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us stock market, trend trading stock
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1/22/02 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERT SERVICE
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertdly.htm
SUMMARY:
- Indexes continue the slide in face of good news
- Looks as if a 50% retracement is in the cards
- Playing the down market
- Subscriber Questions
- Team Trades
Economic news, earnings steadily improve, but not enough to drive a renewed rally.
The news continues to show steady improvement, but not enough improvement for investors to put new money into stocks. Indeed, they are taking money out of stocks on the belief that company outlooks on future earnings are not going to support current prices.
That view started with Greenspan's comments two Friday's ago that were taken as a caution. A few have subsequently said that was not the intention (some more FOMC members this past weekend), but that has not reversed the general sense that earnings cannot support prices at this level. Greenspan speaks later this week, and while the speech will be the same, if he has some intention of changing the tone, we will see a slight change. For him, a slight change is a huge statement.
There was some good news again on the economic front. The Leading Economic Indicators (LEI) rose 1.2% in December, up from +0.8% in November (revised higher from +0.5%), and the largest increase since February 1996. Indeed, our numbers only go back to December 1985, and it has not shown that strong a rise in all that time. These indicators point 6 to 9 months down the road, and they were on the mend before 9-11. Then they took a hiatus as did most indicators, but now have shown three months of expansion: +0.5% (October), +0.8% (November), and +1.2% (December).
Earnings continued to come in at or slightly better than expectations, also showing improvement. Guidance, however, has not been predominantly optimistic. Yes there has been positive words here and there such as ALTR tonight (saying that Q4 was the bottom), but no 'we have seen the end of the down cycle and orders are jumping up' reassurance. That and Greenspan's talk to the bond market sent most investors to the selling window.
Remember: Corporate sentiment lags the market as well. Managers typically remain skeptical about the future until they see definite recovery. You usually only see effusiveness from managers in companies needing a turn around when things have not yet turned solidly back up.
Markets look ready to retrace more of their gains.
Over the weekend we discussed the downward bias, and today it continued with some big names breaking lower and the QQQ making a definite downside break. These were presaged by the selling on stronger volume, i.e., the distribution, we saw in the past two weeks. The trend has turned down, and we are seeing downside buy opportunities as stocks break support or bounce down from down trendlines that have been established over the last couple of months (or are continuations of longer term downtrends).
The Dow and OEX (S&P 100) are just above November and December lows, ready to crack lower. The Nasdaq really broke down today. If the indexes do not mount a quick reversal here on some impressive volume, it looks like a 50% retracement of the gains from the lows is coming. What is that? That is what is considered a 'normal' pullback after a rally of a new low. It comes after a big move up for all of the indexes and right at the point where they ran into resistance from the summer 2001 congestion and the 200 day MVA (Dow and S&P).
Where does that mean the indexes are most likely heading? Without some other big upside impetus to change the view that stocks are too pricey right here, lower. A 50% retracement on the Nasdaq puts it at roughly 1750, about 130 points away (3 sessions if you get days such as the last two). It has been leading to the upside, and now it is leading to the downside in a big way. It is ahead of the pack. The S&P 500 would head toward 1060, but it has some pretty solid support at 1100. The Dow would find 9181. 50% on the SOX would be 475; it closed at 499.13. As you can see, the tech side has been busy giving back the gains fast of late. That most likely means that the techs get there first and turn, and the others continue down a bit more but don't fall as far before they are pulled back up with the Nasdaq.
That of course assumes a 50% retracement. As noted, that historically is the degree of testing, but it can range more or less than that. In 1974 the Dow pulled a full test of the bear market lows while the S&P did not. Right now the sentiment is for selling, so the bias continues down until there is enough air taken out of stocks and the views toward the future start to factor in the improving economic numbers. Then stocks will become a buy, usually at a support level along the way. That is why we keep an eye on the potential levels they could turn: a reversal on higher volume means start closing out downside positions and taking a few tentative upside positions we can build up as the turn continues.
Playing a down market.
This section tonight is in lieu of a Subscriber Question because it is the subject of several subscriber questions of late. We go into this in detail in our online seminars, but I wanted to give a quick overview here as we have been playing more and more downside as the market rolls over for a steeper test of the September bottom.
The market has rolled over and has been selling. We have been selling upside positions to lock in profit and also taking downside positions (along with the continued good upside that is always there). Just as with the upside moves, however, it is not all a straight run in one direction. There is selling, relief bounces, then selling. Indeed, we may get a bit of a relief bounce tomorrow as stocks such as MERQ, NVLS, and ALTR had good things to say after hours and had quite a few stocks bouncing. Unless things really change, that will most likely set up another downside entry point for many stocks.
First, keep sight of your upside investments and know what you want to do with them. Do you have a lot of gain in them and want to hold them for years and years? If so, you can sell calls on those stocks that are optionable. Have they run higher off of all time lows (as have many tech stocks) and look to be heading back down? May want to lighten up, take some money off the table. We have been doing that for the past three weeks.
