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option trading, day trading
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3/08/06 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts: ISE (took some interim gain)
Buy alerts: PDLI; DRIV (bonus)
Trailing stops: FORM
Stop alerts: OXPS; SIRF; DO
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the SSR alert service you can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- After 4.5 downside sessions, stocks reverse, start rebound.
- Crude inventories surge past expectations but oil holding up nonetheless
- Choppy market set to rebound from bottom of range, having to drag SOX all the way.
- Playing this rebound attempt.
Oversold bounce shakes out SP500, SP600 at the 50 day EMA.
Things were getting ripe for a rebound move as the selling continued into its fifth session Tuesday, and in our lunch alert we opined that the market was due for an oversold bounce that could start as early as that afternoon. With SP500, NASDAQ and SP600 joining SOX below the 50 day EMA, a rebound move was more likely. After a breach of key support selling tends to accelerate briefly, but then a rebound to test that break typically occurs in short order. This is especially true when several downside sessions pile up ahead of that breach. Once it is made the shorts start to cover, and voila, a rebound.
The rebound had the flavor of buying and short covering. Many leaders were struggling with more and more undercutting near support. Techs were getting flogged once more along with energy (inventories were quite high), metals, heavy construction, housing - - basically anything to do with a growing economy. When NASDAQ touched near the bottom of its 2006 range and SP500 at the December highs, the bell rang. Shorts figured 4.5 days of downside was as good as it would get. The indices rebounded with SP500 and SP600 recovering their 50 day EMA by the close. NASDAQ lagged a bit, just missing recovering its 50 day. Breadth was narrowly negative; an improvement over the intraday decline, but weak enough to be symptomatic of covering. Volume was up, and as the NYSE indices recovered to close positive, that has positive implications: strong volume on a rebound from support shows buyers stepping in buying shares as they test support, perceiving a value or something of the sort. Volume can also indicate short covering as many of the shorted stocks are the mega cap techs, and when they move they require a lot of volume. At the same time, many strong leadership stocks that struggled with near support early in the session managed nice recoveries to hold support. With those stocks it is clear investors were stepping in on the dip and picking them up 'on the cheap.'
Thus the action had the flavor of both short covering and buying depending on the sector of the market you looked at. Near term the market remains oversold and we are likely to get more of a rebound from the bottom of the range and as SOX rebounds to test its breach of the 50 day EMA. We will see how volume and breadth move with the rebound. We suspect it is going to be average on both, which is more of the same seen this year as the market struggles to move higher in the face of oil prices, further Fed action, new interest rate issues, war issues, etc.
That takes us to the bigger picture. This is a very volatile and choppy market. It shows signs of setting up a move but then gives it away. Or, one part of the market shows solid price/volume action but the other side shows distribution. In late January and early February, NASDAQ was distributing but SP500 was showing modest accumulation. Then NASDAQ and SP600 started to accumulate and rise but SP500 started to distribute. Money was rotating around, but some was also leaving as it rotated. That has kept the market mired in place. Indeed, it looked ready for a breakout attempt at the end of last week but then pitched that away to start this week. The result: back down in the trading range, trying to rebound and set up for a breakout once more.
This choppy action has another familiar characteristic. With similar external influences in 2000, primarily an active Fed, inverted yield curve, and an economy, widely perceived to be rock solid, showing signs of slowing. It is trying to move higher, but it is volatile. Not as measured by the VIX; many you hear on the financial stations say volatility is low. Look at option prices; they are starting to show volatility again despite the volatility indices. It is the same up and down action day to day, week to week seen in early 2000. Strong stocks are up and down recently; there are many still holding firmly, but the number of strong stocks succumbing to some weakness is growing. At the same time we see consumer staples issues starting to perform. That is an indication the economy is not roaring as much as the headlines proclaim, again very similar to the last time the economy rolled over.
