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us stock market, stock trading pick
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10/25/01 Stock Split Report
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Stock Split Report Subscribers:
SUMMARY:
- Bad news slams the market, but sets the stage for another buyer rally.
- Nasdaq volume is strong on a solid break above resistance.
- Dow and S&P show strong gains, but still have not crossed resistance.
- Economic news is horrid.
- Team Trades
When things look grim the buyers returned.
You pick the story: more anthrax cases, the ECB fails to lower rates citing pricing pressures, downgrades of some big tech names making good moves, plunging durable goods orders, or tanking existing home sales. The stories come all at once, and perhaps that is good; it seems to allow the market to take it all at once and then shake it off. No slow torture.
In any event, the market looked bad and got worse as the indexes broke below near term support. Once again, however, buyers took advantage of selling and moved in big. The Dow turned a 100+ point loss into a 100+ point gain. The Nasdaq reversed 90+ points. Volume surged on the Nasdaq as it again led the way with its first 2 billion share day in 7 sessions (the Wednesday selloff). NYSE volume rose again, but it was not a massive spike higher. Solid volume, but not decisively overpowering the recent selling volume.
Dow and S&P reverse and rally, but still not above resistance.
The Dow touched down below 9200 and the S&P tapped support at 1065 on the low (1050 and 1070 are support), then staged furious rallies to the close. There were no subsequent attempts at selling. That was a strong reversal.
Strong, but it did not spring the indexes free from the immediate resistance. The S&P edged over its 50 day MVA (at 1099.31) by the slimmest of margins. As we know, these levels have a lot of gravitational pull. Until its chains are decisively broken we cannot claim victory. The Dow was not able to crack resistance on its close, landing below 9500 and the 50 day MVA (9478.65).
As noted last night, the Nasdaq's move is great, powering past resistance. The Dow and the big caps, however, have not been able to match that move and have yet to clear their near term resistance. If they cannot do it, the Nasdaq's spurt higher may be for naught. We are not trying to be negative, just realistic. We love the moves we are seeing in the plays that are on the reports; we put them on their because they were ready to make these runs. So early in a rally, however, the indexes cannot be too divergent; they all more or less move up or they will not make the move. They are on the verge; the Dow and S&P have to make their moves soon to close some of the gap the galloping Nasdaq has opened up.
THE ECONOMY
Can it get any worse? Economists thought the summertime reports were bad, but they were actually showing improvement. The September numbers were horrid. Yet, the cash infusion and the yet to be defined economic stimulus package have most thinking recovery. What are we recovering from?
Durable goods sales fall 8.5% when expectations called for a 1% drop. The culprits included telecom systems down 40%, computers down 6.2%, and semiconductors . . . up 16%, the second consecutive gain. Remember several months back when we said the semiconductors, the building blocks of technology, would start to move up before the rest of the sectors as far as units. Seems that is happening to a certain degree.
Existing home sales fall 11.7%. Uncertainty following the attack left this bastion of activity during the recession high and dry. This was the worst monthly drop in 11 years. When uncertainty reigns, consumers pull in on the big ticket items.
Jobless claims rise 8,000. They are more or less hanging around 500,000, and though that is still bad, the real news was the continuing claims, those that were in prior reports but have been unable to find employment. Those hit an 18 year high; not even the last recession, erroneously referred to as the 'worst' recession since the Great Depression by the soon to be Clinton administration, had that many out of work on a continuing basis. This slowdown was rapid, but it we are not in a depression.
What is really going on? It is in vogue to say there won't be a recovery for a long time, but that is the psychology of economists. They tend to climb onto a train and ride it long after it has hit its destination and is moving on to the next stop. They felt the economy was unstoppable, 'white hot,' out of control, etc. back in the spring of 2000, back when it was first starting to flash the trouble signs that the Fed ring kissers overlooked. Slowing is slowing, and we reported every week how the economy was already starting downhill even as the Phillips Curve dogma of a runaway economy was spouted. That theme did not quit until late 2000 when lo and behold, economic indicators plunged. They rode the runaway train of prosperity right into the ground. Now that it is common knowledge that the economy has tanked, they cannot see anything but dire circumstances into the future. They have changed trains, and they are speeding along on the gloom track, thinking the light at the end of the tunnel is another train. No boys and girls, it is the sunlight.
The positive? The economy flourishes when the gloom is worst. Why? Because the Fed will continue to reduce rates, bringing down the real cost of borrowing where it needs to be. 25 basis points? Most likely, but the Fed Futures contract is starting to price in 50 basis points in November. It needs 50 basis points to get the cost of borrowing low enough to make it an incentive to actually borrow. The Fed has been behind the curve all the way down; that is why the rate cuts seemed to have no effect. The reason they had no effect: because the real cost of borrowing was artificially high, and there were better uses for the money, i.e., doing nothing with it but let it sit in accounts. As with everything, you have to have incentive to do act; until real rates fall enough to make it worth borrowing, no borrowing occurs.
