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stock trading investing, stock trading
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1/31/02 Technical Traders Update Report
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Technical Traders Report Subscribers:
MARKET ALERT SERVICE
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Rally continues, led by staples, defense, and other less than sexy sectors.
- Bifurcation of the Dow and Nasdaq? Volumes and price actions very interesting.
- Nasdaq running out of steam here. Abdicating post 9-11 leadership role?
- Economic numbers continue to improve if less than inspiring.
- Subscriber Questions
Momentum from Wednesday continues up to resistance.
All indexes moved higher Thursday, closing near their session highs in a continuation of the Wednesday reversal. Closing near the session highs is bullish intraday action. The Dow was especially frisky in its move toward the close. The leaders were the basics, the staples that we all use. The pace was set by PG, a company that has reinvigorated its sales by focusing on its leading consumer brands. The Dow ran hard on its back.
But not all of the stocks that many were crowing about were equally up to the task. We heard statements that WMT and AXP were 'breaking out'. WMT has been enjoying a good run, but today was no breakout. AXP? No way. MMM and JPM were also talked up; there moves were higher, but that was after a beating. They did not break back over resistance, and they did not rise on strong volume.
Nasdaq not on par with the Dow's move.
All three major indexes moved higher, but it was not an equal move. Price gains were not bad, but volumes were not. The Dow and S&P moved up on lower but still strong, above average volume. Indeed, the volume was higher than the selling volume on the prior distribution days other than Tuesday's selloff. It was not a clear reversal of those distribution sessions, but after those two huge volume days Tuesday and Wednesday, it was a solid upside day.
The Nasdaq could not make that claim. It too enjoyed decent price gains on the session, but volume could not even crack average. Other than a handful of bigger tech names led mainly by INTC on an upgrade, tech stocks fared poorly. Again, other than INTC, MU, and AMAT, there were not may decent moves by chips, and most including those that rose, still closed the session below resistance on lower volume. It was not a strong move higher for those stocks.
What is going on? The cyclicals, those that do well when an economy is turning around, are performing better. Food and consumer products were performing well today. BUD put together yet another strong, above average volume day as it works its way closer to the late 2000 high as it works to complete its saucer base. The valuations of these stocks are questioned by some, but we have to realize that we have been in a recession and that earnings trough during that time. As we saw today with PG, earnings improve as the economy improves (that is what those economic reports are showing thus far), and that makes the valuations better. That is why these stocks are performing better.
The big Nasdaq stocks are somewhat in the same boat with valuation concerns. Intel trades 70 times earnings much as it did back in 1998. Problem is, its revenues are declining by 20% or so now as opposed to rising by 40% back then. Many techs are similarly situated. There is a trough in earnings with those stocks as well, but there is concern right now about their ability to recovery earnings and revenues to back up those valuations. The answer? Some will, some won't. Right now not many are willing to bet much on which ones will be the winners.
Thus, the Nasdaq, led by the big cap tech names that have lost for at least now what makes a stock a leader, may be giving up for the time being the leadership role it has enjoyed since the September bottom. Many of these stocks made relatively weak moves back up to resistance today with volume quite weak. This is the true test of Wednesday's reversal: can these stocks, the stocks that move the Nasdaq, make it over resistance and keep up with the Dow, if the Dow is going to continues its move (something not totally decided either).
Divergence ahead?
Back in 2001 after the rally off the September bottom started, we were concerned the Dow and S&P were not performing on the same caliber as the Nasdaq, and that they could ultimately drag it down. More what happened was that the Nasdaq dragged those two along with it, though grudgingly.
There are instances in the past where one index outperforms the others. The Nasdaq did so back in 1999, and many were concerned that was going to ultimately hurt all of the market. The crash that started in March 2000 was not a result of this as we have discussed in the past, but there is merit to the argument that if the indexes diverge, the market cannot maintain an uptrend.
If the Nasdaq cannot break over resistance here and starts to test further, can the Dow continue up? Can the Dow drag the Nasdaq back up if the Nasdaq fails at resistance the first time?
The point: the Nasdaq's move today was not all that it was made out to be on the reports following the close. Volume was not there. Important stocks did not partake in the move, closing below resistance on less volume. Smaller stocks on the index fared much better; it is not a case where all Nasdaq stocks are mired. We are investing in many Nasdaq stocks that are in great patterns and have great numbers. We must, however, keep our eye on the overall market, because 3 out of 4 stocks tend to follow the overall market's direction.
THE ECONOMY
Economic numbers continue to improve, but they are not blowing the numbers out of the water. Thus the market reaction has been staid; no selling on the news, just an improvement in those stocks that fare better as the economy improves (retail, consumer basics, restaurants)
Several reports were issued today. Initial jobless claims for the week were up 30,000 to 390K. 385K were expected. The 4-week average, however, remained below 400K for the fourth straight week, an important indication that jobless claims have topped.
Personal income rose 0.4% (+0.0% prior and +0.3% expected). Personal spending fell 0.2%, right in line with expectations. The prior level was revised to -0.3% from -0.7% originally reported. Income is up and so is spending, but there is still more income than spending. That allows some increase in consumption. A decent sign.
