us stock market, trading system

Begin Part 2 of 2

Some stocks in 'building' patterns.

We talk a lot about stocks in signature patterns such as cup with handle, double bottom, double top, etc. Well, there are some patterns where stocks may not be ready to breakout to a new high or that are not textbook signature patterns, but they still indicate building strength, i.e., a series of higher lows and higher highs coming off a bottom, all on good price/volume action.

There are several semiconductors in this 'building' pattern right now. Take a look at KLAC, AMAT, CY, and NVLS. Each one has come off of the October low after previously hitting that level in September. Since then they have mad a series of higher lows and mostly higher highs with good price/volume action (up on up days, lower on down days). This is a type of ascending wedge pattern where pressure builds from below and eventually shoots the stocks higher in some solid surges.

This is a key sector. If key members are building pressure and gathering momentum for upside moves, this would give the Nasdaq a big boost. Remember, the Nasdaq has been helped and hurt by the semiconductors on this rally off of the lows. They lagged the original move, and then gave the move some more power as they raced higher. They have been lagging this move as well what with last week's downgrades; with today's moves in some of the leaders in the sector, it looks as if they are ready to add to the drive behind the Nasdaq.

That would be a big boost at a critical time. The Nasdaq is once again approaching the 50 day MVA, a point of significant resistance where it was turned back last Wednesday. It has held on, and it is now knocking on the door again. If the semiconductors could provide a surge at this level, it could be the help needed to break the entire tech sector higher. Unlike many that are flying by their gut feelings as to what the market is doing, we are watching the trading action. While many say the techs cannot make significant moves for this or that reason, we are watching the price and volume, the patterns, what stocks are building strength or losing strength. The market is our 'crystal ball,' and there is no better place to go to find what the market is doing and is showing us it is going to do.

THE MARKET

VIX: 33.11; -2.73. 36.49 on the high early in the session, and then pulling back as the indexes rallied in the afternoon. Typical action, still on the high end. Showing continued anxiety in the market, and we should not forget the spike to decade high levels in September.

VXN: 67.36; -1.92. 71.15 on the high in the morning selling, and then calming down as the index found support and rallied in the afternoon. Still a relatively small move down and remaining on the high side. As with the VIX, the VXN flashed extreme levels at the September low.

Put/Call Ratio (CBOE): 0.50; -0.30. Plunged on today's action, the first significant drop in almost two months. Such a drop seems out of sync with the other sentiment indicators, and on the heels of last Friday's option expiration session, we will have to see how it reacts Tuesday and Wednesday. 0.4 is considered a level of complacency, but with the ratio residing in the 0.75 and higher range for over a month, we are not too concerned about this one right now. We will keep an eye on it.

Nasdaq

The techs again sported the best percentage move, climbing close to the 50 day MVA once again after a slow start. Again, however, it rose on below average volume. While there are a lot of naysayers, it looks as if the index is trying to build for a break of resistance.

Stats: +36.77 points (+2.2%) to close at 1708.08.
Volume: 1.531 billion shares (-3.7%). Another gain on lighter, below average volume. That is not the action we would prefer, and it will need more volume to break the 50 day MVA that is just ahead. Up volume was way out in front at 1.013 billion shares to 448 million, so the buyers were in the majority; they are just not overpowering the market with institutional accumulation.
A/D and Hi/Lo: Advancers led again at 1.4 to 1 (1.29 to 1 Friday). Nothing powerful. New highs doubled to 53 (+27) while new lows fell to 47 (-4).

The Chart: http://www.investmenthouse.com/cd/$compq.html

The index showed a doji on top of the prior consolidation last Thursday, and has moved up well since then. The lacking ingredient is volume as it has ticked lower the last two sessions as it approaches its 50 day MVA (exponential and simple) at 1715.91, just 7 points away. Last Wednesday it bolted over the 50 day MVA, but reversed intraday and sold down on hard volume. The lack of volume on this move up off of the lows of the trading range indicates it will stall at that level, but we are staying on alert for a surprise breakout. Again, we are seeing some building patterns in some semiconductors, and other stocks continue their good patterns. No downgrades on the semiconductors (though we could see some tomorrow after ALTR's earnings after hours today), and if none come, the SOX will be freer to move higher.

Dow/NYSE

After Friday's reversal off of the 9100 level, the Dow added to its gains today as it too runs up toward resistance at 9500 and the 50 day MVA. below average volume did not slow it today, but as with the Nasdaq, it will need more to break this resistance.

