer confidence better despite nightly hounding by the sensationalists.
- Subscriber Questions
Market tested some on Friday, but buyers come back in.
September retail sales were sharply lower than expected at -2.4%, more than tripling expectations of a 0.7% loss and a +0.4% reading in August. Take out autos, and sales were down 1.6% versus expectations of a 0.5% drop. That was the largest drop in the 9 years the data has been kept. Expectations were for slowing sales, but no one really knew how much. On top of those numbers, the PPI came in at a +0.4%, higher than the +0.1% expected. That did not help investors get over the retail sales numbers as it indicates prices to wholesalers rose as well. No real signs of inflation (look at commodity prices still tanking) as the increase was led by gasoline, home heating oil and autos. Still nerves were raw.
Okay. Friday's results were worse than expected, but how lasting? After the initial numbers were out before the open, the Michigan Sentiment report was released a half hour into the trading session. In September came in at 81.8. Expectations for October's first reading were all the way down to 76.0 after the initial attack was fully appreciated, the battle was joined by the U.S., and whiffs of more potential terrorist attacks. Instead, sentiment rose to 83.4. Expectations rose to 77.9 from 73.5.
What does the more recent sentiment reading tell us? That the September retail sales numbers were more or less the result of a bunker mentality after the initial attack and threats of subsequent attacks. After the initial shock, it appears that Americans are feeling better about the future now that the U.S. has been mobilized its forces and its citizenry. That indicates that consumers may be ready to start buying again; maybe not in massive numbers, but the snapback in confidence is a good sign.
On top of the economic numbers, a new case of anthrax was reported, and that really sent the market lower. Though confidence is up, the type of surreptitious attacks being waged against (and imagined by) the U.S. still has investors in edge. Any really bad news could sour things; thus far the market has shaken them off.
Indeed, the market recovered Friday.
In a continuation of a familiar pattern the past three weeks, when the market pulls back, buyers use that to pick up shares at cheaper prices. That then rallies the market higher, either closing positive or well off of the lows. Friday the Dow and S&P recovered well off of their lows while the Nasdaq was able to turn a 50-point loss into a small gain. Once again, the buyers used the selling to buy stocks at lower prices.
Volume was lower on the session, again indicating continued positive price/volume action as the Dow and S&P closed down. Nasdaq volume was heavy at 2.1 billion shares, lower than Thursday's volume on the big move. We also have to consider that the session was a solid reversal session, testing the gap up point at 1649 on the low (1651). All indexes are going to face a significant test this week in the form of the 50 day MVA after some strong moves higher. As noted last week, that is a logical time for a breather.
That would mean that the indexes may be ready to give us another consolidation period before the next move higher. That consolidation would give many more patterns that are forming up very well to start completing their bases and thus be ready for the next rally to send them over resistance. This is the series of waves of breakouts that we have discussed the past few weeks, and we are seeing it from stocks hitting new highs, stocks breaking above downtrends, stocks breaking out of longer consolidation ranges. Stocks are continuing to reach the point where demand outstrips supply and the breaks over resistance come. Thus, without some outside influence, we anticipate the indexes may move a bit higher during this move, but then struggle a bit at or above their 50 day MVA's, and form another consolidation at that point.
Thus, even in the face of bad news, both economic and terror related, buyers came back in when an opportunity presented itself. The big question is how long that will continue in the face of the rising action in the war.
War action and rhetoric ratchets higher and more economic news over the weekend.
On the home front, more cases of Anthrax this weekend and more scares regarding 'powdery substances' in letters and airliners. Some were immediately resolved as harmless, while others are still under investigation. Then the Al Qaeda comes out with another fire and brimstone message to the world. Same content, but a lot more wild-eyed and hysterical. In Afghanistan the bombing took a breather but then picked up in intensity once again. Lots of speculation as to what the U.S.' next step will be, but one thing is certain: the pressure will be kept up and the Al Qaeda will become more shrill.
We have been talking with a lot of people around the country, and outside of a few really out on the ledge, most people are taking things in stride, going about their lives just as always with the added caution that comes with the times. They seem to realize that the anthrax 'attack' is not capable of harming many people, especially if you are just aware of what is going on around you. Indeed 52% polled said they were not concerned at all about being infected by anthrax. That explains the unexpected jump in consumer sentiment in October versus September.
