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us stock market, trade stock
Begin Part 2 of 3
THIS WEEK
The market was jerked around by earnings last week, and there is another heavy week of earnings ahead. Will the earnings be good enough to turn things around is the question bulls are asking. Tuesday EMLX and AMCC are highlights. Also announcing are LU, MRK and NVLS. LU and MRK have charts mired in the mud; that is an indication that not much is expected. NVLS was hammered last week as it was a chip equipment manufacturer; we doubt that even a rosy outlook from NVLS would generate much excitement given INTC's cut in cap ex spending (TSM said it was doing the same Friday, by the way). Wednesday there is BRCM, KLAC, QLGC and SEBL. Heavier hitters.
We would be surprised if earnings on Tuesday, even if much better than expected and forecasts are even better, would get things going. If it continues Wednesday, perhaps that would help turn the tide. Companies are being cautious, however, so it will definitely be a surprise if they do give upside guidance above expectations.
There fore we are looking for more downside Monday. The market is getting to an oversold point, but it is also getting to a point where it can really break down. Things never go down in a straight line, and even downtrends see stocks bounce up for a few sessions and then roll back over. The indexes may undercut the support levels and then try to rally back for a few sessions. The fact that the Dow and S&P have already undercut the 50 day MVA and gave it a kiss Thursday before turning back down Friday (the kiss good bye), however, makes it look as if another full session or two of selling is ahead.
As we have seen, however, the indexes are news driven. The bias is down but still without a clear breakdown. Thus they are subject to still being yanked around by news until that happens. We are playing the trend down as we opened some downside index positions Friday (along with our continued stock puts we have been running), and we will look to continue doing that as long as the price/volume action remains negative. At the same time, however, we have some good upside action that can deliver us excellent returns. We just have to have our targets in mind and be ready to pull the trigger when they hit them or have sell orders preset.
As to whether the indexes hold here or not, we suggest they will not. The distribution and failed breakouts are symptoms that the big investors are no longer as confident that the economic recovery will support the rise in stock prices to this point. Until we see something to change that bias and the institutions respond with some big upside volume we expect the next support levels to be tested.
Support and Resistance
Nasdaq: Closed at 1930.34.
Resistance: The March 2000 down trendline at 1955. Then 2000 and the 18 day MVA (1989.48). After that, the December intraday high at 2065.69, followed by the January intraday high at 2098.88.
Support: The 200 day MVA (1933.10) along with the November consolidation tops at 1934 to 194 have been undercut, but not completely broken. Then the bottom of that consolidation at 1875.
S&P 500: Closed at 1127.58.
Resistance: The 50 day MVA (1139.05) was broken and tested last week; that makes it the level to beat. Then 1150 and the 18 day MVA (1145.20). Then the 200 day MVA (1166.62) and the December high (1173.62) and January high (1176.55) all line up as strong resistance.
Dow: Closed at 9771.85.
Resistance: The 50 day MVA (9892.90), as with S&P, has been broken and tested. Then 9992 to 10,000. After that the 200 day MVA (10,104.93).
Support: Trying to hold at the 9,750 level (November low at 9691; December at 9736). After that there is not much to stop it from 9600 to 9500. 9500 has been good support prior in the rally.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
1-22-02
Leading Indicators, December (10:00): 0.7% versus 0.5% prior.
Treasury Budget, December (14:00): $24.0B versus $32.7B prior.
1-24-02
Initial Claims, 1/19 (8:30): 400K versus 384K prior.
1-25-02
Existing Home Sales, December (10:00): 5.16M versus 5.21M prior.
SUBSCRIBER QUESTSIONS
Q: Hello. I really enjoy your newsletter. It has been very helpful. It appears from your writings that "ascending wedges" are good chart patterns to go long on once they breakout. I attended a class [and was taught] that in any wedge, draw the two lines that form the wedge and watch that the "flat line usually wins". In many ascending wedges, this is often the top line (the lows are rising faster than the highs), and the pattern eventually breaks down, not up. Do you agree with this, disagree? What are your thoughts on ascending wedges?
