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THE MARKET

VIX: 32.39; +1.86. Back up on the selling, but not a massive spike higher given the 2.4% meltdown on the S&P. Remains 'high', but well below where it camped out in the 37+ range for weeks. Its recent lower readings may have been forecasting some of this move down. If that is the case, today's slight move up on such large point losses indicates there is more to come.

VXN: 60.29; +3.38. Jumped as well, but not a huge spike given the 5.5% plunge in the Nasdaq 100. The climb back over 60 is significant, but until it is over 65 we would not consider it getting into the 'high' level.

Put/Call Ratio (CBOE): 0.75; +0.22. Major jump back up into the higher end of the range on one day of selling. After hardly budging last Tuesday when the market distributed on some higher volume, today's jump on lower volume is interesting and encouraging that there is not too much complacency re-entering the market.

Nasdaq

After another one of its nice runs higher, the Nasdaq gave us a sharp selloff today, popping through a couple of near term support levels on the way. It is resting right at the third potential support level at today's close.

Stats: -69.44 points (-3.9%) to close at 1699.52.
Volume: 1.673 billion shares (-16.2%). Volume dropped sharply on the selling, falling back below average. That is a good sign that the recent accumulative action over the past 3 to 4 weeks has still not reversed. Down volume soared into the lead at 1.372 billion to 278 million shares. Very lopsided, but not out of hand as of yet. Still, after two strong distribution days in the last 9 sessions, we have to be watching tomorrow to see if selling increases now that Monday is over.
A/D and Hi/Lo: Declining issues were way out in front at 1.90 to 1. New highs dropped to 51 (-11) while new lows fell only 2 to 21 (-2). One thing we want on any further selling or testing of the prior low are steady new lows.

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

The techs did not hold up at the closer potential support levels. It is sitting right at 1700, one of the potential levels down to 1685. As noted over the weekend, after four strong 150 point runs, the index may be ready to further consolidate some gains, and that could push it down to the 1630 level (where it gapped higher in early October). That level has held before. If there is a more serious test coming, something that can occur after 4 runs up a trendline, we look to the 1550 level. Pretty far down indeed, and that will no doubt rattle many who have ventured back in. That might be just enough to turn the index back up as the final test of the low. Remember, we still believe the bottom was put in back in September when all of the sentiment indicators lined up and we had a strong reversal and follow through. The index has been the leader, and it has been very good at following down days with positive moves. The new terrorism alert will most likely push it lower early, and we will see if it can recover intraday. We would be surprised if it did tomorrow, but not if it does so Wednesday or later in the week.

Dow/NYSE

Had not in fact cleared the 50 day MVA on Friday with the low volume ascent, but at least the plunge today was tempered by significantly lower volume. Small comfort, but the price/volume action simply did not have its heart into a move higher.

Stats: -275.67 points (-2.9%) to close at 9269.50.
NYSE Volume: 1.094 billion shares (-13%). Below average volume once again, a silver lining to today's selling. 883 million downside shares to 214 million upside shares.
A/D and Hi/Lo: Decliners jumped ahead 2 to 1 after advancers led 1.45 to 1 Friday. New highs fell to 36 (-11) as new lows rose to 58 (+21).

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

Friday's break over the 50 day MVA (9472.96 as of Monday's close) did not last long, the weak volume providing no staying power. The volume two-step we were looking for did not materialize as the break over resistance did not bring an influx of new money nor did it give rise to short covering. Without that volume, it was up too far with no conviction. It tanked a lot more than anticipated, breaking all of the moving averages we follow today. It looks to be heading for 9165 if not 9000. The market has been resilient, but the poor price/volume action over the past 8 to 10 sessions has not given the index any real support on this move higher as there has been no conviction on the buy side. As we said over the weekend, the Dow has been tagging along with the Nasdaq, not making its own wake. Thus, its ability to catch itself is not as strong as the Nasdaq, and thus it looks to pullback rather substantially.

S&P 500: Following the Dow (or the Dow following the S&P), the big caps headed lower after breaking over the 50 day MVA and the April closing low (1103.25) Friday. The same problem with the break as on the Dow: no volume to back it up. The index is below all of the moving averages we follow, and is looking at 1065, but more likely 1050. That is not too far away at all. The S&P has not had that good price/volume action the Nasdaq has enjoyed, and as with the Dow, the lack of accumulative action opens it up to deeper selling. We will have to see what the volume does, but it would not be too hard for the index to hit 1000 if selling intensifies.

Stats: -26.31 points (-2.4%) to close at 1078.30.
Volume: NYSE volume dropped 13% to 1.094 billion shares. Below average, much like many of the upside sessions of late.

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

TOMORROW

Tomorrow looks weaker once again with the terrorist alert sending futures down. But we all know that the futures are an indicator for about 10 minutes. After that it is up to buyers and sellers and any news that hits the market to determine the action. What news? The government's consumer confidence report hits a half hour into trading and that is supposedly keeping the attention of many investors. Well, not more than any other report of late. Yes there are many economic reports this week, but the news is already pretty much baked in what with durable goods orders tanking last week along with existing home sales fading rapidly.

No, there is simply a lot of uncertainty, uncertainty that the market has been able to overcome since moving off of the bottom. Nothing else has really changed. A new terrorism alert is significant and we will have to watch the volume levels to see how significant to the market. The pressure is to the downside after today's action, but this market has been very resilient. A day of selling is often met on the following day with some buying after a softer open. If buying does not appear, we are pretty sure we are going to get a more significant test of the September low.