Second, start playing the trend. Look for stocks already in downtrends. Look for stocks that have reversed and are breaking support. We like to play continuing downtrends when the stocks run up to the down trendline and run out of gas. We jumped on several of those last week and had some on the weekend reports as well. Those are just continuations of the existing downtrend. Then we look for breaks of support (the opposite of breakouts); we like to jump on those when they break support, rally back up to that level, and fail from there. We were jumping on those last week and today as well.
On each of these plays there is a downside move, then an attempt to rebound, and then more downside action if the stock cannot reverse the trend or break back over resistance. What we try to do is capture the big moves lower for two, three of four sessions, then take the money off the table when they show signs of trying to rebound or at least a cessation in the selling. Stocks just like markets become oversold and try to bounce. We view these as shorter term plays (as we use put options), and thus we will try to avoid the loss of time and value when stocks try to bounce after we capture the good move down. Sometimes we have to wait for a day or two to resume the downtrend, but if we get three of four good down sessions in a row and a stock shows signs of turning, we will take the money off the table.
Third, we always look for those good upside plays. Even in markets that are selling we always see good upside plays. They may just keep on trending higher all through the selling, or they may give us a strong breakout, rally 15% or 20% on our stock positions, and then run into trouble and start to sell. Do we wait around to see if the move holds? Heck no. I will take a 20% move on a breakout and bank it in a choppy or downtrending market. I will take 15% and be tickled. Change your expectations, but you can do it without much trouble; if you buy a stock on a breakout, set a predetermined sell order a little bit inside the target. The surge on the breakout usually takes you through your target and you automatically lock in the gain without worrying about it coming back on you in the test and crashing. If it does not take out the upside target and the move is slowing down after a couple of sessions (gains not as big, closes well off the high), I will adjust my sell order, or just go ahead and take the 10% or so that I have. Not many can boast a consistent 10% upside gain on trades in a tough market. If we adjust our thinking and our methods, however, it can be done. Take the gains when they are there, get the heck out of a play that stalls or turns on you, and you make good upside trades while you also enjoy the downside trades.
Remember: downside action is just like upside action with respect to the moves. If you see a breakdown through support but wait too long to get on it, you catch it right when it bounces. If you let it bounce down from the trendline for a couple of sessions before you make your move, you miss most of the run. We look for breakdowns thorough support, preferably after the kiss good bye or the kiss of death (call it what you want), and stocks kissing their down trendline and ready to fall; those are our favorite downside plays.
THE MARKET
The Nasdaq broke down further on higher volume while the S&P and Dow toy with November and December lows. As usual, the Nasdaq is leading the way; this time it is to the downside. There has been some heavy, heavy selling. After a breach of support there is often a test of that; with some decent earnings and guidance after the close, we are seeing some stocks bounce after hours. That may lead to a bit of upside action, but at this point we do not see it reversing the trend. Indeed, a move higher in the morning will most likely be met with more selling.
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: 25.10; +0.76. Volatility is hardly climbing on the selling, an indication that this is a fairly well entrenched down move, giving rise to the 50% retracement position stated above.
VXN: 50.37; +1.48. As with the VIX, Nasdaq volatility is just inching up despite the hefty selling on the Nasdaq. There is no fear in the face of the selling, and until this indicator starts jumping higher, it looks as if the downtrend that is underway will continue, though we will see interim bounces.
Put/Call Ratio (CBOE): 0.65; -0.20. Put activity dropped sharply on a solid down session. That is the opposite we would expect. You want to see the ratio rising as selling rises, thus indicating escalating bets to the downside as option players rush to short the market. Plays inline with the volatility indicators that fear is not ramping up.
Nasdaq
Typical downtrend action: tried to rally early after getting kicked around last week, but then gave up and finished at the lows. Looks as if there may be another attempt to rally stocks tomorrow as NVLS, MERQ and others said things were looking a bit better. Most likely that will give way in the new rally early, sell later market action.
Stats: -47.81 points (-2.5%) to close at 1882.53.
Volume: 1.871 billion (+10,7%). Another distribution day, i.e., selling on higher volume. That makes 4 in the last nine sessions, a clear problem. Of course, the third session last week had us going negative.
Up volume: 402 million
Down volume: 1.394 billion
A/D and Hi/Lo: Decliners led again at 1.73 to 1, down from Friday's 1.9 to 1. Still, decliners have been walking all over advancers the past week, a further signal of the breakdown as more stocks are heading lower.
New highs: 84 (-2)
New lows: 45 (+15). Up but not running out of control yet. It is early, however.
