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12/31/01 Technical Traders Report
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Technical Traders Report Subscribers:

Happy New Year!

Tonight's report is a summary of the last session of the year. A full report will issue on Wednesday.

MARKET ALERT SERVICE

Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm

SUMMARY:
- Goodbye to a most 'interesting' year.
- Portfolio adjusting to end the year sends indexes lower.
- Indexes close below important levels on slightly higher volume.
- Overall the ingredients to a recovery remain, but they are not stellar.

Last session of the year a microcosm of 2001

All three indexes closed below some key levels Monday in a negative close to a negative year. It was not just the market, but the economy. It was not just the economy, but the shaking of our foundation of freedom, a direct attack on our ideals and our beliefs.

While the market and the economy dominated the financial news for most of the year, the attack was the key event for several reasons. It pointed out that we cannot be lax; once again we were reminded through our tears that the price of freedom is constant vigilance, and if we are not, the price is high indeed. The attack accentuated our economic problems that had already stewed for over a year. The attack pointed out our vulnerability to physical and economic terrorism. The attack woke us up. It was a rude and sad awakening, but now we are awake once more. U.S. citizens and our friends around the globe are awake to the new threats. We are galvanized in our determination to eliminate the threat. As with all challengers in the past, the new enemies have engineered their own demise. They have awakened the power, wrath, and determination of the United States, indeed of the free world. They have captured attention for the day, but their movement will only survive in the history books.

It was a cruel year for many Americans. We are still a long way from healing the wounds. Indeed, we are just getting underway. There are positives we can build on. The government is focused once again on its primary duty: providing for the common defense. If it focuses on removing the threats to our people and institutions, then the ingenuity and indomitable spirit will more than repair the damage done. In our zest for justice and desire to protect the citizenry , however, we need to be sure we protect the basis of our freedom: the Constitution. Whatever we do, we must abide by the principals our forefathers founded this nation upon. It is too easy for good intentions to undermine the careful balance of protections we have. Whether it is protecting individual rights to insure due process or keeping government contained as originally intended so that the individual may enjoy those rights, we must again be vigilant. Our love for our country is so strong and so apparent these past few months. Much good has come out of this, but we must all do our part to safely steward our rights and freedoms for our children and beyond. Great crisis makes for great deeds; as citizens, our deeds are equally important as those of our leaders. We must hold them all true to our founding principles. A great tragedy has occurred this year, but we have the opportunity to turn tragedy to triumph on so many fronts. Let us answer the call and things will then take care of themselves.

THE MARKET

The last day of the year was marked by selling in the biggest names. The Nasdaq 100 outpaced the overall Nasdaq to the downside. There was tax selling and portfolio adjusting going on this last session. Semiconductors were down even though they received some positive comments. There was some buying in small caps, but it was limited. It was adjusting, raising cash for the rest of the month, positioning to take the remaining tax losses available.

Though most of the action can be attributed to year end activities, we cannot ignore that the indexes closed below key levels. The Dow closed below the 200 day MVA; the S&P closed below 1050; the Nasdaq was again unable to hold above the early December gap up point at 1980.

All last minute positioning or avoiding the New Year rush to the exits? Volume was higher, but it was still very, very light. The end of year gyrations give us little to go on for the immediate future, but we still look at the break below these key levels as important. Remember, the Dow and S&P did not reclaim these levels last week on high volume. Thus, the move up was not that strong; we were concerned all along they moves would not hold because the majority of investors were in absentia when the moves were made. They will all be back in to vote come Wednesday.

As we have said a few times the past week, the fundamental reasons for the rally are still present, namely the belief of an economic recovery. The economic reports and the bond market continue to show this to be the case. The issue right now is how strong. That will influence the prices investors are willing to pay for stocks. Factored into this entire mix were several items, one of which was a stimulus package. That may not come to pass now because it is politically expedient to some if it does not. If Congress does not come back and pass a package, the market will back that out of prices, figuring recovery yes, but meager. That is something that investors are concerned about; a weak recovery or a 'double bottom' recession early in the summer. As we should have learned from the September attacks, nothing, but nothing, is set in stone. We cannot get complacent, we cannot sit back and just think things will take care of themselves. Economic reports are indicating recovery; they are not saying recovery is here.

