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us stock market, trend trading stock
Begin Part 2 of 3
THIS WEEK
Big week of economic reports with consumer confidence, home sales, durable goods orders, GDP, and Chicago purchasing managers index. Heavy on the economic news, and some reports such as durable goods cannot help but be better. The trend of late has been upside surprises just as the trend when the economy was starting to slow was downside surprises. While the better than expected economic reports have not vaulted the market higher, they have reinforced the general idea that the economy is going to be a lot better in 3 to 6 months than it is now. That has kept the accumulation ongoing up to this point.
In addition, the war news continues to be favorable. The Taliban is in the process of surrendering and the Al Qaeda is still on the run, unable to put together any reprisals as they are on the run for their lives. Intelligence is still being gathered round the clock and a massive buildup of U.S. troops are ready to enter to search from the air and from the ground to take out the leaders. Much like the economic news, that is not jumping the market higher, but it is supporting the continued building and rallying, building and rallying. If the good news of the capture comes during one of these consolidation episodes, the market could really make solid moves forward.
After moving up toward resistance Friday on more or less a holiday rally, we would be surprised if the indexes can take out resistance just yet. The SOX still has some ground to cover to take out resistance, but as it is a leader it could underpin any move by the Nasdaq. Put another way, the Nasdaq might be able to ride the back of the SOX for a further move up without more Nasdaq consolidation. That does not seem like the likeliest scenario for a sustained move higher; a further lateral consolidation or a pullback to the 18 day MVA and up trendline on the Nasdaq would be a better foundation. Again, we would use that as a point to close the remainder of our put positions if the index again holds at that point. While we feel the indexes need a further pullback to further consolidate the move thus far, the market rarely gives you perfection. Indeed that is the market: it gives you just enough curves and different looks to keep you from being 100% certain. That is what keeps it moving up.
On the same vein, we are always cautious after the return from holidays. Analysts have a nasty habit of coming in after holidays and dumping on the market. While the market is in much better shape now, if it happens we will need to keep an eye on volume and on support levels. Volume comparisons to Friday will be moot, so it is best to look to the days prior to the holiday. The market has absorbed most bad news of late; we are only really concerned because of the proximity to solid resistance and the low-volume rise to resistance on Friday.
We are mixed on our bullish/bearish weekend analyst review this week. Several big names still call for a full re-test of the September low, basing that belief on the idea that markets always re-test the low. Maybe, but we also note that a classic double bottom pattern undercuts the low and does not come back to test that second low again. What if the September low was the second leg of a double bottom that undercut the April low? Yes it is deeper than most undercuts, but this year is hardly the norm as pointed out above. Others still remain converted to the bull side, and that always gives us pause as they were stock-hating bears two weeks ago. Overall sentiment indicators continue to deteriorate. That continues to be reason for concern but the price/volume action has not turned sour to back that up.
For the week we anticipate the SOX to make a real run at resistance, the other indexes to try early but pullback or make a lateral move before trying once again at resistance. We would not mind to see a lateral, slightly lower move for a couple of sessions and then good news, perhaps from the war, to burst it higher.
Support and Resistance
Nasdaq: Closed at 1903.20.
Resistance: 1930 to 1940. The 200 day MVA is at 1971.30. The upper channel is way up at 2030 now.
Support: The up trendline is at 1855. The 18 day MVA is at 1841.40. Below that is 1800 and the 50 day MVA at 1784.79.
S&P 500: Closed at 1150.34.
Resistance: 1150 is still right there. The down trendline is at 1165. The upper channel is at 1180. The 200 day MVA is at 1183.86.
Support: The 18 day MVA is at 1124.35 (also a point of prior consolidations). The up trendline is at 1113, and the 50 day MVA is at 1111.35. Then 1103, the old closing low in the double bottom from March and April. In short, there is a lot of support unless something bad happens.
Dow: Closed at 9959.71.
Resistance: 9992 (former top and bottom). The upper channel is now at 10,075. The 200 day MVA is at 10,183.83 and there is resistance at 10,200.
Support: 9725 is possible, but not much is there. The 18 day MVA is possible at 9688.29. After that we look to the 50 day MVA (9573.90) and the up trendline at 9575. That is strong as 9500 also acts as support independently.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
11-27-01
Consumer Confidence, November (10:00): 86.5 versus 85.5 prior.
Existing Home Sales, October (10:00): 5.00M versus 4.89M prior.
11-28-01
Fed's Beige Book (14:00)
11-29-01
Durable Orders, October (8:30): 1.8% versus -8.5% prior.
Initial Claims, 11/24 (8:30): 430K versus 427K prior.
Help-Wanted Index, October (10:00): 52 versus 52 prior.
New Home Sales, October (10:00): 850K versus 864K prior.
11-30-01
Chain Deflator-Prel., Q3 (8:30): 2.1% versus 2.1% prior.
