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Begin Part 2 of 3

Dow/NYSE

The blue chips mounted another impressive gain, not so much on the price gain, but on the nice and continued expansion of volume. The index cleared the December high on its breakout of the ascending wedge pattern; now it faces the teeth of that resistance range, but it has good momentum for now, and very importantly, the Dow Transportation index has made a very strong breakout as well from the same pattern. That is an important confirmation of the Dow's move though that index still has to break its short term trendline (closed right at that point) and the longer term trendline arising from the 1998 high. Friday's move, however, was a very positive development for the Dow.

Stats: +87.60 (+0.9%) to close at 10,259.74.
NYSE Volume: 1.521 billion shares (+7.6%). A continued surge in volume helped push the index higher above its 200 day MVA and over the December high.

Up volume: 1.023 billion
Down volume: 485 million. Up volume surged over 1 billion as down volume backed off. A very solid price/volume day.

A/D and Hi/Lo: Advancers continued to lead at 1.72 to 1, down from Thursday's strong 2 to 1 lead. Still very solid.

New highs: 144 (+45)
New lows: 10 (-7)

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

The Dow continued its impressive march after making the high-volume break out of the ascending wedge Thursday. We were concerned about a double top, but massive volume is one way to cure that problem. The support from the transportation index on the move adds some authority to the gain. A big part of the move? Financial stocks finally catching gear and taking off. They are expected to lead in an economic recovery, and they are finally showing some of that leadership. The Dow is making a strong move, and it is in the teeth of a large trading range that ran from 10,200 to 10,500 that held from June to August 2001. After that it has the last down trendline that started out of January 2000 (now right at 10,500. Lots of headwinds, and it will be as always: steps ahead and then steps back, then more challenges of the resistance. Yet, it has a strong break higher on excellent volume.

S&P 500: The first test has been passed with a solid, high volume move over the 200 day MVA (1166.71). Similar to the Nasdaq, the big caps were able to take out the December closing high (1170.35), but not he intraday high at 1173.62. That remains the immediate obstacle, but the capture of the 200 day MVA for the first time since September 2000 is a huge, huge, move. The S&P was the last big index to take out that level, and as indicated last week, while it may lag the smaller issues in the coming few months, that does not mean it tanks. Indeed, Friday's long-awaited move gives some support to the Nasdaq's leading the market out of the September bottom. We said on more than one occasion as the Nasdaq charged ahead and the Dow and S&P tarried that the Nasdaq would need their help to keep things moving higher. Last week both the Dow and then the Nasdaq lent their support to that move, rallying above the 200 day MVA on strong volume. Next resistance is close: the December intraday high (1173.62) and the middle of the March double bottom (1183.35).

Stats: +7.24 points (+0.6%) to close at 1172.51.
Volume: NYSE volume surged higher as the big caps made their break over the 200 day MVA, coming in at 1.521 billion shares (+7.6%).

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

THIS WEEK

This weekend a 15 year old flew a Cessna single engine airplane into a Miami high rise. At this point it looks like a lone bandit much like the anthrax mailer. Another tragic, unexplained incident, most likely propagated by some confused individual and not part of a mastermind plot or the next terrorist assault on the U.S. There may be some more information between now and the open, but we do not see this amounting to much of a threat to the market.

So we need to look at the bigger picture still. Improving economic conditions, slowly and haltingly giving up some better numbers. That is often all it takes to get the market moving, and indeed, the market started anticipating these numbers in October after the hints of an upturn we were reporting back in June and August (July was a backsliding month). The market had already picked up on this and was ready to move that week of 9-11. That event set it back, but it did not stop the tide that was coming in.

The political rhetoric is already escalating again about what is best for the economy. While it is unpleasant and sometimes maddening to listen to is the name calling. On the positive side, however, the debate is joined in earnest with no holiday break to fall back on. Our leaders will have to decide if the good of the country is their real concern or not. That will help the market in a weird way: the lively debate keeps alive the potential of a stimulus package that could keep the recovery going and avoid that weak recovery or that double bottom recession.

