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us stock market, trend trading stock
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1/30/02 Stock Split Report Market Summary
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Stock Split Report Subscribers:
MARKET ALERT SERVICE
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SUMMARY:
- Intraday reversal on heavy volume.
- Reversal is noteworthy, but by itself does not reverse the current trend.
- FOMC still cautious but feeling better.
- Interesting statistics
- Subscriber Questions
- Team Trades
Buyers come back into the market after some more vicious selling.
The indexes were en route to another very nasty session. Early selling was pretty bad, but then a brief rally was sold and it just got downright ugly. We were taking profits on some put plays just as we were opening others. Near term support had folded on the Nasdaq, OEX, and SOX. Hard selling led to a casual bounce, but then AMAT came out with statements that the September quarter had been the bottom and TYC management said they were personally buying some pretty impressive blocks of company stock. S&P came out as well and said the TYC accounting issue was a non-issue.
That was the catalyst that built on the bounce and started a decent recovery. Then the FOMC left rates unchanged, noting that while still precarious, economic conditions were improving. Coupled with the positive GDP number out pre-market, there was enough good news to take the relief bounce higher. Some shorts covered just in case, and then buyers came in when the rally did not immediately turned back down. It snowballed, and the indexes ran higher the rest of the session.
Volume on a reversal is important.
Volume surged higher again with both the NYSE and Nasdaq posting strong volume. The Nasdaq posted its first 2B+ session in three weeks. The NYSE just missed a 2 billion share day of its own, surpassing Tuesday's very heavy trade. Reversals on high volume, just as we saw off of the high three weeks ago, have the ability to change market direction. It could potentially be the marker post driven into the ground that signals the bottom of the test of the September low. There is a lot of work to be done before that is shown to be the case, however, as discussed below. A day such as today is good for the upside, but it did not change the trend.
Another note on volume: Nasdaq volume as a percent of NYSE volume slipped even further, now just 105% of the NYSE. That picture is a bit distorted by once again huge volumes in TYC, but it still shows that there is not as much speculative money being thrown at the Nasdaq stocks in the overall picture. When investors are not speculating as much on 'speculative' tech stocks, that is a sign that the bottom is being put in place because those holding the stocks are holding for the longer term. As noted, today's high-volume reversal could be that signpost that the market builds on over the next week or so.
Not all damage cured in today's session, but could this have been the successful test?
As we saw last week, an up session or two on rising volume does not cure the ills of the market. Today was different in that it was one of those reversals that arises out of a plunge straight down and then moves the markets to close higher on strong volume. Those are powerful. They can set the stage for a strong follow through next week. The last attempt from the week prior did not pan out. This move was stronger; volume easily trumped prior volume and that helps wash away the distribution. Indeed, many times a market starts showing distribution, gives a modest rally or two, then turns and really sells again as a result of that prior distribution. Many times that subsequent selling ends in a final cathartic selloff. That is what we have seen here; is everything in place to support a rally that is the conclusion to a successful test of the September low?
40% test on the S&P 500.
Remember, we have cited a rule of thumb about tests of lows: indexes often retrace 50% of the total move before resuming their upward march. As noted last night, the S&P 500 has been leading the downside assault. Today it dropped to 1081.66 on its low, about 20 points from the 1060 level that would mark a 50% retracement. Today's low marked just over a 40% retracement. Enough? Could be; it is a rule of thumb, not a rule set in stone.
VIX almost hits 30, CBOE put/call ratio closes over 1.0.
Volatility hit the high end of the 'normal' range of 20 to 30. A good sign, but not definitive. The put/call ratio closed at 1.05, and at 0.87 overall. A close over 1.0 is a signal that anxiety is getting high enough for a reversal. Combined with the volume and reversal, some pretty darn good signs.
Stocks are not in the best position to rally longer term, but we still have to await a follow through in any event.
