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us stock market, trend trading stock
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12/10/01 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERT SERVICE
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertdly.htm
SUMMARY:
- More talk of the market being overbought as it settles back again on even lighter volume.
- Waiting on the Fed and bad news (JDSU warning for next quarter, HWP/CPQ deal in trouble, CPN could be next) sat on the market but did not kill stocks.
- S&P struggles at its up trendline, but you have to follow the lead of the leader: Nasdaq.
- Subscriber Questions
More talk of a 'needed' correction.
There was a lot of talk again today about the market being priced to perfection and in need of a correction. Another brokerage today said that a 10% to 15% correction was due, but that it would be short-lived and the market would snap right back up. In general, the talk was of a needed correction as the primary reason for the selling.
In all of the history of the market, we doubt that markets rise or fall based on specific beliefs by investors that the market needs a correction or needs to rally right now. Investors just don't say 'the market needs to correct now' and then sell stocks unemotionally based on that belief. 99.5% of investors act emotionally and are behind the curve.
Market settles back further on lighter volume despite gloomy news.
To us the action was pretty much as expected over the weekend: a further consolidation of last week's sharp upside move, and the market was weighted down by the likes of JDSU warning about next quarter, the Compaq deal getting panned, and the worries about the 'next Enron' in the energy field.
Those stories gave it further reason to consolidate, but note that the market did not get overrun by sellers with even some bad news out today and the bias being negative. Indeed, it pulled back on lighter volume once again after Friday's lighter volume selling, indicating that there were even fewer sellers involved in the action than before. This is precisely what you want to see on selling after gains: lighter volume and no major point drops.
It is even better than that. The Nasdaq delivered what is called a shooting star doji on the candlestick pattern. That occurs when a stock or index has been selling lower as on this recent pullback, and then shows a day where it runs higher intraday, but then closes near where it opened. After selling the previous sessions, the buyers stepped in and where able to run the index higher on the session. They did not win out, however, and it sold back, closing near where it opened. The momentum is shifting; the buyers are getting more active again, and are ready to move the market higher. The doji was not the tightest (15 points between open and close price), so it was not the best signal, but it is showing signs that the recent light selling could be ready to end.
A market is made up of stocks, and looking at individual stock patterns we see very similar action with shooting star doji's or low volume pullbacks to support popping up all over the place. NVDA, MXIM, AMAT, KLIC, KLAC, MUSE, PWER, INFA, MERQ, DELL, etc. show this type of action. After such a strong move last week, this is the type of action you would want to see after a slight pullback or consolidation. When you see this type of action repeated over and over, it catches your eye. It caught ours, and we sent out an alert before the close describing this action and how, despite the commentary on the financial stations, the day was not bad at all.
S&P closes below its up trendline while Nasdaq and Dow coast well above theirs.
The S&P was the biggest loser today with the energy trading companies taking a pounding along with the oil sector. That was a big drag on the big cap index. Meanwhile the Nasdaq held well above its up trendline on that low volume doji, and the Dow, though closing near its session low, traded lower on much lower volume.
The S&P's failure to hold its up trendline definitely makes us take note as well as the Dow's failure to hold 9992. The big cap index is struggling, and it could be a precursor to trouble on the Dow then the Nasdaq. Could be. It has not been the leader, however. The clear leader has been the Nasdaq, and it is still in good shape. While we want the Dow and S&P to start performing better, they have been lagging the whole move up; not stagnant by any means, just lagging. That is one reason we are not too alarmed at today's close below the up trendline as it can run back up over it tomorrow and be just fine. Moreover, the Nasdaq continues to perform very well. We do need to keep an eye on accelerating selling action, but that has not happened over the past three sessions. Again, it has been a very orderly pullback to this point.
Waiting on the Fed.
At 2:15 ET the FOMC will announce its decision on interest rates. A 25 basis point cut is baked into the cake and there is a 27% chance of an additional 25 basis points. That pretty much means there will be a 25 basis point cut tomorrow. That is in line with expectations and with a smaller cut the market will rationally be thinking that the Fed will have some better things to say about the economy. If not, that will puzzle investors; if things are still as bad as last meeting, why not 50 basis points?
Thus we expect 25 basis points with some 'things are still slow but look to be getting better here and there' words on the economy. The market tends to act in two ways before the Fed announcements: do nothing or rally slightly into the announcement. Not much help, right? Well, the patterns today indicate there may be a pop upwards after some more early selling tomorrow. Then when the Fed news comes out, if it is just 25 basis points and a 'status quo' statement, that hurts. If it is 25 and a 'things are looking better,' that could help the equities and hurt the bonds. It would indicate the economy is coming back and that there may be no further interest rate cuts. That would hammer bonds after they were up across the board today.
