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10/18/01 Technical Traders Report
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SUMMARY:
- Selling loses strength quickly as volume dries up.
- Dow and Nasdaq hold above recent consolidations.
- Earnings coming in but looks like much of the bad news is priced in.
- Jobless claims hit 10 year+ highs.
- Subscriber Questions
- Team Trades
Selling dries up
Wednesday's heavy selling volume tailed off dramatically today with NYSE volume falling to average and Nasdaq volume down 21%. There were more sellers than buyers in the Dow and S&P 500, but their numbers were down from Wednesday. That leads one to question whether Wednesday was an isolated selling event, i.e., a hiccup caused by the combination of news stories hitting the market at once, or if today was just a way station before the indexes head lower to test the low.
Dow and Nasdaq still holding above last consolidation
The Nasdaq tends to take a leadership role, both to the upside and the downside. It was walloped Wednesday, but today it hit its low early, never giving us reason to issue an alert on QQQ put options. It did not rally straight up, but it continued to hold well above the early lows. The Dow sold down all session, but it too held above its previous consolidation's closing highs. Combined with the lower volume, holding above these levels is somewhat bullish.
Bad news is clearly priced into earnings
More earnings continue to hit the wire, and form the look of it, most of the concerns about the quarter have been factored in. Indeed, if there is nothing specifically bad in the earnings report, stocks are either left alone or even bought.
That is a far cry from the slaughter we saw after Q2 and the prior slaughter last October. It is the same theme that we saw in the NYSE versus Nasdaq volume earlier: NYSE volume as a percentage of Nasdaq volume was much greater than historical levels, indicating that the Nasdaq was getting sold out. The fact that tech companies can report pretty horrid earnings and get a pop in share price is just another example of the bad news being factored in, the index being sold out. Indeed, during the recent run the tech stocks had been the best gainers even if they did not have the best patterns to carry them up and away.
So was Wednesday's selling the outside influence of the war?
Thus, with earnings news factored in and earnings coming in at expectations or even a bit better, the market was ready to price in better times in the future, and over the past three weeks that is what it was doing. It weathered the initial U.S. response attack, the initial anthrax reports, and further foaming at the mouth threats from the al Qaida.
It took a combination of events Wednesday to finally trigger some real selling: assassination in Israel, new anthrax attacks on the House and New York government officials, the House closing down, Pakistan and India mobilizing their militaries. These were powerful forces that sent the market down.
Was it only the news stories? If the indexes had not spurted lower in the last half hour Wednesday it would have been easy to conclude that the selling was news driven. The late selling on high volume is a sign of serious share dumping; that share dumping subsided substantially today. It was not another day of distribution, and it usually takes a few such days to derail a decent rally. Tomorrow is options expiration, and that usually leads to higher volume and volatility. We will see if we get another distribution day to add onto Wednesday's action. The key to us will be a break into the prior consolidations on higher volume or a hold from here and a rise.
THE ECONOMY
Jobless claims hit multiyear highs, but that was expected as well.
Last week's jobless claims drop was too low, and was revised higher by 16,000 jobs to 484,000. This week jobless claims rose to 490,000. The four week moving average hit a 10 year high at 491,000 (+21,000). These are substantial, recession level numbers. Well, we have been at recession levels for a few months now. Again this was no surprise.
Continuing claims, a measure of the pain across the country, reached 3.65 million, up 152,000 for the week. Remember when the number crossed 1 million in the summer? It has mushroomed since then.
Fed gets its wish many times over
The week's jobless numbers lead many commentators to wince, and we have to say it is no fun knowing that so many that were working, thriving, and productive members of society are now having to work just as hard in trying to land a new job. So much talent and energy wasted when it was unnecessary. Lest we forget, remember FOMC member Broaddus who so callously stated over a year ago that unemployment needed to rise to 5%? At the time the statement was appalling; someone with the power to do so was willing to put hard-working U.S. citizens out of work. Now it is just another sad, sad fact of the Fed's errant war on U.S. prosperity, another war on inflation that did not exist, another economic war that careened wildly out of control once the wheels were set in motion. Who set the course to recession? A bunch of unelected stiffs behind closed doors who view humans and jobs with the same cold blood of an actuary.
