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us stock market, stock watch
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12/27/00 Technical Traders Report
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Technical Traders Subscribers: HAPPY HOLIDAYS!!
TONIGHT:
- This is just the kind of rally that is needed: nothing flashy, just solid building on surprisingly solid volume.
- Solid moves across the board, tech to food.
- Leading economic indicators sag, but don't forecast a recession.
- More job cuts: Union Pacific trims 2,000 workers
- Subscriber Questions
- Team Trades
Just what the market needed.
Today there was no huge rally on any of the three indexes, but it was an important day in several respects. First, it was a day that could have gone either way, but it held on and actually rallied in the closing minutes as the last urge to sell was overrun. No huge rally that leads to an immediate selloff the next session, just a nice, quiet, steady move. String together this kind of session 4 of 6 trading days and you go a long way to repairing damage.
Second, a nice, steady gain without a huge rally allows stocks to build their bases in an orderly manner. When the Nasdaq shoots up 150 points and then sells off 100 points, stock patterns look like a set of jagged teeth. There is no pattern to build on and we never get rid of the overhead supply. A nice, steady rally that builds on each day, rising and pulling back but always trending up is how bases are completed. Look at the charts on semiconductor stocks such as AMCC, KLAC, ALTR, etc. They have all sold down in more or less nice sloping patterns. The interest in semiconductors waned over the past few months and now we are seeing the stocks start to perk up. Indeed, AMCC has been trying to move up for two weeks, and today broke above its down trendline in a solid move. If we get a steady, orderly rally we could see these stocks run up to complete the right sides of their bases. That is exactly what the market needs: some solid patterns to develop in leaders (yes, semiconductors can lead the market again, especially the likes of AMCC, PMCS, VTSS and BRCM that are in specialized niches) that presage solid breakouts. That takes some time, but a rally over the two to three weeks would put many of these stocks in positions to then form their handles, i.e., a week or two of light volume selling or profit taking that shakes out the last of the weak holders before the stocks make the really strong breakout move. That might be too much to ask for now with fourth quarter earnings still to come, but we are going to have a rate cut from the Fed and the serious investors will be looking ahead, not back. We need to be ready for that; moreover, in the interim we can make good money as the stocks complete their bases.
Third, today's action was on surprisingly solid volume in this shortened week sandwiched between Christmas and New Years. Nasdaq volume moved up 28.7% to 2.004 billion shares, right at average. NYSE volume, while below average, rose 32% to 1.063 billion shares. Indeed, today's move on the Nasdaq represents confirmation of last Thursday's reversal rally: a 1.8% price gain on rising, average volume. We would prefer to have had higher volume, but given the fact that this is a holiday weekend, the volume was not bad at all. In 1999, confirmation came and then stocks blasted out of solid bases on the way to that historic run. This year, stocks still need to complete their bases, and there needs to be some recovery to do that. In a year that saw the worst losses ever on the Nasdaq and the deepest bear market in such a short time, it is fitting that the repair work require a confirmed rally before it can really start to move higher.
Some are saying this is just a trading rally preceding further selling. We know that bear market rallies can last for weeks or a month or more. All we can do is watch leading stocks and price and volume action. We see some good bases, we some bases trying to form, and we see many stocks with a lot of work still ahead. The lack of quality bases lends weight to the idea that this is nothing more than a trading rally. But, it looks to be a trading rally with some legs on it as it anticipates a rate cut and better times ahead for stocks that were once under attack by the Federal Reserve and high taxes on the U.S. citizens, a very bad combination for sustained growth. When things look really bad, rallies start. We think that is what we have here.
THE ECONOMY
The leading economic indicators came in as expected, showing a 0.2% decline. That projects the state of the economy six months out. October's number was revised down to a 0.3% drop versus a previously recorded 0.2% decline. This shows further weakness which is not good, but the LEI is just down 0.4% from the same time last year. Again, that is not forecasting a recession at this point, just a slower economy. That is welcome, but there are still a lot of variables out there that could send this economy down harder and faster. No reason to hold off on rate cuts.
