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day trading, Breakout test
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10/19/06 Technical Traders Report Update
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Technical Traders Report Subscribers:
Full report issues Saturday.
MARKET ALERTS
Target hit alerts: NVEC
Buy alerts: GYMB; LRCX
Trailing stops: SEIC
Stop alerts: RTEC
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the SSR alert service you can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Modest gains as market sorts through earnings, holding its position as it consolidates the last gains
- Philly Fed turns in second month of negative numbers, but the components were strong.
- Jobless claims crack below 300K. How long before Moskow speaks out?
- Earnings have not driven the market higher, but market is thus far riding through the reports, consolidating in place for the next move. Will see if GOOG, BRCM, et al push them through.
Market overcomes mixed earnings, weaker Philly Fed, rises to post modest gains.
It was the Thursday before expiration, and after some stronger volume and somewhat volatile sessions on Tuesday and Wednesday, the market took a day off ahead of expiration. This is rather typical action in expiration week, but it was also constructive. There were some solid earnings reports and some disappointments (AMD) and jobless claims came in below 300K (299K). The market was a bit defensive in response on the open.
That softer open led to a rebound, however, and stocks were positive a half hour into the session. Leading indicators came out at 10ET, and while back to positive at 0.1%, they were still below expectations. Stocks slid back, but made a higher low and started back up. At 12ET the Philly Fed was released, and it posted its second negative reading in as many months. Stocks held the rebound for about 15 minutes but then faded once more. After that fade into lunch, however, stocks started another steady, dogged recovery into the close, managing to turn positive (except for SOX) by the close.
The intraday tests and recoveries seen this week as the indices move laterally and slightly lower is good action similar to what DJ30 and SP500 showed in early October when they consolidated the previous upside move without giving up much ground. There has been some distribution, but that is also attributable to expiration week and traditionally higher volume as positions are rolled over for November. Outside of SOX, the major indices are wading through all of the expiration play, the earnings, and the economic/Fed data in nice shape. They are still below the next resistance levels they could not push through (DJ30's close above 12K was hardly a major breakthrough) and could use more consolidation, but the overall action shows continued support for stocks.
So from a technical stance you have a rather mellow session taking a breather after higher volume Tuesday and Wednesday trade that mostly is a result of expiration. Stocks were weak early but recovered to close positive. They are holding their gains even as they are buffeted by earnings, economic data, and expiration. Volume was flat to lower as the indices more or less paused. Leadership remains in solid shape overall with many stocks pulling back to and holding near support. It is always a good sign when the indices and stocks test by giving up little ground as that means there are few sellers. Friday, however, we are likely to see the volatility and volume (the V-twin effect) return as expiration week closes; that has been the pattern of late. We will look for stocks to continue riding through this week and hold their gains. We will also look for the leaders that have pulled back to be ready if they start coming off the tests, making early moves higher ahead of the rest of the market, kind of like leaders do.
THE ECONOMY
Philly Fed posts second consecutive negative month, but the component parts say otherwise.
The Philly Fed is a strange cat. It was very weak after the 2005 Gulf storms. It was weak to start 2006. It is weak at the start of fall. It was and is in conflict with the other regional and national manufacturing reports. Indeed, it is in conflict with itself.
First, it is very volatile given the relatively small region it covers. It has posted two consecutive downside numbers (-0.7% in October, -0.4% in September), but those follow Augusts reading that was the strongest in over a year (18.5). The Philly report tends to bounce around like a super ball, and these big swings take away credibility in the overall number.
Second, this regional manufacturing report's overall number is not dependent upon its subparts. Respondents are asked their view of business overall, and that is the headline number. Then they are asked regarding the component parts, but those responses are not weighted, aggregated, or otherwise compiled to derive an overall activity level. Thus there is often disparity between feelings and reality. Nothing new there with respect to the economy, and it explains how the overall number is more an off the cuff sentiment measure than a real measure of activity.
