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us stock market, trend trading stock
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12/21/01 Technical Traders Report
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Technical Traders Report Subscribers:
Merry Christmas!
Holiday schedule: Monday the market is open until 1:00 ET. Accordingly, today's report consists of those stocks we consider best plays for Monday and Wednesday. In order to give the staff time off for Christmas, after the weekend report, our next report will be sent Wednesday night, December 26.
MARKET ALERT SERVICE
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- A rebound on strong expiration volume, but it did not change the character for now.
- Sectors still showing good upside groups and good downside groups.
- Smaller stocks showing some good action.
- Consumer expectations rise unexpectedly.
'Old' reasons to buy overcame Thursday's reasons to sell.
Thursday fears of a not so quick recovery on several earnings warnings and shortfalls was countered a bit today by some better than expected earnings prognostications. Nortel (NT) stated its expected loss would be less than forecasts. Manugistics (MANU) reported an improved outlook, adding its name to the long list of those companies that have already done so. The semiconductor book to bill ratio rose to 0.73; both orders and shipments were down, but orders where higher, and that pushed the index higher. UBS Warburg took that as a sign that the semiconductor sector had in fact bottomed.
The indexes gapped higher and managed to hold the moves all session, though trading in a very narrow range. The Nasdaq cleared the 200 day MVA once again and the Dow cleared 10,000. Volume was very good on the up session. Those are the earmarks of a good session, but how much trust can we put into them?
Options expiration added volume and the indexes are still below key resistance.
Thursday saw strong volume as positions were squared for the triple expirations. Friday's volume made it apparent that more positions were being squared in addition to those on Thursday. No doubt the upside bias was helped by the announcements of improved forecasts and the improving economic numbers, but the very heavy volume before a holiday weekend indicates there was more than just buying by the bulls.
Moreover, the action did not change the picture much, especially when you factor in that the increased volume was almost certainly due to options and futures expirations just as it was last month. The Nasdaq climbed back over its 200 day MVA, but it was not able to make any real headway toward overtaking its up trendline once again. The Dow cleared 10,000, but it tested the 200 day MVA and pulled back 35 points to the close. It is still showing signs of a head and shoulders/double top pattern. The S&P held steady, unable to break over resistance at 1150 nor the March 2000 down trendline. It too is still threatening that head and shoulders pattern, though not completed of course.
In other words, even though the indexes moved higher today on strong volume, it did not appear to change the character a whole lot. The indexes broke their uptrends starting two weeks ago, and though they are holding up and trying to form consolidations here, the patterns are equivocal at best. The breach of the uptrend changed the character, and the volume has been back and forth last week.
Does confusion reign? There are some great upside sectors and some downside sectors.
With the improving economic numbers we are seeing and better reports from companies, the overall picture longer term is still positive. Right now, however, the indexes are struggling to find footing for the near term. There has been some doubt case upon the speed of the recovery given the JNPR, et al warnings, but overall there is real improvement. The question is what happens now.
Even with the short term equivocation in the market, there are some very good sectors that look to move higher and some that look to move lower. Despite all of the talk of a bad holiday season, retailers are performing very well. In addition, we see many smaller tech and other small stocks perking up with quite a bit of upside pressure. These are in computer equipment and peripherals, some software, some health services, and food. We have picked the best for the report
It is no surprise that these small stocks are looking better. The 'January effect' starts in earlier and earlier, now cutting into December. That explains the upside, building patterns we see in these stocks similar to what we saw in the semiconductors a couple of months back. Mutual funds start picking up these stocks as they feel they have the best upside potential for the year ahead. It is somewhat of a self-fulfilling prophecy: mutual funds move their big money into the stocks, and sure enough, the start moving higher.
As for the sectors looking lower, some big money banks and investment brokerages look weak. Some of this is due to the problems in Argentina and exposure there as well as continued concern about the Enron fallout. We see several descending wedges and possible head and shoulders patterns setting up, and we are incorporating the best ones on the report as well.
Thus, the market overall is showing strain yet resilience; its constituent stocks are doing the same, and we can take advantage of that by recognizing them to make some quick downside money and take advantage of good upside moves that take advantage of the overall sense that the economy and thus earnings will improve.
THE ECONOMY
The news Friday was better than expected in all instances, some actually good news while other reports were just not quite as bad as expected. That last part seems to be a recurring theme in the land of economic forecasting. Just as economic reports back in the spring of 2000 were coming in still good but consistently weaker and below expectations, now they are coming in better and better and beating expectations. Back in 2000 the weaker readings were dismissed; the economists saw continuing strong numbers and could not fathom that they were the start of the end. We have seen the same thing on the flip side. When the economic numbers started improving last summer, most dismissed them, but the evidence of improving numbers was there just as the signs of weakening were there in early 2000. Now more are confident of the recovery, but it is not universally shared.
