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12/18/01 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 (covered last week) broke resistance at the 200 day MVA (EMA) today on strong volume. A buy up to 25.12 on this breakout move from a new cup with handle. CREE (last Tuesday) broke out of the cup with handle, buy point 27.62. Almost too far for us to chase, but volume was strong with the stock gapping up on the open; aggressive players may want to jump in. Another previously covered stock, MCRS, made a big move up in its handle (12-12 report) but volume was lower and still below average. The stock made our aggressive buy point at 24.50; breakout point is 26.13 on volume in the area of 116,000. LTD remains in the pennant pattern. Aggressive buy point is 14.62; over the 200 day MVA, 14.80 (12-11 report).

Other Continued Plays: SANM closed just under its support level, the 18 and 200 day MVAs (it did bounce off the low). Volume was rising and we will want to see a quick move back over the resistance. Puts: DCTM rallied bigtime on news of a positive outlook for next year; the stock exploded over the 18 day MVA on huge volume, gapping over the resistance. Other puts: MANH moved back over its 50 day MVA, but just barely. Keeping a watch on it and on SPC, which continues to hold 44 but still looking weak. Other continued plays that are in position to move up after today's action: EMLX, KLAC, ULGX, TUNE (see last night's report). VRTS made a good move on rising volume (still below average) but still needs to take out the 200 day MVA. The stock closed just under that resistance.

Indexes: The DJX and OEX can be forming bearish head and shoulders patterns here. May not complete the patterns, but we are watching them in case they do. The DJX was up on stronger (above average) volume, closing at 99.98 just over the level of the first shoulder's peak (which is at 99.93). If it moves back down we will look for the breakout below the 50 day MVA (buy point 97.25). OEX: Can move up from here until it hits potential resistance at the top of the first shoulder's hump at the 598 range. Aggressive buy point on a move down from here is 595 on continued strong volume.

Continued Play:

GENZ (Genzyme--$59.88; +0.99; optionable): Biotech
http://biz.yahoo.com/p/g/genz.html
STATUS: Just beat the buy point for a breakout from the 6-month cup base, but volume was drastically lower and well below average (2.34 million; avg. 5 million). Yesterday the stock looked ready to make the move and volume had been building up for three days (with a huge spike up last week). We will watch for volume to roll back in to support this breakout move. GENZ remains a buy on the move up to 62.82 as long as volume is on target. Strong buying and high money flow. Price target: 72
BUY POINT: From here, over 60.12 (intraday high) with volume in the range of 7.5 million or higher. Stop: 55.94 (7%)
POSITION: Stock and/or April $55 calls to buy (GZQ DK).

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

New:

PRSE (Precise Software--$23.23; +2.53; optionable): Applications
http://biz.yahoo.com/p/p/prse.html
STATUS: PRSE is in a long base of 15 months (the stock was issued mid-year 2000) and Tuesday broke over a long-term down trendline (connecting the December 2000 top, and current year June and November and previous December tops). The move was strong on big volume of 1.06 million (avg. 610,454) as the stock cruised on a buy rating by CSFB. The pattern of the last 11 months is a double bottom with ragged handle at the bottom of the larger base, volume falling off nicely below average in the handle just prior to the stock's blast-off today. Positions taken here are aggressive, with the buy point over the November (handle) high for the pattern's natural pivot point. Excellent money flow and buying. Target: 29
BUY POINT: Breakout: 24.01 on continued strong volume. Stop: 22.33 (7%)
POSITION: Stock and/or February $20 calls to buy (PUI BD; very low open interests).

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

Previously covered:

MUSE (Micromuse--$16.25; +1.09; optionable): Software
http://biz.yahoo.com/p/m/muse.html
STATUS: We were covering MUSE as an 18 day MVA bounce play, but it slipped below that support and tested the 50 day MVA three days ago. Tuesday the stock gapped up and over the short term moving averages on continued rising volume (it has been building for 4 days) and closed with a tight doji (3.7 million; avg. 3.9 million). Now back at the support from which we were looking for a bounce, we will watch for that move from here. It may take a day or so of consolidation, but we like today's action. Money flow off the floor and steady; buying positive. Target: 23.86 range (200 day MVA).
BUY POINT: Aggressive: 16.80 on volume of 4 million or higher. Stop: 15.62 (7%).
POSITION: Stock and/or January $12.50 calls to buy (QUM DV).

