understanding the stock market, swing trading stock

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12/11/01 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

THE PLAYS:

Good movers: NTAP, RNBO. Others are in good position to make their moves, including POWI, IBI, HD, PHM. BRCD, VRTS, KLAC, IBM and XLNX look good. SLOT dropped below its 18 day MVA yesterday but was back over it today, holding with a doji on even lower volume. It could move up from here in the handle.

Continued Plays:

BRCD (Brocade--$38.80; +1.35; optionable): Computer Hardware
http://biz.yahoo.com/p/b/brcd.html
STATUS: After a 2-day pullback that tested the nice run up last week, BRCD headed higher, tapping at 40.23 on the intraday high as volume pumped up to 19.1 million, near average levels. The stock gapped up over our aggressive buy point at 38 but nearly closed the gap on the intraday low. It also took out our higher buy point at 39.33, selling back down at the end of the day on the MRK news. It bounced back after hours (to 39.15 at the time of this writing) and we are looking for the stronger volume to kick back in and break it back over today's high. May test lower ahead of that move; look for support at the 10 day MVA (35 range) at the lowest, or higher. Target: 43
BUY POINT: Aggressive: 39.33 on above average volume. Stop: 36.58 (7%). Break of resistance: 40.30 on volume in the range of 19.5 million or higher. Stop: 37.48 (7%).
POSITION: Stock and/or January $35 calls to buy (UBF AG).

http://www.investmenthouse.com/ct/brcd.html

Covered Call Sale Play:

BORL (Borland Software--$17.14; +0.01; optionable): Applications
http://biz.yahoo.com/p/b/borl.html
STATUS: BORL is topping out on the super breakout run from its cup with handle pattern that we bought into just under $15. Volume continues to climb but the stock is churning, not able to move much the last 2 days at the top of the run (volume was its highest in several days Tuesday at 2 million; avg. 717,000). We are looking for the stock to move back down to test the buy point at 14.48 (or in that range) for the covered call; once BORL hits support it can move back up, and that would be the point at which we buy back the calls. At the close of trading today the January $15 calls were selling for $2.80 with a delta of 0.73. For a 3-point move, they can increase in value to $5.00 or close. That is a gain of about 20%.
BUY POINT: 17 on a pullback.
POSITION: January $15 calls to sell (BLQ AC).

http://www.investmenthouse.com/ct/borl.html

Previously covered:

ACTN (Action Performance--$35.69; +2.41; optionable): Basic Materials Wholesale
http://biz.yahoo.com/p/a/actn.html
STATUS: After a nice run on a November breakout from a short base, the stock pulled back to the 18 day MVA again (currently at 32.72) and gave a good bounce today on strong volume (454,800; avg. 385,272). It looks ready to break out to a new high on the move; once it pulls back again, we can watch for another bounce from the MVA. This is the first bounce after the breakout, so ACTN can offer up 2-3 more before a major correction if we're lucky. Target: 51
BUY POINT: Aggressive: 36 on continued rising volume. Stop: 33.48 (7%).
POSITION: Stock and/or January $30 calls to buy (QNC AF). Delta unavailable.

http://www.investmenthouse.com/ct/actn.html

CREE (Cree Inc--$26.01; +0.38; optionable): Semiconductor
http://biz.yahoo.com/p/c/cree.html
STATUS: Looks good as it forms a handle to the 4-month cup that is at the bottom of the larger base that started mid-May (within the 22-month base, highs near 100). CREE broke out of a pennant for the recent move up to the December (handle) high at 27.49, and is testing that move as it traces the handle. Showing its 4th consecutive doji, the last 2 at the 10 day MVA, volume dropped well below average the last 2 days (538,900; avg. 1.4 million). Looking for a breakout over the high. Target: 33. Strong money flow.
BUY POINT: Breakout: 27.62 on volume of 2 million or higher. Stop: 25.69 (7%).
POSITION: Stock and/or January $22.50 calls to buy (CVO AX).