Secondary indicators: Volatility and the put/call ratio are sentiment indicators. They are thus contrary indicators (typically moving inversely with the market) and are most useful at extreme levels. They take a back seat to price and volume, but they can give us a heads up or a caution flag so to speak ahead of time. That is why we keep an eye on them.

VIX: 23.32; +0.89. No real movement, holding just above the summer low (20.26).

VXN: 47.26; +1.32. Still right at the July 2001 consolidation level (47.50) and above the closing low in June (43.96). Complacency is more or less here for the overall tech index, but we have to see how the buyers and sellers come back to the market this week.

Put/Call Ratio (CBOE): 0.70; +0.02. A very light options day, but the ration did climb back into a 'comfort' level if you are long on the market. This indicator has consistently indicated continued anxiety in the market or disbelief that the rally can hold. That is bullish as this is a contrary indicator. Also note that the NYSE short interest is rising again, another indication that there are still plenty of non-believers. That is good because it is also a contrary indicator, and if the rally does continue, those folks will eventually have to cover, and that is more fuel for the rally.

Nasdaq

Nasty point loss and back below 1980, but the A/D line was positive and new highs grew. As we noted above, the heavy action was against the big names. We asked if there was foreshadowing here; we think so, but we do not think it will be much different than in years past. Small caps will perform the best early in the year.

Stats: -36.86; (-1.9%) to close at 1950.40.
Volume: 1.411 billion shares (+6.25%). Volume continued to climb during the light holiday sessions, but we not that the selling volume today was the highest of all even if it was still very light.
Up volume: 442 million
Down volume: 913 million. Down volume ran way out ahead for the first time in a while.

A/D and Hi/Lo: It was a narrow victory, but on such a down session, advancers topped decliners 1.04 to 1. Very important number as it shows overall stocks were rising.

New highs: 149 (+29). New highs rose on a down session. The small issues at work.
New lows: 18 (-7). New lows falling on a down session. Same as above.

The Chart: http://www.investmenthouse.com/cd/$compq.html

Under pressure all session, turning positive for just a few minutes early on. It was not a good session as the Nasdaq undersold 1980, the early December gap up point and then closed just below the recent down trendline from early December. It remains above key support at the 200 day MVA (1926.63) and the prior consolidation tops from 1934 to 1941. Those are the key points to watch later this week and they will more than likely to be tested as we noted over the weekend. Volume will be the key. Near term we think the uncertainty regarding the stimulus package will push the big names lower as the recovery factor provided by an expected stimulus package is factored out of near term prices.

Dow/NYSE

Crashed below the 200 day MVA after a brief peak above that level, but as with the Nasdaq, it was not a horrendous day as the A/D line remained positive and new highs rose on the down session. Big names sold, small names bought.

Stats: -115.49 points (-1.1%) to close at 10,021.50.
NYSE Volume: 956 million shares (+5.5%). Higher volume on the selling, but still several hundred million shares below average (1.29 billion).

Up volume: 321 million
Down volume: 617 million

A/D and Hi/Lo: Advancers lost ground again, but heck on this day it was very informative to see them come out ahead at 1.03 to 1 (1.75 to 1 Friday).

New highs: 134 (+15). New highs up on a down session; broader moves up than down.
New lows: 16 (+2)

The Chart: http://www.investmenthouse.com/cd/$indu.html

Plowed below the 200 day MVA (10,091.16) after a brief , 2-session peak over that level. Volume was the heaviest of the holiday season, but still not much of anything to get in a knot about. It held above 10,000 and 9992, levels that will be tested Wednesday. It gets more interesting down at the 50 day MVA (9826.85) and then at 9750, the point where the Dow launched out of the 4-week lateral trading range in mid-November. Are we simply looking at a test of the recent move, or is this a double top preceding a further correction before it is ready to try a move up once again. Again, we will see the pulse of the market later this week. A test of 9992 is a sneeze away.

