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THE MARKET

Selling on Tuesday followed by buying on Wednesday. Once again buyers used selling as their cue to take action, and the fact that it occurred on the heels of distribution makes it all the better. Again, the Nasdaq's close over resistance at the 50 day MVA, while a first in this rally, does not mean it is going straight up from here. Volume was not overwhelming as compared to Tuesday, and the Dow and S&P 500 are still battling their resistance within their trading ranges on lower volume. We like the leadership from some golden oldies that stepped in to fill the gap, but now they will need some help from the other sectors that have been leading. Medical is one of those, and it has been walloped the past two sessions. Biotechs may be ready to help fill their gap, however, as AFFX reported strong numbers and that sector could be the next to start to move.

As for the upside positions we had taken and discussed last night, well, turns out our strategy to let them ride for now has paid off. Again, however, we are not out of the woods, but you have to like the change in pace again today.

VIX: 32.87; -0.32. Down fractionally on a session that saw the S&P underwater most of the day. This still continues to erode more than we want it to; the return to some slight accumulative action today helps, however. Remember, this is a secondary indicator, but it was lining up with the negative price/volume action we were seeing.

VXN: 61.91; -1.82. Continues to fall, today as the Nasdaq made a move up. This is more of the move you would anticipate, but it is still eroding as is the VIX. Not too much of a concern if the price/volume action remains positive, but with the recent distributive action before today, it is well worth watching.

Put/Call Ratio (CBOE): 0.55; -0.03. Trading places the past three sessions, holding its own but still well off of where it was camped out for over the past month. It is not showing complacency, but it is not showing a lot of fear. The recent acceptance that the market is looking healthier for a further move up is something we don't like particularly, and this indicator is showing that new confidence. Believe it or not, overall investor confidence in the market is not really what we as investors want.

Nasdaq

Led the move today by finally moving over the 50 day MVA through the close. Volume rose a hair, making today an accumulation day. Does it wipe out Tuesday's poor action or the prior week? The close over the 50 day MVA helps, but the slate is not cleared just yet.

Stats: +27.10 points (+1.6%) to close at 1731.51.
Volume: 1.895 billion shares (+3.3%). Not powerful volume, but above average and higher than Tuesday's selling volume. Up volume led 1.343 billion shares to 524 million downside shares. A return to better price/volume action, but not a green light that everything is okay.
A/D and Hi/Lo: Advancing issues took charge again at 1.17 to 1 (decliners led 1.14 to 1 Tuesday). New highs rose to 45 (+1) as new lows fell to 54 (-1). Whopping moves, eh? Shows the market is still not just blowing and going up or down just yet.

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

The Nasdaq finally closed above the 50 day MVA (1716.09) on rising, above average volume. This is what it had to do and it needed to do it right away or face yet another test. It is still not out of the woods; it did not take out Tuesday's intraday high (1739.47) on the close, nor the intraday high last Wednesday on that strong reversal day (1754.01). Now a move over that latter level on strong volume would be huge. Once again, the Nasdaq is in an ascending wedge pattern and has cleared some resistance. That is a positive and it could in fact make a run at clearing all of that near term resistance. Originally we were looking for a move up to 1800 on this move, and the Nasdaq has not been denied thus far.

Dow/NYSE

Rallied late to close slightly positive, but unlike the Nasdaq, did not come close to clearing resistance. Further, volume fell slightly, suggesting some churning (further selling action) continuing, but the tight doji above the 10 day MVA is a positive sign.

Stats: +5.54 points (+0.1%) to close at 9345.62.
NYSE Volume: 1.325 billion shares (-0.6%). Above average volume, just slightly lower than Tuesday's selling volume. The slight rise on roughly the same volume suggests the index is still churning or subject to institutional selling. Down volume led 732 million to 597 million shares.
A/D and Hi/Lo: Decliners led again, showing the problems in the NYSE versus the Nasdaq. 1.28 to 1 (1.04 to 1 Tuesday). New highs fell to 42 (-3) as new lows rose to 64 (+6).