The big story was consumer confidence in the Michigan survey. Expectations were for 85.8 for December, up from 83.9 in November. The actual number was 88.8. That is getting downright respectable when viewed on a historical basis. Confidence was way up in 1999 and 2000, well above historic norms. A climb back into the nineties seems at hand, and that bodes well for continued buying ahead. The Congress just needs to help ensure that the supply will be there to avoid inflation. That has to do with proper stimulus, something we have discussed before, and something that will not be addressed now until well after January 1.
GDP was the other headline news, and it came in at -1.3% as opposed to the -1.1% previously reported. Despite some supposed surprise shown by television anchors on the news, with the sharply lower inventories just recently reported, the lower number is not surprising. Inventories are considered part of the GDP; if they are showing consistently negative growth, that impacts GDP to the downside.
Personal income fell 0.1%, but expectations were for a 0.2% drop (although originally in the week, expectations were for a flat report, not a loss at all). Personal spending dropped 0.7%, below the revised expectation of a 0.8% drop (it was just a 0.5% drop earlier in the week). Not impressive numbers heading into the December shopping season, but all things considered with the 9-11 attack, it is not bad at all.
THE MARKET
A very nice recovery Friday from Thursday's expiration-related selling, but with the indexes not breaking back over resistance levels, we were not closing out our index puts just yet.
VIX: 23.29; -1.09. After the tepid jump Thursday, volatility tanked back down Friday even more, edging toward that 20 to 22 level that marked the summer doldrums. Despite this, we have to keep the overall picture in mind: the VIX is best as an indicator when it is at extreme levels. It flashed very high extremes when the market reopened after the 9-11 attack. Since then it has bled back, but it has not reached extremes on the other side that would show true extreme complacency.
VXN: 50.96; -1.95. Gave back over half of Thursday's gain, but still holding at levels above the summer blues. Much as with the VIX, it flashed extremes in late September, and as noted Thursday, it still readily spikes higher on any selling. That indicates there is still enough anxiety in the market to keep climbing that wall of worry.
Put/Call Ratio (CBOE): 0.69; -0.28. As fast as it shot up on Thursday, put activity dropped Friday. But even with the plunge, it is still at 'high' levels. That continues to provide a contrary indicator, i.e., still enough anxiety to keep things moving higher.
Nasdaq
A lower low Thursday on a big point drop, but a bounce back over the 200 day MVA Friday on big volume. Still hanging onto the handle consolidation to its move up off of the September low, but we cannot take much from the option expiration volume Friday as to whether this was an accumulation day.
Stats: +27.29 points (+1.4%) to close at 1945.83.
Volume: 2.365 billion shares (+15.8%). Volume shot up Friday, easily the highest since the big rally day on December 5 (2.77 billion). Still, it was an impressive, day, easily outstripping the volume on the October and November expirations. We have to consider, however, this was the last expiration of 2001, and it also coincided with rebalancing on the Nasdaq 100.
Up volume: 1.584 billion
Down volume: 717 million. Up volume did not outpace Thursday's down volume even on the higher volume up session.
A/D and Hi/Lo: Advancers stormed back into the lead at 1.56 to 1; still below Thursday's 1.88 to 1 decliner lead.
New highs: 86 (+10)
New lows: 34 (-8)
The Chart: http://www.investmenthouse.com/cd/$compq.html
After blowing down through the 200 day MVA (1930.40) Thursday, the techs gapped back over that key level Friday, tested it on the low half way through the session (1931.87), and then rallied back up to close positive on the session. This keeps the index above the late November consolidation level and the 200 day MVA; when a stock or index breaks below a key support level, if it can jump back over it the next session on good volume, that move can be forgiven. The move keeps the Nasdaq in what is more of a consolidation handle of its plunge in May to September and rally back up to early December. Volume was outstanding, but it is mitigated again by the triple witch and the Nasdaq 100 rebalance. It has the makings of a good test and reversal. Even if it does not follow through on Friday's move, the big cap heavy index most likely will not stop the smaller stocks we are seeing improve in their building patterns.
Dow/NYSE
As with the Nasdaq, after breaking below 9992 Thursday, the Dow turned and ran right back up through that level on tremendous NYSE volume. It made run at serious resistance at the 200 day MVA, but never really tried to challenge it; thus the third challenge is still ahead. There is that old rule, three strikes and you are out. the Dow needs to break the level this time.
Stats: +50.16 points (+0.5%) to close at 10,035.34.
NYSE Volume: 1.707 billion shares (+14.5%). Options expirations and the S&P rebalancing no doubt had an impact on volume, but it was tremendous volume nonetheless, the highest since the big rally of December 5. If it can keep this action moving post-Christmas, it has a very good shot at making number 3 the charm.
Up volume: 1.085 billion
Down volume: 606 million
A/D and Hi/Lo: Advancers took a strong lead at 1.88 to 1 (decliners led 1.47 to 1 Thursday). Good action.
New highs: 78 (-5)
New lows: 48 (+8). Surprising action given the upside move.