Stats: +172.92 (+1.9%) to close at 9377.03.
NYSE Volume: 1.086 billion shares (-16%). A strong price move that triggered program trading curbs, but there was no volume. Up volume did lead 768 million to 324 million shares, and though the buyers were again in the lead today, they have yet to show they are in the lead in the overall market since Wednesday's distribution day. Have to see that above average, rising volume gain with a strong upside move, A/D line included.
A/D and Hi/Lo: Advancing issues maintained their lead at 1.45 to 1 (1.22 to 1 Friday). new highs rose to 52 (+11) while new lows rose to 59 (+11).

The Chart: http://www.investmenthouse.com/cd/$indu.html

After touching down at 9080 on Friday's low, the Dow continued its move higher in its recent range, buoyed by AXP earnings released during the trading session. Volume did not match the move as noted, and thus the Dow has a lot of work ahead at 9500 and the 50 day MVA at 9490.66. Last Wednesday the Dow reached out a finger toward that level and then abruptly reversed. This low volume will not do the trick. The double ice at 9500 might require another subsequent attempt to breakout, but it does not have many more chances after that. The market, the same as baseball, usually gives you just three strikes before sending you to the bench until your next at bat.

S&P 500: A mirror image of the Dow, rising once again after it tested support at 1050 on Friday's intraday low, and then rebounding through the close today. NYSE volume was a disappointment as it fell 16% on the gain, coming in well below average. It too has very significant resistance at 1103, the closing low in the March and April double bottom pattern, and the 50 day MVA (1100.46) as well. Double ice to break and no volume thus far to do it. That can change with the wink of an eye, however, as institutions have been accumulating looking at the overall price/volume action the past three weeks and the intraday price action (weak opens, then buying rallies the indexes intraday). If the shorts feel they have to cover when the indexes test above resistance, that could trigger the next leg up. What would that require? A close over the 50 day MVA.

Stats: +16.42 points (+1.5%) to close at 1089.90.
Volume: NYSE volume fell significantly to 1.086 billion shares (-16%). It is still not showing that strong accumulative action it was before last Wednesday's distribution, and that keeps us on edge.

The Chart: http://www.investmenthouse.com/cd/$spx.html

TOMORROW

Okay, we made it through a Monday with no downgrades of entire sectors, and the market survived another anthrax threat expansion. Over the weekend we indicated that if the indexes did not get hit with another round of downgrades they might be able to muster a breakout of their consolidations. Volume was a disappointment, but without any major upside news, we will gladly take the lighter volume gain. Then we will look for volume to move in on a break and hold above the near term resistance.

The lack of a semiconductor downgrade thus far this week helps the market. Again, all things equal, the market tries to rise right now. Wednesday did not change that, but the market has not been able to put together a solid accumulation session since that decidedly distributive session. Approaching resistance, the indexes need to change their tunes and buyers need to come in. Without buying volume, their chances of success are not great. We have seen moves bloom late, i.e., after a couple of up days volume surges in. That will have to be the case this time as volume has been shrinking.

We do like the building patterns we see in addition to the more traditional cup with handles, etc., so that is more than an outside chance. If we get the upside breaks, we are looking for more upside index positions and the other stocks that are in tradition patterns and these 'building' patterns. The latter may be shorter term moves, but they can be very good moves. Overall, the market has been rising, pricing in better times. We are buying breakout stocks, and many of those are moving higher on strong volume despite what the overall market volume is. We also continue to look at some of the beaten down stocks as stock plays (e.g., JNPR, QLGC) as well some semiconductors that are in those building patterns (e.g., KLAC, AMAT, CY, NVLS). There are lots of plays out there making good moves; now we need to see the indexes follow the moves as the stocks complete their patterns and move higher.

Support and Resistance

Nasdaq: Closed at 1708.08.
Resistance: The 1700 level was beaten today, but the low volume indicates it has not broken away from that level. Also, as long as the 50 day MVA at 1715.91 is ahead, 1700 is not safe. Then 1750.
Support: We keep looking for 1700 to hold, but on the light volume today, that is very iffy. 1650 is still trying to hold on the close. 1626 is the point where the index gapped higher, and 1605 is next.

S&P 500: Closed at 1089.90.
Resistance: The former closing low at 1103.25. The 50 day MVA at 1100.46. 1124 (prior consolidation level) and 1150 (also price consolidations).
Support: Held at 1070 on Monday's intraday low and then rebounded. After that is 1050, a level it tested intraday Friday.