A: We are glad that the newsletters are of help to you. Ascending wedges can lead to some explosive breakouts, and this is especially true when the market is making bullish moves. They can form over a short period (couple of weeks) or over months. Clearly, it is a more bullish pattern in an overall stronger market or strong run by a stock - we often see them form after a stock has broken from another pattern, like a cup with handle, and the pattern holds above the breakout point on the test. It forms the ascending wedge on top of the former pattern, and leads to a big move. Of course, it does not have to form in that manner. Some recent ones from the Technical Traders report include KANA and MROI (exploded out of the pattern Friday). The move can be explosive, but as KANA showed, can be short-lived in a tough market. We have had dozens break out over the past year. A descending wedge works in the opposite direction. The stock makes lower highs while hold a steady low, and pressure builds for the downside break. One we were following recently on the reports was FLR, and it just cratered.
We can look at wedges and certainly get an idea of the strength of it by looking at the various factors that affect the overall pattern. For example, in the best ascending wedges you will see volume build on the moves up but ease off as the stock falls back. We look for a volume surge as the stock moves over the highs of the pattern. Again, the results can be explosive, but if we are not in a strong up-trending market the breakout can be short-lived, but the few sessions of moves can be quite lucrative.
The discussion of which line is longer as ruling the move applies more to pennants than wedges or triangles. In a pennant, where we have a descending trendline from the top and an ascending line from below, the longer line will usually win the battle. This can be applied to ascending wedges where say the upper line defines a historic level that goes way back (i.e., strong resistance), and the ascending line has formed over a much shorter period, that can indicate that it could be harder to breakout. Overall, we have had a lot of success with the pattern and like to play it.
TEAM TRADES
We were looking upside and downside Friday, taking direction from the stock and index movements.
MROI: In that ascending wedge pattern with a good move Thursday, so we were watching for the breakout Friday. It gapped higher, over our buy point of 25.50. It ran almost to 27 on the opening run, but then pulled back to test the breakout, hitting just above 26. It rebounded and crossed the early high and we issued the alert. We put in a limit order at 26.78, but it ran by too fast. Peaked at 27.19, and started to come back. I modified the order to 27. It was hit on the way down to 26.70 or so before it bounced again. The stock made a great run all day, fighting the urge to sell mid-day and then rallying hard into the close on a lot of volume.
DJX: We were looking at starting some aggressive downside positions on the indexes, and the Dow had broken the 50 day MVA. It gapped lower and then plunged on the IBM and MSFT open, but we could not get any options early. We waited for a bounce, and it came at 97.55 and moved up to 97.90. At that point it started to roll over and we issued an alert on the play. We were able to enter some put options at $3.30, jumping in at the ask as the index started down. The index hit 97.60 and wouldn't you know it, bounced all the way back to the opening price. We knew it would not last, and it fell back again, but don't you know it held again at 97.60. That always gets us interested because it was showing some support there. Another rally hit a lower high over the next 2.5 hours and then the plunge we were looking for came. Hit a new low at 97.40, but rallied in the last half hour and closed at 97.70. We ended up where we started. Some days are like that, and this was an aggressive entry point where we were trying to get an edge on the move lower; not always our usual tactic. Anyway, we will look at taking more positions on a breakdown below 97.
THE PLAYS:
Good movers: MROI followed up on Thursday's promise and broke out beautifully Friday!
Removed and watching:
VRTS: Gave us the bounce we wanted. Dropped back from 45, closing with a doji on lower volume above the 50 day MVA. In good position for an upside move here if the market is supportive.
ACTN: Never gave the bounce we expected. Still holding the 50 day MVA.
BRKS: Still in a cup with handle, but handle back below the 18 day MVA. Tapped lower support (200 day MVA) on the low so will be watching for a good move back up. Holding up pretty well overall.
NOVL: At support in a rocky handle with volume decreasing nicely. Not a great pattern due to handle but continuing to watch.
BORL: Got a bounce up to the 18 day MVA so closed out positions on the covered call sale play.
MROI: Beyond 5% limit on this breakout. Still riding until we see it topping.
LXK: Can't hold above the 18 day MVA in the handle. May test 55 (50 day MVA).
