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us stock market, trend trading stock
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10/15/01 Technical Traders Update
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SUMMARY:
- Market recovers once again from an early Anthrax scare, weekend war hype, and analyst downgrades.
- Volume low on the selling as the indexes continue to rally, consolidate beautifully, and then . . . rally again?
- Subscriber Questions
Again a nice recovery in spite of the obstacles.
The deck was stacked to the negative side today: indexes at resistance, weekend war talk, another high-profile anthrax scare, and analysts with the downgrade pen in hand. The market would have been taken out and shot three weeks ago. Today it sells down to support and then rallies toward the close. That is a recurring trend the past three weeks, and it demonstrates the continued accumulation trend.
The market had plenty of opportunity to sell. It is struggling at the former lows and 50 day MVA on the indexes. If that was not enough, there is some piling on going on. Last week the analysts waited until Tuesday to issue their downgrades on tech stocks and chip stocks in particular, mostly in deference to the start of U.S. air strikes. Today there was no delay. Monday brought out semiconductor downgrades from all sides (except one). Lehman Brothers pretty much downgraded the whole sector, saying the timing of the recovery had been pushed out. JP Morgan downgraded communication chips. Same story, different week.
This is a pattern: notice how analysts are coming out after a rally and saying that stocks are now just overvalued. They cannot see any recovery. One well-known analyst today said that a chip recovery would be Q1 or Q2 at the earliest, and that stock prices would lag behind that. That is TOTALLY opposite of how the market works, i.e., how the market prices in earnings recoveries before they actually occur. Stock prices are NOT a lagging indicator, and that is one of the reasons you cannot listen to what analysts are saying. The market does the talking about where it is going, not the pet stocks and pet peeves of analysts. Today the market took in what the analysts had to say, sold down a bit as it thought it over, and then the buyers decided to rally it back up.
More anthrax in the mail. Now targeting a member of Congress. There will be more. It is pretty clear this is another terrorist attack on the U.S. There will probably be some envelopes showing up in Great Britain, Germany, and other countries of the coalition. All things considered, if this is the best bio-threat they can muster, that is a relief. And it most likely is; if they had something better, something of the caliber of 9-11 attack in the form of a biological attack, they would not get us on high alert regarding these types of attacks before they launched it. They would do what they did before: sneak in to take out as many unsuspecting, innocent people as possible with their biggest threat. The market, however, handled this too and rallied off of its lows.
Despite all of the headlines, we really like the look of the market yet again.
Today's action told us a lot. The indexes have developed a pattern over the past three weeks, a pattern of sharp rises, sideways movement on lower volume, then sharp rises again on heavy volume. It is a stair-step picture of accumulation: buyers outstrip sellers and the indexes make solid gains. Profit takers then come in and sell, but the indexes do not fall. Instead, buyers use the early selling as a chance to pick up stocks once again at lower prices. They step in and buy, rallying the markets up close to their previous close. This action keeps them in a pretty tight range, a range that tightens as the indexes move sideways. When the profit takers are finished, the indexes jump back up again as the buyers again outnumber the sellers.
Today was a continuation of that action. There was early selling on the negative news that took the indexes down to near term support. The indexes, however, turned things around as buyers came in, driving higher to either close in positive territory (the Dow) or just lower. After the sharp rises Wednesday and Thursday, the indexes are moving laterally on lower volume with a tightening trading range, testing support on the lows just as they did the prior Thursday, Friday, Monday and Tuesday. That is the heavy buying, light profit taking action that is giving this market its underpinnings.
Volume as noted was lower, indeed, much lower. Friday volumes were lower, but still above average. Today volume fell off the table, falling well below average on all the major indexes. That is perfect action: tapping support on the low and rallying back; still moving sideways after the big moves, but on that low volume that tells us there are not that many sellers in the market. Up days show increases in volume, meaning that not only were there more buyers on that session, but more buyers relative to the sellers on those down days. That is what we mean by accumulation, and it is occurring now. To us that means we have another big move ahead in a day or two barring any unexpected bad news from the war.
