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us stock market, trading system
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10/21/06 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Target hit alerts: Took some interim gain on AMX, KNOT
Buy alerts: UARM
Trailing stops: BHE
Stop alerts: MOLX
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:
- Stocks close mixed on a rather quiet expiration, still trying to consolidate gains in place.
- Bonds are still not convinced the economy will continue its rise.
- Market weathering earnings as NASDAQ & SP600 test and try to set up for next move higher.
- Subscriber Questions
Some big individual moves Friday, but the market closes flat to end the week.
GOOG posted some impressive earnings while CAT missed and provided disappointing guidance regarding the housing market and thus CAT's 2007. GOOG up; way up. CAT down; way down. There were some other similar earnings stories, but for the most part earnings impacted the specific stock reporting (though CAT's miss was so impressive it bled to other stocks in its sector) while the rest of the market pretty much sat still to close out the week. Indeed, the indices closed mixed and basically on the flat line outside of the small and mid-caps. Even those losses in the smaller caps were well under 1%.
Oil was sharply lower despite OPEC officially voting to reduce production by 1.2M bbl/day. It closed at an 11-month low at $56.82 (-1.68), but that was the November contract that expired Friday. The December contract was trading over $59/bbl and thus we could see oil at $59 to $60 early this week, and the market seemed to see through the drop in the November contract as it did not derive much momentum from the sharp decline.
The result was a market that was overall stuck in time and in place, waiting on the next week to come after spending this week consolidating some of the prior gains. NASDAQ and SP600 put in some nice work, fading modestly after the good breaks higher two weeks back. DJ30 just continued to work higher, and SP500 closed higher for the week as well, though it moved laterally on the week, consolidating somewhat itself. Indeed, the action was not bad at all given earnings season kicked into high gear and the market had run higher ahead of the season. Many times when the market moves up before earnings it falls as the reports hit. This time, despite the pre-earnings run, stocks are resisting the urge to sell off. Bulls are running pretty high, but so are bears. The combination of skepticism and continued money rotation helped hold the market gains.
Technically the week encountered some issues, namely some distribution on NASDAQ and some churn on SP500 (high volume after a run higher but the index goes nowhere). Given it was expiration week and the distribution and churn occurred midweek, the higher volume was likely the result of expiration as the pattern matched previous expiration weeks. DJ30 managed to close above 12K, but it is hard to say it clearly broke through that level after playing footsy with it for a week. NASDAQ tapped at the April high to start the week but faltered, fading modestly. SOX tapped the 200 day SMA on Monday but then fell like a stone. Meeting resistance and basically foiled, but it was not a reversal by a long shot, at least not for NASDAQ or the Dow. Breadth remains on much more solid footing, and leadership mostly held above near support.
That leaves an overall solid picture with the indices holding most of their gains even as the market sputtered as earnings came fast and not so furious with respect to guidance. The fact that they held up through this first round of earnings after rallying ahead of the releases is notable, and with NASDAQ pulling back, once they are digested it is ready for a break higher once more to take on the April high.
THE ECONOMY
Bonds and stocks await Wednesday FOMC meeting.
The Fed meets for the third time since its decision to pause on rate hikes in August. There is a splinter group on the Fed with Lacker, one of the newbies, adamant more hikes are needed. He has expressed his concern that inflation is not falling fast enough. Moskow has not dissented yet, but he also expressed his concerns re the slow progress on the inflation front. As discussed last week, this impatience is often what kills the market as the Fed abandons its game plan and locks onto its inflation boogeyman.
The bond market was coming more in line with the stock market gains as yields rose. Unfortunately, the inversion has not disappeared. Indeed, it has widened to 8 basis points after hitting 9 on Thursday and early Friday. That is not a whopper, but it has sustained itself for a couple of months after momentarily reverting after the August FOMC meeting where the Fed first paused. Prior to that the inversion held for a few months. An inversion can either be big (25 to 30BP) and not have to last a long time or it can be smaller and last a long time like a Tootsie Roll. Either one can get you to a recession.
Seems the bond market has come part way to the meet the stock market with yields recovering from the 4.5% range (for the 10 year), but it is not letting go of the inversion. It is holding back, anticipating that the Fed is not out of the picture yet. Yes it rebounded with yields after overshooting on the economic downturn, but it is not convinced the Fed won't go too far. Indeed, because the economy is returning to some vigor after a Q3 slowdown there is concern that the Lackers and Moskows on the FOMC might gain some followers. As we have noted before, the Fed and its tough talk about inflation comfort zones has left it little wiggle room if its pet indicators remain elevated. There already were grumblings at the last meeting about losing its reputation on inflation if it did not act.
