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us stock market, trend trading stock
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12/05/01 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERT SERVICE
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Powerful follow through to Tuesday's breakout move.
- Patience pays off big.
- DRAM prices up another 20% overnight as NAPM Services is, as anticipated, back over 50.
- How much further on this run?
- Subscriber Questions
- Team Trades
The volume rolls in.
The missing ingredient Tuesday was volume. Volume was not a problem today. The indexes powered higher on massive volume. Indeed, Nasdaq volume was the highest in this rally from the September bottom (and one of the highest of the year), and NYSE volume was no slouch, logging its biggest day since the September 21 reversal session. It was buying volume that was seriously needed, and investors came through.
A powerful move, and it is almost fitting that it came on the fifth anniversary of Alan Greenspan's 'irrational exuberance' statement that kicked off his attack on the stock market (though he denies this) that ultimately led to its crash along with the economy. The economy was hit by 'friendly fire' in his assault on the stock market and investors who, according to Greenspan and his crew, just did not understand the dangers of the market. Investors understood the market, they simply did not understand how a group of men could take it upon themselves to sink it supposedly to prevent something that was nowhere to be found, i.e., inflation.
In any event, buyers have crowded the market across the board the past two sessions, buying up everything they could get their hands on. That move over the 200 day MVA and above the down trendline on the S&P 500 turned more shorts into longs, and pulled more and more money into the market on the buy side. With this two-day explosion, now we have to worry about how far this will run. More on that later.
Patience is the key.
We know some were getting a bit frustrated at our saying 'be patient and wait for the move' tone the past week. It is tough to do. You tend to want to jump the gun. Sure things looked right, but with the indexes right at resistance, you don't know until you see the move start. I remember sitting in church as a teenager and the sermon was about patience. Patience and teens do not mix. Anyway, the main idea of the sermon was that you had to pray for patience. Of course, when I tried it later myself, it turned from 'please give me patience' to 'I want patience and I want it now!'
Patience and investing are a hard mix, but it is absolutely essential in order to be successful. Don't get those 'happy feet' in the pocket that a young quarterback gets. Hang in there with your game plan and it often works just as you envisioned it. The rally over the last two sessions was setting up, and we saw it kick off Tuesday. It was time to buy as was today. The moves have been huge. The SOX and QQQ options plays have been big winners.
It is amazing how you can pack a quarter's worth of returns in a couple of sessions, and then continue to ride the longer term positions to even greater gains. That has been the way all during this rally: patience to wait and then get in at the right times and let the moves carry you higher. We were reviewing some alerts sent out over the last couple of months, and we picked up BRCM at 24, QLGC at 24.50, GNSS at 32, PLCM at 28.13, AZO at 44, LOW at 35, TERN at 7.68. These were buys that just kept on moving up. We added to these positions later when they opportunity came on pullbacks, but they have just been steady performers all rally. Big short term gains on options, big longer term gains on stock positions that we keep on holding. Patience to wait and get in when the market says to do so, and then patience to let the plays work for you. When the market is telling you things are okay, let it work for you.
THE ECONOMY
There is a new trend that was showing itself back in August: economic news getting better and companies starting to say things were getting better. September 11 made everyone skeptical, but both the economic news and company news has rebounded right back.
Primary example today: NAPM services jumped up to 51.3, right back above 50 as it was in August. It dipped in September and October, but it powered right back up as we anticipated it would. It was expected at a wimpy 43, up from October's 40.6, but hardly exciting. Instead the news today generated excitement and though the market was already rallying, it added a lot of fuel to the fire.
There was also good technology news as DRAM chip prices once again rallied sharply overnight, rising 20%. Once again that had the semiconductor sector with buyers at the gates. More good economic news.
Now people are waiting for Intel's mid-quarter conference call tomorrow as well as what GE has to say. They want the ball to keep rolling with more news of double digit growth in 2002.
THE MARKET
The big question: a beautiful rally, but where to next? This rally has been one that shows anywhere from 2 to 5 days in each leg, and then a consolidation. These have been two big days up. The Nasdaq is close to its upper channel near 2100 as is the SOX, and the Dow and S&P tapped their 200 day MVA today before pulling back just a hair to the close. Two hundred points on the Nasdaq has been the 'usual' move up of late. This move is powerful, and there is upside momentum even after two huge sessions. Maybe some softness in the morning, but on this overall move, even with a selling session in between, we would expect the Nasdaq (the leading index) to make a try at the upper channel at 2100 or the down trendline at roughly 2150. After that a pullback where we can look at selling some covered calls on positions we intend to hold. We walk you through an example tonight just to be ready, to be again ahead of the curve to make that money work HARD for us!