The other positive: perhaps Congress will pass a worthwhile stimulus package. Once again, however, the parties are warring to get their pet projects that were cut out of the prior tax cut bill reinserted. How can a 'rebate' be given to someone that did not pay anything in the first place? It is not a rebate; it is a giveaway. At least be honest with us; we might even agree with some of the things being pushed. With the business sector in recession for over a year, the historically correct action is not to try to prime the pump with rebates to those that do not pay taxes; after all, the consumer has been 'runaway' (to use the Fed's words) for the past 5 years and was so until just recently. Business still tanked even with that buying going on. So it is obvious that dumping more money to the wind won't get things moving. Get businesses to buy business products; that is the time proven method to get this dormant part of the economy active. Then we all benefit because companies can buy new computer systems, manufacturing systems, etc., and write it off immediately in a tax credit. How does that benefit the average person? Well, the business gets new equipment it would have done without, making it more productive and starting the economy. The tax credit saves that money and that can be paid in keeping employees on the payroll. Then the business side cranks up and there is more production and that means more jobs. Time proven, but somehow lost on these folks that ran at the first sign of trouble in DC, leaving us to run the country.
THE MARKET
Shook off news once again and reversed on high volume. Continued bullish action once again, with the techs still in the lead. The Dow and S&P are trying to follow, but they need to clear that resistance.
VIX: 31.36; -1.51. Volatility continues to trail off with the gains. Note that it spiked to 35.08 at the height of the selling, showing there is still some anxiety under the surface. Still, it continues to erode overall; nothing dangerous, just something to note if selling picks up. Thus far, solid price/volume action is winning out.
VXN: 56.93; -4.98. Tanked on today's rally, but we note it hit 64.20 on the high in the midst of the selling.
Put/Call Ratio (CBOE): 0.65; +0.10. This indicator bucked the trend, rising on strong moves higher in the indexes. But, it also was on a reversal day, so there was downside action as well. Still, we like the climb in this contrary indicator as the market rallied.
Nasdaq
Again the strongest of the lot with a strong percentage move on high volume that really broke the chains of the 50 day MVA. Strong move, but we have to keep an eye on the Dow and S&P; if they cannot more or less match the moves, they will start to drag on the Nasdaq. So far it is looking solid with those 'building' patterns racing higher over resistance.
Stats: +43.93 points (+2.5%) to close at 1775.47.
Volume: 2.267 billion shares (+19.8%). Powerful volume day with 1.706 billion upside shares to 545 million downside. The strongest volume in over a week and a good exclamation to bucking the recent attempts to distribute. Positive price/volume action is once again taking over.
A/D and Hi/Lo: Advancing issues improved the lead to better than 3 to 2 (1.57 to 1). New highs rose to 59 (+14) as new lows fell to 37 (-16).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The techs put it into gear today. They broke below 1700, but then gathered it all tighter at 1685 and never looked back. All the rest of the session it just rode up the 5 minute moving average. Strong, strong rally. Short covering? Sure it was there; remember, the index closed over the 50 day MVA Wednesday, and when it re-emerged above that today, the shorts really started to cover. Institutions, however, were what turned the market that made the shorts cover. It was buying leading to that snowball effect we discussed last week. It is now racing toward 1800, the next level of potential resistance, along with 1850. Neither are really solid resistance, but the Nasdaq makes 100 to 150 point moves and then consolidates. 1800 is about that point.
Dow/NYSE
Impressive reversal in rising, though not blowout, volume. It is right at its major resistance point; it needs to clear it to assist the Nasdaq and the entire market in this rally off of the bottom.
Stats: +117.28 points (+1.3%) to close at 9462.90.
NYSE Volume: 1.370 billion shares (+1.7%). Good to see a second consecutive gain on rising volume, but it was not blowout as noted above. Still above average, and up volume doubled down volume at 906 million shares to 454 million shares. A good, solid above average volume gain, but not as strong as the Nasdaq's move.
A/D and Hi/Lo: Advancers took the lead 1.6 to 1 (decliners led 1.28 to 1 Wednesday). New highs rose to 52 (+10) as new lows fell to 53 (-11).
The Chart: http://www.investmenthouse.com/cd/$indu.html
The Dow is wedging higher in similar action to what the Nasdaq was showing before it made the big breakout today. It tested all the way down to 9177.89 on the low and then ran and ran to the upside. The improving price/volume action gives us some more faith that it will make the move, but it has not done so yet. It has major resistance at 9500, and the 50 day MVA at 9478.65 is even in front of that. These levels have tossed the index back recently, and the 50 day MVA is an important barrier. It needs to clearly take this level out as the Nasdaq has done; that will help the entire market higher. At this point, the improving price/volume action is a strong plus. Now it just has to show us the move.
S&P 500: The big caps cracked over the 50 day MVA today (1099.31), but still have not broken 1103.25, the closing low on the March and April double bottom. It too is in an ascending wedge pattern, poised just below resistance as the Nasdaq recently was. It did break the 50 day, but as we know, that does not mean it is clear and free to rise. These levels can be sticky. The close over the 50 day MVA lends to short covering, particularly if we see action as we saw today on the Nasdaq: close over that level, selling, and then a rally. That drives the shorts out of the positions. Price/volume action is improving, but we have yet to see blowout volume. We did not see it on the Nasdaq, however, until its breakout move today. It was a strong session; it needs to clear this resistance on a surge in volume. When it does that, the market will be ready to make some serious moves. Until it does, the Nasdaq is on its own, a somewhat risky proposition in a market heading out of a bear market. 1125 is the down trendline from the May and August highs.