The sub-parts were strong. New orders rose to 13.5. Shipments climbed to 5.3. Prices were lower once more with energy declines. The only negative readings were order backlogs and workweek length. The six-month outlook for business activity rose to 16.7, a 5 month high. It was a solid report outside the overall number. Perhaps sentiment was lower overall with the recent slower economic cycle. The economy appears to be picking up once again, however, so this sentiment survey has to be taken in a measured amount.
Initial jobless claims fall to 299K. Fed commentary to come?
In the late 1990's and early 2000 one of the Fed's talking points was jobless claims and employment. As jobless claims fell toward 300K the Fed was talking of a 'tight' job market and 'wage-led' inflation. During this recovery, the Fed was hoping for a decline in jobless claims toward 300K. Different times and different agendas. Back in 2000 the Fed wanted to cool the economy. In 2004 the Fed wanted to get the economy moving.
Now, however, the Fed has two years of hiking under its belt and it is worried about inflation. It has talked some of wages leading to inflation. Now with the jobless claims falling below 300K it is just a matter of time before we hear from our old friend Moskow about a job market that is too tight and just another indication that inflation is out of control. Lacker and Moskow are already on record with their frustration that inflation is not falling rapidly enough. This will only inflame them and we wonder if Moskow will be goaded into once again saying more people need to lose their jobs in order to save the economy. No doubt he was roundly criticized for the callousness of that previous comment, but time has passed and there is a new Fed chairman. He may feel it is his duty to speak out.
We should not be worried about employment. That is what we strive for. A healthy economy generates jobs. Jobs don't cause inflation, improper management of money supply does. If the Fed creates too much money for the strength of the economy, the excess liquidity leads to inflation. The Fed had liquidity too high and then the initial round of tax cuts were demand-side and added to already solid demand at a time when supply was shut down. The excess liquidity from the Fed and the excess demand spawned the inflation we had up to a year ago. Since then Bernanke has bled off the money supply growth, something Greenspan would not do, and that has just about done the trick. We should be happy we have fewer jobless claims and more jobs and worry about how we can keep them as opposed to the belief that we need fewer jobs as a way to somehow protect prosperity. Just common sense tells you that if you have fewer jobs you have less prosperity.
THE MARKET
MARKET SENTIMENT
VIX: 10.9; -0.44
VXN: 16.93; -1.16
VXO: 10.57; -0.69
Put/Call Ratio (CBOE): 0.76; -0.21
Bulls versus Bears:
Bulls: 52.2%. Held steady at 52.2% for the second week. Good to see it stall its advance some, but it is still too high. Up from 49.5% and 47.4% before that. Making some big jumps as the market does the same. This has caught the April high and is moving closer to the January peak at just over 60%. 55% is considered a bearish indication.
Bears: 30.0%. Down modestly from 30.4% after a 3 point drop, the largest of the move, the prior week. Bears are down from 35.4% before that and well off the 37.1% hit in July (the highest level in this entire cycle, easily clearing the 34.4% hit in late June back when bulls and bears kissed, just missing a crossover). It is still well above the 20% level considered bearish, and if it holds at a high level even as bulls move higher, it acts as a governor on the bullishness. Hit a new post-2002 high in that late June move, eclipsing the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005).
NASDAQ
Stats: +3.79 points (+0.16%) to close at 2340.94
Volume: 1.973B (-10.94%). Lower but still above average volume as NASDAQ tested the 10 day EMA and then rebounded to close modestly positive. No complaints about this action; the whole weeks volume is skewed by expiration.
Up Volume: 1.016B (+153.593M)
Down Volume: 921.304M (-408.696M)
A/D and Hi/Lo: Advancers led 1.41 to 1. Modest at best but it matched the session. Breadth has improved markedly in October.