The Chart: http://www.investmenthouse.com/cd/$compq.html
The techs broke hard below the 200 day MVA on rising volume, checking up just shy of the 1875 support level that markets the bottom of the November consolidation. It may find this as a point where it can make its first real oversold bounce; it tried twice last week and failed. The after hours action showed some chip stocks making a recovery attempt on the NVLS news, and some software looked good on the MERQ news. It could test 1875, even undercut it tomorrow, and then run back up to the 200 day MVA (1933.31) before it sputters again. Overall, the higher volume break of the 200 day MVA is telling, and we were taking downside puts on the index today, and we will add to them when it gives us the next entry point (most likely that bounce to test the 200 day MVA). If we see stocks rallying tomorrow, however, we will watch for the upside move to end, and then enter more downside positions when it fails; that is the typical downside action we see when a correction is underway.
Dow/NYSE
Sputtering just below the 50 day MVA and above the November lows. It is caught between resistance above and some support below. We don't give it much upside chance given the Nasdaq's harder break lower today.
Stats: -58.05 points (-0.6%) to close at 9713.80.
NYSE Volume: 1.298 billion shares (-3%). Volume was lighter on the selling action, about the only thing good on the session as the NYSE avoided a distribution day that the Nasdaq had. Up and down volume roughly held their relative positions.
Up volume: 481 million
Down volume: 817 million
A/D and Hi/Lo: Decliners led 1.28 to 1, a bit narrower than Friday's 1.53 to 1 lead. The A/D line is still heading south as more stocks falter.
New highs: 90 (+7)
New lows: 59 (+23). Pretty hefty rise in new lows, and the first crack over 50 in months.
The Chart: http://www.investmenthouse.com/cd/$indu.html
The Dow is struggling at the 50 day MVA (9885.88) as it attempts to hold above the November low (9691.39). It is making steady lows right at 9690, but its highs are falling. It may try another bounce up toward the 50 day MVA, but we expect it to follow the Nasdaq lower; the Nasdaq has led higher and it appears to be leading lower. If 9700 cannot hold, 9500 is the top of the October range, and it has been tested once.
S&P 500: The big caps broke lower as well, heading below the March 2000 down trendline (1123). The December low is still in the way (1114.53), and today's move was not on high volume. The index could thus attempt a bounce at the December low before rolling over for the next move down. It does appear ready to head lower for a deeper test of the September bottom, however.
Stats: -8.27 points (-0.7%) to close at 1119.31.
Volume: NYSE volume backed was lower again, avoiding a distribution day, though much of the damage in that regard has been done. Volume was 1.298 billion shares (-3%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Futures were improving a bit after hours on some of the earnings news, indicating there may be an attempt at some upside action early. The indexes have sold hard and are at points where they are ready to bounce on some good news. We don't believe the news at this point is enough to support any strong upside move. There has not been the change in perspective just yet to support a lasting upside move. We will look to take some downside positions on any bounce that fails at resistance, and use that as well to clear out upside positions we still have. One thing to watch for is the quick pop and sell down that later gives way to a rally attempt after over a week of downside action. That may or may not happen, and you can get wound up trying to play every micro move. For now it appears the overall trend is down though we will continue to have good upside plays that can bring us great returns as well. Play the moves that you are comfortable with and be ready to take your gains when the targets are hit.
Support and Resistance
Nasdaq: Closed at 1882.53.
Resistance: The 200 and 50 day MVA (1933.31 and 1941.44, respectively). The March 2000 down trendline at 1943. Then 2000. After that, the December intraday high at 2065.69, followed by the January intraday high at 2098.88.
Support: The top of the November consolidation collapsed, and there is support at 1875, the bottom of that consolidation range. After that point, 1800 at best. As noted 1750 would be a 50% retracement. Support at that level looks to be anywhere from 1700 to 1750.
S&P 500: Closed at 1119.31.
Resistance: The March 2000 down trendline at 1123 may try to hold it back, but there is more resistance at the 50 day MVA (1138.27) and 1150. After that the 200 day MVA looms at 1166.42. The December high (1173.62) and January high (1176.55) all line up as strong resistance.
Support: 1125 is being broken right now, but volume has been declining; it may try to hold or at least test it again. After that is 1100, the tops of the November consolidation range. That is followed by a range of support from 1075 to 1050, the 1050 level holding twice in October. That is right at the 50% retracement.
Dow: Closed at 9713.80.
Resistance: Still the 50 day MVA (9885.88) has checked upward movement thus far. Then 9992 to 10,000. After that the 200 day MVA (10,104.10).
Support: Sliding below 9750, though still in that 9690 to 9750 congestion range. From here it gets dicey all the way down to 9500, a level of good support. After 9500 there is a very congested trading range from 9125 to 9500. A 50% retracement is 9181.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
1-22-02
Leading Indicators, December (10:00): +1.2% actual versus 0.7% expected and +0.8% prior (revsed from 0.5%).
Treasury Budget, December (14:00): $26.6B actual versus $24.0B expected and $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
See 'Playing a down market' above.
End Part 1 of 2
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us stock market
trend trading stock
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