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understanding the stock market, trend trading stock
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9/26/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: VCLK; CMTL; MNTA
Trailing stops: Noneissued
Stop alerts: None issued
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SUMMARY:
- Stocks post another session of gains in the relief bounce, but looks it is about out of steam.
- Existing home sales rise 2%, but it was pre-Katrina and Rita.
- Fed needs to pipe down, quit talking at every opportunity: Moskow and Greenspan rattle sabers again Monday.
- Consumer confidence out Tuesday as stocks try to keep the relief move alive.
Stocks continue modest relief move on mixed volume.
Rita missed major metropolitan areas and left some production and refinery resources untouched, trading off, however, with similar facilities in east Texas and western Louisiana. The initial response was positive. Oil prices were down almost $2/bbl. Stock futures were higher and stocks rallied out of the gate on solid breadth.
As often happens with relief moves, that was the zenith of the session. Stocks started pulling back within minutes and were unable to push past those early highs on the next rally attempt after the first 30 minutes. They wandered laterally through lunch but could not get back on track. The culprit (at least the blame assigned on the financial stations) was oil; it turned from selling to buying and rallied positive, adding over a dollar per barrel. Stocks moved inversely, giving up much of the gains. SP500, the laggard in the session, even turned negative. It took a last hour rebound to turn all stocks positive on the close.
It did not help that Greenspan and Moskow of the Fed both came out and sounded off against inflation and housing. Moskow remains an inflation hawk, complaining that inflation was at the 'high end of the comfort level for consumer prices.' Greenspan later added that the housing market remained 'frothy'. With all of this taking whacks at the market it is no wonder its early enthusiasm was splashed.
Volume was higher on NYSE, lower on NASDAQ. That means the NASDAQ gain was not accumulation while the basically flat close on SP500 suggests the large caps simply churned after tapping the 50 day EMA on the high and fading. The small caps were a bright spot; they led the market with a 0.9% gain as the small oil exploration and service companies rebounded.
Technically it was another weak session overall. NASDAQ moved well but volume was significantly lower and below average. Breadth was mediocre (1.4:1). The indices tapped at or toward key resistance and faded. For the third day of a relief bounce the technical action indicates weakness. Maybe the small caps can lead the market higher; they are going to have to turn a very sluggish SP500 and a NASDAQ that looks ready to continue selling.
In short, the market had a dose of really good news, i.e. little damage to huge metropolitan areas and associated energy production and refining facilities. The market rallied out of the gates with a lot of aplomb, but it gave up the move or at least a good chunk of the move. Moreover, in keeping with the past three weeks, price/volume action continues to be weak, i.e. higher on down days and lower on upside days. Poor technical action and poor sentiment is sapping the move.
The market is reflecting a worry that has dogged the economy all year: the Fed remaining hawkish on interest rates for too long and energy rising too far and holding up high prices for too long. That one-two punch typically takes the wind out of stocks. They have shown some weakness since August, and that weakness emerged again in the past two weeks. September is typically weak, and this one is leading into a test of key support in October. October gives birth to more than a few bottoms in the past. Looks as if it will have the chance to do the same this time around as well.
THE ECONOMY
August existing home sales rise 2%.
What if a report was released and no one cared? That is happening a lot of late with economic data that reflects the situation prior to Katrina and Rita. The reading was the second highest on record. Problem is, the results are before Katrina. The game has changed since and thus there was not a lot of hoopla or market reaction to the news.
It is not something to ignore. It showed that the housing market was not collapsing but was continuing forming the broad top started 5 months back. The trend remains higher but the moves are shrinking. Some of the internal readings also show a steady, contained slowing of the market. Key was the housing inventory level that rose to 4.5%, getting closer to what is considered a more normal, sustainable level. The median home price is still on a tear, however, rising 15.8% year over year.
All in all this data shows a continued strong market that is slowing in an orderly manner. The Fed no doubt feels good about this. The problem with the Fed, however, is that it typically overshoots on any industry it is targeting (the entire economy as well) because it does not stop until it sees significant inroads in its victim. By that time it is too late; the seeds of crash have been sown. Ironic isn't it? After all Greenspan is so keen on heading off inflation before you see it, yet he does not act the same when trying to slow the economy or a sector; he won't take his foot off its throat until it is clear the target is struggling.
Fed is talking way too much.