This is in spite of what we are seeing on some 'news' shows on the tube. Thursday and Friday we watched them with the purpose of getting a more comprehensive feel for what is being said and how it is being delivered. There is a lot of overblown hype out there that is not helping the situation. One well-known host said he was 'terrified' by the 'terror' that was everywhere in the U.S. That certainly does not gibe with what we are hearing from many people across the nation or what was reported in the Michigan Sentiment statement. We hope that the U.S. citizens keep their heads as they have done thus far and not give way to some of our own hysteria that is being put on our own airwaves.
On the business side, Boeing announced 9,000 new layoffs this week and anticipates 12,000 layoffs before this round is over. This rattles the analysts, and of course, workers. Losing a job is a terrible thing, and when it is because of a recession, it is totally frustrating. You did nothing wrong; policies that set the wheels in motion is to blame, but that is lost in the grand speeches and explanations. As we have pointed out in the past, however, employment tends to lag market recoveries; the market looks ahead, not to yesterday and today. That is why it has been able to overcome bad news of late; it sees the rate cuts, high fear, and stimulus package as affecting an economic recovery.
THE MARKET
Great recoveries off of the lows as buyers stepped in after fear selling, learning the lesson from the incredible market anxiety after the attack. Still, the moves after the Friday anthrax scare did not take the indexes over the next level of resistance that is more or less represented by their 50 day MVA's. After very good moves, this important level is one we would expect to provide some resistance. They may clear that level on the initial stab, but we have to see how they hold from there. What would be best would be a nice move over the level and a sideways move for the next move. The most likely? They move up to or slightly over those levels and then they pullback down a bit below them. There is a lot of flex on either side of the 50 day MVA on the way back up. So far the move up has been solid; for now we plan on continuing to let it work for us, i.e., letting good breakouts test their moves, sticking with solid plays. We may take some short-term profits if we see the indexes run up and reverse, but overall the moves remain intact.
VIX: 36.45; +3.86. On the high it hit 38.15 as volatility spiked back up even as the S&P recovered in the afternoon. Investors are still on edge, and that remains good for the market to an extent. If anything really bad happens, however, it could torpedo the moves higher regardless of where volatility stands.
VXN: 65.98; +4.34. Hit a high of 67.85 on the anthrax story, but pulled back in the afternoon recovery. It was still a strong jump and the high puts it in what we consider a high range.
Put/Call Ratio (CBOE): 0.76; +0.14. Put action jumped back up once again on pessimism in the market. Even with the afternoon recovery, put action remained high to the close. Again, this is another sign that there is anything but complacency in the market.
Nasdaq
The only major to reverse and close positive, the Nasdaq, driven by large cap technology stocks, has been performing the best of the major indexes. Volume was lower but still heavy as buyers saw a buying opportunity in the early afternoon and drove prices up at the close. It still must deal with the 50 day MVA just above.
Stats: +1.93 points (+0.11) to close at 1703.40.
Volume: 2.18 billion shares (-13.5%). Volume was above average and still considered heavy as the index sold but then recovered for the slightest of gains. Up volume remained in the lead at 1.381 billion to 757 million shares. Hard to call it a good or bad day, and since the gain was slight, we see the slackening volume as more positive than negative.
A/D and Hi/Lo: Decliners actually outpaced advancers 1.17 to 1 (advancers led 2.04 to 1 Thursday). This shows the tug of war going on Friday as the index approached its 50 day MVA. New highs fell to 34 (-24), and new lows also fell down to 48 (-10).
The Chart: http://www.investmenthouse.com/cd/$compq.html
Tapped down to the gap point (1649.55) on the low (1651.24), and then rallied to turn positive. It is still battling resistance at 1700 and the 50 day MVA at 1724.96, and Friday's recovery did not threaten that level. On the other side of the coin, the index held above the recent consolidation and shot right back up. The 50 day MVA is its next important level to take out on strong volume. Now, after an 8% move last week and some new anthrax and threats over the weekend, a slew of negative earnings reports (though as we have seen, there will continue to be surprises), and the near resistance, we may see another round of consolidation. As noted above, the index may rally over the 50 day MVA; there is a soft zone around the 50 day, but any break needs to be on strong volume. It could even clear that level before coming back to consolidate some more. In sum, it has run a long way, we may squeeze some more out of this upside, but we need to see how it handles the 50 day MVA before we take more index positions on it.