VIX: 24.79; -0.54. Volatility fell today even less than Tuesday as the S&P surged. It is creeping toward the lower end of the 'normal' spectrum, but as we have said before, you cannot base your investing on secondary indicators. They showed the right stuff at the bottom, and the market is enjoying the fruits of that high reading. Price/volume action is excellent, and does not indicate a big selloff coming. For perspective as to where it is now, volatility ranged from 20 to 22 during the summer (very low, very complacent), and then spiked over 55 when the market re-opened after September 11. Since then it has ranged from 28.19 to 38 before this dip lower.
VXN: 47.44; -0.60. As with the VIX, Nasdaq volatility dropped just a hair given the powerful rally. It is knocking at the door at the top of the summertime range (43 to 47), but again, the price/volume action on the index, the primary indicators, is a solid as it can be. For perspective, in the summer it ranged from 43 to 47 on the lows. After the re-open it was up to 93 intraday, and after that ranged from 55 to 70. Another thing to consider; volatility levels back in January through March 2000 traded in a range from 55 to 60 before the Nasdaq's dive.
Put/Call Ratio (CBOE): 0.62 (+0.03). Put activity rose on the session when stocks rallied sharply. Put sales and covering perhaps, but the fact that it is not tanking is still a positive.
Nasdaq
Massive move on heavy volume follow through to the Tuesday breakout. This is exactly what we wanted as the market continues to outperform the expectations
Stats: +83.74 points (+4.3%) to close at 2046.84.
Volume: 2.676 billion shares (+40.4%). Massive buying volume as tech stocks were purchased across the board.
Up volume: 2.146 billion
Down volume: 337 million
A/D and Hi/Lo: Advancing issues pressed their lead to 1.90 to 1 (1.72 to 1 Tuesday). This is what you want on a strong session on a new breakout.
New highs: 165 (+63)
New lows: 33 (-18)
The Chart: http://www.investmenthouse.com/cd/$compq.html
What can you say? It blew past the 200 day MVA Tuesday and the first down trendline (intraday highs) today. A 2-day, 7+% move on the index is bringing it toward its upper channel at 2095 and its closing price down trendline from the March 2000 high. As noted, the Nasdaq runs last from 2 to 5 sessions on these runs, and the upper channel and down trendline are logical points for some profit taking. At this point it is hard to chase many stocks higher, so we are riding positions and looking for the resistance as an opportunity to let them pullback, write some calls on them, and then get ready to take new positions as the next opportunity presents itself.
Dow/NYSE
Today the Dow broke that first resistance, but it was unable to clear the 200 day MVA. It finally pulled some strong volume, the best in over two months. It is helping out the Nasdaq now.
Stats: +220.45 points (+2.2%) to close at 10,114.29.
NYSE Volume: 1.738 billion shares (+32%). Powerful volume. Not the highest in the move, but the best in months. It is the caliber that it needs to clear the 200 day MVA.
Up volume: 1.486 billion shares.
Down volume: 267 million shares.
A/D and Hi/Lo: Advancers continued to lead, but the breadth dropped to 1.87 to 1 (2.3 to 1 Tuesday). Still a very good number on the move.
New highs: 163 (+55)
New lows: 35 (-3)
The Chart: http://www.investmenthouse.com/cd/$indu.html
Finally cleared that 9992, the middle hump of the March and April 2001 double bottom pattern. That had been sticky resistance, but the powerful volume today smashed that ice. Now it tapped at the 200 day MVA on the high (high at 10142.32; 200 day MVA at 10,143.05), and pulled back 28 points in the last half hour to close. Not a solid bounce down, just some softness at the close after a strong rally. This is the next big point for the Dow, but we think it will clear it as it heads for its upper channel at 10,260. Now once it reaches there it may start to soften a bit; the down trendline from September 2000 is riding just above the upper channel, roughly at 10,350. Combined with some former price lows at the 10,200 to 10,300 level, there is a lot of resistance still. Volume is good, and that will help it. It is a long road to recovery, having to smash resistance, but those are the trials of climbing out of a hole.