The upshot of this is more crystallization of what we started writing about toward the end of 2005. The expansion is solid but is starting to struggle now that it is over 3 years old and has had the Fed after it for almost two years. The market is losing confidence that the Fed will live up to its rational, reasoned talk from the fall of 2005, i.e. how it was aware of the Fed going one hike too far, etc. We have said it before, the Fed talks a good game at first, but when it is down in the trenches after two years of war it tends to lose its perspective. It doesn't help that long rates just jumped up; that added confusion on top of the concern, rattling investors further.
That makes this market much more treacherous as it struggles to make the next move. It has been unable to make the successful break higher, and the Tuesday and Wednesday breaks lower, while not devastating, raise the warning flags a bit higher. There are still strong stocks holding either near support or the 50 day EMA, and most of the indices are holding their ranges if not their trends. They can still recover and drive forward, but the recent action warrants plenty of caution. We are likely to get a further rebound here, and we can use it to play the strong stocks that have used the recent selling as simply a test of their moves or to complete their bases. If the market cannot generate a breakout, however, we will have to use the rebound to exit all but the strongest plays and look also to those issues that perform better in economic contraction.
It may not come to pass, but with the choppy action it only makes sense to focus in on the strong and ride them while we see if the market can recover and once more try and deliver a breakout. With the recent action and the issues confronting stocks the latter is more hope than anything else, and hope is not a strong market ally.
THE ECONOMY
Oil inventories surge, but gasoline demand is rising after warm winter.
Oil inventories jumped 6.8M bbl, much greater than the 1.7M anticipated. That helped drop oil back to $60.02/bbl, -1.56. It also fostered more speculation (as if it ever died down) about where prices are going. Exxon continues to believe oil is going back to $50/bbl. It said that for the past two years, however, basing that on plentiful world supply. Even OPEC chimed in, however, claiming that oil would drop below $60/bbl in the second quarter.
It may very well do that, but if it does, it is likely to be the result of a slowing economy and thus less demand for oil. There is event risk still in the pipeline so to speak from a terror event and now there is also Iran being referred to the UN regarding its nuclear desires. That is keeping price stable every time it starts to break lower. Again, it would take declining demand to really sink oil, and that comes from slackening economies.
If gasoline demand is any indication, however, that is not occurring just yet. Demand rose 2.5% year/year the past week and up 0.3% month/month. A warm winter has the wanderlust rising early, and consumers are stirring already. Gasoline still dropped a bit even with the increased demand figures, but as we noted early this year, prices are much too high even before driving season begins, and from $2.20+/gallon it takes just a small hiccup in supply to get it to $3/gallon, the point where demand caved in the fall of 2006.
THE MARKET
MARKET SENTIMENT
VIX: 12.32; -0.34
VXN: 17.47; -0.23
VXO: 11.94; -0.46
Put/Call Ratio (CBOE): 0.96; -0.06. The market rebound brought the ratio back from a 1.0 close. Quick bump over 1.0 Tuesday is not really enough to indicate any significant shift in sentiment.
Bulls versus Bears:
Bulls and bears are at prior rebound levels even as the market toys with new highs. That remains something of a positive for a breakout, though the Monday action was anything but. Remember, this is always a secondary indicator and not a sure bet. It tells us that conditions are ripening for a turn.
Bulls: 42.6%. Bullishness is really on a dive, dropping from 45.3% and 48.9% the week before. Quite a drop from 60.4% hit at the start of the year. It has now undercut the prior two lows that helped kick off their own rallies.
Bears: 30.8%. Bears did not grow as fast as in prior weeks (25.5% to 27.7% to 29.5%) or as fast as bulls fell, but as with NASDAQ, the reading has topped the prior two highs at 29.2% and 30% in May that presaged bottoms.
NASDAQ
Stats: -0.92 points (-0.04%) to close at 2267.46
Volume: 2.167B (+10.21%). Volume rose as NASDAQ tapped the bottom of its range and rebounded to close basically flat. That suggests some buying as it hit the lower end of the range as well as some short covering after almost 5 straight downside sessions. Decent start to a rebound from the recent drop.