It is ironic to us that many economists and other market watchers were once again saying 'thank God Greenspan was chairman when the attack occurred.' Sure he had a calming effect because he had been in crisis situations before and is viewed as an old hand at dealing with them. He played a strong roll in the Russian meltdown, helping inject liquidity in world markets to bring calm to the financial world. He had also been there in 1987. And now he is here now.
Funny thing (is it really funny?) that he has been in those crisis situations. He was on a Fed that jacked up rates in the 1980's to stop inflation that was not there (during the Reagan years when there was explosive growth and the Fed fought the growth with rate hikes), and those rate hikes are credited in large part to Black Monday. Then his Fed took the prosperity and next to extinct inflation in the late 1990's and drove the economy into recession as his cronies vastly overestimated the strength of the U.S. economy.
Thank goodness Greenspan is here to handle the crisis? That is like thanking the person that set a 6 alarm fire for giving you a garden hose to douse the blaze. Heck, if we had a Fed head that had not purposefully chased away prosperity and replaced it with recession and the worst bear market in 25 years, we would be in a much, much, much stronger position to handle what happened on September 11. Economically we would be dealing the cards from a deck stacked in our favor. Is it any wonder that the terrorists struck now when the economy has fallen with a hard thud? Now we are in for a real fight, the fight of our lives. The Fed did not get it (or it did but had other motives), and now Congress does not seem to grasp the gravity of the situation. The Senate is open for business as usual, but the House members flee like kids running from the schoolhouse for summer recess instead of doing what they have told us all to do: suck it up, go to work, get the job done. We need a stimulus package now, but when danger reared its ugly head, our representatives bravely turned and fled (our apologies to Monty Python). We would call them and tell them to get to work, but all you get are recordings. Our government has shut down in a time of crisis because they feel threatened by a very curable disease.
THE MARKET
As noted, the sellers from Wednesday were much quieter today. They were still in the majority on the Dow and S&P, but they gave way to buyers on the Nasdaq. Not big buying volume, but enough to move the techs into positive territory. The Nasdaq and Dow are still above their recent consolidations, and after Wednesday, we would not have taken that bet today. The big caps are moving toward a test of 1050, but if the techs, the strongest group of late, hold the line here, the S&P will be dragged back before it moves that far.
VIX: 37.36; +0.13. 38.56 on the high as volatility rose a fraction on the selling. It was not intense as noted.
VXN: 70.69; +3.58. Technology volatility shot higher for the second straight session even though the Nasdaq was the only index able to hold the line in positive territory. The close higher was impressive, but note that it hit 72.06 on its high.
Put/Call Ratio (CBOE): 0.93; +0.21. Spiking higher on a day when the selling was just not that intense. The rise Wednesday was just 0.02. This continues to show the anxiety in the market and the willingness to go short on selling.
Nasdaq
Again showed the strongest action, this time to the upside. Not a powerful day, but it held above the prior consolidation as volume shrank; the sellers backed away quickly.
Stats: +6.38; +0.4% to close at 1652.72.
Volume: 1.794 billion shares (-21%). Volume backed down to slightly above average levels. It was down on an up day, but even during the early selling, volume was much lower. 989 million upside shares to 749 million downside shares. We like that the selling volume abruptly dried up.
A/D and Hi/Lo: Decliners were still in the lead at 1.8 to 1 (1.56 to 1 Wednesday). New highs fell to 31 (-25) as new lows rose to 55 (+11). Not a huge jump.
The Chart: http://www.investmenthouse.com/cd/$compq.html
After the bad action Wednesday, the Nasdaq drew the line at the point of its former consolidation, never touching down to that level. We were watching the QQQ along with the SOX, OEX, DJX, etc., and it never hit our target to buy on the downside. It came within 10 cents, but it held the line. That is part of picking buy points below support: make them break it to take positions. It did not rally sharply off that level; it gyrated up and down all session. That leaves a question mark after the session: no heavy selling to tank it through support, but no surge of buying to bounce is decisively off of that level. It was great that the sellers vacated the area immediately; an isolated distribution day won't tear things asunder. Now we are watching to see if the sellers reassert themselves or if the buyers decide the latest news is nothing to panic over. It is now sitting just above the gap up point (1650), showing a tight doji at the 10 day MVA (1648.24). If it was ever set to bounce, this would be it. Again, we have to let it show its next move and some volume. Futures after the close were as ambivalent: a tossup.