Previous Session: Decliners led 1.04 to 1
New Highs: 150 (-39)
New Lows: 31 (0)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ was soft early, falling below the 10 day EMA (2329) and into the Q1 trading range. It held the line, however, and 'rallied' to close above that level. It was really a slow burn higher to the close, not a rally. However you look at it, NASDAQ did some more of what it needed to do, i.e. test lower into the range, shake out some, and then rebounding to hold above it on the close. That is stronger action than selling into the range and closing there. It is likely not done, but there was some tech movement Friday even before GOOG's earnings announcement that will likely have some coattails on Friday.
SOX (-0.38%) fared a bit better Thursday as it managed to recover from its selling that took it below the 50 day EMA (450.90). It did not recover really as it closed below the 50 day EMA. It did, however, rebound well off of its lows to recoup most of its losses. This kind of hammer doji can indicate a rebound coming; it certainly needs one after the drubbing it took following its Monday tap a the 200 day SMA. SOX needs to recover to also help NASDAQ finish its consolidation and break through its April high. BRCM may provide some help to chips; after hours it reported some solid results and was trading near 30.
SP500/NYSE
Stats: +1 points (+0.07%) to close at 1366.96
NYSE Volume: 1.634B (+0.82%). Volume was up slightly, still above average as the NYSE indices tested lower again and then recovered. A bit of churn similar to Wednesday as SP500 stalls at this level, working laterally. Good to see it holding its gains, but the volume is worth watching. The fact it is expiration is another factor that mitigates the volume action some.
Up Volume: 881.682M (+126.852M)
Down Volume: 740.361M (-82.757M)
A/D and Hi/Lo: Advancers led 1.6 to 1. Fairly modest, but so were the gains. As with NASDAQ, breadth has improved here in October.
Previous Session: Advancers led 1.28 to 1
New Highs: 232 (-73)
New Lows: 12 (+1)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 continued its lateral move following the break higher a week back. It is working laterally, tapping lower and rebounding to close as the 10 day EMA (1359) rises to meet it. That moving average sent it higher on the last consolidation. Five bounces into the move it is more problematical. The higher volume is likely attributable to expiration, but with this many bounces under its belt after the breakout we have to watch this coming week to see if it the volume remains high on a test lower. That would indicate it is going to make the deeper test that often comes after five bounces off the 10 or 18 day EMA after a breakout.
SP600 (+0.42%) was a market leader on the session posting a modest gain after a two-day pullback to test the strong move from last week. It is still easily holding above the 10 day EMA (385.76) and some key resistance at 385 and 383.50. Solid action as the small caps continue to recover their leadership role.
DJ30
DJ30 closed above 12,000 Thursday on lower but still above average volume. There was much rejoicing. Modest move but enough for CNBC to tout 9 records in 12 sessions, etc. What can you say? It has been a stellar move up the 10 day EMA (11,924). It is not stalling, just continuing the move. The import of its action is that the market continues to show a bullish bias. You don't buy into the DJX here or anything like that, but you use the strength in DJ30 and SP500 to give reason to look for stocks that have set up well to move higher when the money hits.
Stats: +19.05 points (+0.16%) to close at 12011.73
Volume: 260M shares Thursday versus 276M shares Wednesday. Still solid above average volume.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
No economic data out Friday, but the key to the early action is GOOG and its bellwether characteristics. GOOG gives no guidance, so that allows it to crush earnings as analysts have nothing to go on and aim a bit low. GOOG was up 8% or so after hours and it has some coattails. BRCM reported some solid results, and while its move was not as spectacular, it was up nicely and could give some lift to the boxed up chip sector.
It is expiration Friday, and the pattern the past few expirations has been a quiet Thursday and then a more volatile, higher volume Friday. If GOOG sweeps things higher early we have to see what kind of staying power the move has. Wednesday tried to make a run and it reversed. Those early jumps can lead to reversals, particularly after good gains. NASDAQ may challenge the April high, and how it reacts will tell us more about where NASDAQ goes from here. It is the next key index to try and break to a new post-2002 high, and if it breaks through (2376) and holds the move that suggests there is more upside to this rally.
