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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.

SUBSCRIBER QUESTIONS

Q: I was watching CNBC and heard several times that if/when it was announced Bin Laden was captured the market could probably expect a +/-500 point run on the news. Well, last night I heard several Military analyst's say they expect Bin
Laden to be captured more than likely within a week.

My question is, do you subscribe to the "victory rally" theory the financial analysts' are speaking of? If so what would be a good play for this? OEX ,SOX, QQQ? Furthermore, if indeed we did see this type of reaction from the market, how do you feel it would play out? 500 points over a span of one trading
session, two or three days? Thank you for your input.

A: Around the Thanksgiving holiday I opined that Bin Laden's capture was days away. At that time I believed that a big move would occur on the news. The market was giving signs of that as the QQQ traded up sharply on a story that his capture appeared imminent.

Now for the last week there has been ferocious fighting directed precisely at the Al Qaeda and supposedly Bin Laden is there. There have been those continued reports that you cited stating the end game is on and that capture or death is near. The market has had time to absorb that now. Thus, the impact is not going to be a surprise to the market in general other than a surprise at the exact timing of the news. That will bounce the indexes higher, but will it be 500 points (assuming that was on the Dow of course)? If it occurs after a bit of a pullback the bounce could be strong. Will it hold? Not all of it by a long shot; the news is being priced in with each bombing run. Right now I feel there is more risk to the downside if he is not caught or killed before Christmas. The market needs some good news from time to time to keep it moving forward. It has been pricing in the capture or death of Bin Laden, victory, and a stimulus package. Those need to come to bear or it could be a problem for the market as they are then priced out of the market.

The longer term aspects of his capture or death are the best story for the market longer term. While it does not mean the end of Al Qaeda and instant security, it will be a big confidence boost and that is good for the economy. That gets money spent, investments made, etc. that have been put off. Thus, we see a pop up on the news, but a 500 point rally in a day is a stretch. Maybe over two or three days, and not all of it will hold. Options would be a great way to play the news if you are nimble at getting in, riding the news, and then taking the profit. At the same time, we will have breakout points ready for stocks and indexes; clearing resistance is a good point to buy whether or not on news of capture or not.

Good Investing!
Jon L. Johnson and the Stock Split Report Staff.

All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners of Online Investment Services, LP or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.

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