On the other hand Poole indicated a couple of weeks back that the Fed should follow the market with its monetary policy. If it was doing that it would look at the inversion and not try to explain it away as being different this time. Instead it seems to have swept it under the rug, but the inversion is growing again and that continues to be a significant development. The Fed won't likely raise rates Wednesday, but we will be in the dark as to the outcome of the debate until next month. Maybe by then the Fed's pet inflation indicators (CPI, PCE) will have cooled, finally following ECRI's lead.
THE MARKET
MARKET SENTIMENT
VIX: 10.63; -0.27
VXN: 16.7; -0.23
VXO: 10.46; -0.11
Put/Call Ratio (CBOE): 0.8; +0.04
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: +1.36 points (+0.06%) to close at 2342.3
Volume: 1.915B (-2.92%). Volume backed off on expiration Friday, even lower than Thursdays lower trade though still above average. Volume was up for the week, particularly on the Tuesday and Wednesday selling. Some distribution but also expiration week. In the end it was a modest pullback that held above the Q1 trading range. Not bad.
Up Volume: 971.416M (-44.177M)
Down Volume: 895.758M (-25.546M)
A/D and Hi/Lo: Decliners led 1.54 to 1. Breadth markedly improved on this October move, and that did not change even on this pullback week.
Previous Session: Advancers led 1.41 to 1
New Highs: 137 (-13). New highs have not ratcheted higher on this move, indicating that the larger cap techs are making the moves as the index is market cap weighted and about to surpass the post-2002 high.
New Lows: 34 (+3)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ tried the April high to start the week and then spent the rest of the week fading back from that high as it worked through the earnings ups and downs. It rallied into earnings and some giveback is normal, particularly combined with the test of the post-2002 high. It held the 10 day EMA (2331) on the pullback. May need more of a consolidation this week as more earnings come out; another lateral move would set it up well for another try at that April peak (2375.54). With all of the earnings thrown at it last week and SOX' tumble, it did an admirable job.
SOX (-0.41%) had another rough session, falling below the 50 day EMA (450.76). Not nearly the hammering it took Tuesday and Wednesday, but was unable to capitalize off of the Thursday doji at the 50 day.
SP500/NYSE
Stats: +1.64 points (+0.12%) to close at 1368.6
NYSE Volume: 1.635B (+0.01%). Volume held steady, remaining above average as SP500 continued moving laterally. Rising volume Wednesday through Friday indicates some churn as SP500 could not push higher, but it was expiration week.
Up Volume: 707.352M (-174.33M)
Down Volume: 880.266M (+139.905M)
A/D and Hi/Lo: Decliners led 1.2 to 1. Very modest. Breadth has improved nicely this month.
Previous Session: Advancers led 1.6 to 1
New Highs: 195 (-37)
New Lows: 10 (-2)
The Chart: http://investmenthouse.com/cd/^gspc.html
The large caps spent all week moving laterally, unable to extend the prior weeks short but solid break higher. The 10 day EMA (1361) rose to meet the index at the end of the week with SP500 tapping it on the Friday low before rebounding. Similar to the move to start October though a bit more ragged. The financial stocks took a break during the week as well, and thus so did SP500. Still in the fifth bounce after the mid-August breakout, and that leaves it vulnerable to a further fade.
SP600 (-0.66%) continued its test, tapping the 10 day EMA (386.10) on the low. Very solid action to test its strong break higher last week that took it over resistance in its 6 month base. Solid support at 385 and 383.50, and SP600 is showing the kind of action that suggests another move higher.
DJ30
Finally cleared 12,000 late in the week, but it was no strong move closing off the highs Wednesday and Friday. According to all of the financial and indeed all of the news stations it was a banner week with that close above 12,000. In reality DJ30 could not make a strong move through that level, struggling to put some teeth into its fifth bounce off the 10 day EMA (11,938) after the mid-August breakout. As noted Thursday, this is not a level you buy into, but it shows how strong the move has been. Money will move around as DJ30 tests, and that is where the other sectors start their moves.
Stats: -9.36 points (-0.08%) to close at 12002.37
Volume: 313M shares Friday versus 260M shares Thursday as CAT made up 68M of that.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
Stocks held up pretty well last week for a test, particularly given the run higher ahead of earnings and the less than outstanding guidance plaguing techs and indeed other sectors as well. The action turned a bit volatile, but it was expiration week as well and while jittery, stocks mostly held their near support. In short, some stalling in the move but no collapse by any means. Indeed, NASDAQ and SP600, the latest indices to make significant breaks higher, are engaged in nice tests of their moves, and that bodes well for a continued move higher.
The issue here is how long it takes to consolidate the last move higher before NASDAQ and SP600 are ready to continue playing catch-up to the NYSE large caps. SP600 looks about there, and NASDAQ could go at any time, but the techs could use a few more days to really set up the run toward the April high, its next major breakout point for NASDAQ and indeed the rest of the market.