Dow/NYSE
The Dow was under pressure Friday after the great breakout Wednesday and follow up on Thursday. Lots of pressure from retail sales, war, etc., but it is also true the index ran 350 points in two sessions; a bit tired and some news got the best of it. But after selling down over 200 points (9193.73 on the low) intraday, the index rallied 121 points to the close. Again, buyers stepped in on a perceived opportunity, i.e., buying in the face of fear selling.
Stats: -66.29 points (-0.7%) to close at 9344.16.
NYSE Volume: 1.347 billion shares (-19.4%). Volume pulled back on the selling, coming in just above average with down volume rising to 845 million and up volume at 477 million shares. Lower volume on selling is what you want to see.
A/D and Hi/Lo: Decliners pulled ahead at 1.52 to 1 (advancers led 1.76 to 1 Thursday). New highs fell to 41 (-36) and new lows barely budged, rising to 27 (-1). That is more what we like to see. We now have two sessions with new lows below 40. Two more consecutive days below 40 would mean a further rise coming according to part of the Dow theory.
The Chart: http://www.investmenthouse.com/cd/$indu.html
The news sent the index lower, though its proximity to the 50 day MVA (9546.87) did not help its upward thrust. Still, the real selling coincided with the news of the anthrax case. On the low it undercut Thursday's close, but it did not fall back into the recent consolidation before it jumped higher. The recovery was solid, but as with the Nasdaq, it has near term resistance at 9500 and the rapidly approaching 50 day MVA (9546.87). As with the Nasdaq, the Dow could run through that level before consolidating some more. We will watch how it handles the 50 day MVA to determine what our next steps with index options will be; if it hits that point and bounces down, we will look at taking profits on the DJX plays. Thursday was a powerful move. We anticipate the index to pause near the 50 day MVA for more consolidation and then resume the move higher.
S&P 500: The big caps have yet to clear the closing low of the March and April closing low (1103), and it too faces the 50 day MVA immediately overhead (1105.34). That represents a double layer of ice for the big caps, and even with their pretty spectacular recovery Friday, the big caps have a real test ahead of them this week. It has done just what we would want: rally on big volume, consolidate on subdued volume, then power back ahead. We need it to power over this level this week, but would not mind a day or two of some low volume consolidation first. What we will look for is that high volume move over this level. That will cue us in on new positions that we will look at for a move up to 1050.
Stats: -5.78 points (-0.5%) to close at 1091.65.
Volume: NYSE volume pulled back to just above average on the selling to 1.347 billion shares (-19.4%). That continues the positive price/volume action.
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
So many undercurrents at once this week. Indexes making strong moves but at potential resistance. Lots of news from the weekend on the war effort here and abroad. More layoff news over the weekend (Boeing). Lots of economic news coming out as well. Economic news has taken somewhat of a backseat, but now it is coming back into prime. Some good news or better than expected helped last week, and it was hurting things a bit Friday. Then there are earnings reports that will be flying this week. Also, the economic stimulus package will be pushed to the front burner this week.
For now the market has overlooked some economic hiccups in the aftermath of the attack, looking at rate cuts and economic stimulus that are here and those to come. The market is overcoming a lot of down news, still looking ahead. That is how markets work. The question, the doubt, on most investors and analysts' minds is can it continue or when will it end. All you can do as an investor is look to the market and what it has and is telling you. We have repeated the litany of events that have sparked this turn and have watched the follow through, consolidations, and then rallies. There has been strong accumulation ongoing.
By watching the market we get our cues. We also throw in a good bit of history from prior markets, bear and bull, peacetime and wartime. The market is looking good, but it is in the early stages, and subject to upset from major negative news. Will the market hold up to continued attempts to undermine our lives here at home? If we can maintain control at home, we will be successful in Afghanistan, and that has continued positive implications for the market.
