us stock market, trading strategy

Begin Part 2 of 4

THIS WEEK

A shortened trading week with the market closed Thursday and open just a half day Friday. Many fund managers like to start getting the holidays off to an early start the Thanksgiving week, but with the war action ongoing, we anticipate they will not be heading out too early this week. Still, volume overall will most likely be lower.

In addition we need to be aware of the potential for more downgrades. The analysts are in a tug of war right now with the negative ones still downgrading on valuation bases (we saw some of those late last week) while others are starting to upgrades stocks. It is a tug of war, helping the upgrades, hurting the downgrades as the market still is not totally in rally mode.

As far as economic news, Monday brings the biggest with New homes and building permits for October. Did the market snap back? It is expected to be lower but still in a pretty strong range. We don't anticipate any real surprise here.

So, we have the market pretty much left up to its own devices this week with the usual wildcard of the war. For the past month and more, the market has risen in the absence of news, but it was also rebounding from massively negative sentiment indicators and a tragedy-induced selloff. Those factors are running out of steam at this point. As for the news, thus far it has been good, particularly given the very negative press coverage just two weeks ago. Maybe news will continue to be good, but the new government is shaky and Bin Laden is still on the loose. While his capture or death will be a tremendous positive, it does not ensure there will not be further attempts on the U.S. Indeed this weekend there were many questions as to whether he was still in Afghanistan.

There are many reasons to believe that the market is going to sell further. We outlined many of them in the market summary. We spot the start of change a bit earlier than most, looking ahead and behind the numbers. That gets us ready ahead of the move, and as with any investment or trade, you need to let the change actually start and then get on board. The newest consolidation started last week, and we anticipate more softness this week. Thus far the primary indicators of price and volume do not indicate a serious pullback, just more consolidation along the lines of what we have seen on the way up. Still, the sentiment indicators and the conversion of bears to bulls on the weekly financial talk shows causes us to take note that the market has the potential for a deeper test than the flat, lateral consolidations we saw the prior two weeks.

Support and Resistance

Nasdaq: Closed at 1898.58.
Resistance: 1930 to 1940 (recent highs at 1922.12 and 1922.45 on this run last week). Upper channel at 1985 and close to the 200 day MVA at 1988.60.
Support: 1800 has been holding. The 18 day MVA is right above that level at 1810.21. The up trendline is just above that at 1815. That is pretty solid support if the index decides to sell more.

S&P 500: Closed at 1138.65.
Resistance: 1150 is the next level (price consolidations; 1146.46 on Thursday's high). The upper channel is at 1170. The 200 day MVA is at 1188.26.
Support: 1124 (prior consolidations). Then 1103 and the 50 day MVA at 1105.47. The up trendline is now at 1100. Below that 1050 has been very solid.

Dow: Closed at 9866.99.
Resistance: 9870. The upper channel is at 9995, right at resistance from 9992 that acted as support and resistance in the past.
Support: 9725 is possible, but not much is there. 9500 is the first real level of support. The 50 day MVA is at 9514.27 and the 18 day MVA is at 9560.27. There is a lot of support at the 9500 level. The up trendline is at 9400.

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

11-19-01
Housing Starts, October (8:30): 1.515M versus 1.574M prior.
Building Permits, October (8:30): 1.49M versus 1.524M prior.

11-20-01
Trade Balance, September (8:30): -$26.0B versus -$27.1B prior.
Leading Indicators, October (10:00): 0.0% versus -0.5% prior.

11-21-01
Initial Claims, 11/17 (8:30): 444K versus 444K prior.
Mich. Sentiment-Rev., November (9:45): 83.5 versus 83.5 prior.
Treasury Budget, October (14:00): -8.7B versus -11.3B prior.

SUBSCRIBER QUESTIONS

Q: How do you know when a stock or index will use the 10 day MVA or 18 day MVA? Especially in this strong run up? Do you play the 10 and see if it holds? Or do you go for the 18 day?

A: The stronger the move to the upside, the more a stock uses its 10 day MVA as near term support. As we teach in the online seminars, what we often see in a rally is that a stock breaks out of a pattern, and then tests the move, usually back to the pivot point or 18 day MVA, and then it starts to run up, testing either the 10 day MVA or the 18 day MVA when it does pullback. We often see a stock hold the 10 day MVA on the close while testing the 18 day MVA intraday. Still, it depends upon the stock. QLGC tends to hold the 10 day MVA as it did on this move higher. The neat thing is, we don't have to guess at it. Stocks tend to make 4 runs or bounces up off of the short term moving averages when making a strong run before they pullback for a further consolidation, usually to the next support level and that is often the 50 day MVA. We can see the first move, let it come back to that level, and then pick them up on the bounce. That is the beauty of stocks: they give you more than one chance to buy. That is why we cringe when we hear those mutual fund managers say you have to stay invested all the time so you don't miss that first 20% move in the indexes. Well, if you followed that advice, you would have riddent the Nasdaq down 70% in order to catch a smaller 25% upside move.