GDP-Prel., Q3 (8:30): -0.8% versus -0.4% prior.
Chicago PMI, November (10:00): 45.5 versus 46.2 prior.
SUBSCRIBER QUESTIONS
Q: Mortgage rates have just increased substantially (0.65 %) on 2 years + terms (at least in Canada)!!! Why is that so when the Fed in the US and the Bank of Canada are reducing rates??? Is that just temporary or will the trend continue towards increases rather than decreases of mortgage rates?
A: Mortgage rates are somewhat impacted by central bank moves, but you need realize that central banks deal in the shorter maturities, and any impact on the longer end is more of a 'trickle through' effect. Normally there will be an impact, and indeed ther was an impact occurring. Problem was, long term rates were not falling lockstep with the short term cuts. There was a major disconnect between the 10 year and 30 year notes still. What was keeping longer term rates higher? Back in July and August we reported our belief that the bond market was showing that economic recovery was in the future because long term rates refused to give in. Now that the 30 year has been eliminated from the Treasury's arsenal and long term yields have again started to climb nonetheless, it is clearer that the bond market is pricing in an economic recovery where money will be in more demand in the future and thus rates are higher.
Will it reverse? The bond market is similar to any market; it swings up and down, back and forth, but it usually trends one way or the other. It has been trending higher. The discontinuation of the 30 year bond tried to break the trend with a massive bond rally, but the trend reasserted itself as the econmic reports continued to come in better than expected. What started the trend was being confirmed by these later economic reports. The bond market has been slaughtered this past couple of weeks. Just as it was too far on the rally, it apears to be getting too far the other direction. We could see bonds rally a bit over the next week or so (more like recover from the past week's slaughter), but we don't think the trend will change. It is subject to upset if economic numbers tank of there is another terrorist attack, but if the long term view is that we will recover economically (and judging from the bond market's actions, it is anticipated to be a sharp recovery), the trend will hold.
TEAM TRADES
Okay, Friday was not the biggest day in the market, and volumes were going to be way off, but there are always stocks we have our eye on, and BBY has been selling quite a bit of merchandise in its stores, and it is in a decent pattern. During the correction from the July high it has formed a 17 week base with up weeks on higher volume in a dead heat with down weeks on higher volume. We have a belief that some analysts are overplaying how bad the holiday season will be, and a stronger economy down the road usually sees retailers as one group that does well. The price patterns certainly seem to indicate that.
Thus we were ready to dip our toes in on BBY and WTSLA and any other retailer that were ready. BBY is a new pre-announcement split candidate to boot, so we had double interest in it. WTSLA had moved higher Wednesday on massive volume, so we picked up a few shares when it moved above the November intraday high. That was no problem as it had vaulted higher Wednesday on massive volume. It was just 20 minutes into the session, so we expeced volume to be light, but with the strong breakout we wanted to be in it. It was a straight stock buy, nothing fancy. It pulled back a bit in the last couple of hours, but we like the big volume move Wednesday.
BBY was not racing on any kind of volume. Indeed, volume has been very light of late, one of the things we liked on the handle to its cup pattern. Friday it made a move up to our breakout point (68), but it did not take it out when it made its first run in the first half hour (67.92 on the high). We sat tight and watched it bounce down from the pivot point all the way back to 67, just below Wednesday's close at 67.37. We know that previous intraday highs and closing prices can act as support on tests of current session moves. It did not stay there for long and bounded back higher. Now we could have jumped in at that point; if a prior close holds (and the fact that it was close is good; it does not have to hold to the penny), but with the true breakout point not yet met, we were going to wait for the breakout. BBY turned and rallied right off of that level and did not slow down. It ran right up to our buy point at 68 and . . . moved sideways. Those resistance points can stop a stock dead. But it did not tank. It moved laterally for 20 minutes and then jumped over 68 on a big volume spike. That was enough for us: resistance had been holding it back but then it broke through. We issued an alert an looked for positions. The stock shot up to 68.35 and by the time we got to our buy screen it fell back to 67.80, an immediate test. It held and bounced higher from there and we had entered an order to buy at 68.06, just above the breakout. That way we could pick it up if it moved back over 68 and with the off price we had a better chance of getting hit. It worked and the stock moved higher, but not massively. Volume was not much at all; not breakout level, but we were willing to get in Friday in anticipation of reports of better than expected sales coming in early in the week. If it moves on higher volume Monday, we will look to add more positions.
THE PLAYS:
All prices are current as of the close of trading Friday.
Best Plays:
1) ORLY: At support in a handle.
2) BAC: Financial stock moving to a new high.
3) MTON: Nice lateral consolidation on low volume.
4) MNC: Ditto.
5) BORL: Another handle at support.
6) GMST: Testing the breakout.
7) VRTS: Holding support nicely and awaiting a rally.