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

AUDC (Audiocodes--$4.43; +0.33; optionable): Scientific & Technical
http://biz.yahoo.com/p/a/audc.html
STATUS: Deep in a 15-month base, covered previously in a cup with handle type base with the stock now having formed an ascending wedge where a handle should be. A wedge is not the preferred handle, but this pattern looks pretty good at this point. AUDC is moving up from the second dip, which posted a higher low than the previous one. Volume was slightly up (208,000; avg. 400,000) on today's gain. Looking for a continued move up with volume following suit, for a breakout over the December highs just over 5. Money flow and buying are strong. Initial target: 6 (200 day MVA). Above that, 7-8.
BUY POINT: Aggressive: 4.60 on continued rising volume. Stop: 4.28 (7%). Breakout: 5.21 on rising volume (540,000 or higher). Stop: 4.74 (7%)
POSITION: Stock and or April $5 calls (XRD DA).

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

DRRX (Durect Corp--$12.00; +0.10; no options): Drug
http://biz.yahoo.com/p/c/drrx.html
STATUS: The stock is a new issue from last fall, covered on the report over a week ago. It is in a base dating from the time of its debut (highs at 17 from the first of October) and more recently in a cup with handle of 24 weeks. The handle continues to advance on nice, below average volume with prices tightening nicely (24,200; avg. 91,000). We expect a continued hold at the 10 day MVA (11.76), just above which DRRX closed with a tight hammer doji Tuesday on very low volume, followed by a breakout. Excellent money flow and great buying. Target: 17
BUY POINT: Breakout: 12.35 on volume of 137,000 or higher. Stop: 11.50 (7%)
POSITION: Stock.

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

BORL (Borland Software--$15.93; +0.33; optionable):
http://biz.yahoo.com/p/b/borl.html
STATUS: The stock looks ready to hold the 18 day MVA (15.52), bouncing lightly from there after some selling caused it to fall and close at the support Monday. BORL tapped the MVA the previous 2 sessions as well. Volume Tuesday was down to 402,100 (avg. 815,318). When we first looked at selling the covered calls as the stock topped out on the late November-early December breakout (to 17.49), the January $15 calls were selling for $2.80. They were selling for $1.70 at the close of trading today; buying them back here would lock in not a huge gain, but on multiple contracts not bad at all. Money in the pocket and then we let the stock rally again. On a strong bounce back up, we can look at buying more stock and when BORL tops out again, sell calls. Target on a move up from here: initial, 20
BUY POINT: Aggressive: 16.10 on rising volume in a rally. Stop: 14.97 (7%)
POSITION: Stock and/or April $12.50 calls to buy BLQ DV).

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

Puts:

QLGC (Qlogic--$49.01; -2.15; optionable): Semiconductor
http://biz.yahoo.com/p/q/qlgc.html
STATUS: Hate to go against this stock but it broke below support, the short term MVAs (18 day is at 50.74) and other price support at 50 after the recent double top, and looks ready to head down to its 50 day MVA at 45.49. Volume was rising at 14.6 million (avg. 12 million). There was no news at the time of this writing that explained the selling. We expect QLGC to continue moving up in the base, but are ready to play the downside as well if the return looks good. We have to be careful of too big of a gap down tomorrow; if it does, it may come back to test the prior close; if that fails, that is the entry.
BUY POINT: 49 on continued rising volume.
POSITION: January $60 puts to buy (QLC ML).

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

SUMMARY:
- Solid housing market helps market keep some upside momentum.
- Volume increases slightly on Tuesday's gains.
- Good earnings in retail, but after hours Alcoa warns and MU loses more than expected.
- Stimulus package a terminal victim of politics as the true face of Congress again emerges.
- Subscriber Questions
- Team Trades

Housing starts and permits rise again.

November starts were expected to fall slightly, but instead they continued their climb, rising 8.2%, the fastest rate of growth since July. Indeed, if it keeps up this rate of climb it is heading for is best year since 1986. It was not all single family dwellings (versus apartments), but it was a solid continuation in the trend higher. Permits rose as well, up 5.3%, also better than expected and the best growth since August, right before the September attack. Another interesting feature shown in the report: the percentage of disposable income used to service debt was 13.8%, the smallest percentage since Q4 of 1999. That means more money to spend on other things. That is why the 30 year was eliminated: lower rates and unlock a lot of equity and monthly cash to be used in other areas of the economy.

Market responds with a continued upside move to resistance levels.

Bolstered by the good economic news, the markets were able to keep the upside action going. It was not straight up, as usual. Gapped higher, broke some resistance, and then sold back down. Mounted an afternoon rally to retake resistance more or less, though the Dow closed below the 10,000 level and the S&P never did take out 1050.

Volume was a tad better, moving to average on the Nasdaq and above average on the NYSE. Still lower than last week's selling volume, but as noted last night, the week before and after Christmas is usually lighter, options expiration or not. There were some more good breakouts, e.g., CREE, FILE, IPIC, SEBL, NTAP, but a lot of the action was sluggish. The SOX was up on the session, but many semiconductors were down on the day. And they will be down more tomorrow most likely as MU reported more crappy earnings (losses actually) after the close. Better than last quarter's losses, but still crappy.