What we expect Monday is a mild test of the recent move. The indexes jumped up to the December highs (Nasdaq and S&P) but could not take them out. A little pullback before actually taking them out would be normal. Nasdaq would look at 2000 on the bottom side. The S&P, the 200 day MVA. The Dow, the 200 day MVA as well or the recent December highs. The point: we do not expect much of a bad test unless some bad news erupts. We have had over a month of sideways movement where the indexes refused to give up their gains, and now there was good news to start another leg higher.

Many are still calling for a steeper correction, saying it has to be before the market can really cast of its bonds and move higher. Two weeks ago the market was looking weaker, then we had the holiday rally and then last week's strong upside move. Perhaps the indexes need to correct again, but they are not showing signs of doing that right now. They hit a low in April, rallied, hit another lower low in September, and are now rallying after sentiment indicators spiked to all-time highs. For now the market has shown and is showing it is heading higher. It will without a doubt suffer corrections again, but we cannot say it will happen in a week, a month, or longer. What we can say is that the market has shown all signs of a reversal and good stocks have been and are moving out of good patterns on strong volume. You cannot ask for a whole lot more.

Support and Resistance

Nasdaq: Closed at 2059.38.
Resistance: The December intraday highs still stands in the way (2065.69). After that the up trendline at 2090. Then 2250 to 2300.
Support: We are looking for 2000 to hold on any test, though the March 2000 down trendline (now at 2025) would be a very good place to hold. After that 1934 to 1941 (tops of prior consolidation) have been the best support since the early December gap higher. 1980 has tried to hold, but it has pretty much been pushed around and has lost its edge. The 200 day MVA is next at 1927.41.

S&P 500: Closed at 1172.51.
Resistance: Jumped over the 200 day MVA (1166.71) and now looking at the December high at 1173.62. Then the hump in the March double bottom at 1183.35.
Support: The 200 day MVA would be the level to hold (1166.71). After that, 1150 is a level of some support, but it has been broke back and forth may times. The 50 day MVA (1136.20) follows and held last week. It is backed up by price consolidations at 1125. After that, 1100 is next (top of the October consolidation range).

Dow: Closed at 10,259.74.
Resistance: Took out the 200 day and the December high. Now 10,200 to 10,500 is the trading range from June to August 2001. The down trendline from January 2000, the all-time high, is right at 10,500. The up trendline is at 10,400.
Support: The December high at 10,169.44 or 10,184.45 could hold. Still looking for the 200 day MVA (10,092.21) to hold this time given the higher volume move over that level. 9992 has acted before as support, but it is weaker. Below that is the 50 day MVA (9865.76).

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

1-8-02
Factory Orders, November (10:00): -2.6% versus 7.1% prior.
Consumer Credit, November (3:00): $4.7B versus $7.0B prior.

1-10-02
Export Prices ex-ag.; December (8:30): -0.4% versus -0.4% prior.
Import Prices ex-oil; December (8:30): -0.6% versus -0.6% prior.
Initial Claims; 1-5-02 (8:30): 447K versus 447K prior.
Wholesale Inventories; November (10:00): -0.3% versus -1.0% prior.

1-11-02
PPI; December (8:30): -0.2% versus -0.6% prior.
Core PPI; December (8:30): 0.1% versus 0.2% prior.

SUBSCRIBER QUESTIONS

Q: Wondering if you could shed some light on managing positions, especially during this time of market acceleration. I'm finding that I constantly am holding more positions than I can truly effectively manage. So many good stocks are breaking with good patterns that I find I want to take advantage of way too many of these... then I end up with two or three times the number of positions I can really keep my eye on. How do you keep this under control and manage a portfolio. I feel that holding 5 or 6 positions should be plenty and my intentions are fine, then I keep ending up with 15 positions! Any rules for behavior management?

A: Ah the problems of an improving market. I fully agree that most investors should avoid investing in a lot of positions; you get to where you are having to compute too many variables at once and you end up making bad decisions because you miss something. What happens is you are like a small mutual fund and you start getting those mutual fund returns - - mediocre. You start missing sell points or covered call sales on your positions because you have too much to monitor.

