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TOMORROW

Factory orders come out at 10:00 ET. Every piece of economic data has an impact, but the degree varies. We would love to see another upside surprise, but as long as it comes in near expectations, the market is such that numbers do not have to be perfect for the market to continue its moves. The indexes finished near their lows for the session, and conventional wisdom is that puts initial downward pressure tomorrow. However, we have seen several times the past month at least that this modern market can reverse direction on a dime.

What we see is continued good news, i.e., the same theme of what brought us here is still in place. There is some edginess about whether the indexes have arrived or are still on the way higher, and that is what the 'priced to perfection' talk is all about. That is good to hear as it keeps at least some skepticism and worry out there.

Tomorrow we expect to see the indexes test lower early, down toward those support levels cited above and below. Given what the market is telling us and what the continued improved conditions are saying, we do not anticipate a major turn of fortune after last week's rally. The market's pattern is rally for 3 to 5 sessions, take a breather, then rally again. It took a month of lateral motion before this last move; we don't think we have seen the end of this current move. As always we have to keep a watch on the price/volume action, but that has been very solid on the rally. There may be some continued fear and rumor about earnings warnings, and those will put a short term damper on the moves, accentuating downside action. As we have seen, however, we believe that will continue to be short term.

We cannot state enough: what brought us this far is still in place. Something has to change for that pattern to change. It could be a sudden realization that not enough stimulus will be in place, but that will most likely be down the road. There is the possibility of a double bottom recession ahead if the business side of the economy does not get moving again. That is the main thing that concerns us when looking at the big picture. We still think fiscal stimulus is necessary despite whatever those in Washington, D.C. think.

Support and Resistance

Nasdaq: Closed at 2037.10.
Resistance: Ran into the up trendline today at 2090; tomorrow it will be at 2100. The December intraday highs still stands in the way (2065.69). Then 2250 to 2300.
Support: This 2040 area could provide some support, but we are looking for 2000 to hold on any test, though the March 2000 down trendline (now at 2015) 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 1928.14.

S&P 500: Closed at 1164.89.
Resistance: The 200 day MVA was not cleared totally, and it pushed it down today (1166.78). The December high at 1173.62. Then the hump in the March double bottom at 1183.35.
Support: The 18 day MVA (1157.61) is riding just above some possible support at 1150 (it has been cracked many times). The 50 day MVA (1137.33) follows and has held in the past few weeks. It is backed up by price consolidations at 1125. After that, 1100 is next (top of the October consolidation range).

Dow: Closed at 10,197.05.
Resistance: 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 moving right at 10,500. The up trendline is at 10,410.
Support: The December high at 10,169.44 or 10,184.45 (intraday) could hold. Still looking for the 200 day MVA (10,094.08) to hold on any test given the higher volume move over that level. 9992 has acted before as support, but it is weaker.

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: A question on stops and profits vs. losses: How do you deal with a stock that breaks out, then comes back to retest? My example is CBR. I bought it on the breakout (as per the Daily) at 9.20 on the breakout and it moved up to 10.95 three days later. The Daily target price was 11. Next day it dropped to about 10.25 with a low of about 10 and has been moving down to test the breakout point (today's range was 8.81 to 9.49, with a close on the high...looking like the test has been successful). [Editor: it since moved back up to 10.88 and closed today at 10.61] My question is, how did you play this stock? Did you buy at 9.20? Did you sell some or all at 10.5-10.75? Did you hold on and let it come back and test? Did you/will you add to your positions here at 9.5? Do you move your stops up as the stock moves up?

A: How I deal with tests usually depends upon the market. If it is choppy as it was before 9-11 and immediately thereafter, I am quick to take a 20% (or very close thereto if the stock appears to be topping) on any stock move. Now that breakouts are holding up better and are giving successful tests I will often let the stock test the move and then add positions when it does test and then start back up on what appears to be good volume. With CBR it was bought when it spiked up on good volume but could not hold to the close. It then shot up right to the target three sessions later on massive volume. It closed at the high so there was no reason to think it would reverse. Well, it gapped down the next session and fell, but volume was light. Looked as if it was going to test the move, but I decided to hang on. It rode all the way down to the buy point, bounced, and then tested lower intraday below the buy point and blasted up last week.

