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THE MARKETS

Anticipatory rises in all of the major indexes gave way to immediate selling in the aftermath of the Fed's decision. A weak rally attempt was simply an opportunity to dump positions before things got really ugly. All three indexes quickly turned negative and sold on heavy volume. Things will remained locked in their downtrends. Does not mean we will not get bounces back up; we always do. We just keep our eyes on the trendlines when we play positions to the upside and flip to the downside when they bounce off of those trendlines. Yo-yo the positions and make money; it has been fairly predictable. We also look at good patterns in defensive sectors for the upside plays. Those are proving solid even in this market.

Overall market stats:

VIX: 30.73; -0.72. Volatility moved down even as the Nasdaq hit a new low for the year. We are not getting a push in volatility to the upside that we need for a reversal. At this point, by reversal we mean bounce, not a real turn and race higher.

Put/Call ratio: 0.76; +0.21. Put buyers rose, but did not dominate. We may see more put buying tomorrow. Now that the Fed did not cut rates, many will think the market is only going lower (correct view). That should start pushing the ratio higher, and that brings us closer to a turning point in the future.

Even if the above indicators give us favorable signals, for a lasting move we need a tangible change in the environment for stocks that will build on the sentiment. That would be a powerful hand-in-hand signal, but we have neither right now.

NASDAQ: New intraday and closing low for the year on heavy volume. The techs did not have much of a chance after the Fed announcement. The mild bounce after the initial selloff just gave room to clear out positions before the real selling started. If futures weaken again, we could see a test of 2400 tomorrow. After six days of selling, that could finally give the markets a bounce up for a day or two. After the news today, we have to see where it tries to make a stand before going to test 2000.

Stats: Down 112.81 points (-4.3%) to close at 2511.71. A 185 point range today.
Volume: 2.319 billion shares (+12.3%). Volume swelled on the selling as investors dumped shares on the view that the market would not improve in the short run. 1.895 billion downside shares versus just 369 million upside shares.
A/D and Hi/Lo: Declining issues strengthened their lead to 1.97 to 1. New highs rose to 84 (+19) versus 480 new lows (+104).

The Chart: http://www.investmenthouse.com/ch/nasdaq.html

The techs hit a new low today intraday (2509.76) and closed at a new low. The Nasdaq looks destined to test the 2200 to 2000 level before this is all over. After six days of selling, a strong open to the downside could give us a reflex bounce to the upside. We have to watch resistance at the 2500 level on any reflex move.

Dow/NYSE: The Dow was up triple digits, fought off some selling after the Fed announcement, but then cratered. A 200 point range on the session on higher, distribution volume.

Stats: Down 61.05 points (-0.6%) to close at 10,584.37.
Volume: NYSE volume jumped to 1.316 billion shares (10.7%). Down volume came in at 642 million versus 625 million to the upside.
A/D and Hi/Lo: NYSE advancing issues hung on for a 1.02 to 1. New highs rose to 229 (+5) and new lows rose to 116 (+12).

The Chart: http://www.investmenthouse.com/ch/djia.html

The Dow climbed to 10,784.58 on its high, right at the 10,800 level that has offered some resistance this month. Then it rolled over and got downright ugly, closing just below the 10,600 level that marks the upper side of the 10,300 to 10,600 range (or the lower side of the 10,600 to 10,900 range). What used to hold up the Dow at 10,900 appears to be shifting down to 10,800. That is important as that marks the down trendline the Dow is not having difficulty breaking. Indeed, the Dow closed below its 50 day moving average (though still above its 50 day simple moving average at 10,561.03). It seems destined to re-test the 10,300 level, and if there is no economic change, even the Dow's defensive elements will not be able to hold the index up, and a test of 10,000 looks possible.

S&P 500: The 500 big caps turned in the second worst performance of the day, testing once again the 1305 level it just tapped on Friday. Heavy volume indicates further distribution occurring, and it looks as if the big caps are going to test the year low at 1294.90 tomorrow. That does not look like much of a challenge given the futures readings we are seeing. What is going to be really interesting is the 1270 level that could possible be in jeopardy over the next few sessions. Now with all of the selling, the S&P could also try a reflex bounce as it approaches the low for the year. That will most likely come after a morning of selling.

Stats: Down 17.14 points (-1.3%) to close at 1305.60.
Volume: NYSE volume grew 10.7% on the selling. More distribution at hand as institutions sell shares in preparation for more downside.

The Chart: http://www.investmenthouse.com/ch/sp500.html

TOMORROW

The big news is out. The rest of the news this week will be more or less proving or disproving the Fed's decision. Tomorrow we get November housing starts and building permits. Housing starts are expected to edge up just slightly as mortgage rates have continued to fall. Again, this news is not going to move the markets one way or the other. Indeed, today there was talk of an interim Fed rate cut in early January. That could happen, but the Fed is going to wait to see what the initial reading on fourth quarter GDP is before it acts. Does the Fed know what GDP will be ahead of time? Remember when McTeer said not to be shocked by the lower third quarter number that was going to be released in early October? Sure they know or at least have a very good idea. So do we.