We still think the market has already put in its bottom as noted above, so any downside index put action will be aggressive though there is plenty of room to make some downside money. As noted over the weekend, we believe this selling we were looking for is going to set up more good buys for us on some of the former leaders that are showing a lot of good action. Many of those sold back today, but did so on light volume. In addition, we still had some good breakouts on strong volume, but we also had some good movers last week get thrown back down the day after making a good move. The first action is consistent with a good market; the second indicates things are not as strong yet as you would want.

Overall the market is just as mixed: techs outperforming, blue chips and big caps underperforming. In the very near term we see more selling pressure. Stepping back, we still see enough evidence of a market turn and unless sellers just crush the market, we are looking for a successful test of the low and then another rally up out of this bottom. Best case scenario is another test down to the consolidations and then a high-volume climb on all indexes. Worst case in our book is a full test of the lows. We are looking at the former.

Support and Resistance

Nasdaq: Closed at 1699.52.
Resistance: The 50 day MVA is at 1719.59. Then 1750 followed by 1800 to 1830 (former minor highs and lows). Then 1930 to 1940.
Support: 1700 trying to hold. Then 1685. After that is 1630.

S&P 500: Closed at 1078.30.
Resistance: The former closing low in the prior double bottom at 1103.25. The 50 day MVA at 1098.68. After those levels there is 1124 (prior consolidation level) and 1150 (also price consolidations).
Support: The 50 day MVA did not hold, and the index is now holding above potential support at 1070. Real support is at 1050. If that does not hold, we look to 998.

Dow: Closed at 9269.50.
Resistance: The 50 day MVA at 9472.96. Then 9500. 9870 to 9992 are the next levels of resistance where the index moved right before the September plunge and where it found resistance in the middle of its March and April double bottom pattern.
Support: Neither the 50 day MVA nor 9500 held. The next level is 100 points down at 9165 (the top of the first consolidation after the move off the bottom and one that has been successfully tested). Then 9000, and that looks solid. If that does not hold, 8700. It starts to fall fast after 9000.

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

10-29-01
Treasury Budget, September (14:00): $35.4B actual versus $29.0B expected and $65.7B prior.

10-30-01
Consumer Confidence, October (10:00): 95.9 versus 97.6 prior.

10-31-01
GDP-Adv., Q3 (8:30): -1.0% versus 0.3% prior.
Chain Deflator-Adv., Q3 (8:30): 1.7% versus 2.1% prior.
Chicago PMI, October (10:00): 43.0% versus 46.6% prior..

11-01-01
Auto Sales, October (8:30): 6.0M versus 5.7M prior.
Truck Sales, October (8:30): 7.5M versus 7.1M prior.
Personal Income, September (8:30): 0.1% versus 0.0% prior.
PCE, September (8:30): -1.0% versus 0.2% prior.
Initial Claims, 10/27 (8:30): 503K versus 504K prior.
Construction Spending, September (10:00): -0.7% versus -1.1% prior.
NAPM Index, October (10:00): 44.0% versus 47.0% prior.

11-02-01
Average Workweek, October (8:30): 34.0 versus 34.1 prior.
Nonfarm Payrolls, October (8:30): -300K versus -199K prior.
Unemployment Rate, October (8:30): 5.2% versus 4.9% prior.
Hourly Earnings, October (8:30): 0.3% versus 0.2% prior.
Factory Orders, September (10:00): -5.0% versus 0.0% prior.

SUBSCRIBER QUESTIONS

Q: Would you please speak to the advantages/disadvantages of buying during the first 30 to 45 minutes of the open market trade and the last hour of the market?

A: A difficult decision is when to buy. It seems easy, and most of the time it is. You see a stock move above a breakout point and you buy. If the move is early, do you buy then or do you wait for the morning tug of war to resolve itself and then buy later? What is our perfect scenario? When a stock builds up volume all session long and then breaks out later in the session, preferably after lunch. We have seen volume move up toward what we want it to be and then the stock makes the move, usually on volume that is already at the level we would prefer it to be. Investing like life is not perfect. Many times a stock will hit the buy point early in the session and then never look back, galloping away. If we wait we get left out totally on the move as the stock has already shot 5% beyond the buy point.

We would prefer not to buy right out of the gates, but sometimes a stock that has been forming a great pattern makes the move early. If we like the pattern and it triggers that buy point, we will look at picking up some shares, particularly if we are not going to be around to watch to see if it runs higher and then tests the breakout intraday, etc. Then after lunch we will take another look to see the status. If it has come back to test the breakout and has moved or is moving up off of that level and the volume is strong, we will then add to or complete our buy. If it has reversed on us and is selling below the pivot point on high volume, we obviously won't add to the position. We will see how it closes that day, checking before the close to see where it is vis a vis the pivot point and what the volume is. If a breakout from a cup with handle, etc. has reversed intraday on high volume, that is not a good sign; it may proceed to the bottom of its base or worse. We can either sell at that point or wait for the next session to see how the stock performs. This is usually only a significant problem in a market that is trending down or is suffering a bit of topping action either minor or severe. When breakouts don't work by the scads, the action is not right to the upside.

Right now we are seeing more breakouts work than not, but there are still stocks getting tossed right back down, e.g., BVF today. It was one of my personal favorites and I jumped in after about 15 minutes when it tried to bounce up off the breakout point it gapped above, but I jumped the gun. It recovered off of a test of the 18 day MVA on the low, but ti was still below that strong move on Friday on lower but still very high volume. I am going to see if that 18 day MVA continues to hold; strong volume followed by strong volume down is always a warning flag. I believe BVF will be okay based on what I have seen from the stock, but I am not going to let one position, no matter what my gut feel is, take down a portfolio.

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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