No reason indeed when you have yet another major corporation announcing layoffs today. After the close Union Pacific said it would cut 2,000 employees and take some charges. We have had Ford, IP, GM, Georgia Pacific, Union Pacific and many others announcing major layoffs. On top of that we have the continuing problems in the technology sector with 23,000 jobs lost in the last three months in internet businesses alone. The Fed wanted higher unemployment? It's got it. It wanted lower consumption and confidence. Its got it.
THE MARKETS
The market did just what we wanted it to do today: a nice, steady rally that hung on. We were holding our breath for a while, but the rally on the close was a real relief to see. It looks to us that in the midst of despair about earnings, the economy and the Fed the market has started to rally. Once again, not all of the indicators were firing, so who knows how far it will carry us. Still, we viewed today as one of the most positive in a long time.
Listening to the tube, however, they were talking about what was, not what is coming. They were talking with Wall Street Journal reporters about how bad the year in the Nasdaq was and how the internet was killed. It was a pretty gloomy lineup. But that is okay. The fact that they are dwelling on the negative and turn their collective noses up at a 45 point gain on the Nasdaq that showed excellent volume and follow through for the earlier rally attempts is good as well. The fact that they cannot be pleased by a mere 1.8% move shows that the common wisdom on the street is that things are still much too bad. They should be looking forward, but are mired in their misery. That is the way it usually works. Those that are always late to the party dwell on the past while the real investors, those who make good money, are looking at what the market is showing and seeing the changes taking place. May be nothing more than a bear rally, but it is something to be focused on, not the past.
Overall market stats:
VIX: 32.31; -0.23. Volatility held steady even in today's rise. Not a lot of believers out there still. That is a good sign for a continued move up as the market usually rallies while the majority are still wondering what is going on.
Put/Call ratio: 0.72; -0.23. Put buyers fell off again on today's rally. This indicator has yet to give us a close over 1.0, a pretty reliable signal that fear has reached a reversal level. Still, other bear/bull indicators are showing bears in the majority, so we have to recognize there is a lot of despair and take advantage of moves the market is telegraphing.
NASDAQ: Not a huge day point-wise, but an important day of building on solid volume. Leaders were moving up sharply (e.g., JNPR, AMCC) even on an 'average' day. A 1.8% gain on stronger, average volume four days into a rally is considered a confirmation day, a requirement for any solid bull leg. It does not guarantee a bull run, however, and we have seen recent confirmations fall by the wayside. The market needs a solid, steady rally to get bases formed, and then it needs a catalyst to break it out. A 2-3 week rally spurred by a Fed rate cut in early January would help complete bases, then some profit taking to form the handles, then a breakout on another Fed rate cut at the January 30 FOMC meeting. That is a best-case scenario. Plausible, but we just have to see what the market gives us. For now we see a continued move up through the New Year.
Stats: Up 45.84 points (+1.8%) to close at 2539.35.
Volume: 2.005 billion shares (+28.7%) 1.56 billion shares (-30.4%). This is average volume, not bad at all for a shortened holiday week. Up volume came in at 1.059 billion shares while down volume fell to 781 million shares.
A/D and Hi/Lo: Advancing issues took back over, but not by much, 1.21 to 1. That is not the 2 to 1 or 3 to 1 ratio we like to see on the start of a new advance. New highs continued to climb to 129 (+28), and new lows actually rose to 384 (+10).
The Chart: http://www.investmenthouse.com/ch/nasdaq.html
The Nasdaq was able to close back above the point where it gapped sharply lower last Wednesday, and it did so on decent volume. Nothing like the volume on that day (2.3 billion shares), but very respectable given the holiday week. The Nasdaq has a lot of obstacles ahead of it, but it looks to be ready to move up for now.
Dow/NYSE: Another 100+ point day on the Dow as it moved up to close just over 10,800 and is apparently readying itself for another test of 10,900, the level that has stopped the index for over the past month.