TEAM TRADES

We had sold some calls on BORL positions we owned at a cost of less than 12.50 when the stock appeared to be topping last week. The stock had approached resistance at 14 and pulled off of the high. We sold then the next session when the stock could not take out its high of the previous session. Maybe we should have waited as the stock made another 25 cent gain, but picking the exact top and bottom is usually a fool's errand. The November calls still had a lot of life in them and we could get a good gain even if we were called out. The beauty: even if BORL did not fall fast and we got called out, the stock looked as if it was ready to fall and we could pick it up again near 12 to 12.50 for another call sale.

Well, the stock kept looking as if it was going to fall, but it did not fall far enough for us; it also kept bouncing back up and with the stock looking as if it would come back a bit further, we did not want to buy back the calls for what we sold them and be flat on the covered call as the stock fell. So, we let the position get called out on us, getting to keep the money on the calls we sold and getting some capital gain on the difference of the price we paid for he stock versus the price at which we will be called out (12.50). A nice return for a week, and we will look to do it again. The name of the game on these is cash flow, and we did not have the stock but for a couple of weeks. This is a great strategy to get your confidence back, and you can do it with most any stock that you have purchased whether you bought it with the intent of doing this or not.

THE PLAYS:

FLO announced its split Friday, as forecast! We continue to see a growing number of stocks announcing splits, and many of them are right here on the Stock Splits Report. The key is focusing on leading stocks in strong patterns they give us splits, and they give us great gains before and after the announcement!

Targets and Stops: Remember in this market that targets, although set at generally conservative levels, are 'loose' and we are watching for topping signs on moves that would point to our taking profits. We will continue to point out those topping signs as we see them, and let you know when we are contemplating taking profits. The stops are initial stops that we place within 7% of the buy point, typically below support. In this market we are moving up the stops to protect profits as we realize gains.

BONUS PLAYS:

MXIM (Maxim Integrated Prods--$54.10; -0.04; optionable): Semiconductor
http://biz.yahoo.com/p/m/mxim.html
STATUS: In a cup base of 5 months (prior high at 58.40) and is trying to form a handle. With volume dropping off to low levels the last 2 days of the week in the neophyte handle, MXIM has shown 2 consecutive dojis with lows tapping the 10 day MVA, lower support. It needs to consolidate 3 or so more days this week, and if it does we will look for a move up from the range of this support level, for a breakout over the November (handle) high at 56.95. Volume was down to 3.3 million (avg. 5.8 million). MXIM shows excellent money flow and high relative strength. Target: 68
BUY POINT: Breakout: 57.08 on volume of 8.7 million or higher. Stop: 53.08 (7%); 10 day MVA is at 52.87.
POSITION: Stock and/or December $55 calls to buy (XIQ LK). Deltas unavailable.

FLEX (Flextronics--$24.02; +1.06; optionable): Electronics
http://biz.yahoo.com/p/f/flex.html
STATUS: FLEX is in an ascending wedge just beneath its 200 day MVA (24.17); a longer view shows the stock in a 15-month base, but it is off the lows around 12.50. Friday FLEX moved up from support, the 10 day MVA at 22.94, with volume rising above average to 1.25 million (avg. 9.27 million). The stock was able to move above the 200 day MVA though it did pull back to close just under the resistance. Still we are going to watch for a breakout as volume continues to rise. Target: 30. Money flow looks good.
BUY POINT: Breakout: 24.88 on volume of 12.5 million. Stop: 23.14 (7%); 18 day MVA is at 22.34.
POSITION: Stock and/or January $22.50 calls to buy (QFL AT). Deltas unavailable.

KOPN (Kopin--$15.10; +0.40; optionable): Electronics
http://biz.yahoo.com/p/k/kopn.html
STATUS: KOPN is another chip stock in a cup pattern that is trying to form a handle. Currently holding support at the 10 day MVA (at 14.74), the stock was up slightly Friday with volume breaking above average to 1.5 million (avg. 1.2 million). KOPN threw a huge volume spike Wednesday on news of a stock offering, but intraday recovered back over the support level after dropping below the 18 day MVA (14 at the time). Money flow is strong, and we look for a breakout over the November highs at 15.90. Target: initial, 19
BUY POINT: Breakout: 16.03 on volume of 1.8 million. Stop: 14.91 (7%); 18 day MVA is at 14.16.
POSITION: Stock and/or December $15 calls to buy (KQO LC). Deltas unavailable.

PRE-ANNOUNCEMENT PLAYS FOR THIS WEEK: After getting Friday's FLO forecast, we are not expecting announcements just before the Thanksgiving holiday. No new pre-announcements met our criteria this week, but we are watching some promising candidates shape up.