THE MARKET
A gloomy session listening to the financial stations, i.e., Dow unable to hold 10,000 and Nasdaq unable to hold 2,000. Stocks overbought, correction coming, etc. A consolidation is here right now, and thus far, it looks just as it should for a healthier market that is looking to add more gains on top of that consolidation in the near future.
VIX: 26.00; +1.11. Unlike Friday, volatility ran higher on S&P selling. It still resides in the middle of the 20 to 30 range that is considered the normal range but is well below the spike we saw in September that was one of the signals of a market turn. The fact that it continues to hold above the summertime range is a positive even as the market has rallied well off the bottom. 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 the last few weeks when it has dipped and held just above the top of the summer range.
VXN: 52.12; +1.94. Added another sizeable move up after Friday's jump on that selling. This is how volatility should act if investors are still a bit skittish. From what we read and here, many are saying the Nasdaq is most at risk for a correction, so it is not really surprising that volatility jumps more on this index at any selling. 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): 0.63; -0.10. Surprising drop in put activity given the more intense (point-wise) selling Monday and the increase in volatility. Still holding at the higher end of the range, something that has been the hallmark of this rally.
Nasdaq
Tried an early rally, but after testing positive territory fell back for another session. The buyers were there, they just were not there in enough numbers to turn the tide today. Volume was lower, it held above the up trendline, it is showing a good pattern, and so are many of its stocks. It is setting up; now it needs the catalyst.
Stats: -29.14 points (-1.4%) to close at 1992.12.
Volume: 1.680 billion shares (-12.3%). Lower, below average volume on the further consolidation of that strong move that started last Tuesday. Continues the good price/volume action.
Up volume: 459 million
Down volume: 1.203 billion.
A/D and Hi/Lo: Decliners ramped up their lead to 1.73 to 1 (1.07 to 1 Friday). Broader selling than we have seen, but again, volume was mild.
New highs: 95 (-7)
New lows: 27 (-3). We like to see the new lows shrinking on selling. Very good action.
The Chart: http://www.investmenthouse.com/cd/$compq.html
The early rally off of the open gave way and the index spent the rest of the day selling, attempting brief rallies, then selling again. That set up the shooting star doji, a signal on the candlestick pattern that is a bullish indication. The index was unable to hold 2,000, a bit disappointing but not a crushing blow. It held above the 10 day MVA (1975.89) and the down trendline (1980) still, and is comfortably above the up trendline off of the September bottom (1941). That is very solid support: 1940 is a consolidation level and the 200 day MVA is at 1941.08. Several layers of support merging makes for a solid base to bounce up off of.
Dow/NYSE
The Dow fell through a first level of support at 9992, but NYSE volume continued to taper off on the selling. The sellers were not in the majority and backing off in power as the index approaches its up trendline.
Stats: -128.01 points (-1.3%) to close at 9921.45.
NYSE Volume: 1.177 billion shares (-7.3%). Another below average volume session as the index continues to pull back.
Up volume: 262 million shares
Down volume: 920 million shares.
Downside action was still predominant, but still no distribution.
A/D and Hi/Lo: Decliners blew out advancers 2.25 to 1 (1.20 to 1 Friday), the first clear rout in a long time. Something to keep an eye on, but the A/D line is not a great timing indicator on the upside.
New highs: 69 (-25)
New lows: 48 (+18). New lows started up stronger on today's selling, rising above 40. We will keep an eye on this one.
The Chart: http://www.investmenthouse.com/cd/$indu.html
After tapping at the 200 day MVA last Tuesday, the Dow made one attempt to cross it, but lost its nerve. It has been pulling back on lower volume since, a good sign as the move is consolidated. A bit more consolidation, and it will be consolidated away. Seriously, the up trendline is just above the 18 day MVA (9866.00; up trendline is at 9870). As 9992 did not hold, the up trendline is where we look for support on the close. The lower volume selling is the right price/volume action; now it just has to hold the trend.
S&P 500: The big caps were disappointing today, unable to hold above the up trendline on the close. It was being squeezed between the 200 day MVA (1174.15) and the up trendline on the downside (roughly 1150; also support from previous price consolidations). Disappointing to see this break to the downside, but it was not a high volume breakdown. The big caps have been lagging, thus this move is not a crisis. Still, it is something we must take note of, and if selling increases tomorrow, the fact that the big caps have already broken their up trend may mean the others will follow. On the other hand, it has been the laggard, and the other indexes could easily recover above their up trendlines and then start back up and pull the S&P with them. The key will be watching that price/ volume action. A bounce back over the trendline on rising volume is the best medicine. If it does not, we look to 1125, the point of prior consolidations and the 50 day MVA; we do not want it to go that far.
Stats: -18.38 points (-1.6%) to close at 1139.93.