http://www.investmenthouse.com/ct/cree.html

LTD (The Limited--$14.02; +0.09; optionable): Retail: Apparel
http://biz.yahoo.com/p/l/ltd.html
STATUS: LTD still looks good in the pennant pattern now turned ascending wedge it has formed below the 200 day MVA (14.84). Showing a doji just above support at the 18 day MVA (13.77), volume was higher at 1.09 million (avg. 1.87 million). The stock is likely to hit the 18 day MVA and then we look for a bounce back up and breakout (if not right away, then soon since the pattern continues to tighten up). Upper resistance in the pattern is near 14.50 (at the level of the down trendline that connects February and August tops), but we are looking for a move over the 200 day MVA. Solid money flow, buying.
Target: 18
BUY POINT: Aggressive breakout: 14.62 on volume of 2.5 million or higher. Stop: 13.60 (7%). Breakout over the 200 day MVA: 14.97 on volume of 2.5 million or better. Stop: 13.92 (7%).
POSITION: Stock and/or January $10 calls to buy (LTD AB).

http://www.investmenthouse.com/ct/ltd.html

PRGS (Progress Software--$18.00; -0.13; optionable): Applications
http://biz.yahoo.com/p/p/prgs.html
STATUS: Testing the breakout from the rolling pattern, closing Tuesday with a doji at the upper levels of that pattern (18). Showing a doji, the stock tapped the 10 day MVA on the low of 17.73 then bounced, with volume rising to 214,400 (avg. 128,454). PRGS may continue to test at the 10 day MVA but we would like to see it hold at the 17.90 range (buy point) for the strong move back up. The stock ran to 19.20 on the breakout, and continues to show strong money flow and high relative strength. Target: 23
BUY POINT: Aggressive: 18.30 on continued strong volume. Stop: 17.02 (7%).
New high breakout: Over 19.20 on continued rising volume. Stop: 17.90 (7%).
POSITION: Stock and/or January or March $15 calls to buy (RGQ AC or CC). Deltas unavailable.

http://www.investmenthouse.com/ct/prgs.html

SUMMARY:
- Prilosec side effect: upset market.
- Fed cuts by 25, market okay with it.
- Is MRK a blip or change in the market?
- Nasdaq still looks good, but it cannot hold out if the other two tank lower or do not rally with it.
- Wholesale inventories falling faster than expected.

Merck burps and upsets a nice rally post-Fed.

The market was tentative ahead of the Fed, but moving higher into the announcement of the 25 basis point cut. Nokia had upped estimates before the open, and that had tech stocks and most stocks in general trading higher. After the patterns shown Monday, it was good to see the positive trigger send stocks up higher.

When the Fed announced the rate cut and stated that the weakness in demand was abating but still tentative, the market sold down first but then rallied. Seems the smaller cut was okay given the statement that demand was not terminal. The indexes turned and rallied sharply, and were at their peaks when MRK was halted. To the minute the indexes started to sell.

In the end, the Nasdaq held onto a small gain on rising volume, but closed well off of its high and almost turned negative right before the close. The Dow and S&P headed south, losing again, this time on stronger, above average volume. The swing from positive to negative on rising volume is not a good sign. They have been lagging, and they are starting to crumble around the edges.

Merck news trips the market. Just a surprise or a change in character?

The Fed news was expected. The market liked what it heard about some improvement in demand, falling inflation, and the open door for another rate cut. The market was set up to rally on some good news (the shooting star doji on the Nasdaq and some of its leading components), and the one-two triggers of Nokia upping earnings expectations and some positive Fed comments was doing the trick with some increased volume buying. Indeed, hour-by-hour volume on the NYSE was up as the Dow and S&P moved higher in positive territory.

Then MRK announced and that was unexpected. The indexes all turned south and headed down. NYSE volume grew. In the 2:00 ET hour volume was running 15 million ahead of Monday. In the 3:00 ET hour (after the MRK news hit in the last part of that hour) volume was up 51 million over Monday. volume was better, but then the volume raced higher as the index started selling down on the MRK news.

Why did this hurt all indexes? MRK is a Dow component, so its whacking understandably hurt the Dow. MRK is an S&P component, and other drug manufacturers and even biotechs sold hard in sympathy and fear. Thus the Dow and S&P are more or less understandable. Why the Nasdaq? Most likely because of the surprise nature of the news; it caught the market off guard when a relatively steady performer announced it was going to stink up next year when the economy was supposed to recover. If MRK, wondered investors, who else?