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

The Dow is in a decent pattern, i.e., still in its trading range and able to catch itself at the 10 day MVA on the low (9275.19; 9278.80 low), showing a tight doji to boot. That might suggest a move higher and another attempt at resistance at the 50 day MVA at 9479.30 and 9500 by the end of the week. Today it was helped by IBM but hurt by Kodak and AT&T. IBM did not move on strong volume, however. Internals on the NYSE are not strong (poor A/D line today). If it cannot break through resistance on strong volume along with the S&P 500, it puts the Nasdaq's move at risk. If it fails, 9100 to 9000 can offer support, with emphasis on the latter.

S&P 500: The S&P mirrored the Dow. It too rallied late to positive territory, but NYSE volume backed off a hair. A doji in its trading range and testing the 18 day MVA on its low (1076.71; 1079.98 low), it too looks as if it could try another shot at resistance at the 50 day MVA (1099.28) and the 1103.25 closing low in the March and April double bottom pattern. As with the Dow, it needs to make it. If it does not, it could fall back to 1050, the first real level of solid support. That would not help the Nasdaq's attempts to rise further. Coming out of the bear, all indexes need to join hands and rise just as the Democrats and the Republicans should once again do on the stimulus package and put this petty 'pet project' crap to bed.

Stats: +0.42 points (+0.0%) to close at 1085.20.
Volume: NYSE volume edged lower to 1.325 billion shares (-0.6%). Above average, and it looked like a bit more churning with the weak internals.

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

TOMORROW

The Fed Beige Book did not tell much that anyone did not know: weaker across the board but bounced back a week after the attack. Thursday before the open there are existing home sales and durable goods sales for September. Both are expected lower. Economic news from August and September, however, have not moved the market much to the downside the same way weak earnings have not necessarily killed the market thus far. Perhaps the honeymoon will end soon; if price/volume action does not hold up and follow the Nasdaq's lead today, it most assuredly will end.

What is the bigger picture at this point? Still not great even with today's move. Yes the Nasdaq broke some important resistance on the close on higher volume, but the Dow and S&P did not really try to follow it. If they cannot match the Nasdaq and move through resistance on stronger trade, the Nasdaq won't have any support, and it is less likely to sustain a move. It could give us a sharp move to the upside but then be dragged back down by the rest of the market that is trying to decide if it wants to move up or re-test. The Dow and S&P patterns are good: lateral consolidations with rising lows; the price/volume action, however, has not backed the patterns up thus far. If they make a run at resistance and fail again, we have to be ready for a further test this time (three strikes).

Given the divergent action in the indexes, we are going to stick with the basics for now as we did today: looking for stocks that are breaking over resistance or out of patterns on solid volume. There were many techs doing that today, and the biotechs look as if they are preparing for some moves. These may fill some of the void in leadership the past few sessions as the medical, drug and just healthcare stocks in general have undergone some pretty nasty distribution. Maybe a change of leadership is here, but it is hard for stocks 80% off of their highs to lead the indexes higher as they tend to sooner or later be subject to selling by those that bought a long time ago and vowed to 'get out even.' Without renewed leadership in stocks 15% or better below their prior highs, it is hard for rallies to sustain themselves for that very reason.

Thus, we stick with the same strategy: stocks clearing good patterns and stocks clearing resistance. We are also going to keep a close watch on the resistance levels for the Dow and S&P, and if they again hit resistance and start down on higher volume, we will expect some further test of the lows. We are not jumping all over new index plays just yet as the indexes are banging around inside trading ranges (except for the Nasdaq), and are thus subject to quite a bit of volatility. On an unsuccessful test of resistance, however, we will most likely close the upside index plays out and then look to the downside.

Support and Resistance

Nasdaq: Closed at 1731.54.
Resistance: Breaking away from 1700, but still not free from the 50 day MVA at 1716.09. After that 1750.
Support: 1700 would be nice, but again we note that it is hardly real support. 1650 is much better and has held on the close. 1626 is the point where the index gapped higher and where it held last time. 1605 is next.

S&P 500: Closed at 1085.20.
Resistance: The former closing low at 1103.25. The 50 day MVA at 1099.28. 1124 (prior consolidation level) and 1150 (also price consolidations).
Support: 1070 (Monday's intraday low). After that is 1050, a level it tested intraday Friday.

Dow: Closed at 9345.62.
Resistance: The April closing low at 9389 is still there, but the big resistance is the 50 day MVA at 9479.30 and 9500.
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 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 and TEAM TRADES

Due to some technical problems, we will have to put off the Subscriber Questions and Team Trades until tomorrow.

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.

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