Dow: Closed at 9377.03.
Resistance: The April closing low at 9389 still looms, and then 9500 where the index was stymied last week. The 50 day MVA is right there at 9490.66.
Support: 9000 looks like the best level at this point though 9115 to 9100 may try to hold in another test.

Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.

10-22-01
Leading Indicators, September (10:00): -0.5% actual versus -0.5 expected and -0.1% prior (revised from -0.3%).

10-24-01
Fed'd Beige Book (14:00)

10-25-01
Initial Claims, 10/20 (8:30): 490K versus 490K prior.
Employment Cost Index, Q3 (8:30): 0.9% versus 0.9% prior.
Durable Orders, September (8:30): -1.0% versus -0.3% prior.
Existing Home Sales, September (8:30): 5.2M versus 5.5M prior.
Help-Wanted Index, September (10:00): 53 versus 53 prior.

10-26-01
Mich Sentiment-Rev., October (9:45): 83.0 versus 83.4 prior.
New Home Sales, September (10:00): 852K versus 898K prior.
Treasury Budget, September (2:00): $29.0B versus $65.7B prior.

SUBSCRIBER QUESTIONS

Q: Should investors put money back into NASDAQ consolidation now? It seems that we have missed the boat?

A: If this is a true bull run, we will have many chances to enter positions. Contrary to what we hear on the television from mutual fund managers that are saying if you are not fully invested all the time you miss the first half or so of a 25% move in the index. If you are in index funds, that could very well be the case; problem is, if you were fully invested all the way down, you lost over 60% before that move back up. There are many entry points to quality stocks. Buying into them when they breakout on strong volume is the first entry point. Then the test (50% test the breakout), and then the moves up off of the 18 day MVA (you get 4 or so of these), and then the test back down to the 50 day MVA and the move off of that (occurs after the 4 or so bounces up the 18 day MVA). Then if it is a long bull run as we saw in the 1990's and in many other times throughout history, you have opportunities to buy those stocks on their next bases. Many stocks breakout and then form a flat base or ascending wedge; when they break from there the gains can be really exciting. So don't buy into the idea you have to buy at the low or you miss out; we prefer to let stocks earn our investment dollars by showing they can clear resistance in strong moves.

TEAM TRADES

Today the trades were many what with HCSG, ENDO, MANH, TERN, RMCI, IMCL, CAH, etc. We issued a lot of alerts all session long today because so many were hitting our buy points and showing some good volume. Over the weekend we decided we would test the alert system 'blind', i.e., when the buys hit our points we would place a buy order without analyzing the move that day but just playing the buy point. We had some good stocks in good patterns in the reports, so we were not too worried about making a play on what came up first.

First up we had SVU and MANH in a tie, then IMCL and TERN. I like software, so I opted with MANH, and I also have had my eye on IMCL, so that was a go as well. MANH was in a reverse head and shoulders/cup with handle that had taken off Friday on strong volume. Money flow is huge. Today it cleared the buy point in the first 10 minutes of trading, with no real time for volume to accumulate. We did notice it was rising on a big volume spike, and that did not hurt. When the buy point was reached we just bought at the ask which was about a quarter above our target price. The stock pulled back just a few cents the next ten minutes and rallied higher. Two hours of sideways movement and then it rallied again; that old surge and rest pattern the remainder of the day. Up 4.89 on the close on massive volume. Friday's move on high volume in a low volume market was the key in our book for this play.

IMCL bolted out of the blocks as well, hitting the buy point very early. IMCL had been in a tight, low volume lateral consolidation, and as MANH, it made a strong move Friday. That had us zeroed in on this one. When the buy point was hit, we bought on the ask, or right at 61. The stock ran to 61.40 and then tested the move, falling to near 60.40. It rallied and rested the rest of the day, but after hitting 62.40, it fell on the close to 61.60 or so. A new high and volume rose to be sure, but it was right at average and not a massive breakout. When dealing with breakouts, we like to see strong volume. At the time the buy point is hit, we might not have it yet as we saw today. What to do? As we have said in the past, we will take a partial position on the first move when it hits the buy point or tests it. Then we look later in the session to see if what volume is, and if we like it and the stock is giving us a good entry point still, we will complete the buy.

Good Investing!
Jon L. Johnson and the Stock Split Report Staff.

All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners of Online Investment Services, LP or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.

us stock market
trading system