Dow/NYSE
Not a strong day at all on the Dow as it sold off all session, hitting its low in the last thirty minutes before it bounced about 40 points to the close. Still, volume was sharply lower; the sellers that were so fired up on Wednesday were on the sidelines. Then again, so were the buyers; they did not rush in to drive prices higher, but it too managed to close above the highs in the prior consolidation.
Stats: -69.75 (-0.8%) to close at 9163.22.
NYSE Volume: 1.252 billion shares (-15%). Volume was back to average, better on the selling as it shows less sellers in the market. They were still in the majority for the session as the index closed lower and down volume led 895 million to 360 million shares.
A/D and Hi/Lo: Decliners remained in the lead at 1.8 to 1 (1.72 to 1 Wednesday). New highs fell to 24 (-30) as new lows moved up 3 to 46 (+3). Again, not a strong day, but a better day than Wednesday.
The Chart: http://www.investmenthouse.com/cd/$indu.html
Picked up where it left of Wednesday, but after trying to hold the line, it sold off a couple of hours into the session. A 2:00 rally failed as the index gave up 70 points before a late move recovered some of the lost ground. The key: volume on the selling was lower and the index held above the string of tops in the prior consolidation at 9125 to 9150. Then there are a string of intraday lows at the same time that were tapping at support at 9000. The shrinking selling volume above these levels is a positive. As with the Nasdaq, we will need to see which side steps up to the plate with more volume tomorrow.
S&P 500: The S&P was the only major index to break down into its prior consolidation range. It just missed closing at the 1070 level that we were looking for (1068.61 on the close), so it still has not totally given up the ghost. As we suspected, the index traded below that level (1064.54 on the low) and then tried to recover. It is still right there. If that cannot hold, 1050 was very solid during the prior consolidation as the index tapped that level four consecutive days intraday before launching higher.
Stats: -8.48 points (-0.8%) to close at 1068.61.
Volume: NYSE volume pulled back on the selling to 1.252 billion shares (-15%). As fast as it shot higher, price/volume returns to more acceptable ranges.
The Chart: http://www.investmenthouse.com/cd/$spx.html
Summary: We did see the continuation of the downside action except for the Nasdaq, but it was not a nasty day. As noted last night, the indexes had not rolled over, and today they again did not do so. There is still some potential downside here just as the indexes could rebound; it is at a crossroads. We are going to watch our support levels on the put play we initiated today; if the buyers come back in at those points (covered in the plays) we will close them at least partially. On the Dow, OEX and SOX that gives us some good downside still. If they break down through there, we keep on riding them. again, today the sellers went to the sidelines, but the indexes did not show us that the buyers were back in business after a day off.
TOMORROW
Expiration Friday, and as we have seen lately, the volume has returned on expirations after being dormant in the summer. Thus we expect more action tomorrow and more volatility. A day trader's game if you let it get to you. The approach to these sessions is to know ahead of time how you will react. If we see indexes sell down and bounce at support levels, we will close the downside plays; they were for quick action anyway as the market had been showing very good price/volume action until Wednesday. If they keep selling, we will let them continue to move down for us.
The thing we took from today: the selling volume that was as gone as suddenly as it showed up as well as the spike in the put/call ratio. Lots of downside players ready for action today. We have to admit that we were in that group. No increase in action on Wednesday during the heavy selling, but there was action the following session on much lighter selling. A lot ready to play the downside, but institutions were not in the selling mood again. It may have been a one session distribution before some more consolidating.
Still, at this point the indexes could lean either way; the action to now has been solidly bullish, but there was that one mild distribution day 8 sessions ago and the strong one on Wednesday. Two in 8 sessions. If there is another one that breaks the indexes into the prior consolidations, a test of the lows is more of a reality, and we continue to play the downside on the indexes and other prime plays until they hit that bottom. That does not mean that the bottom was not the bottom or that we no longer look to upside plays. There are still many fine stocks in good positions to break to the upside. As we think we have already hit the bottom, we are happy to add those positions when they make their moves. Why? Because certain leaders are not selling back much, and they are already pricing in better times even as the market may re-test the lows.
End Part 1 of 2
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