The market will tell us a lot early in the week. We are anticipating some hesitation at the 50 day MVA. Again, how it handles that level will be key. We would prefer a two-day sidestep followed by a high volume break over it. Monday, well, a softer open would not be surprising given the weekend results. What we would want is another hold above the recent consolidation levels over the next few sessions before the next move occurs. Markets tend to do some of their best work in uncertain times, and the market can show us lots more this week after it overcomes the weekend news.
Support and Resistance
Nasdaq: Closed at 1703.40.
Resistance: Still fighting with the 1700 level and the 50 day MVA at 1724.96 after a strong 8% move. Again, this is the first time the index has been at this level since August.
Support: 1670 is where we wanted the index to hold, but it tapped 1650 on the low. That was right at the gap up point. 1641 is the top of the prior consolidation, and 1630 is after that.
S&P 500: Closed at 1091.65.
Resistance: The former closing low remains intact for now at 1103.25. The 50 day MVA is at 1105.34. After that, there is 1124 (prior consolidation level) and 1150 (also price consolidations).
Support: 1084 is the high in the prior consolidation with the closing tops in that consolidation at 1070 to 1072. 1050 has been solid prior to that during the consolidation.
Dow: Closed at 9344.16.
Resistance: Fell right back below the April closing low at 9389; it is trying to break through but that closing point, 9500 and the 50 day MVA (9546.87) are holding it back for now.
Support: 9389 did not hold as it was not definitively broken. The high in the recent consolidation at 9187.37 held on Friday's low. The consistent prices in that consolidation are at 9115 to 9120.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
10-15-01
Business Inventories, August (8:30): -0.3% versus -0.5% prior.
10-16-01
Capacity Utilization, Septebmer (9:15): 75.6% versus 76.2% prior.
Industrial Production, September (9:15): -0.7% versus -0.8% prior.
10-17-01
Housing Starts, September (8:30): 1.490M versus 1.527M prior.
Building Permits, September (8:30): 1.46M versus 1.56M prior.
10-18-01
Initial Claims, 10/13 (8:30): 468K versus 468K prior.
Philadelphia Fed, October (10:00): -13.4 versus -7.3 prior.
10-19-01
Trade Balance, August (8:30): -28.4B versus -28.8B prior.
CPI, September (8:30): 0.2% versus 0.1% prior.
Core CPI, September (8:30): 0.2% versus 0.2% prior.
Treasury Budget, September (14:00): $29.0B versus $65.7B prior.
SUBSCRIBER QUESTIONS
Q: Would you tell me what's the symbol for Put/Call Ratio (CBOE)?
A: There is no symbol for the put/call ratio. It is a ratio of the number of puts traded on the option exchange to the number of calls traded. For example, a reading of 0.70 means that for every ten calls traded, 7 puts were traded. As you know, extreme put buying indicates extreme fear, and when the ratio closes above 1.0 (more puts than calls), that historically is an indication that fear is running high. You have to remember, most investors, speculators or whatever tend to be more bullish than bearish. When the crowd of option players (the majority are speculators, buying short term out of the money options) gets spooked and feels the market is only going to sell down, that is often a sign that things are going to swing the other way. Thee week the market re-opened, four of the five sessions showed a put/call ratio close greater than 1.0. Indeed, one session the level was 1.21, the highest recorded.
To find the put/call ratio, you can grab it after hours at www.cboe.com under 'market statistics.' This gives the reading on the CBOE. There are other option exchanges, but the CBOE is the largest, and its readings are usually accurate.
Q: Where can we find deltas on the web?
A: Finding such a useful piece of information for investing in options is surprisingly difficult on the web without a real time service. Deltas on options, i.e., how much the option price moves for each one dollar move in the stock, can help us determine what options we want to purchase or sell. We like deltas of 0.70 or better on calls (that would be -0.70 on puts) as that gives us 70 cents of option price movement for every $1 move in the stock.
To find deltas, go to www.phlx.com, the Philadelphia Option Exchange web site. All of the 'greeks' are listed there.
FAQ's: http://www.investmenthouse.com/1questions.htm
ESignal for Investment House Subscribers
Contact: Ray FitzGerald
Account Executive
800-322-0940
www.esignal.com
End Part 1 of 2
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