This is evident in the statements of Greenspan and Moskow on Monday. They both came out as hawkish as ever even with energy prices spiking, two major storms hitting the US, and slowing economic activity and sentiment even before Katrina and Rita. To be a bit fair, the Fed has a tough hand dealt to it with the shortages Katrina and Rita have created will push inflation pressures higher short term: demand remains the same or higher while supply is reduced. That is the definition of inflation, and that is what the Fed is deathly afraid of here in the twilight of Greenspan's career. He does not want to be remembered as the Fed chairman who was soft on inflation and left it on the doorstep of his successor.
That aside, we are tired of the endless stream of speeches and photo ops the FOMC members are engaged in under the Greenspan Fed. Used to be you never heard from them other than the statement. We are all for more clarity from the Fed in what it is doing and what its goals are; we have said all along the Fed should let the market know where it is going with rate moves and then do it. It can always change the course if circumstances warrant, but that gives the market some certainty and clarity and ceases this ridiculous cloak and dagger game of outguessing the Fed. Business can get on with business and individuals can get on with investing without playing games.
Instead under the Greenspan Fed the central bank has adopted Washington, D.C. politics as its model. Innuendo in statements and testimony before Congress. Self-serving statements about issues well outside the Fed's mandate. Leaks from Fed henchmen as to what Fed intentions are. Coy cat and mouse games with Congress, the very body the Fed has to answer to. We have a group of unelected officials running our economic and financial lives that play games with the very body they are accountable to. This is insanity in a free market economy and a republican form of government, yet as with many of the issues that confront our country we are letting it proceed as if it was expressly spelled out in the Constitution. No, the Fed and its structure is a creation of Congressional act. It is legal for Congress to do this, but the result is not, i.e. the economy and our lives held hostage by 13 men and women.
THE MARKET
MARKET SENTIMENT
VIX: 13.04; +0.08
VXN: 14.82; -0.34
VXO: 12.1; -0.53
Put/Call Ratio (CBOE): 1.23; +0.28. Jumped back up as stocks rebounded. Lots of up and down action in the ratio the past few weeks with put selling for premium and put buying for protection and speculation. It is holding at a high level and that typically indicates a high level of speculation.
Bulls versus Bears:
Disappointing to see the bulls rise and bears fall even as the market caps a two week slide that saw distribution. Not a good sign that the market will be able to make much out of this relief bounce.
Bulls: 54.3%. Bulls continued to rise despite the market selling off the past two weeks. That is up from 53.2% and 52.1%, the third week in a row of gains. Disappointing. Still just below the 55% level considered bearish. Bottomed in May at 43.5%.
Bears: 25.5%. Bears fell to 25.5% from 26.6% after reaching 28.1% on the recent rise. Still above the 20% level that is considered bearish. Hit a high for the year at 30% in early May.
NASDAQ
Stats: +4.62 points (+0.22%) to close at 2121.46
Volume: 1.591B (-3.1%). Volume was lower and again below average as NASDAQ rallied for the third consecutive session following the harder two weeks of selling. Lower and lower volume on rallies indicates insufficient buying to set off a new rally.
Up Volume: 867M (-80M)
Down Volume: 631M (-21M)
A/D and Hi/Lo: Advancers led 1.43 to 1. Mediocre breadth that remains lower than the sharp selling breadth the prior week.
Previous Session: Advancers led 1.61 to 1
New Highs: 92 (-12)
New Lows: 38 (-57)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ tapped the 10 day EMA (2131.58) on the high, managing to hold a gain into the close but 11 points off the high. In other words the index lost more than it gained intraday. The candlestick pattern shows a loose tombstone doji on the session, and that indicates a rebound running out of steam. Hard selling on volume followed by a weaker volume rebound. That typically sets up more selling as an index continues its trend lower to seek the bottom of the pullback. Significant that NASDAQ did not manage to even tap the 50 day EMA (2139) on the Monday high before losing steam. Unless it receives a dose of good news to send it higher on volume it looks ready for another test of key support at 2100 and even the 200 day SMA (2078).
SOX gapped higher to the 50 day EMA (464), rallied through that level to the 50 day SMA (470), but then slipped to close just below the 50 day EMA. Still posted a gain on the session but also showed a tight doji below support on the candlestick chart. That typically indicates a move has met its end and is ready for another test lower. Last week it held 453 on the intraday lows; maybe it can hold again and continue the rebound, leading the market. With NASDAQ struggling that is less likely. Next support is 440.
SP500/NYSE
Stats: +0.34 points (+0.03%) to close at 1215.63
NYSE Volume: 1.549B (+2.33%). Volume rose on NYSE, maintaining an above average level as it has since the month started. Strong volume as SP500 went nowhere suggests churning, i.e. high volume turnover. After a bounce that can suggest a move has run out of gas. On the other hand SP600 rallied on this rising trade, a good indication. It is populated by many small energy stocks, however, and that no doubt helped it higher along with boosting volume some.