Up Volume: 992M (+521M)
Down Volume: 1.148B (-317M)
A/D and Hi/Lo: Decliners led 1.09 to 1. Breadth was again surged negative intraday but rebounded. It was positive heading into the final hour where it slipped back as NASDAQ did the same. Narrow breadth can show lack of commitment to either selling or buying (depending on the market direction that day), but it can also show a move was based on short covering as the downtrodden, large cap stocks that move an index rebounded from the selling as short sales were covered.
Previous Session: Decliners led 2.36 to 1
New Highs: 77 (-8)
New Lows: 63 (+5)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ continued its drop below the 50 day EMA (2270), unable to hold that level just as it was unable to do so in early February. It tapped near the January low intraday (2248 at the Wednesday low) and then rebounded. It recaptured the 50 day EMA in the afternoon, but as the last hour hit it faded and could not muster another bounce to take it out. It thus closed just below that level on rising volume. The pattern suggests it could stop right here, but it is likely to rebound further after notching another visit to the bottom of the 2006 trading range. It held above the February low, but that is simply a moral victory here. NASDAQ has to show strong upside volume and some breadth as it rebounds if it is going to have another shot at breaking through the resistance. Sounds like a familiar line, but indeed, it is given NASDAQ ahs thus far failed to make the breakout. It has also, however, failed to break down as well.
SOX (-0.55%) continued its woes, dropping further and undercutting the January low intraday, then rebounding to recoup the majority of the session losses. That is about all, but its candlestick pattern suggests it is going to continue its Wednesday rebound attempt and likely come back up to test the 50 day EMA (522.29) breach. That will be the key point for SOX in this move. it was a three time loser at taking out 550, and if it fails at the 50 day EMA, that will confirm its new-found weakness.
SP500/NYSE
Stats: +2.59 points (+0.2%) to close at 1278.47
NYSE Volume: 1.766B (+6.29%). Volume moved back above average as the NYSE indices reached below support and then rebounded to hold those levels and post modest gains. Clearly some buying on both the long and the short covering side, particularly in the small caps that sold off hard from the top of the channel. Nothing necessarily bad about short covering; it invites itself to all rebounds after hard selling.
A/D and Hi/Lo: Decliners led 1.02 to 1. Similar to NASDAQ, volume recovered from another drubbing though it was flat on the close. More indication of some short covering.
Previous Session: Decliners led 2.69 to 1
New Highs: 74 (+36)
New Lows: 63 (+9)
The Chart: http://investmenthouse.com/cd/^gspc.html
Fell through the 50 day EMA (1274) for the second straight session, and once again the large caps managed to rebound, this time posting a gain on the close. That has the elements of a reversal: reach through support, rebound to positive, rising and above average volume. SP500 remains in much better shape than the tech indices as it has not broken its 50 day EMA on a closing basis. It can still make a nice higher low here and set itself up for another breakout attempt. Once side of the market struggles, the other side looks decent; the positions were reversed a month ago.
SP600 (+0.09%) undercut its 50 day EMA (370.45) and October/December up trendline on the low and then rebounded to post a modest gain above those levels. Nice doji with tail on the candlestick chart, and after a sustained pullback that typically indicates a rebound coming, particularly when the move lower tests key support and rallies back from selling on rising volume. SP600 was primed to fall from the top of its channel, and now it is ready to attempt the rebound once more. This would provide much needed strength in the form of breadth and leadership (SP600 is in a textbook uptrend) for the rest of the market.
DJ30
DJ30 tapped its 50 day EMA (10,924) for the third straight session and again rebounded for a gain. Volume was again lower and below average. No power here yet, but its strength is in its refusal to give in at support. DJ30 is now in position to snap back and once again help lead an attempt to take out this year's highs. There are silver linings in this market as DJ30 and SP600 show.
Stats: +25.05 points (+0.23%) to close at 11005.74
Volume: 276M shares Wednesday versus 284M shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
A day closer to the employment report, and that gives the market a day to try and extend the Wednesday afternoon recovery. The market remains somewhat split in its action with DJ30, SP500, and SP600 set to rebound while NASDAQ is problematical and SOX is downright ugly still. Overall the combination of the environment outside the market (political, geopolitical, energy, Fed) and the choppy, mixed action in the indices has us on edge because we have seen this set up before when the market starts to show the stress of an economy that is preparing for a contraction.