In any event, after today the markets are going to be feeling around for a point to bounce. The Nasdaq has been hit with six consecutive selling days; a quick downdraft in the morning well down into the 2400's could set off a reflex bounce on the theory that there is no more bad news out there for now. That is the problem on the day after. The markets have to find out which end is up, what the near-term bottom is, etc. The market has shown strong bounces off of this pattern: several days of selling with a climax gap down and then reversal. We are looking to take positions on the really roughed up high-fliers with stock and/or call options on the reversal after a test of 2400 or lower and ride them up for the gain. The plan will be to get the heck out when it looks as if the move is slowing. We will then look for downside plays as stocks move up to encounter their down trendlines; those down trendlines, however, are a long way away from the close and after hours carnage today. This is aggressive trading, but it can net us some great gains to save until the Fed starts to loosen rates.

Don't get a distorted view. The selling in technology has opened doors in other stocks that we have been riding up as the techs sell. There are pearls even when the former leaders are getting taken to the woodshed. We continue to look at good upside plays in rising sectors that are showing good patterns and good volume. The leaders with the earnings will be back, and we will make some money off of them perhaps tomorrow if we get a bounce after some sharp selling early on. There are also plays that look like good puts outright (i.e., still right at the down trendline and can drop a long way before bouncing). The market has taken a shot and it will have problems until the Fed actually decides to let the economy off the floor. That does not mean we cannot take advantage of what is going on. We play the good upside plays as always, buying on the breakouts. We play the downside moves until they find support. We catch the reflex bounces and ride them up until the move stops. If we are in doubt, we get out. In this market being careful is the priority.

Support and Resistance Levels

Nasdaq:
Resistance: 2750 represents some resistance. The down trendline is around 28500 at this point.
Support: 2500, then 2000 to 2200.

S&P 500:
Resistance: 1335 is acting as some resistance. 1370 is the down trendline.
Support: 1300 is still trying to hold. If that fails we look to 1270 to 1280.

Dow:
Resistance: 10,800 to 10,900.
Support: 10,300, then 10,000.

Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.

12-19-00
Trade balance for October (8:30): -$33.2 billion versus -$34.3 billion prior
FOMC results (2:15)

12-20-00
Building permits for November (8:30): 1.537 million prior
Housing starts for November (8:30): 1.540 million versus 1.532 million
Treasury budget for November (2:00): -$23.7 billion versus -$27.0 billion

12-21-00
Third quarter GDP final revision (8:30): 2.4% versus 2.4%
Third quarter GDP deflator (8:30): 1.9% versus 1.9%
Initial jobless claims (10:00): 320,000 prior
Philadelphia Fed survey (10:00): 4.0% versus 5.2% prior

12-22-00
Durable goods orders for November (8:30): 1.3% versus -5.5% prior
Personal income for November (8:30): 0.4% versus -0.2% prior
Personal Consumption Expenditures (8:30): 0.3% versus 0.2% prior.

SUBSCRIBER QUESTIONS

Q: When people write or talk about "capitulation" in the market, what do they mean?
A: Definition: Not what we have had in the market this year. Commentators on the television often say they are looking for capitulation that signals a move up. What they mean is that they are looking for sentiment to turn so negative that it cannot go any further. Signs include high bearishness, high volatility, a high put/call ratio, and rising, heavy volume to the downside that signals lots of sellers versus buyers. Another sign is the ability to absorb bad news with no real selling after some serious downside moves. Basically they are looking for fear to get so high it washes out all of the sellers that are going to sell and gets them out of the market so the buyers can come back in and buy without those eager sellers that are going to stall any rally by selling into it.

As noted, we have not had this. We have had many 'reversal' days on high volume that lead to a short term rally that stalls out as the sellers have not left the market completely. The sentiment indicators tell us that the fear level has not hit the necessary levels. Thus we have false starts that fail. For some reason, even though this year has been the worst Nasdaq market performance ever, investors have not turned bearish in large quantities. That keeps a lot of investors in the market ready to 'get even' when they can. Eventually the Nasdaq will sink far enough to finally get those investors out of their positions. Will that be 2200? 2000? Will it take a crack into the teens? Many said that a break below 3000 would trigger selling. It did, just not enough. There were still a lot of buyers coming in on each rally that would not sell when the market turned. These would then sell on the next rally.

We don't know what 'capitulation' will look like this time around. It differs with each reversal. In 1998 it was a sharp reversal that completed a double bottom pattern. In 1999 it was more a war of attrition that reversed in one session and confirmed that move the following week. This year it has dragged on. Now that the fear is a slowing economy still to come, the chance of a high-volume reversal being the true capitulation is questionable until the Fed eases rates. Markets anticipate change, however, and we have to watch the price/volume action moving into next year. It may just be that if the overwhelming economic evidence points to the certainty of a Fed rate cut, the markets will begin to move up in anticipation of that move. Watch the price and volume action and look for confirmation.

TEAM TRADES

We had some downside plays after the Fed announcement made it clear the market was going down. Unfortunately we have had some technical problems tonight with our servers and were not able to compile the trades. We will resume with recaps of team trades tomorrow.

Good Investing!
Jon Johnson and the Tech Traders Report Staff.

All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners of Online Investment Services, LP or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.

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