Stats: Up 110,72 points (+1.0%) to close at 10,803.16.
Volume: NYSE volume rose to 1.063 billion shares (+32%). Strong, but a bit below average. Up volume was solid at 753 million shares versus 267 million to the downside.
A/D and Hi/Lo: NYSE advancing issues moved well out in front, 2.48 to 1. Very solid advance across the board. New highs continued to climb up to 318 (+31) while new lows fell to 86 (-19).
The Chart: http://www.investmenthouse.com/ch/djia.html
The Dow jumped over the down trendline connecting the September and November highs (throwing out the quick rise in December that immediately failed) and its 200 day moving average as well. The break over the down trendline was good, but we would have liked to have seen at least average volume as we saw on the Nasdaq. It has a solid test at 10,900 to 11,000. If it turns back there, we will have to watch volume carefully; selling on higher volume is a very bad sign for a continued rally attempt.
S&P 500: The 500 big caps continued to move up off of the year low last Thursday. Volume was higher, yet below average, so the move has some questions behind it, though we have to consider the holiday weekend. The index touched 1332.03 on its high; 1335 has acted as some support and resistance in the past, and the index needs to clear this point and take out 1360 after that. Lots of work, but we think it will at least challenge these levels in the next few weeks. After that we have to watch the price versus the volume.
The Chart: http://www.investmenthouse.com/ch/sp500.html
TOMORROW
The rally continued today and we think it will continue to build. We like the slow, steady pace. We have to admit that we felt kind of funny talking about low-volume pullbacks last night, but that is exactly what it appeared that the market was showing us, and it turned out to be the case. The market swings from the very bearish downtrends to these sudden shifts in character to a more bullish posture. The key, however, is that each one of these attempts has yet to take hold and overcome the severe downtrends that currently grip the indexes. Two to three weeks of rallying to complete bases coupled with the right news from the Fed and leading companies could do the trick. Yes, we are expecting some pleasant 'surprises' from the usual leaders this earnings season, e.g., AMCC, JNPR. This will show that even with the economic slowdown the leading stocks are performing well, and with the Fed easing, the prospects for the future will be even better.
What we continue to look for is the market moving up in a more or less bullish fashion. That means rising on stronger volume, pulling back on lower volume much as the drug stocks, healthcare stocks and other defensive sectors that have enjoyed bullish moves have. Not every day will be an up day. That is the tricky part as we have seen most rallies start to turn back on low volume and then the volume kicks in as the selling intensifies. Keep an eye on the resistance points; if selling starts at those levels and cannot turn back up and take them out, that may signal the end of the rally, and in this climate, we prefer safety to sticking the neck out.
The nice thing about today was that the moves were made across the board. That helps quite a bit as we can continue to play the defensive sectors as they line up and break out and play the techs to the upside as well. You can make money both ways, but the upside gets everyone excited.
Support and Resistance Levels
Nasdaq:
Resistance: 2600 represents some resistance from the late November and early December lows. Then there is 2750. The down trendline is approaching 2750.
Support: 2500 for now. If 2500 does not hold, 2200 down to 2000.
S&P 500:
Resistance: Right at resistance at 1335. Then 1350 to 1360. The down trendline is now at 1360.
Support: 1270 is possible support. 1254.07 is the year low hit last Thursday.
Dow:
Resistance: 10,900 to 11,000.
Support: 10,600, then 10,300. After that, 10,000.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
12-26-00
The existing home sales and consumer confidence reports were delayed due to the holiday.
12-27-00
Leading economic indicators for November (10:00): -0.2% loss versus -0.2% loss prior.
12-28-00
Existing home sales for November (10:00; delayed due to holiday): 5.10 million versus 4.96 million prior.
Consumer confidence for December (10:00; delayed due to holiday): 128.0 versus 133.5 prior.
Initial jobless claims for prior week (8:30): Not available yet.