THE MARKET
Look at all three major indexes. Each one sold down intraday, hitting its low above or at near term support, and then rallying back for the close. Very similar pattern to what went on a week ago that lead to yet another strong move up: a stair-step move higher that is not getting ahead of itself.
The indexes performed well today, but they did not scream out 'buy us' - - yet. As we were saying last week during a similar consolidation, it may take another day or two before they are ready to make those big moves higher that will get us into some new index call option plays. This sideways action also lets the stocks still forming their patterns continue to do so. That way they are ready for the next move to give us the next wave of breakouts. The indexes are still below their 50 day MVA, but they are massing at the border for the next run to break over those resistance levels.
VIX: 37.76; +0.76. On the high the VIX hit 38.54 as investors remain quite skittish. Even the rally in the S&P late in the session did not alleviate the anxiety. This continues to be a positive for the market, as high levels of fear keep that wall of worry high.
VXN: 66.24; +0.26. Hit 69.44 on the high before the late rally. This is still a high level even though it spiked over 90 intraday during the major fear when the market reopened in September.
Put/Call Ratio (CBOE): 0.88; +0.12. Put action ratcheted higher again on another session of selling followed by buying. Option buyers as a group are speculators; they trade on emotion. Thus, when we get extremes of anxiety or complacency, we need to take note. Put buyers are still very close to the majority of option buyers. When the anxiety is this high, the market tends to continue to respond positively.
Nasdaq
The biggest loss on the day (0.4%), but it was down 2.3% at its low before buyers came back in and drove it almost back to flat for the day. As it was, a small loss on light, below average volume. Without the help of the semiconductors (downgrades pushed the SOX down 22.05 points), this was an admirable job. Let the semiconductors get sold out over the next day or two (after NVLS tonight, it may take two), and then we will be ready for another run higher.
Stats: -7.09 points (-0.4%0 to close at 1696.31.
Volume: 1.586 billion shares (-27%). Well below average on the selling and further consolidation, just what we want to see. Down volume led, but it was not by much at 930 million to 628 million shares. Very good price/volume action that continues to show accumulation: up days on strong volume, profit taking on very light volume.
A/D and Hi/Lo: Advancing issues actually led decliners on a down close on the index, 1.06 to 1 (decliners led 1.17 to 1 Friday). Not a blow out at all, but a good sign on a down session. New highs fell slightly to 33 (-1) as new lows fell slightly as well to 47 (-1). We love to see new lows fall on down days.
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq tapped down to 1663.78 on the low, selling just below the 1673 point (the point the index gapped down back in September when the market reopened) and then rallying back up to close above the opening price. Thus, the index maintains a fairly tight closing price range, and the overall trading range during this consolidation is narrowing as well. This action occurred even as the semiconductor sector was mired in the wake of several downgrades. This is a pattern we saw two to three weeks ago; the semiconductors are the lightening rod for problems with the techs. They sell the hardest, but when they rally, they rally the hardest. With the NVLS news after hours (bookings are hurting), they may take another day or two to turn it around. That fits the time scheme perfectly for the next rally attempt.
Still some support at 1670, and then at the gap point (1649.55). Resistance at 1700 and the 50 day MVA at 1723.84. It looks as if it is going to consolidate right here and then make a run at the 50 day MVA later this week.
Dow/NYSE
Very nice action as the index tapped at the lows of this consolidation and rallied to close with a tight doji on lower, well below average volume. This is the same pattern we have seen, and the tightening trading range indicates just a day or two until another move higher.
Stats: +3.46 points (+0.04%) to close at 9347.62.
NYSE Volume: 1.027 billion shares (-23.7%). The index closed positive on lower volume, but that was not the point today. It did not churn, i.e., run in place on high volume. It sold down and rallied back as it continued its consolidation. That is the action we want. Down volume led 575 million to 442 million shares.