At the same time we continue to see SP600 in its uptrend, coming back to the trendline this week and showing every indication Wednesday it is ready to rebound once more. The small caps are not a safe haven area; their continued advance depends upon economic expansion, and if there is an economic decline coming they will breakdown ahead of it.
What do you do in this environment? What we said before. If the rebound continues there are many strong leaders that appeared impervious to this round of selling. Yes they pulled back, but it was a normal pullback in a continuing uptrend or a continuing basing process. If they show another strong move we will look at those to play in the event the market continues on and surprises us with an upside breakout. If the rebound continues but is not necessarily a strong one and starts to reverse again at resistance, we will use it to unload many upside positions. There are some positions we anticipate closing on any rebound in any event outside of a major change in character.
It is an environment to move cautiously. Sure you have to go out on a limb at times and take positions when the market says yes even as your gut says no. This time around, however, the market has already run prior to this year's lateral range and the outside forces have gelled more and the picture, while still far from clear, is looking more like 2000. Thus we will participate if we see solid moves, but we are not going to load the boat, instead buying partial positions and working into positions more slowly. If they prove themselves with a market breakout, we will gladly buy more. If the move fails we will be looking at downside plays as the indices fail to take out resistance levels. We hope we are wrong and very well could be wrong with respect to the correlation with 2000. As noted above, however, hope is not a good companion in the market.
Support and Resistance
NASDAQ: Closed at 2267.46
Resistance:
The 50 day EMA at 2271
2273 is December 2005 closing high.
2278 is December 2005 intraday high.
The 18 day EMA at 2283.41
The 10 day EMA at 2284.45
2288 from December 2000 low.
2328 from the May 2001 peak
The January high at 2333
3015 is the December 2000 peak and the October 2000 low
Support:
The October 2005 up trendline at 2257
A minor peak at 2249 held Wednesday
2218 from August 2005 peak
S&P 500: Closed at 1278.47
Resistance:
The 18 day EMA at 1281.61
The 10 day EMA at 1282.39
The late January peak at 1285
The January high at 1295
1297.57 is the recent February high.
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
Support:
The December highs at 1275 (intraday) and 1273 (closing)
The 50 day EMA at 1274
1264 from the December 2000 lows
The bottom of the November/December 2005 range at 1248
Dow: Closed at 11,005.74
Resistance:
10,985 is the March 2005 intraday high
The 18 day EMA at 11,002
The 10 day EMA at 11,013
11044 is the January high.
11,159 is the February high.
11,176 - 11,186 from April 2000
11,350 from the May 2001 peak.
11,401 from the September 2000 peak.
11,425 from April 2000 peak
Support:
10,965 from Q4 2000 and November/December 2005
The 50 day EMA at 10,924
10,868 is the December 2004 high
10,754 is the February high
10,720 is the high in the recent lateral move
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
March 06
Factory orders, January (10:00): -4.5% actual versus -5.5% expected, 1.6% prior (revised from 1.1%).
March 07
Productivity, revised Q4 (8:30): -0.5% actual versus -0.1% expected, -0.6% prior
Consumer credit, January (2:00): $3.9B actual versus $5.0B expected, $3.4B prior
March 08
Crude oil inventories (9:30): +6.8M versus +1.7M expected and +1.638M prior
March 09
Initial jobless claims (8:30): 295K expected, 294K prior.
Trade balance, January (8:30): -$66.5K expected, -$65.7K prior.
March 10
Non-Farm payrolls, February (8:30): 210K expected, 193K prior
Unemployment rate (8:30): 4.7% expected, 4.7% prior.
Average workweek (8:30): 33.8 expected, 33.8 prior.
Hourly earnings (8:30): 0.3% expected, 0.4% prior
Wholesale inventories (10:00): 0.5% expected, 1.0% prior
Treasury budget, February (2:00): -$118.0B expected, -$113.5B prior.
End part 1 of 3
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