BEST PLAYS: Besides the plays set forth below as best plays, there are some other stocks that also look good. These include Pre-Announcement FDC; and Pre-Split ITG.

PRE-ANNOUNCEMENT BEST PLAYS
1) FLO - Got the announcement! Hear our reports for this and other recent splits at ON24.com! (Hit "Columnists & Contributors" and then "StockSplits.net")
2) EASI - Got the relief bounce, now looking for another drop

FLO (Flowers Foods--$41.99; +0.08: optionable): Food & beverage. Announced a 3:2 stock split Friday, as forecast!
http://biz.yahoo.com/p/f/flo.html
STATUS: Got the announcement Friday, which adds strength to an already solid pattern! FLO pulled back last week after surging to a new high (43.44), and since has held in a lateral consolidation over its 10 day MVA (41.62). Friday was the second consecutive doji for the stock as volume has dried up as the pattern extends (32,000; average 69,500). Good action overall, and with the strength of the announcement behind it we are looking for FLO to blossom into a solid move that will take it to the recent high and beyond. Excellent money flow. Target: 50.
BUY POINT: 42.50 on increased volume near the average. Stop: 40.
POSITION: Stock and/or January $40 calls to buy (FLO AH).

EASI (Engineered Support--$38.81; +0.84; optionable): Aerospace/Defense. Forecast to announce a split on 12-10-01 in conjunction with earnings. At this time, the company cannot confirm this date.
http://biz.yahoo.com/p/e/easi.html
BACKGROUND: EASI last announced a 5:4 split on 2-1-2001 with a board meeting at a price of $28.50. Before that it announced on 6-12-98 at a price of $26.50. The company has sufficient shares for a 3:2 split.
STATUS: Making the little relief bounce. EASI has been falling hare, dropping through its 50 day MVA (45.62) Tuesday and continuing down on increasing volume. Friday EASI gapped down slightly but managed to push back up, moving on stronger volume of 604,700 (average 459,700). After the heavy drop we were looking for a bit of a bounce, perhaps testing 40-41 (high of 40.14 Friday), so we will see if the move continues up a bit more; from there we are looking at a hard fall back down for a continued put play, targeting the 200 day MVA at 34.86.
BUY POINT: After this bounce fails at 40-41, a drop back through 39.50 on increased volume.
POSITION: December $55 puts to buy (UFE XK; January options available Monday).

PRE-SPLITS BEST PLAYS: Remember, we try to grab these as they break out of good patterns or as they start a run right before the split. Not looking for home runs, but looking for those $3 to $4 moves running into the split, watching for topping signs and potential resistance. Not huge money, but it can be very steady. We set our initial stops at the 7-8% range below the purchase price (or just below obvious support), and move them up on a move to preserve our profits.
1) PSC - The consolidation continues
2) BRO - Looking for a pre-split run to break the range

PSC (Philadelphia Suburban--$29.04; -0.11; no options): Water utility. Splits 5:4 effective 12-3-01.
http://biz.yahoo.com/p/p/psc.html
STATUS: Continues to consolidate. PCS looks to be primed for another move, now that it has pulled laterally over its 10 day MVA (28.99) for the last week, testing the breakout from its cup with handle/ascending wedge pattern. We got a volume spike Tuesday as the stock made a small move up, and volume has decreased markedly (54.900 Friday; average 80,200) as the stock has pulled back slightly the last two sessions. Friday it tested its 18 day MVA at its low of 28.82 before pulling back up to close with a loose doji. Good action, and we will see if it can spring from support and take out the consolidation high. As it makes its move we are watching the recent (mid-October) intraday spike at 30.80, but if it can make it past that level, we are targeting 34. Money flow and buying are excellent.
PLAY: A buy point of 29.75 on above average volume, stock only. Stop: 28.50 (50 day MVA at 27.91). The aggressive can jump in as the stock takes out the recent closing high at 29.50, still wanting above average volume. Stop: 28.50.

BRO (Brown&Brown--$59.50; +0.65; no options): Insurance Brokers. Splits 2:1 effective 11-23-01.
http://biz.yahoo.com/p/b/bro.html
STATUS: Continues to edge back up in its ascending wedge pattern, and finally got some volume behind it Friday. BRO has shown several dojis over the 18 day MVA (58.16) in the lower part of its pattern, starting back up again this week but volume has been below average, Friday up but still below average at 138,900 (average 142,200). BRO has been on a solid run, and this wedge is setting up a potentially good move on the breakout. We were looking for the stock make a strong roll back up, but with the current movement we are looking now toward a breakout with some strength behind it as we go toward the split next Friday. Initial target 66, but we will watch for topping signs (recent high from an intraday spike at 62.20) as pre-splits can be volatile. Shows strong money flow.
PLAY: 60.37 on volume of 180,000. Stop: 57.50. Stock only.

End Part 2 of 4

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