Stats: +14.89 points (+1.4%) to close at 1100.09.
Volume: NYSE volume edged higher to 1.370 billion shares (+1.7%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Friday comes along with Michigan sentiment and New home sales out after the open. The market was on shaky ground earlier in the week with a return of distribution. As quickly as it reared its head, however, buyers took advantage of lower prices and were buying. Big tech buying today as the tech sector continues to lead. The key will be how the Dow and S&P respond to the Nasdaq's lead. Can they break resistance and head higher? Might not see the answer tomorrow, but the market continues to upend doubters. What we have now is a return to better price/volume action on the Nasdaq, and we want to see a similar upside blast of volume on the Dow and the S&P to dispel it distributive ways.
Health care is all of the sudden not enjoying its cozy spot with investors. These leaders have been dumped the past few sessions in favor of more speculative issues such as the beaten down techs. A change of trend? Biotechs had a good day as we noted last night we thought they might. CHIR, one of our plays, took off today similar to QLGC's move Wednesday. KLAC, SMTC, RFMD, BRCM and other chips we have been taking positions in soared on strong volume as well. BRCD and JNPR had to buck downgrades, but finished the session slightly down and well off of their lows. There is definitely some change afoot, and we like playing these stocks that have set up good, interim patterns. Why interim? Because they are so far off of their highs. They have to deal with a lot of overhead out there that can stop a move at any point. For now they are being snapped up and we love it. We just need to be ready in the event the Dow and S&P cannot make the moves over their resistance over the next several sessions. As we said before, those will weigh on the Nasdaq.
Well, we were looking for some weakness after taking several upside positions early in the week and last week; the weakness that appeared was just intraday. Staying the course with those plays has worked out well. Tomorrow we have an eye on several more good patterns. Many of the building patterns have exploded higher and are already a bit extended to chase right now. Don't fret; as we said before, there are many times to buy a good stock on a bull rally. You don't miss out if you don't buy them all right at once. We just don't like to chase them after they make strong moves as we want to buy on the support and then ride the move higher.
We don't see any compelling reasons for the market to change its tune tomorrow. We remain cautious, but like what we see with the improving price/volume action. The shorts may try to take the Dow and S&P down at resistance. It has not worked thus far. Then there is the SOX rapidly approaching its down trendline joining the two August highs. That could stop it, but it sucked us in on some puts early today just to rally hard. It has formed a 'flying W' double bottom off of the September low (where the right leg of the W does not undercut the left leg), and that can be very bullish; it may be all of the test it needs.
Support and Resistance
Nasdaq: Closed at 1775.47.
Resistance: Blew past 1750 with ease. Next is 1800 and 1850.
Support: 1750 is possible support, but the 50 day MVA is at 1718.42, and that should be support for those institutions that have taken positions on this move higher. Then 1700 that more or less held today.
S&P 500: Closed at 1100.09.
Resistance: The former closing low at 1103.25 is still there. The 50 day MVA lingers at 1099.31, and it has not broken away from that level yet. Then 1124 (prior consolidation level) and 1150 (also price consolidations).
Support: 1070 (held more or less Thursday). After that is 1050, a level it tested intraday Friday.
Dow: Closed at 9462.90.
Resistance: The 50 day MVA is at 9478.55, and the 9500 level is strong.
Support: 9165 may act as support, then 9000 looks like the best level.
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): 504K versus 490K expected and 496K prior (revised from 490K).
Employment Cost Index, Q3 (8:30): 1% actual versus 0.9% expected and 0.9% prior.
Durable Orders, September (8:30): -8.5% actual versus -1.0% expected and -0.3% prior.
Existing Home Sales, September (8:30): -11.7%.
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.
TEAM TRADES
CELG is a biotech stock covered on the Technical Trader in its cup with handle pattern. Earnings were out before the bell and on the strong report the stock raced up and hit our aggressive buy point at 30.50, stretching to the early high at 31.25. It immediately pulled back to test the buy point, and tried to hold that level with the Nasdaq down over 44 points. Intraday volume was pulling back as well, good price/volume action, so when the stock popped up on a sudden rise in buying volume we decided to leap on it as this looked like the breakout. It was a calculated risk at this point with the market selling down, but we liked the stock's action, the earnings news, and the Nasdaq was holding at this point. We put in an order at 7.70 on the January $25 options that were now trading at 7.90 by 7.60.
We got the fill as the stock barely dipped below the 30.50 support, but that was brief and was on an even lower drop in volume. At 9:45 the stock used that support and started running up, hitting another high at 31.37 by 10:23. CELG beat that once again a few minutes later, and went on to hit a high for the day at 32.97 before settling back down to close at 32.12 and our options at a bid of 8.80. The stock had hit the pivot for the break out of the handle (32.44) at 2:30.
End Part 1 of 4
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