Help wanted index for November (10:00): 79 prior. Not available yet.
12-29-00
Chicago PMI for December (10:00): 43.5% versus 41.7% prior.
SUBSCRIBER QUESTIONS
Q: What are you referring to by "down trendlines", and exactly what do they represent? You seem to refer to them being of importance when a stock is in the midst of heading "upward". Are these points of resistance?
A: Down trendlines are formed much the same as up trendlines, they just head the opposite way. Any line is formed by connecting at least two points. Down trendlines are formed by connecting the highs a stock or index makes. The more points on a trendline, the stronger it is. As noted in the summary tonight, some highs can be tossed out if a sharp rise is made that quickly fails. That forms a new trendline, but if the former trendline resumes, that shows its strength.
When a stock or index approaches a down trendline, it is running up toward resistance. If that down trendline coincides with other resistance in the form of price consolidations or a 200 day moving average for example, breaking that resistance will be very difficult. It takes a lot of volume to break down trendlines for good. One of the most powerful signals of a reversal is a gap over a down trendline on strong volume. In October 1999, the Nasdaq gapped over a short down trendline on massive volume, setting off the rally that carried the index to 5048. That down trendline was of very short duration, nothing like the 10-month longer term and 4-month downtrends on the Nasdaq right now. It will take a big shift in character to break those downtrends. A friendly Fed and softer monetary policy (e.g., tax cuts) would help that.
TEAM TRADES
JDSU: Were looking for a move up from the Tuesday doji, after the stock had fallen for several days and after it held up remarkably well on a day it was downgraded. The 10 day MVA was at 49.58 and in a rally the stock could run up to that level. Closed Tuesday at 41.88.
The stock ran up to a high of 43.25 a few minutes before 9:00 am (CT), after opening at 41.81, just a few cents down from the previous close. Volume was pretty good already, but the stock pulled back to test the 42.50 level; thought it might hold there because price had bumped up against that level earlier, but the stock dropped down to 41.88 by 9:02. The Nasdaq was tanking as well, down 37.95. Fortunately JDSU found support at 41.75 and turned around. Volume was pushing higher still and continued to look good (about 3 million).
The Nasdaq was pulling back up a bit, up to -31.81 points down at 9:15. JDSU was trying to break over 42.75, hanging at that level with the index improving to -25 points down. We set an alert on eSignal for 43 (stock was at 42.88) at 9:17; volume was now up to 8 million, so was really clipping by this time. We were getting ready to place an order to buy February $40 calls, which were trading at 9.50 by 9.13. That was not a bad spread at all, so put in the order. The stock hit 43, so we placed a limit order at 9.50, confident in the good volume and the rallying Nasdaq, now at -15.62. The fill was made. That was at 9:18; ten minutes later the index was down only 8 points and JDSU was at 43.51.
The stock then climbed pretty steadily to a high of 46.19 by 11:00, but then started to pull back along with the Nasdaq, which had rallied over 40 points up but began pulling back, losing almost half that gain by noon. Still positive, though. The options were at 10.88 by 10.38 and the stock at 45.13. We definitely wanted to see better than that and were comfortable keeping the position as long as the stock held above 44.50. That looked like a good intraday support level at this point.
Turns out that was correct, as the stock rallied back just before 2pm, hitting a the previous high of 46.19 by 2:13, options at 11.38 by 10.88. The Nasdaq was 35 points up.
By 2:30pm the stock was tapping at the high of 46.19, hitting 46 on volume of 38 million, options trading at 11.63 by 10.88. The Nasdaq had rallied back to 31 points in the black. In the next five minutes the stock broke above the old high, moving to 46.26, pushing the options to 11.75 by 11.25. If the market held up to the close, we intended to hold the position for a continued move up to the 10 day MVA in a continued rally.
Closed at 47.38, options at 12.50 by 12. Holding the position for now.
For a review of frequently asked questions, please use the link below:
http://www.investmenthouse.com/1questions.htm
End Part 1 of 2
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