S&P 500: As with the Dow, the S&P rallied over some key resistance at the March 2000 downtrend (the mother of all downtrends at around 1160) and ran further to the 200 day MVA on the high (high was 1173.62; 200 day at 1176.36). From there it also backed off at the close about 3 points. Some profit taking at the close and the weight of the 200 day MVA. It can clear this on continued momentum on this run, either tomorrow or take a breather and then move up again. It has more resistance after that at the March and April 2000 hump in the double bottom at 1183.85 (also acted as a bottom in July). Then the upper channel is just below 1200. Yes there is resistance, but it is doing everything the way it should: rally, rest and consolidate to get the foundation built, and then rally. Today it showed some real buying power, something the price/volume action needed. We need to see it stay strong; maybe not as powerful, just strong buying volume, then weakening volume on any pullback.
Stats: +25.55 points (+2.2%) to close at 1170.35.
Volume: NYSE volume was powerful at 1.738 billion shares (+32%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
Summary: The breakout had follow through on strong volume. Just what was needed. Now some stocks are beyond where we want to chase them on this move. Patience led to some great buy points, now we let them work for us. That has been the theme the entire move up. There are still buys and we will take advantage of them while we also prepare for some potential covered call plays over the next few sessions as the move plays out.
TOMORROW
Initial claims come out again tomorrow, and there are still announcements running strong with stories such as Enron. Indeed Challenger today reported that high tech layoffs continued to run strong. That may dampen some enthusiasm and may give us a bit softer open. After two strong rally days some of the softness at the close could translate to some early profit taking, particularly if we get a 'bad' jobs report. We do not think that will have a lasting effect on this rally, however, and believe that stocks will resume their upward climb after early weakness. Perhaps a chance to get in on some stocks we missed today. We need to remember: jobs lag an economic recovery, and an economic recovery lags a market recovery.
Factory orders are also out tomorrow, a half hour into the session. They are expected to turn positive after a 6+% drop in October. Given the jump we have seen across the board, the snapback in factory orders would not be a surprise.
We would prefer some weakness on the open tomorrow. That is a better scenario for a run up to the next levels of resistance Thursday and Friday. A stronger open is subject to a pullback after two strong sessions. At this point nothing indicates weakness in either scenario would be the start of deeper selling. One thing we always have to watch for after each big break higher on strong volume is the next session selloff on high volume. The market is in much better shape now, but that is always something to watch for. We will be keeping a close eye and sending alerts when we see the lay of the land.
Support and Resistance
Nasdaq: Closed at 2046.84.
Resistance: Cleared the intraday down trendline from March 2000 highs (now at 2005) and is running up toward the upper channel at 2090 and the closing price March 2000 down trendline at roughly 2160.
Support: The 200 day at 1947.23 should act as some support. Below that is 1940. The up trendline is way down at 1900.
S&P 500: Closed at 1170.35.
Resistance: Broke the down trendline at 1155 and now is just below the 200 day MVA at 1176.36. Then 1183.85, the middle of the March and April 2000 double bottom pattern. The upper channel is just below 1200.
Support: 1150, prior consolidations. The down trendline at 1160. Then 1125, a level of prior consolidations. That is backed up by the 50 day MVA at 1120.63.
Dow: Closed at 10,114.29.
Resistance: The 200 day MVA at 10,142.05. Then the upper channel at 10,260. The September 2000 down trendline is running at 10,350. From 10,200 to 10,300 the index has some pretty tough resistance. 9992 (former top and bottom). The 200 day MVA is at 10,146.45. The upper channel is at 10,225, just above some prior price resistance at 10,200.
Support: 9992 may now hold as support as it was so pesky on the way up. Then the up trendline is at 9800.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
12-3-01
Auto Sales, November (8:30): 6.8M versus 7.8M prior.
Truck Sales, November (8:30): 7.9M versus 9.8M prior.
Personal Income, October (8:30): 0.0% actual versus +0.1% expected and 0.0% prior.
Personal Spending, October (8:30): 2.8% actual versus 1.9% expected and -1.6% prior (revised from -1.8%).
NAPM Index, November (10:00): 48.8 actual versus 41.9% expected and 39.8% prior.
Construction Spending, October (10:00): +1.8% actual versus -0.5% expected and -0.4% prior.
12-5-01
NAPM Service, November (10:00): 51.3 actual versus 43 expected and 40.6 prior.
12-6-01
Initial Claims, 12/01 (8:30): 488K versus 488K prior.
Productivity Rev., Q3 (8:30): 2.6% versus 2.7% prior.
Factory Orders, October (10:00): 1.0% versus -6.2% prior.