Finally, the Chicago PMI came in at 45.1, topping the 41.5 in December though right in line with expectations. New orders were up but still below that important 50 level. Employment index was a sore spot; it hit a 52 year low.
The economic numbers continue to improve though not blasting expectations as much as they were just a couple of weeks ago. Of course, expectations are finally being revised higher as more accept that there is some recovery occurring.
THE MARKET
The Dow looked sharp, rising on solid, above average volume and great breadth, clearing some intermediate resistance in the process. It could still move higher and test more serious resistance. The Nasdaq was sputtering, unable to put anything together after the reversal. It may take a rest and try again next week on a follow through session, but many big names need some work and were not impressive today. Small caps remain the way to go. The small cap indexes are just off all-time highs. Many of the stocks we are following fall into the small and mid-cap range.
VIX: 22.84; -2.03. Gave back all of the gains from the big selloff session and is now right back down at the lows from the summer 2001. Price and volume control, but the continued lethargy in volatility and its quick return to where it was before the brief selling indicates that not a whole lot of weeding out was accomplished in the recent selling.
VXN: 42.46; -2.21. Fast drop back to the lows of last summer. Much as the VIX, Nasdaq volatility dropped off quickly after spiking up to 48 on Wednesday. Again this shows that there was not a lot of anxiety built up during the selling because it dissipated so rapidly.
Put/Call Ratio (CBOE): 0.67; -38. Sharp drop in the ratio, but still at a 'high' level. Wednesday's high reading (1.05) on a reversal day where the indexes closed positive was a good upside signal. As we noted last night, it often takes a second such reading to turn the market higher.
Bulls and Bears: Bulls fell and bears rose, but bulls are still over 50% and bears are well under 30%. Those levels are too extreme either way; if it gets worse it will have an impact on any attempted rally.
Nasdaq
Up for the second straight session, but closing right below resistance on lower, average volume. Some big names still have less than great patterns.
Stats: +20.59 points (+1.1%) to close at 1934.03.
Volume: 1.803 billion (-12.6%). Volume slid back to average. Volume on today's upside was lower than prior distribution sessions. That was not overly encouraging.
Up volume: 1.053 billion
Down volume: 682 million
A/D and Hi/Lo: Advancing issues improved their lead to 1.45 to 1 (1.2 to 1 Wednesday). Better, but it will need to get better (2 to 1) on any follow through session next week.
New highs: 133 (+53)
New lows: 27 (-38). New highs jumped right back up and new lows fell right back down. That is what you want to see on a reversal from selling.
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq tapped at 1906.90 on the low and then rallied to close near the session high. The rally higher pushes it right to resistance at the November consolidation top (1934 to 1941) and the 200 and 50 day MVA (1939.76 and 1937.75, respectively). These are important levels along with the recent intraday tops that are right at the simple 50 day MVA (1965.77). Many of the big caps on the Nasdaq are sitting in similar circumstances: right below resistance on lower volume. It has momentum, but it has to break through these levels with the same power it showed Wednesday.
Dow/NYSE
Looked the best of the session, led by PG. Looks as if it wants to try 10,000 again, and that will show more what it has in store. A solid move, but it has not reversed the recent selling.
Stats: +157.14 points (+1.6%) to close at 9920.00.
NYSE Volume: 1.518 billion (-25%). After the big volume spikes on the selling and then the reversal, volume was down but still well above average volume and strong.
Up volume: 1.163 billion
Down volume: 360 million
A/D and Hi/Lo: Advancers were beautiful today at 2.1 to 1 (1.57 to 1 Wednesday). This is in line with the several days when decliners led 2 to 1 and more on the recent selling.
New highs: 158 (+65)
New lows: 21 (-51). Dropped just as we said it needed to do.
The Chart: http://www.investmenthouse.com/cd/$indu.html
Another strong move up from the test of support intraday at 9500 just Wednesday. The Dow blew past the 50 day MVA (9863). It is right below the next resistance at the simple 50 day MVA (9938.36) and 9992 to 10,000. It stalled out below the simple 50 day MVA on the week rally leading up to Tuesday's selling session, but it now has more steam on this move back to that level. Closing right at the session highs, the Dow will try 10,000 Friday. Volume will most likely be lower, and that will leave some questions unanswered if it does make the move over that level tomorrow. If it turns back at that level we need to be careful. Today's action was much, much better than last week's attempt to rally back up that was hallmarked by lower volume and a poor A/D line. This move has volume and is broad. If it stalls at 10,000, it may just be catching its breath. If it does not fall back on stronger volume from that level when it does take a breather after these two strong moves, we will have to exit our puts if it catches support at 9800 to 9900 and tries to bounce. This is a higher quality move back up and may be able to shake off the head and shoulders formation.
S&P 500: The big caps enjoyed a strong day on the back of strong NYSE volume as well. It was able to top some resistance at 1125 after moving back up through the December and prior January low. Again, its test down to 1081 on Wednesday put it within one session of 1060, a 50% retracement of the move off of the September bottom. It could be that the big cap index has made its test, and the other indexes are not going to have to retrace as far as it did. Other tests in bear markets were similar: one index tested lower than the others. The Dow and S&P made super moves back up from the intraday lows. The S&P now must deal with the exponential 50 day MVA (1134.81) and 1150. With the momentum it has, it looks to head toward 1150 Friday. From there most likely there is a pullback where it catches its breath; then we see if it can rally higher and follow through on Wednesday's reversal.