Many stocks stopped the plunge today and rallied off of their lows. Some on very solid volume, some on so-so volume. What is still a common theme: a lot of the stocks that had the largest intraday ranges are still in patterns that are more or less ravaged by the last few weeks of trading. Sure there are still some patterns out there that show the process of accumulation and that are ready to move higher, but a lot of the big names that everyone follows were hit hard and will take some time to get into position where they can give us gains with some more comfort level. Many are still in precarious, bearish positions (e.g., GNSS) below support and not showing any great reversal action and/or volume. We can take some aggressive positions on some stocks primed for a bounce, but most of our upside plays continue to be higher percentage plays, i.e., those with good patterns formed that can give us a good launching point for a nice gain with little loss of sleep.
Volatility and bulls versus bears, despite volatility's spike higher intraday, remain in the doghouse, and leave some question marks about how long any rally can continue. There was a lot of upside momentum in the last half of the session as each selling attempt was just a breather space for the next leg higher. That momentum can carry through Thursday and at least part of Friday before it runs out of steam. We still see a lot of patterns where the stock has still not overcome resistance even after today's action. Indeed, two more upside days won't put some of them over significant resistance and may just set up another downside buy point. Sentiment indicators do not trump price/volume action, but they can give us some insight to the strength of moves.
THE ECONOMY
FOMC feels better about the economy. Citing a still weak economy with risks to the downside, the Fed noted some positives, enough to leave rates steady. First, the Fed noted that the weakness in demand appeared to be abating. Now we are not sure what weakness the Fed is referring to; the consumer has never slowed down, at least nowhere near prior recession levels (as the housing and auto markets indicate). Must be referring to corporate demand. That would be great, but all we have seen and heard on this is that demand remains weak. Second, the Fed noted signs of increased economic activity are prevalent. As usual the Fed's statement did not go into the details, but it was more of a cautious 'all is well, kind of.'
Some of the potential signs: Q4 GDP surprised all with a +0.2% reading versus -1.1% expectations. That is up from the -1.3% in Q3, but there are items to note. First, there will be revisions; what was better today may not be so strong later. Second and more importantly, government spending was up 9% and made up a large part of the rise. Third, durable goods spending was up 38% (mostly autos), something that cannot keep pace. Key: business investment was down 12.8%. That continues to be the drag on the economy, not consumer spending.
Positive from GDP: Inventories fell $120 billion, continuing the year long draining of overstuffed pipelines. That actual lowered the GDP number; it would have been higher than the 0.3% if inventories were not still being drained.
Mortgage activity drops.
After a big week last week, all areas of home buying and finance fell. New purchase activity dropped 25%; applications fell 11%; refinancing plunged 36%. Higher rates causing a problem, or is the housing market just out of gas? Historically rates are still very, very low. Could be the housing market is finally hitting 'E' on the gas tank. Some say the numbers are choppy week to week, and thus it could still be in the upward expansion mode. Remember, they said that about the economy when the numbers started the yo-yo action. When indicators are in a strong uptrend and then start to get choppy, that is usually a sign that the trend is starting to weaken. We see the same thing with stocks: solid moves higher (or lower), then volume goes wild and prices jump up and down; then comes the change in trend.
Interesting statistics and quotes.
Americans who receive 50% of the benefits provided by the federal government pay just 1% of the taxes used for those services.
There are 129 million taxpayers.
The 32 million making up the top 25% of income earners pay 83% of the income taxes.
The remaining 97 million pay only 17% of the income taxes.
43% of income tax filers receive refunds from tax credits in excess of their tax liabilities (they make money by filing tax returns).
70 million voters have no tax liability.
167 million voters have little or no tax liability.
32 million voters pay 83% of the taxes that pay the benefits the 167 million voters with little tax liability receive.