S&P 500: The big cap stocks took a hit as well today, not surprising as it was the day to unload some big cap stocks. It was not dumping per se, just stronger selling at the year end. It undercut 1150, a level of important support. Now it gets very interesting (using that word a lot today) as it approaches the 50 day MVA (1132.61) and price supports at 1125. It has been threatening to finish up that head and shoulders pattern (with an undercut of 1125), and that will give us another chance to play the downside.

Stats: -12.94 points (-1.1%) to close at 1148.08.
Volume: NYSE volume was up again (956 million shares; +5.5%).

The Chart: http://www.investmenthouse.com/cd/$spx.html

Wednesday

The big investors will be back on Wednesday, and it looks as if test to the next support levels are in the cards as the bigger names tipped their hands a bit today. We will not know for sure until the volume comes in, but the patterns are looking bearish on the big indexes at least for the short term while there is a shift over to some smaller cap stocks. We could get a downside opportunity on the big caps. If the OEX completes its head and shoulders (below 1125), the SOX does the same (aggressive on a move below the 50 day MVA at 522.19; completion of pattern at 505), and the Dow continues down below support (9992) in its double top look, we will take advantage of that action with some January and February index puts.

The shift over to the small cap side provides the upside opportunities that we have been stocking the reports with along with the other great stocks. As we have been saying for the past few weeks, small stocks are moving, and today was no exception. It was not a stellar day, but we are going to see upside days, some big, some not so big, but the trend for them is up. this is their time, and we are going to take advantage of them just as we will take advantage of any short term dip in the big indexes as investors get rid of some big names and back out some of the recovery expectations that a once-promised stimulus package was providing.

Overall, the market looks as if it will move upward, but with uncertain steps at first. Without clearly strengthening earnings reports and without a stimulus package to bring the promise of a B-12 shot for the market, while recovery looks as if it will come, the promise that was there is not as sparkling. Accordingly, we are going to do what we always do; take what the market gives us. Further downward moves on the indexes will give us downside profits in the short term until they test and turn back up. Small caps can give us sterling returns to the upside at the same time we play the big indexes lower. Short term money in options, long term money in small caps and the good looking big caps that will inevitably defy the rest of the crowd.

Support and Resistance

Nasdaq: Closed at 1950.40.
Resistance: 1980 (the gap up point). The next level is more a psychological one at 2000, but the December high at 2010.91 is after that.
Support: 1934 to 1941 (tops of prior consolidation). The 200 day MVA (1926.63). After that the 50 day MVA is at 1900.94.

S&P 500: Closed at 1148.08.
Resistance: 1050. The 200 day MVA at 1166.94. Then the December high at 1173.62.
Support: As 1050 did not hold (still could but not looking strong), the 50 day MVA is next at 1132.61. and former price consolidations at 1125. After that, 1100 is next (top of the October consolidation range).

Dow: Closed at 10,021.50.
Resistance: The stay above the 200 day MVA (10,091.16) did not last long, and it is still the point to beat once again. The December high is next at 10,169.44. The up trendline is at 10,320.
Support: 9992 is the next level below the 200 day MVA, but it has not held with much consistency. The 50 day MVA is at 9826.85. After that, 9500.

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

1-2-02
Auto Sales, December (8:30): 6.1M versus 6.3M prior.
Truck Sales, December (8:30): 7.8M versus 8.2M prior.
NAPM Index, December (10:00): 45.8 versus 44.5 prior.

1-3-02
Initial Claims; December (8:30):
Construction Spending; December (10:00): -0.1% versus 1.9% prior.

1-4-02
Nonfarm Payrolls; December (8:30): -175K versus -331K prior.
Unemployment Rate; December (8:30): 5.8% versus 5.7% prior.
Hourly Earnings; December (8:30): 0.3% versus 0.3% prior.
Average Workweek; December (8:30): 34.1 versus 34.1 prior.
NAPM Services; December (10:00): 50.3 versus 51.3 prior.

Good Investing!
Jon L. Johnson and The Technical Traders 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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