If there is a big rush higher we will look to bank some more gain on the move. Then we will see how leaders that have pulled back ahead of Friday react and whether they give us some entry points. Again, a lot of that will be dictated by how they respond to the early move higher. With the Dow and SP500 in their fifth move higher after their breakouts and NASDAQ bumping against the April high, an early gap upside may be fodder for sellers to enter. It may not; GOOG, BRCM, et al may have finally provided the ammunition for a NASDAQ break through resistance. This market may be a bit extended, but that has not kept it from moving still higher.
Support and Resistance
NASDAQ: Closed at 2340.94
Resistance:
2376 is the April high, the post-2002 high
2384 is an interim peak from January 1999
2493 is an interim peak from February 1999
Support:
2333 is the top of the Q1 2006 trading range (the January and mid-March 2006 highs)
The 10 day EMA at 2329
2316 from interim tops in January and March 2006 trading range
The 18 day EMA at 2306
2273 is the recent September peak
2250 is the March 2006 closing low.
The 50 day EMA at 2242
2234 is the June 2006 peak (intraday)
The 200 day SMA at 2227
2225 is the August 2004/April 2005 up trendline
S&P 500: Closed at 1366.96
Resistance:
1371 to 1373 is the December 2000 peak and the January 2001 peak
1378 is a low from May 2000
1389 is a low from November 1999
1398 is a low from January 2000
1401 is a low from April 2000
Support:
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February 2002 low at 1360.
The 10 day EMA at 1359
The 18 day EMA at 1351
1339 is the late September closing high
1334 is an October 1999 peak
1326.70 is the May 2006 high
1324 to 1329 from the October 2000 lows.
The 50 day EMA at 1325
1311 is the April closing high.
1302 the recent August highs
1294 is the January 2006 high and 1297.57 is the February 2006 high.
Dow: Closed at 12,011.73
Resistance:
12,000 is proving to be some near term psychological resistance. Broke through Thursday but barely.
Has broken free and now we just look at how far above its 50 and 200 day SMA it gets to gauge how overbought it is. It is 6.9% above the 200 day SMA so it has some room before it gets to the 10% level where it typically will start to falter.
Support:
The 10 day EMA at 11,924
The 18 day EMA at 11,844
11,750.28 is the prior all-time high
11,723 is the January 2000 closing high
11,670 is the May intraday high
11,642 is the May 2006 closing high
The 50 day EMA at 11,609
11,488 is the early September high.
11,401 from the September 2000 peak and April 2001 highs
11,384 is the August intraday high.
11,350 from the May 2001 peak
The March 2006 highs at 11,329 to 11,335
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
October 16
NY Empire Index, October (8:30): 22.9 actual versus 12.0 expected, 13.8 prior
October 17
PPI, September (8:30): -1.3% actual versus -0.7% expected, 0.1% prior
Core PPI, September (8:30): 0.6% actual versus 0.2% expected, -0.4% prior
Net Foreign Purchases, August (9:00): $116.9B actual versus $53.0B prior
Industrial production, September (9:15): -0.6% actual versus -0.1% expected, 0.0% prior (revised from -0.1%)
Capacity utilization, September, (9:15): 81.9% actual versus 82.2% expected, 82.5% prior
October 18
CPI, September (8:30): -0.5% actual versus -0.3% expected, 0.2% prior
Core CPI, September (8:30): 0.2% actual versus 0.2% expected, 0.2% prior
Housing starts, September (8:30): +5.9%
Building permits, September (8:30): 1.691M actual versus 1.715M expected, 1.727M prior
Crude inventories (10:30): 5.1M this week, 2.408M prior
October 19
Initial jobless claims (8:30): 299K actual versus 310K expected, 309K prior
Leading Economic indicators, September (10:00): 0.1% actual versus 0.3% expected, -0.2% prior
Philly Fed, October (12:00): -0.7 versus 6.5 expected, -0.4 prior
End part 1 of 3
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day trading
Breakout test
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