"By the next election [2004], the majority of Americans will be dependent on the federal government for their health care, education, income, or retirement - at the same time the number of taxpayers paying for these benefits is rapidly shrinking. How can any free nation survive when a majority of its citizens, now dependent on government services, no longer have the incentive to restrain the growth of government?" - U.S. Representative Jim DeMint, republican, South Carolina.
Fewer taxpayers demanding more services stress the engine of the economy. Increased services and increased numbers receiving the services require more revenue. Raising taxes to generate revenue ultimately results in lower revenues. That is a well-documented, but not well-learned history lesson. Since the majority of voters will not vote to decrease the truly free services they receive (free at least to them), the only answer is to provide enough incentives to those that pay the for the services so that they will take the risks and invest the money necessary to keep the economy running at a high rate that it generates enough revenue to sustain those services. If taxes get too high, they will not invest. All the more reason to cut capital gains taxes, payroll taxes, and marginal tax rates across the board.
THE MARKET
Impressive reversal on very strong volume. Indexes are still in sloppy patterns, but held onto support on the move. Stocks are also still in precarious positions. Today was not an 'all clear' signal, but rallies have to start somewhere, and high-volume reversals out of selling has launched a few.
VIX: 24.87; -1.39. Still so very low but hit 29.92 on the high. That is a respectable level. Still the number tends to forecast a rally that does not have a lot of power. Still, we have to watch price/volume action and leading stocks to tell us more. Right now we are not too hopeful.
VXN: 44.67; -1.23. Fell right back down on the reversal, but it did hit 48.28 on the high. That is strong in gain but in the big picture not very high. Still at low levels, indicative of potentially less strength on a rally attempt.
Put/Call Ratio (CBOE): 1.05; +0.15. First close over 1.0 since the week the market re-opened after the 9-11 attack. On all option markets the ratio was 0.87. A close over 1.0 is considered a signal of a reversal at hand. One such close puts us on alert, but it usually takes two to really give a clear signal. Still a very good sign for upside longer term.
Nasdaq
Was heading south with some really vicious distribution, but was able to turn the tide and close above 1875 on strong volume.
Stats: +20.45 points (+1.1%) to close at 1913.44.
Volume: 2.066 billion (+10.25%). First 2 billion share session in three weeks. Started as distribution, i.e., volume was heavier as the index sold early, but it turned it around and upside volume was strong as well.
Up volume: 1.134 billion
Down volume: 902 million
A/D and Hi/Lo: Advancing issues snuck back into the lead at 1.2 to 1 after being in deep trouble early.
New highs: 80 (-7)
New lows: 65 (+12)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Plunged to 1851.49 on the low, undercutting the bottom of the November consolidation range at 1875, the last real vestige of support before 1800. Then it reversed. Sixty-two points later it closed right at its session high, back over 1875 on strong volume. Some leaders reversed on strong volume, but many are still in poor patterns (head and shoulders is still common). There is more work to do. Still below the 1934 to 1941 tops of the November consolidation (it is in the consolidation range now) and the 200 day and 50 day MVA (1939.35 and 1937.90, respectively). It has momentum, and it will almost certainly continue to move higher tomorrow. Key levels will be those cited above as well as the simple 50 day MVA at 1965.06 that stopped the move last week.
Dow/NYSE
The Dow plowed down to 9500 and reversed. It spanned two important levels today, 9500 and 9700 to 9750. Massive NYSE volume. It has recaptured the November and December lows. Can it take out other resistance.
Stats: +144.62 points (+1.5%) to close at 9762.86.
NYSE Volume: 1.966 billion (+8.4%). Again above average volume, well in excess of any seen since September. Dumping was underway again, but then there was buying activity in the second half of the session.
Up volume: 1.282 billion
Down volume: 696 million
A/D and Hi/Lo: Advancers took back over at 1.57 to 1. Decent, but nowhere near the 2.0+ levels decliners have shown the past two weeks.
New highs: 87 (-5)
New lows: 72 (+23). New lows continue to climb even on the reversal. Lows need to move back below 50 in the next session.