I could have sold that first big rally and thought about it as the stock ran 19% from the entry point. I did not, however, and when it started back on lower volume, I let it go for the test because I liked the big volume move. I quite often, however, will sell half my position on a 20% move such as that. I am not adverse to taking a 20% gain in a hurry on a stock position. I also could have raised my stop loss point to maintain some gain but chose not to. We are going to address that in another subscriber question this week: the pitfalls of stop losses.

When I decided to ride out the test, the important thing was to be patient: if the price/volume action was good, I would let it test the pivot. That means it will sometimes trade intraday below my buy point; as long as it closed above that level, however, I will let it work for me. That is exactly what CBR did. I did not but should have bought more positions the next session when it started higher on a small gain on very high volume: a successful test. It then blasted up Friday but could not take out the prior high at 10.88. Today it closed lower but in the top half of the range on lower volume. It looks good, but I may sell half my position if it tests 10.88 again and does not break through.

PLAYS TO LOOK AT:

BONUS PLAYS: ELBO took the dive!

IMGC (Intermagnetics--$23.86; -0.99; optionable): Manufacturing.
http://biz.yahoo.com/p/i/imgc.html
STATUS: IMGC has been in a downtrend since August, the past two sessions again falling back from its down trendline, which is with its 50 day MVA (26.19). It is showing something of a descending wedge here, with recent pattern lows at 23.23. Volume was much stronger on the fall today, coming in at 267,700 (average 190,800), and we are looking for continued strong selling to take it down. Target: 20 (September low 18.26).
BUY POINT: 23.11 on continued strong volume.
POSITION: February $30 puts to buy (IMG NF).

OTEX (Open Text--$29.75; -0.18; optionable): Internet Software.
http://biz.yahoo.com/p/o/otex.html
STATUS: OTEX has formed a cup with a double bottom configuration (deep within a larger base) that dates back to February (high 36.56). It broke out from a handle in early December, and after hitting a high of 31.79 has pulled back into another handle. It recently tested near its 50 day MVA (28.49), moving back up off of that level and now holding with consecutive dojis on its short-term MVA's (29.85). Volume has picked up significantly the last few sessions, signaling a possible move is near. We are looking for a bounce up that takes out the handle high, targeting the left-side high. Good money flow.
BUY POINT: Aggressive: 31 on continued strong volume (today 159,000; average 100,800). Stop: 28.83 (7%). Breakout: 31.91 on minimum volume of 150,000). Stop: 29.68 (7%)
POSITION: Stock and/or February $25 calls to buy (QFT BE - low open interest; there is over 100 open interest for the $30 calls).

MARKET FAVORITES: Watch NTAP for a possible exit, as it was hit with some negative comments after a big breakout move.

PSFT (Peoplesoft--$41.34; +1.26; optionable): Semiconductor equipment.
http://biz.yahoo.com/p/p/psft.html
STATUS: Has formed a huge double bottom with handle over the course of the last year. The stock dipped back below its 18 day MVA (40) last week on strong volume, but quickly recovered with a stronger move, and has held up nicely in the pattern since. Today PSFT received a downgrade from SSB, but held up well, tapping up to 42.48 (near the handle high at 42.73) but pulled back to close with a doji. Volume remained strong at 8.93 million (average 8.25 million), so we will see if it can continue to hold this nice pattern and make a breakout. Target: 50.
BUY POINT: Breakout: 42.85 on volume of 12 million. Stop: 39.85 (7%).
POSITION: Stock and/or April $40 calls to buy (PQO DH).

INTC (Intel--$35.27; -0.52; optionable): Semiconductor.
http://biz.yahoo.com/p/i/intc.html
STATUS: INTC made a great move last week, breaking out of a handle-type consolidation. That pattern had formed nicely after the stock had broken across the highs of its April-August range, and the breakout last week was quite strong. The last two sessions it has retreated, but given up ground sparingly and on decreasing volume (today 48.8 million, about average). If it can continue to hold over the recent handle high at 34.85, INTC looks good to continue the surge in a better market. Target: 40.
BUY POINT: After holding 34.85, a move back over 36 on increased volume in a rally. Stop: 33.48 (7%).
POSITION: Stock and/or April $32.50 calls to buy (INQ DZ).