MRK problems specific to MRK?

Well, MRK has specific problems, and these were finally talked about after the close. Most of it deals with patents that are expiring, and that means some cash cows are not going to be as fat as they have been. That is the reason for the pun in the headnotes about Prilosec. It is not a sector-wide problem. No way. You know what the greatest increased cost to health insurers is? Prescription drugs. That is causing all of our rates to shoot higher; great drugs that were not even dreamed of 10 years ago, but the development costs money. Someday a pill will cure cancer, diabetes, and kidney problems; it costs money to get there but man is it great when we do. Thus, it is crazy talk to say that drug companies are going to be losers, especially with the aging of the baby boomers. MRK has problems with short-life patents left, and that will hurt its earnings for now.

So why sell tech stocks and biotechs on the news? Surprise is one reason; no one expected MRK's news. Could it be that there is some sea change going on that will impact the markets overall? Specifically, bad news was not phasing the market for the past two months, particularly if there was good news out there such as the NOK news earlier today. MRK trumped that news when it came down to the wire.

The S&P is struggling hard; still above support at 1125 but below its up trendline for the second straight close. The Dow is on its up trendline now with a shooting star doji, but it sold down on rising volume; poor price/volume action as the sellers took over late and tanked it. The Nasdaq still looks positive, rising on rising volume, but it lost most of its gain for the day. Even with its continued stellar performance and solid price/volume action, it cannot continue to drag the Dow and the basically negative S&P 500 around with it. If they crumble, the Nasdaq cannot sustain its move. It appeared that the S&P and the Dow were ready to move with the Nasdaq last Tuesday and Wednesday, but now they are back to their old lethargy. It will be very important that the Dow jumps up off of its up trendline tomorrow on strong volume. Not sure what the catalyst will be, but it has to do it. At least it is technically set up to do it with a close on the up trendline with a shooting star doji.

THE MARKET

After setting up so well Monday, the market was moving up off of that set. It had momentum from NOK and it liked what the Fed said. Then MRK took it by surprise and they all sold. The Nasdaq held support with a gain on higher volume, but we have to temper that with the understanding that it was way up and then gave most of the gain back. It is still in good shape overall. The Dow was hit with a component getting drilled, and it closed lower on higher volume, but it did hold its up trendline, a key fact. It is still okay, but struggling, and it needs to rally right here and right now. The S&P closed for the second session below its up trendline on increasing volume. Not a good scenario; it is a drag on the other two. The silver lining: it is holding above a double support level at 1125.

The action today struck a sour note. It did not torpedo the market, but it soured the action. It could shake it off and move on; indeed, after analyzing the MRK news that is what it should do. But the market does not always do what we think it should do. The action left me unsettled even though technically the Nasdaq held up as did the Dow. As the Crocodile Hunter would say, "be careful Steve."

VIX: 25.69; -0.31. The S&P was up and that took the wind out of the volatility, but it did not ramp it up. That is the second time in three sessions that selling did not push volatility higher. This is worth noting along with the poor price/volume action today. Volatility is not responding to selling as it settles down into the upper end of the range it traded in during the doldrums of last summer. It is still good that it is holding right at that upper range, but it is getting no pop from any selling. That indicates that complacency is setting in. With the poor price/volume action, we don't like what we are seeing.

VXN: 50.73; -1.39. The Nasdaq finished higher, so it makes sense volatility should have edged lower; an inverse relationship. It is bouncing up and down, but the range of its bouncing is dropping lower and lower, back down to the summertime levels. In other words, it is in a downtrend and is not ready to break that trend. Growing complacency perks up our interest, but price/volume action so far is still good. Today's intraday action is concern, so we are on alert.

Put/Call Ratio (CBOE): 0.73; +0.10. Pinballing from 0.63 to 0.73. Good to see it rise on the late selling. At least there is still a belief among option players that the downside is worth playing. That is good because option players as a group are bad at accurately picking market direction.

End Part 1 of 2

understanding the stock market
swing trading stock