It certainly will have something to think about as the FOMC meets on Wednesday for a 1-day meeting with Lacker and Moskow getting impatient. There will also be about a ton or two more earnings reports. The market has not really had enough time after the run higher into the results to sit back and digest the news. It will likely take some more time ahead of the FOMC meeting and then start a modest move on Wednesday ahead of the announcement. When the market gets confirmation that the Fed has held and the statement is not breathing brimstone it could make its move at that point.
The good thing about the test is that it is putting some great stocks in position for new buys and with money still rotating through the market we want to be ready when they start their moves once more. The bond market inversion remains a concern down the road, but near term the market continues to show improvement. Yes there was some distribution last week, but as we noted at the time, that was likely mostly attributable to expiration week. Before expiration the price/volume action was solid, and even through expiration week breadth improved nicely, and leadership held strong. Though SP500 and DJ30 remain extended, NASDAQ and SP600 are making nice tests after breakouts that showed a definite movement of money back to these areas. After this test they will be ready to continue playing catch-up.
Support and Resistance
NASDAQ: Closed at 2342.30
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 2331
2316 from interim tops in January and March 2006 trading range
The 18 day EMA at 2310
2273 is the recent September peak
2250 is the March 2006 closing low.
The 50 day EMA at 2245
2234 is the June 2006 peak (intraday)
The 200 day SMA at 2228
2226 is the August 2004/April 2005 up trendline
S&P 500: Closed at 1368.60
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:
The 10 day EMA at 1361
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February 2002 low at 1360.
The 18 day EMA at 1353
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 1327
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 12,002.37
Resistance:
12,000 is still some near term psychological resistance despite closing over that level Thursday and Friday.
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 11,938
The 18 day EMA at 11,860
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 11,624
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 25
Existing home sales, September (10:00): 6.25M expected, 6.30M prior
Crude oil inventories (10:30): +5.02M prior
FOMC policy statement (2:15): Fed Funds Rate at 5.25% and expected to hold at that level.
October 26
Durable Goods Orders, September (8:30): 2.3% expected, 0.0% prior
Initial jobless claims (8:30): 308K expected, 299K prior.
New Home sales (10:00): 1.05M expected, 1.05M prior
October 27
GDP advance, Q3 (8:30): 2.1%, 2.6% prior
GDP Chain Deflator, Q3 (8:30): 2.9% expected, 3.3% prior
Michigan sentiment (revised), October (9:45): 92.5 expected, 92.3 prior
SUBSCRIBER QUESTIONS
Q: You always point out the delta when buying an option. Is it better to have a high delta or a low one?
A: An option delta measures approximately the change in the option price for every $1 change in the underlying stock price. For example, if a call option has a delta of 50 (it can also be shown as 0.50), for every $1 the underlying stock moves up or down, the option will move, all other things equal, 50 cents. A put option delta is designated as a negative; if the stock moves up it moves down and vice versa. Typically the deeper in the money and the closer to expiration, the higher the delta.
As the delta represents the percentage the option will move in relation to the stock, the higher the delta the better the move. We prefer higher deltas for various reaons. One of the primary reasons is that the option will move better when the stock moves and that makes us a better profit on the play. Getting a higher delta, however, has to be balanced with the cost of getting that delta. If the cost is high the precentage gain may be less even though the higher delta option generally increases in value more rapidly.
We always look at the available options to see if it is a better value to buy a closer to the money option than a deeper in the money option (e.g., a $12.50 strike call option on a $13 stock as opposed to a $10 strike call option) even though that deeper in the money option has a higher delta. The idea is to get the best value for the price that will deliver the best return. As a general rule we like a higher delta, but we always then run the numbers to see what the anticipated profit will be given the anticipated move in the stock.
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Q: I look at after-market activity for the previous day and pre-market data before I start the new investing day. I see shares moving 10% and more up and down in post and pre-market action on ECN's, usually with low volume. What is the best way to take part in Pre- and Post Market activity?
A: Trading before and after the open and close has improved with more efficient trading systems and better liquidity. Anything to help match up orders helps, and with more individuals participating it has helped liquidity. One of the problems with trading outside 'normal' hours is that there is no market maker; orders have to be matched based on size and price. Thus you can put in an order at the ask or bid and not be filled simply because there is no matching counterpart to your order. Thus it can be hard to get out of positions in the outside hours.
The price swings you see are typical of these sessions. As we see with light volume days, if one side of the market takes over it can push prices hard. Or you can have big swings back and forth. It comes back to liquidity, and with fewer participants it is harder to find an equilibrium price and thus the price swings. You might want to buy for a quick turn for that 20% move, but due to the matching system of orders you may not get the other side of your play completed. Also, the closer you get ot the open premarket, the more realistic a price you will have versus say 1.5 hours before the open. After the close the further you move from the bell, the less and less relaible the action becomes.
This does not mean you cannot buy and sell in the outside hours and make money. Things have improved as far as matching orders. You have to know going in that getting the fill moving into and out of positions is not as simple as during regular hours.
End part 1 of 3
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