12-7-01
Nonfarm Payrolls, November (8:30): -210K versus -415K prior.
Unemployment Rate, November (8:30): 5.6% versus 5.4% prior.
Hourly Earnings, November (8:30): 0.2% versus 0.1% prior.
Average Workweek, November (8:30): 34.0 versus 34.0 prior.
Consumer Credit, October (3:00): $1.5B versus 3.2B prior.
SUBSCRIBER QUESTIONS
Q: I agree with your Q & A response on limit orders because I have also received poor treatment by the Floor Traders on market orders. However, last night (Dec 4) I put in all limit orders at or slightly above the previous closing prices on several stocks. Needless to say I did not execute any trades. All of my limit orders were below the lowest price of the day, so. I knew the market would gap up but I still don't like to use market orders.
Is there anyway you can determine where those first trades are going to transact or should you just put in a market order so you don't miss the day like I did today? Or should I just get up at 6:30AM and watch the tape?
What a call on Autozone! Unbelievable!
A: AZO has been one of our best performers bear market and bull. Thanks. With gaps higher it is a tough one. You hate to jump in on the gap up, but if you cannot watch the moves, how do you determine the best time to get in? When using a real time service you can look before the open and see where Nasdaq and some other stocks are trading, and you can adjust any order to that point. If you use a 'live' broker, he or she can tell you where stocks are indicating at the open. Market orders are so tough because you often get close to the high right before the pullback and are trying to make up the difference on the session. If it is a breakout from a good pattern and we are planning on holding long term, we don't care as much. On option plays, we care a lot more. On powerful days such as today your best choices are (1) figure out the trading prices from your broker in the morning and put in an order there; (2) put in a buy stop order ahead of the price, (3) get an alert on the first pullback. With option 2 you can put in that order ahead of the price and it is triggered if the stock hits it. You can also put in a limit order and let the stock come back to you after it has gapped higher.
TEAM TRADES
All that tech action and we got some LUV. One of our favorite split stocks, just 500 shares bought in 1993 would yield over 11,000 shares today. All it does is keep growing and splitting, growing and splitting. We bought some when the market tanked after 9-11, and were looking for another good entry points. Today it was easy: it had held a tight consolidation above the 200 day MVA and today started out of that pattern on above average volume. It was not above averate at the time, but it was on its way. This is one we pick up and hold. It is right at $20, and when it gets in the lower thirties it usually splits. It is one we hold for long term and let it do its work. The position gets big and then we can write covered calls off of it, not having to make a ton on each option we write. It is like getting paid double for being a loyal shareholder. That is easy to do with its record.
The SOX options have soared. We were tempted to take some profits from Tuesday's position this afternoon, but we decided to hold off and see if we get a pop in the morning. With such a massive move over these two days, if they do rally we will look to take some money off of the table. If things start slow, we will let them build back up and see if we get a move up after the initial weakness. That is a stronger move, and we might be interested hanging on to positions longer though we will still look to take some profit off the table.
THE PLAYS:
All prices are current as of the close of trading Wednesday.
Good movers and breakouts: The majority looked good today - PLCM, FLEX, CREE, IBM, CMOS, PHM (yesterday), NETA, MRVL, GMST, PMCS, HD, ORLY, BORL, VRTS, CHKP, KLAC, BRCD. Super day.
Best Plays: Will be watching these plays in context of a possible market pullback.
1) COST: Ready to break out.
2) IBI: Looks like it is ready as well.
3) IBM: A strong breakout and still a buy.
4) CREE: Breaking out and still a buy.
5) NETA: Another breakout.
6) VRTS: Looks good and has room to run.
7) CHKP: Ditto.
NEW PLAYS:
COST (Costco Wholesale--$43.48; +2.50; optionable): Retail
http://biz.yahoo.com/p/c/cost.html
STATUS: Making a strong move up in the handle of a large double bottom with handle base of 10 months, previous highs near 46. Volume shot to 4.3 million (avg. 4.1 million) on the move, and the stock closed just under the November (handle) high at 43. Middle hump in the pattern is at 44.70. Looking for the breakout over 43.84. COST shows high money flow and relative strength that is breaking out. Target: 53
BUY POINT: 43.97 on volume of 6 million or higher. Stop: 40.89 (7%).
POSITION: Stock and/or January $40 calls to buy (PRQ AH).
http://www.investmenthouse.com/ct/cost.html
End Part 1 of 2
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