8) CHKP: Ditto.
9) INFA: Holding support on low volume in this pullback.
10) RDRT: Showing promise with Friday's action.
NEW PLAYS:
ORLY (O'reilly Automotive--$32.70; +0.20; optionable): Auto Parts
http://biz.yahoo.com/p/o/orly.html
STATUS: In a cup with handle pattern and currently pulling back in the handle. The stock hit support at the 10 day MVA Wednesday and Friday, the former day also tapping at the lower 18 day MVA (now at 31.28). Volume has fallen nicely in the handle as well, down Friday to a very low 57,000, thanks to the light market action (avg. 474,000). Despite that ORLY did make a small bounce, showing a doji just off the support of the 10 day (32). We are looking for a breakout over the November (handle) high at 34. ORLY made a nice little 2-day pop up the right side of this base just before forming the handle, and we want to see similar action on the breakout. Showing excellent money flow and high relative strength. Target: 41
BUY POINT: 34.13 on volume of 711,000 or higher. Stop: 31.74 (7%)
POSITION: Stock and/or January or February $30 calls to buy (OQR AF or BF; 0 and 64 open interests, respectively).
http://www.investmenthouse.com/ct/orly.html
BAC (Bank of America--$64.99; +1.41; optionable): Money Center Banks
http://biz.yahoo.com/p/b/bac.html
STATUS: Financials in improving economies. BAC is up from the lows (just above 35) in a lengthy base dating from mid-1998, highs near 90. The stock had a very nice run up from the October lows (52 range), consolidated above the 10 day MVA for the last week after hitting resistance at 64, then Friday broke through with a nice move up. Volume was lower at 2 million (avg. 6.5 million), but had been stronger and rising the previous session (which was higher than that of Tuesday). Thus, since trading was so light on Friday we will look for volume to surge back in and continue pushing the stock up. It needs to get over the August high at 65.54, top price at the start of this cup-type base (with a double-bottom at the lows). We are looking at a target of 75 after the breakout. BAC shows strong money flow and high relative strength.
BUY POINT: 65.67 on volume of 7 million or higher. Stop: 61.07 (7%); 50 day MVA is currently at 60.54.
POSITION: Stock and/or January $65 calls to buy (BAC AM). Deltas unavailable at the time of this writing.
http://www.investmenthouse.com/ct/bac.html
MTON (Metro One Telecom--$37.05; +0.23; optionable): Diversified Communications
http://biz.yahoo.com/p/m/mton.html
STATUS: Formed a lateral handle to a 5-month cup base (high at 45.75). With volume steadily decreasing in the part of the pattern, the stock is holding support at the 37.50 range, with the 10 day MVA encroaching from below (at 36.41 right now and moving up). Upon a convergence of the lateral pattern and the lower support, we will look for a breakout over the handle high at 38.73. MTON shows steadily improving money flow and high relative strength. Volume was lower at 143,700 (avg. 812,000). Target: 47
BUY POINT: Breakout: 38.86 on volume of 1.2 million or higher. Stop: 36.14 (7%)
POSITION: Stock and/or January $35 calls to buy (KQM AG; very low open interest and delta of 0.67).
http://www.investmenthouse.com/ct/mton.html
MNC (Monaco Coach--$19.04; +0.14; optionable): Automotive
http://biz.yahoo.com/p/m/mnc.html
STATUS: In a lateral pattern that can be functioning as a handle to a 5-month cup (with a sharp "v" bottom in September) that has a previous high at 22.13. Volume is nicely low in the lateral formation, with MNC holding above its 10 day MVA (18.83); 29,200; average is 96,000). We are looking for a breakout over the high at 19.66, target at 24. MNC has steady money flow and a high relative strength.
BUY POINT: Breakout: 19.79 on volume of 144,000 or higher. Stop: 18.40 (7%)
POSITION: Stock and/or January $16.63 calls to buy (MGH AW).
http://www.investmenthouse.com/ct/mnc.html
BORL (Borland Software--$13.50; -0.09; optionable):
http://biz.yahoo.com/p/b/borl.html
STATUS: Another cup with handle. BORL is pulling back in the handle, showing a doji Friday just under the 10 day MVA (13.54). Volume has slipped back the last 2 sessions, falling to very low levels (136,900; avg. 733,000). We will look for a move back up; if not from this doji, then after BORL tests back to the 18 day MVA at 13.11 (currently). The handle (November) high is at 14.35, above which is the buy point. BORL has formed this base (with highs around 16) as part of a larger 2-year base. Shows strong money flow and good buying. Target: 17
BUY POINT: 14.48 on volume of 1.1 million or higher. Stop: 13.47 (7%)
POSITION: Stock and/or January $10 calls to buy (BLQ AB).
http://www.investmenthouse.com/ct/borl.html
End Part 2 of 3
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us stock market
trend trading stock
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