A/D and Hi/Lo: Advancers led 1.27 to 1. Even with a solid small cap session breadth was poor. Weak breadth rallies are prone to fail.
Previous Session: Advancers led 1.09 to 1
New Highs: 117 (+31)
New Lows: 68 (-54)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 rallied and moved through the 50 day EMA (1221) up to the 18 day EMA (1223) on the high, a nice 7 point gain. It could hold only a fraction on the close, fading back and showing a tombstone doji of its own on rising volume and below resistance. That is pretty bad from a technical sense, and when you add in the distribution that led up to this drop it is still a weak technical position. SP500 held 1210 support on the last test, but that is not that strong. 1200 and the 200 day SMA (1199) are likely targets on further selling (1200 was tested on the late August lows).
SP600 (+0.9%) led the market Monday but it could not influence all stocks. Breadth was still low on NYSE. The smaller energy companies helped push the index higher as it moved back through the 50 day EMA (344.48) and stalled out intraday at the 50 day SMA (344.48). It too still has upside resistance from the latter 50 day MA as well as the September high at 355. Good action in a weak market, but with the energy influence on the sector it is not necessarily a good indication for the rest of the market recovering and rallying higher.
DJ30
Blue chips rallied as well but could not reach the 50 day EMA (10,527) or the 200 day SMA (10,539) on the intraday high, instead stopping lower at the 18 day EMA (10,509) on the session high. That keeps it in the range above 10,350 and below the 10,700 top. It is basically hiding under the cover of the rest of the market action.
Stats: +24.04 points (+0.23%) to close at 10443.63
Volume: 234M shares Monday versus 238M shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
Support and Resistance
NASDAQ: Closed at 2121.46
Resistance:
The 50 day EMA at 2139
2151, the early December closing high and highs from January 2004
The 50 day SMA at 2158
2163, the mid-December closing high
2178 is the January closing high
2191.60, the January intraday high.
2192 is the mid-July high.
2220 is the August high
Support:
2100 was key resistance on the way up and it held last week.
2090 is the February and March interim highs
The 200 day SMA at 2078
S&P 500: Closed at 1215.63
Resistance:
December 2004 high at 1219 and June high at 1220
The 50 day EMA at 1221.44
The 50 day SMA at 1227
March 2005 closing high at 1225 and intraday high at 1229.11
The April/July up trendline at 1241
The September high at 1243
The recent August high at 1246
Price tops at 1265 from 1-28-99 and 2-99 & price bottoms from 12-20-00
Price top at 1-6-99 at 1272
Price tops at 1290 from 5-23-00
Price tops at 1364 from 1-29-01
Support:
1210 is some support.
1200 is some support
The 200 day SMA at 1199
1196, the mid-January high and the early December peak in the left shoulder.
1183 - 1184 from November 2004 highs and July 2005 intraday low.
Dow: Closed at 10,443.63
Resistance:
10,500 is some price point support but could not hold.
The 50 day EMA at 10,527
The 200 day SMA at 10,540
The April high at 10,557
Price consolidation at 10,600
The June highs at 10,646 to 10,656
10,720 is the high in the recent lateral move. This is the key resistance.
10,754 is the February high
10,868 is the December 2005 high.
10,985 is the March high
Support:
The May high at 10,406 and 10,400, the bottom of the November/December range
10,350 turned out to be support in the recent pullback, and it held again on the last Thursday low.
10,250 held in the June and July lows.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
September 26
Existing Home Sales, August (10:00): 7.29M actual versus 7.11M expected and 7.15M prior (revised from 7.16M)
September 27
Consumer Confidence, September (10:00): 95.0 expected and 105.6 prior
New Home Sales, August (10:00): 1350K expected and 1410K prior
September 28
Durable Goods Orders, August (08:30): 0.7% expected and -4.9 prior
September 29
GDP-Final, Q2 (08:30): 3.3% expected and 3.3% prior
Chain Deflator-Final, Q2 (08:30): 2.4% expected and 2.4% prior
Initial Jobless Claims, 09/24 (08:30): 420K expected and 432K prior
Help-Wanted Index, August (10:00): 39 expected and 39 prior
September 30
Personal Income, August (08:30): 0.3% expected and 0.3% prior
Personal Spending, August (08:30): -0.2% expected and 1.0% prior
Michigan Sentiment-Rev., September (09:45): 78.0 expected and 76.9 prior
Chicago PMI, September (10:00): 52.0 expected and 49.2 prior
End part 1 of 3
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understanding the stock market
trend trading stock
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