Stats: +16.63 points (+1.5%) to close at 1130.20.
Volume: NYSE volume was off, but it was still strong and well above average. 1.518 billion (-25%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
The employment report is out tomorrow. While most know that report is a lagging indicator, investors will be looking for some improvement. Unemployment should rise more, however, before it actually peaks. With GDP stronger than anticipated in Q4 and weekly jobless claims 4-week average now below 400k for several weeks, unemployment may top out lower than expected. So much the better; those that were put out of work through contrivance of the powers that be deserve their jobs back.
The momentum is high. We anticipate that the Dow and S&P will test upper resistance tomorrow before pulling back some before the weekend after a major comeback for the week. There is still resistance to cross, and stocks have made a tremendous recovery. There will be the desire to take some money off the table before the weekend to let things shake out over the weekend. That leaves the indexes still below resistance and still vulnerable to a further test.
In the big picture it would be great if the indexes have tested the September bottom and are ready to rally. They have showed great strength on this recovery. They will still need a follow through session or two starting Tuesday through next Friday. They have great momentum on this reversal rally, but there are also some patterns from the big names that need work before they are ready to have a lot of sustained upside. They are making great recoveries, but without good bases formed, the action is usually more choppiness.
Today we were getting involved in a lot of upside plays as plays on the reports were popping. About every play on Wednesday's SSR was a great move. Some days it is like that. We are still holding puts taken earlier in the week as many stocks and the indexes have not shown that they are going to challenge the highs. There are indications on the S&P and Dow, but even if they are, we will still have a period to get out when they hit resistance and then pullback to take a rest; if selling does not ramp up at that point, we have to exit with a loss on those. We will see how that plays out, but we won't delude ourselves: the move on the Dow and S&P was strong today even if the Nasdaq and the SOX were looking squeamish.
Support and Resistance
Nasdaq: Closed at 1934.03.
Resistance: 1934 to 1941 represents the top of the November consolidation range. Then the 200 day MVA (1939.76) and the 50 day MVA (1937.75) are right there. After that we look at the simple 50 day MVA (1965.77).
Support: The bottom of the November consolidation (1875). After that, 1850 held intraday on Wednesday. Below that would be 1800, and 1750 would be a 50% retracement. Support at that level looks to be anywhere from 1700 to 1750.
S&P 500: Closed at 1130.20.
Resistance: Working on clearing the price consolidations at 1125, but the 50 day MVA (1134.81) is the next real test. 1150 is after that, and that represents some resistance above the simple 50 day MVA (1142.78). The 200 day MVA is at 1166.06. The December high (1173.62) and January high (1176.55) all line up as strong resistance.
Support: 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 9920.00.
Resistance: The simple 50 day MVA (9938.36). After that 9992 to 10,000. Then the 200 day MVA (10,104.59). The January high at 10,300 level is last.
Support: 9691 to 9750, the November, December and January lows. 9500 is the next level, and it held Wednesday intraday. 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.
1-28-02
New Home Sales, December (10:00): 946K (+5.7%) actual versus 923K expected and 934K prior.
1-29-02
Durable Goods Orders, December (8:30): +2% versus 1.3% expected and-4.8% prior.
Consumer Confidence, January (10:00): 97.3 actual versus 96.0 and 93.7 prior.
FOMC Meeting started
1-30-02
GDP-Adv., Q4 (8:30): +0.2% actual versus -1.1% expected and -1.3% prior.
Chain Deflator-Adv., Q4 (8:30): -0.3% actual versus 1.9% expected and 2.2% prior.
FOMC Meeting (2:15): FF rate unchanged.
1-31-02
Initial Jobless Claims, 1/26 (8:30): 390K actual versus 376K expected and 360K prior.
Employment Cost Index, Q4 (8:30): +0.9% versus 1.0% expected and 1.0% prior.
Personal Income, December (8:30): +0.4% actual versus 0.2% expected and 0.0% prior.
Personal Spending, December (8:30): -0.2% actual versus -0.2 expected and -0.3% prior (revised from -0.7%).
Chicago PMI, January (10:00): 45.1 actual versus 45.0 expected and 41.5 prior.
Help-Wanted Index, December (10:00): 45 versus 45.
FOMC Minutes, 12/11
2-1-02
Nonfarm Payrolls, January (8:30): -60K versus -124K prior.
Unemployment Rate, January (8:30): 5.9% versus 5.8% prior.
Hourly Earnings, January (8:30): 0.2% versus 0.5% prior.
Average Workweek, January (8:30): 34.2 versus 34.2 prior.
Michigan Sentiment-Prel., January (9:45): 94.2 versus 94.2 prior.
Construction Spending, December (10:00): 0.2% versus 0.8% prior.
ISM Index, January (10:00): 49.5 versus 48.2 prior.
End Part 1 of 2
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