Volume: NYSE volume was down below average once again, taking the sting off of the selling that pushed the index below the up trendline (1.177 billion shares; -7.3%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
The big news tomorrow is the FOMC meeting with results due at 2:15 ET. While the consensus many times over is for 25 basis points, you never know until you know. More than in the past, the statement will be key because for the first time in quite a while the cut was not 50 basis points. With a change in the magnitude, the market will be expecting a change in economic views to the upside. It might not be much, but it needs to be something different. Otherwise the Fed will simply look as if it was scared to cut another 50 basis points when needed. Confidence and perception is key right now. Unfortunately, the Fed has lost much confidence from the U.S. citizenry over the past year or more.
What does the market do up to then? The market bias was downside at the close as the indexes closed near their session lows. That could carry over to the early action tomorrow. The Nasdaq and the Dow, however, are still above the up trendlines and the price/volume action has been solid. Moreover, the Nasdaq as well as many individual stocks have pulled back right to support and are ready to rally. After some weakness early that may test the trendlines, we will look for the indexes to start back up ahead of the FOMC meeting.
If the committee gives some positive economic comments (they will still be guarded) in the statement, we anticipate some more upside. Some will take the announcement, regardless of what it is, as a point to sell or go short the market, anticipating a further pullback. With positive things to say about the economy, we would anticipate the move to hold more or less. It has taken a day or two for the market to make definitive moves after a Fed meeting, but the Nasdaq and many stocks are ready to move higher if they get the catalyst from the Fed, and to us that would be a statement of stronger economic statements from the Fed.
As for our plan of action, we are going to be tentative, looking at some solid patterns to bounce. We want the lower open and test of support and then rally. That will give us more confidence to take positions as stocks bounce up from the nice pullbacks they have shown. We also see some builders on the reports in very good cup with handle patterns, and we will look to see if they provide a breakout move on the news. The fact that the meeting is late in the session is good and bad: good in that we can see volumes and how well moves are holding; bad in that many stocks are ready to move up from where they closed. Again we will look for a softer open and start selectively taking positions as the indexes improve.
Support and Resistance
Nasdaq: Closed at 1992.12.
Resistance: The December high is at 2065.69, something always to consider. The upper channel is almost touching the closing price March 2000 down trendline at 2125.
Support: The gap up point at 1980, just above the 10 day MVA at 1975.89 is a logical support level. Then there is the 200 day MVA (1941.08), price tops at 1940 and the up trendline all converging at the 1940 level. Very strong support if the index is going to hold this trend off of the bottom.
S&P 500: Closed at 1139.93.
Resistance: Today's action changed the landscape a bit. The up trendline at 1150 could now act as some resistance if the index cannot hop right back over it. Then there is the down trendline from March 2000 it had broken, and it is at now right at 1150 as well. The 200 day MVA at 1174.15. After that, there is the middle of the March and April double bottom at 1183.85.
Support: Closed on the 18 day MVA (1141.85), but that is not strong at this point. The 50 day MVA is at 1124.49, and that is coincident with a former resistance level at 1125 made up of prior price consolidations.
Dow: Closed at 9921.45.
Resistance: 9992 was resistance on the way up, and now the Dow has broken back down below that level. It could pose resistance again, but the Dow is jumping all around that level now. Suffice it to say it has some resistance there. The 200 day MVA is still up there at 10,131.29. After that, 10,200 to 10,300 is very congested. The upper channel is right at 10,300, right with the September 2000 down trendline.
Support: The up trendline is just ahead of the 18 day MVA (9870; 18 day is 9866.00). That is the key level now. If it fails, the 50 day MVA at 9699.04 is right at the bottom of the prior consolidation low in late November.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
12-11-01
Wholesale Inventories, October (10:00): -0.3% versus -0.1% prior.
FOMC Meeting (2:15)
12-12-01
Export Prices ex-ag., November (8:30): -0.7 versus -0.7 prior.
Import Prices ex-oil, November (8:30): -0.4% versus -0.4% prior.
Current Account, Q3 (10:00): -$94.2B versus -$106.5B prior.
12-13-01
Retail Sales ex-auto, November (8:30): 0.2% versus 1.0% prior.
Retail Sales, November (8:30): -2.8% versus 7.1% prior.
PPI, November (8:30): -0.3% versus -1.6% prior.
Core PPI, November (8:30): 0.0% versus -0.5% prior.
FOMC minutes, 11/6 (14:00)
12-14-01
Business Inventories, October (8:30): -0.4% versus -0.5% prior.
CPI, November (8:30): -0.1% versus -0.3% prior.
Core CPI, November (8:30): 0.2% versus 0.2% prior.
Industrial Production, November (9:15): -0.5% versus -1.2% prior.
Capacity Utilization (9:15): 74.2% versus 74.6% prior.
End Part 1 of 2
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us stock market
trend trading stock
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