The Chart: http://www.investmenthouse.com/cd/$indu.html
You can look at this chart different ways. One of the precepts of technical analysis is that you don't read things into a chart that are not there. In other words, if the chart is not clear, don't try to anticipate too much; let it show its hand. The Dow has now tested the 200 day MVA (10,104.26) twice now, making a slightly lower high on the last test. The pattern can be viewed as a bearish head and shoulders or even a double top, or as forming a more bullish ascending wedge. Now the wedge pattern is not there yet, and it is not the best wedge anyway (we would want the highs in the pattern to be the same level, but it is close). In the same sense, the head and shoulders is not there either as that pattern is not completed until the index falls to the neckline that is right at 9700 (right at the 50 day MVA at 9770.18). We have some downside puts on the index, but if it breaks over the 200 day MVA and holds on the close, we will have to start closing those out. We did not do that Friday because (1), it was not over the 200 day MVA, and (2) the index has broken its up trend and was failing again at the 200 day MVA. Friday was a positive with the massive upside volume; we will have to let the pattern play out to tell us what is going to happen. Without totally ignoring everything just said about letting the pattern speak to you, we have a felling it is going to fail in this test for the time being.
S&P 500: The S&P rallied from Thursday's selling, and it did it on that very heavy NYSE volume. Still, it logged just a small gain, failing to take out resistance at 1150 (1147.83 on the high) or the March 2000 down trendline (just under it on the close; it starts at 1143 Monday). The big caps are struggling, forming a head and shoulders pattern with an anemic right shoulder. We took some downside positions on Thursday's selling, and will look at more on continued downside action. The real breakdown in the pattern, however, will be at 1125. We do not like the action we have seen, and that is why we were taking downside positions ahead of the true breakdown; aggressive, but the index was failing again at key resistance. If this does break down here, it could test all the way to 1050.
Stats: +4.96 points (+0.4%) to close at 1144.89.
Volume: NYSE volume rocketed to 1.707 billion shares (+14.5%), aided by the triple witch expiration and the S&P rebalancing on Friday.
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
A holiday shortened week, but still plenty of trading time. Volume was high late last week, but we doubt it will be nearly as strong this week. Nonetheless, we remain excited about the prospects of putting good money into our pockets on the short week. The reason is that we see good downside patterns in large stocks that have been the most sluggish of late, and good upside patterns in many of the smaller cap stocks that tend to move well after Christmas, into January and on through the spring. We have often made good money between Christmas and New Years, both taking short term positions to generate cash that week and longer term positions to ride that buying spree that accompanies a new year with a stronger market and the prospects of a better economy.
Thus, while many traders and investors take the week off, we are going to enjoy family and the gifts we have been given, yet we are also going to take advantage of what is being offered up in the market. We think it will be well worth our time and a great way to end the year and bring in the new.
We really like this dichotomy because it is so fitting for the time of year: big stocks under some pressure and small stocks building upside pressure. That gives us many opportunities: quick money to the downside if the selling of the big caps gets a bit more intense and good entry points for solid moves to come in the smaller issues. It is somewhat like going to the cafeteria and getting to pick and choose exactly what you want. No earnings are scheduled and the economic news will be light until Friday. there is also the perception that Congress will in fact return and be more or less bound to pass a stimulus package.
Maybe hope springs eternal on this subject as well, but it will be hard to answer to the public with a slower GDP than expected and the fact that there are still hundreds of thousands of people out of work who were just working 4, 5, 6, 9 months ago. It is stupid to scuttle a stimulus package to give them unemployment benefits and get them a job, opting to let them suffer through Christmas wondering whether their leaders really give a damn and whether action will be indeed taken to get them back to work. Hell, it was the government through the Fed that caused or allowed the problem to develop; the government should get back in and rectify what it wrecked.
That gripe out of the way, again we remain excited about the prospects for this week. Have a wonderful Christmas and enjoy family, friends, and all the other gifts we have in this great country.
Support and Resistance
Nasdaq: Closed at 1945.83.
Resistance: Cleared the 200 day MVA (1930.40) and back over the consolidation tops (1934 to 1941). The next resistance point is the 1980 gap up point. 2000 (the interim top is at 2010.91) is still resistance. The up trendline is at 2020.
Support: Maybe the 200 day MVA (1930.40) will hold along with the 1934 level. The 50 day MVA (1886.94) is next.
S&P 500: Closed at 1144.89.
Resistance: Still at 1150 (former price consolidations). The March 2000 down trendline at 1143. Then the December high at 1173.62. The 200 day MVA 1169.11. The up trendline is at 1178.
Support: 1125, former price consolidations, and the 50 day MVA (1128.27). After that, 1100 is next (top of the October consolidation range).
Dow: Closed at 10,035.34.
Resistance: The 200 day MVA (10,104.26) remains the big wall to climb. The up trendline at 10,130. The December high is at 10,169.44.
Support: The 50 day MVA is at 9770.18. After that, 9500.
End Part 1 of 2
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us stock market
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