The Nasdaq crossed over 2000 and held, but the S&P never did give 1150 a real test. The Dow moved over 10,000, but gave it up in the last few minutes. The SOX tried resistance at 575 early, but never challenged it later in the session and tanked 5 points in the last 10 minutes of trade ahead of MU's numbers. I just was not a powerful session, but it was about what we expected.

Can the rally continue with after hours earnings woes?

Now the question will be if the can rally further beyond resistance. The leader has been the Nasdaq, and it will be the key on any further move. It will have its hands full. MU reported those bad earnings; one positive: DRAM prices spiked sharply right at the end of the quarter. MU is not taking the overly positive position on that, however, as it has seen that before. The chip sector was already dragging at the Nasdaq. It will pull at it more tomorrow.

There won't be much help from the Dow or the S&P as Alcoa (AA), the first blue chip to announce, earned just 10 cents exclusive of charges. It will be a major drag on the Dow. Motorola lowered its expectations by a ton for Q1, but said it was still committed to its earnings for the year. Sounds more like it has not simply given up hope just yet.

Momentum abhors hard, negative news. The moves were not powerful today, and the indexes will be challenged from the open tomorrow. Softer opens can lead to rallies in more times. We will see if the bullish buyers come back in after some selling in the morning.

THE ECONOMY

We covered the stats above and tomorrow the big news is the Leading Indicators. They project economic activity 6 months into the future and have been positive for four months prior to September 11 and are supposed to be positive once again (they were in October, right after the attack).

The stimulus package is about at a point where it could not stimulate a teenager at a wet t-shirt contest. It is the victim of political objectives that have nothing to do with the country's well being over the next year or more, but the political careers of several Congressmen. While there may be deep beliefs on both sides as to what is and is not proper, the language we are hearing at the press briefings is filled with political bias, backstabbing, and party maneuvering. Looks like Congress has finally returned to its normal ways.

Unfortunately, this gridlock is not what economy or the market needs. There are important parts to this bill, including some accelerated depreciation. That would really help the high tech arena by allowing the purchase of their products and writing off that expense faster. That sells products that would not otherwise be sold and helps reduce inventories and gets workers back to working. If that does not come to pass, the high tech doldrums will continue a bit longer. There are other parts of the bill that are good as well.

It is coming down to a battle over a small portion of the bill (medical insurance for laid off employees) that reflects different philosophies: should government be in charge of taking care of everyone or should government set up the framework to allow people the opportunity to make the decisions about their lives. Most Congressmen have had people whispering in their ears that stimulus is not really needed now, so they are not willing to give in on this issue. If it does not pass, any further recession can be blamed on the current administration. If it does not pass, the republicans can blame the democrats for stonewalling stimulus if the economy fails again. Great political fodder, but it does nothing for you or me.

Sure the bond market is showing a recovery coming. But the bond market has also been expecting a stimulus package; when reports the past week were coming out that the stimulus package was in trouble, the bond market rallied some. Not a lot, but it started to stem the losses. Don't think the bond market is not trying to tell us something. We could have an improving economy, but then fail to do what started us on the road back, i.e., rate cuts, promises of stimulus, etc. If those do not come to pass, the markets will take some back.

The galling part of all of this is that we are having all of this teeth gnashing over something that was made worse than it had to be. We know the story: rate hikes to slow down a very healthy, no inflation economy. Purposeful, deliberate actions using 'new' measures of inflation instead of the old measures to con everyone into thinking it was necessary to stomp on the economy. Basically the Fed looked at anything that was a sign of prosperity and said if that kept up, the economy would overheat. If it showed strong economic growth, it was a new inflation measure.

Low weekly jobless claims equaled a 'tight' labor market. Higher wages were deemed inflationary even though history says inflation is more money chasing fewer goods. There was no shortage of goods as supply was in high gear and capacity utilization was still below 'bottleneck' levels. CEO after CEO said their companies had no pricing power at all. Does that sound inflationary? People had jobs in record numbers, had record discretionary income, and prices were not rising anywhere near historic levels that were considered inflationary. It sounds more like the prosperity every politician promises but cannot deliver. When we sit back and reflect on what was and what is now, we just have to shake our heads and try not to get sick at the thought of millions of households with their retirements flushed away, college accounts imploded, prosperous businesses folded. Why did this happen? Not because of inflation.

With all of the investigation about Enron and the horror for its employees, magnify that across the entire nation. Where is the advocate for those families? They suffer while the 'experts' said nothing about the Fed's actions and now while Congress bickers over whether a small part of an insurance policy (the stimulus package, that is) uses government to pay for health care or puts money into the pockets of the individual so the individual can decide what is best. In a free enterprise society, my belief is that the latter is preferable: let the individual decide what is best without requiring more government. In any event, it is a small part of the package, and our Congressmen are fools if they think everything will be roses next year without it.

End Part 1 of 2

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