There are two ways to approach this. Fist, keep your short list short. Pick the plays that you like the best and then invest in those when they make their moves. As long as they perform as you want or do not turn on you, keep them open and working for you. The problem with that as you have noticed is there are a lot of other plays out there that look good as well, and when one makes a move, you want to run with it. It is very similar to my early days of fishing. I would get in some good-looking water and start to work it; then I would see a fish hit the surface 100 yards away. The impulse is to leave that water you chose as the best and run over to that other area and chase that fish. Problem is, the fish is either long gone or was a carp. Always looking for that greener pasture or better water can take your eye off of what you actually have. That can hurt you just as too many can hurt you.

Focus is the key. Here is what I often do. You recall from many of the Team Trades that we discuss that I often take only partial positions on what I want to own. I don't dump 100% of my allocated funds for an investment right in unless I plan on this being a short trade all along and want to capture a specific move. What I do is take a third or so of a position, maybe half, and then see how it performs. If I have a few that look good, I can get in to all three of them, but spreading my money between them and not using up all of my funds. Then if one outperforms the others, showing good appreciation on good volume, etc., I can close the others and then put more money into that position at the next logical buy point, e.g., a pullback to near term support on lower volume, the break over the next resistance point on strong volume, etc. That way I end up FOCUSING my assets on winners. You cannot pick the one stock that will appreciate the most each time you invest. Cast a bit wider net over some very solid stocks, and then let them run the race for you. Let them show you which is the one stock you want to focus on. That way you concentrate on a winner and you improve your success percentages.

Now many will say this is lunacy, that you are not properly diversified. Well, you picked a handful of promising stocks, and you let them show you which had the bloodline you wanted. You then bought more of that. Averaging up into a stock is how smart mutual funds buy and how nearly ALL of the successful investors I know have made their fortunes. That does not mean you hang onto it forever. You learn when a stock is topping, when it is flashing danger signals: the blow-off top, the double top on low volume, the broken trendline you are investing in. We teach these in the online seminars that are coming up again soon, and when you see them, start taking money off the table. Sometimes it might be all of it, other times you might want to start lightening up on the position just as you were buying into it as it moved higher and hit new buy points. This way it does not matter if you have your assets concentrated in one, two, three or five stocks. If you have them in two stocks and one shows signs of topping, take the gain off the table and slap yourself on the back for a job well done. If it was a false alarm and you still like the stock, you can always start over, taking partial positions at the right time, putting your money in piecemeal when it hits the buy points. It is your money, and it deserves this kind of attention. You give it this kind of attention, and you will do very, very well in this bull market.

Good movers on Friday: BRKS. CVTX hit our target (45) for the put play then bounced back up and rose for the rest of the day. It closed just under the 50 day MVA (near its high), so may move back over it requiring closure. AWRE broke out of the cup with handle; it is at the 5% limit but may give a nice run from here (will look for pullback).

Removed to make room for more great plays:
MCDT (gave us a pop of almost 4 points but looks ready to regroup for a test of 30 where a bounce will be an add to point).
EMLX ready to pull back again on this doji; a good covered call play, selling the January or February 40 calls and buying back when it hits the 18 day MVA and holds (just below 40). BLDP still looks good in the ascending wedge, but may dip back down again ahead of a breakout. Still a live play, so see Thursday's report for buy point.
FHRX: Big move up then fell to 50 day MVA.
MONE: Still looking for a further breakout move over the 200 day MVA.
KLAC: May be topping for a covered call play to 50.
TXN: Running out of steam below the 200 day MVA.
SUNW: Hit the 200 day MVA target; may be a good covered call play here down to 12.50, selling the $12.50 calls.
MIL: Fell out of consolidation.
OO: Still a play, but has not had the power of other stocks.
DKWD: Soared but fell back to the 18 day MVA. Higher volume indicates a jump here. COHU: Big move, but finding 22 resistance once again. If it clears it we hang on. If it tries it gain and fails we will sell.
AGAM: nice breakout and now testing it. Must hold above 5.
AWRE: Huge move as we wanted.
LTD: Making the move we want, but volume was lower; we will continue to watch for the move up to the target at 18.
ERTS: Made our aggressive buy point so will continue to watch for a move up to the initial target at 67.
AZPN: Made the buy point in the ascending wedge. Not a powerful move as it closed off the intraday high, but volume could move in now over the 200 day.

End Part 2 of 3

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