VIP: Not showing much for now in the ascending wedge.
INVN: Nice move up Thursday but the stock looks like it will take a rest before running up to 45. Tried to move higher but sold back, still closing just positive on the day.
GSLI: Still watching for the breakout over 10.88 though the stock turned volatile in the handle this week.
WW: Still holding the nice ascending wedge but showed some selling Friday. If it can hold the 18 day MVA here, has a good chance to make the breakout.
AXCA: Looked for a breakout to a new high but the stock is now under the 18 day MVA. May hold 13.50 but we will wait for the move back over.
AUDC: In the pullback (handle) still, but under the 18 day MVA. Low volume shakeout, so keep the buy point handy from last week's reports.
KLIC: Ugh. Down to the 200 day MVA and may visit a few days.
LNOP: May bounce from the 50 day MVA, but is below the 200 day MVA for three days now. Slid down that far on a test of the breakout (well below buy point).
KANA: Another breakout test that pulled back too far.
VAST: Trying to move up in the handle on decreasing volume, so are pulling out to wait for better price/volume action.
RECN: Still watching the tight lateral pattern the stock's held for almost 2 weeks now in the handle to its cup. Buy points still 27 (aggressive) and 28.28 for a breakout.
SHLM: Started throwing flags but each successive move up was shorter and on lower volume. We are looking for a pullback to the 18 day MVA.
Puts:
ROH: Still looks weak but now will have to move below 32 for new entry points. Did not give us the strong move down we wanted, but will continue to watch.
ABGX: Looking for a move to 22.50; hit the buy point (26.25) Tuesday and got 2 points move down before Friday's bounce back up to hold at 25 on lower volume.
FLR: Gave the relief bounce after dropping to 29.56 for the put play and is holding under some resistance at the 32.50 range. Our target is 28 and could get a move back down from here (31.55 close Friday); volume continuing to decrease.
APC: Looks ready to hold (on continued decreasing volume) at 46.90, Monday's low; were looking for a drop to 44 but needs to move below that price on rising volume.
PPG: Very satisfied with what we got from this closed put play.
KBH: Back over the 18 day MVA.
QCOM: Below the previous January low on rising volume. Can drop again as it couldn't break the 10 day MVA.
Best Plays:
1) OEX: Still looks good for the put play.
2) SFA: Strong move up Friday off the 50 day MVA.
3) CAKE: Ditto.
4) MOGN: At support in a handle.
5) RMG: Ready for a breakout!
6) EGOV: A textbook test of the breakout.
7) NBIX: Looks heavy (put).
8) ANAD: Ready for the kiss good-bye in its bearish pattern.
9) MCK: Ready to fall from the down trendline.
10) IONA: At support on low volume in the pullback.
11) IOM: Still like this pattern.
Index:
OEX (Standard & Poors--$575.24; -6.39; optionable):
STATUS: Still holding support at 575, but moving below it on the intraday low of 573.05. Volume still above average but decreased to 1.3 million (avg. 1.26 million). Still like the odds for a move down on a break through resistance at the December closing low (570.60). That would clear the index for a possible move down to our initial target at 560. Below that, 550.
BUY POINT: 570 on rising volume.
POSITION: February $580 puts to buy (OEB NP).
New:
SFA (Scientific-Atlanta--$26.70; +2.90; optionable): Telecom Equip
http://biz.yahoo.com/p/s/sfa.html
STATUS: Strong earnings and upgrades started SFA on its move Friday. The stock is in a little double bottom (of 6 weeks), more of a flying 'w' since the right dip does not undercut the first. On the whole the pattern is in SFA's larger 17-month base and currently is below the 200 day MVA (33.07). The middle hump high is at 28.18, and on the strong move we are looking for a breakout over that price for a trade up to the 200 day. It may form a handle first. Either way is okay. Volume was quite strong at 8 million (avg. 2.1 million). Relative strength breaking higher as is buying.
BUY POINT: 28.31 on continued strong volume. Stop: 26.33 (7%)
POSITION: Stock and/or March $25 calls to buy (SFA CE).
http://www.investmenthouse.com/ct/sfa.html
End Part 2 of 3
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