A/D and Hi/Lo: Decliners still led, but by a narrow 23 stock margin (1.01 to 1). The decliners led 1.52 to 1 Friday, indicating the selling is losing its grip. New highs rose to 46 (+5) as new lows rose to 34 (+7), but still were below 40, making today the third session in a row that they held below 40. Dow theory says after selling, if there are 4 consecutive days of less than 40 new lows, a rally will ensue. That would be in accord with what we are seeing in the price and volume action.
The Chart: http://www.investmenthouse.com/cd/$indu.html
Tapped down to 9238.78 on the low, well above the highs in the prior consolidation (9187.37), and then rallied back from that 105 point loss to close positive for the day. It was not so much the positive close but more of the rally back from the selling that was impressive: it continues to show buyers each time the index sells down early; buyers wanting to own stocks longer term trying to buy them at better prices. This is so important: institutions are accumulating stocks, i.e., buying them whenever the opportunity presents itself. If they get a selloff intraday, they buy. Then when the rally starts anew, they buy now as they feel prices will be higher later. That is a 180 turn from just four weeks ago.
We really like the tightening range and the low volume; very good consolidation action in anticipation for another rally higher. It still has to clear the 50 day MVA ahead at 9539.06, but we think it will do so, and we are looking for some aggressive index positions when it clears its high in this consolidation.
S&P 500: Another very good session for the big caps. Yes, they closed lower, but they held above the 10 day MVA on the low (1078.19; 10 day at 1074.03) and recovered smartly to show us a tight doji on that very low NYSE volume. It held above the high of the prior consolidation (1084) on the close, and held intraday above the 1070 to 1072 level that is next in line as support. This continues a bullish pattern as we have seen in the past, but so many are still scared to partake; any selling sends the VIX and the put/call ratio higher, even if it is on low volume. It too has the 50 day MVA ahead of it still at 1104.73 as well as the April closing low at 1103.25, but we like the consolidation, and as with the Dow we are looking at aggressive upside and breakout plays on the OEX.
Stats: -1.67 points (-0.2%) to close at 1089.98.
Volume: NYSE volume tumbled to 1.027 billion shares (-23.7%) on the selling. Very nice.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
We are bombing like crazy just as we did in Iraq. That has a tremendously demoralizing effect. If you are not totally committed, you tend to fold when faced with real force after a sustained and powerful air attack. These are not just bombs that drop dumbly to the ground; they seek out targets with precision; if they want to hit you, they will. The can burrow into the ground and then blast bunkers with 20' thick concrete walls. We have infrared sensors that can see people under the ground. This is not the Soviet's war of containment; this is a war to win, something completely different. We are not going to escape without our own wounds, but it is not going to be the impossibility that many are saying. The point: the air war is going to go on for another week at the minimum. That means no shock from ground invasion upsetting the market in the near term as far as we can tell.
That leaves us to the home front. We have more anthrax news, but this is really not a major attack. Truck bombs seem to be more of a threat than letters. If you get a letter that is suspicious, don't open it. If it has powder, call the police and call your doctor.
Also on the home front: earnings. Notice how there are a lot of earnings beating estimates? There are misses for sure, but there are many beating the street, albeit they are lowered expectations. Still, they are beating expectations. NVLS reported okay earnings, but it said its bookings were pretty pathetic. That is what investors seemed to be focusing on. There were good signs: cancellations were 'non-existent' in the quarter. Indeed, NVLS said that the U.S. market is looking pretty good compared to other global markets. Is this bad? Hardly. It shows just what we thought: the U.S. went down first (remember the European gloating?) and the rest of the world, feeding on the U.S. economy, then went down. If the U.S. market is recovering already, that is a very good sign for the U.S. and the rest of the world.
More earnings will come, and many semiconductor earnings will be bad. We anticipate the majority of them will say what NVLS said: improving at home, no cancellations, etc. The SOX has been selling off; as we saw on the last round of downgrades, it will lag the Nasdaq by a few sessions and then gallop higher, the entire Nasdaq moving higher with it. Some more so-so earnings reports will dog the market a bit, but then as we have seen, the market will swallow it and look to the future. What NVLS said was not all that bad; indeed, it fits in with a market that looks ahead to better times. The short termers will panic out and sell on the news that Q4 may not be grand. But, we already know that. That only sets up another rally in the semiconductors.