The Chart: http://www.investmenthouse.com/cd/$indu.html
On the low hit 9529.46, just above the 9500 level that the index etched out as good support in November. It kept the index above that support (testing it) and also pushed it back over 9691 to 9750, a level of quite a bit of congestion. Massive dumping Tuesday, massive reversal Wednesday. Call it even? Would be nice, but it still ahs to deal with the pattern (head and shoulders) and some important resistance points overhead. The 50 day MVA (9860.67), then 9992 to 10,000, and then the 200 day MVA at 10,105.50. It has some momentum after today and will try at least the lower levels of resistance before the weekend. How it responds and on what volume will tell us a lot about its future and the future of our DJX put positions today.
S&P 500: Ran to 1081.66 on the low, just another day's selling from the 50% retracement at 1060. By reaching way down and closing above 1100, it can be argued it successfully tested a 50% retracement and closed back at support. Anything can be argued; the proof is in what it does next. Lots of upside momentum in the afternoon, and it will teat 1125 this week. Beyond that is the real test with the 50 day MVA (1135) and 1150. The 50 day MVA near 1138 stopped it on its last rally attempt last week. It could have some more power here with the big volume reversal. If it clears those points on volume, the upside looks a lot brighter.
Stats: +12.93 points (+1.2%) to close at 1113.57.
Volume: NYSE volume exploded back to the upside, shifting from selling to buying mid-afternoon. 1.966 billion (+8.4%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
After a big reversal such as today, the cards are shuffled a bit. Clear selling turned into buying, and now we have to see how far the upside momentum engendered today will last. As noted, the indexes along with many big name stocks are still in bearish patterns; today's action has reversed some momentum, but it has not reversed the patterns. We have to see how the indexes and individual stocks handle resistance once again. If they fail we can add to our downside positions. If they break over them on strong volume, we start closing them out.
Even with the momentum to the upside, however, most of the big names are not in great patterns. Everything for a rally can be in place, but if there are no stocks in good patterns to carry it forward, it has a problem keeping it all together.
Today we were taking profits on some upside plays and downside plays as well. We were also entering plays in both directions as well. Wish some of the downside plays were calls as it turned out, but the moves were there and we stepped in. With the pattern breakdowns we have seen and the distribution, unless the indexes can mount a solid follow through, we have a feeling next week we will be moving back in the money on these. Still, feelings are one thing, market action is another.
With that in mind, while we let the market sort out its direction, we will continue to look at some of the leading stocks in good patterns and some favorites that are ripe for a bounce such as SEBL. It did not tank on the selling and used it to set up a point where it can bounce. We will continue to look for nearer term profit targets in the 15% to 20% range until we see more direction again either way. The market is still choppy and if we get that type of move and bank it consistently while letting the big trends play out, we perform very well in this market despite the up and down action.
Support and Resistance
Nasdaq: Closed at 1913.44.
Resistance: 1934 to 1941 represents the top of the November consolidation range. Then the 200 day MVA (1939.35) and the 50 day MVA (1937.90) are right there. The March 2000 down trendline is before that at 1915. After that we look at the simple 50 day MVA (1965.06).
Support: The bottom of the November consolidation (1875). 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 1113.57.
Resistance: The March 2000 down trendline at 1115. Then price consolidations at 1125, followed by the 50 day MVA (1135). Then the 200 day MVA is at 1166.25. The December high (1173.62) and January high (1176.55) all line up as strong resistance.
Support: Again right at the October tops at 1100. 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 (1060).
Dow: Closed at 9762.86.
Resistance: Then the 50 day MVA (9860.67). After that 9992 to 10,000. Then the 200 day MVA (10,105.50).
Support: 9691 to 9750, the November, December and January lows. 9500 is the next level, and it held Wednesday. After 9500 there is a very congested trading range from 9125 to 9500. A 50% retracement is 9181.
End Part 1 of 2
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