PRE-ANNOUNCEMENTS: RYL still could bounce, with DRI and DHR testing their moves.

EXPD ($59.20; -0.62): Working on a date. Saw the breakout last week, and in a bit of market weakness Monday EXPD pulled back slightly, but the drop was on lower volume (423,300, about average), and it held the prior pattern highs (59). Looking for a continued hold here, and on a run back over 60.14 on increased volume, stock and/or February $55 calls to buy (URP BK - under 100 open interest. Next month out is May, with very low open interest).

PII (Polaris Industries--$57.25; -0.65): Forecast to announce a split on 1-29-02 before the market opens in conjunction with earnings. Still in a tightening ascending wedge, holding support over the short-term MVA's (10 & 18 day at 57.14 and 56.42). Today it dipped back a bit on continued low volume of 73,200 (average 123,600). Looking for the breakout, with a buy point of 58.83 on volume of 173,000 or higher, with stock and/or March $55 calls to buy (PII CK).

GNSS ($68.01; -0.74): Forecast to announce a split with earnings, on January 17 after the close. GNSS continues in a nice pennant, pulling back today but holding its 10 day MVA (67.33) as volume remained below the average (2.09 million; average 2.5 million). Looking for the break over the high of 70.91 on volume of 3.38 million, with stock and/or March $65 calls to buy (QFE CM).

JCI ($81.70; -0.43): Forecast to announce a split on 1-18-02 in conjunction with earnings. At this time, the company cannot confirm this date. Gapped down slightly Monday, but held the 10 day MVA (81.06) with a doji on increased volume (370,800; average 386,800). Nice consolidation, and we are looking for a bounce here to a breakout. The buy point is 82.82 on volume of 600,000, with stock and/or January $75 calls to buy (JCI AO - low open interest).

PRE-SPLITS: LIZ looks like it could test its move over recent highs.

SYMC ($69.16; +0.27): Splits 2:1 effective February 1. Showed another doji today after again testing the short-term MVA's at its low of 67.40. Looks good and we are looking for a breakout move as we go toward the split. The buy point is 71.12 on volume of 3.8 million, with stock and/or February $65 calls to buy (SYQ BM - low open interest).

XRAY ($50.20; +0.10): Splits 3:2 effective February 1. XRAY reached up to 50.74 intraday but pulled back to close with its fourth consecutive doji (a loose doji today). Volume has continued to be quite strong, signaling a possible move is in store (there has been excellent price/volume action overall on this stock). Looking for the bounce over 51 on continued strong volume, with stock and/or January $45 calls to buy (XAQ AI).

CHS ($41.20; -1.00): Splits 3:2 effective 1-19-02. CHS could not make a break on the recent move, and gently pulled back today in the range of its little consolidation. Still holding comfortably over the 10 day (40.37), and we could get a test of that level before a move up. That would be fine. After holding the 10 day, on a move over 41.50, with stock and/or February $40 calls to buy (CHS BH). From here, we can look at a move over 42.

CONTINUING CANDIDATES:

BBBY ($34.15; +0.34): Forecast to announce a split during the market hours on 12-20-01 in conjunction with earnings. Holding in an ascending wedge, with another doji today over its 10 day MVA (33.58). Volume continued below the average at 3.47 million (average 3.72), and we are waiting for a breakout from the nice pattern. On a move over 35.70 on volume of 5 million, stock and/or February $30 calls to buy (BHQ BF).

POST-SPLITS: CACI gapped up, so we will see if it tests back or tries to breakout.

CBH ($40.12; -0.14): Split 2:1 effective 12-19-01. After the solid move Friday, CBH relaxed Monday, dipping slightly on much lower volume (510,400; average 412,000). It could dip a bit more, but we are looking for CBH to hold the former high of 39.60 and make a strong run back up from that point. On the move, stock and/or March $37.50 calls to buy (CBH CU).

Good Investing!
Jon L. Johnson and the Stock Split 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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