So, we are looking at another move higher in a session or two. May happen tomorrow with more selling in the semiconductors on the NVLS news, but then we get IBM and others after the close. Can IBM pull off a GE? Some say no, some say could be. If it does, the market will start to rally. If it does not, it will rally at some point in the near future, we think this week barring any calamitous news.
We are going to lay off the SOX for a bit until it finishes selling out on these analyst downgrades and NVLS earnings, but we are going to jump on it when it appears to bottom; it can give us another 75 point or so run when it does. The other indexes are getting ready with aggressive and breakout buys we are looking at on the reports. Then there are the breakouts that are moving ahead and breaking out and forming up their final patterns even on these down days. Today we issued a ton of alerts on stocks that broke out of patterns; it was a very busy upside day with our stocks even though the indexes closed mixed and none showed a lot of power. This supports what we have been saying: accumulation is ongoing even on the down days. This gives us continued investment opportunities.
Support and Resistance
Nasdaq: Closed at 1696.31.
Resistance: The 1700 level and the 50 day MVA at 1723.84 are the next levels of resistance.
Support: 1670 again held on the close as it again held above 1650 on the low. 1641 is the top of the prior consolidation, and 1630 is after that.
S&P 500: Closed at 1089.98.
Resistance: The former closing low still remains intact at 1103.25. The 50 day MVA is at 1104.73. After that, there is 1124 (prior consolidation level) and 1150 (also price consolidations).
Support: 1084 is the high in the prior consolidation, and it held on the close today. After that the closing tops in that consolidation at 1070 to 1072. 1050 has been solid prior to that during the consolidation.
Dow: Closed at 9347.62.
Resistance: Continues to hold below the April closing low at 9389. 9500 is also tough and it is backed up by the 50 day MVA at 9539.06.
Support: The high in the prior consolidation at 9187.37, and it held intraday today. 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): -0.1 actual versus -0.3% expected and -0.5% prior.
10-16-01
Capacity Utilization, September (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.
TEAM TRADES
Today we were going to be particular given the consolidation ongoing in the market, but we were seeing the moves we wanted to see on some key stocks. As we have said, you let the market do the talking and we are willing to not let our preconceived notions get in the way of good moves.
ADVP is one of our split plays, and it has been in a brief cup with handle following a prior cup with handle in May through August. When the market gets a shock, stocks in good patterns may show a short term hit. In ADVP's case it sold down and formed another quick pattern. It was not perfect, but ADVP was in a very good move before all of this hit; we can give it a bit of leeway. About an hour into the session ADVP, up already, started making an explosive move on some big volume. It hit our buy point above the high in the handle and we immediately sent out an alert. This was a stock that we liked a lot. We had a buy stop above the breakout point entered to pick up the stock when it broke out. That is an order we discuss in the seminars where you place an order on a strong stock in a strong pattern above the buy point; we let the stock show us it is worth our money by breaking out of a strong pattern. This base on base pattern of ADVP was strong in our mind. That is why the order was put in above the breakout point. The stock broke resistance, ran up to the buy stop, triggered, and then the stock consolidated at 77.50 after the breakout. It then rallied sharply again, closing near 80 on the session. A strong stock makes a strong move.
LMT: Another SSR stock in a classic pattern that we discuss in the seminars: The breakout of a strong pattern (a big ascending wedge from March to August/saucer with handle) followed by bounces up off of the short term moving averages (the 10 and 18 day MVA). It made the huge breakout move when the market reopened, and then sold back to the 18 day MVA. From there it rallied $8, and then pulled back to the 18 day MVA on Friday. We were ready for the bounce today, and when it came an hour into the session we were on it like a duck on a June bug. Lots of these defense stocks rallied and then pulled back. The breakout and then bounce up the short term moving averages for 4 or 5 bounces before testing the 50 day MVA is a normal pattern in bullish stocks. We saw it on LMT and went after it.
End Part 1 of 2
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