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us stock market, trend trading stock
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2/06/02 Technical Traders 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:
- Locked in a range but edging lower.
- Semiconductors hold up better once again while CSCO easily beats the street.
- Productivity higher as fewer workers doing more.
- Subscriber Questions
- Team Trades
Bouncing around in a slowly descending range.
The three major indexes moved lower Wednesday, but it was rather mild selling compared to the higher volume bleeding seen in previous sessions. The indexes are in a degree of limbo, moving in a range, but a range that is slowly descending toward the next support level. The exception is the SOX; it has found some strength to hold the line on a series of reports about improving conditions and analyst upgrades. It is not off and running, but it is holding up.
It is not a freefall. Looking at the price action, the indexes are trying to hold above that near support. On the session lows they test toward that support and then recover. They are refusing to totally cave in. What does that mean? It means there are actually buyers coming in and locking horns with the sellers. Tuesday the indexes did not tank on the higher volume, but held in a tight range on the open and close. Again, the buyers and sellers were almost in a dead heat.
This is another attempt to hold the line here. It is far from clear if it will succeed. Buyers are stepping in right now, but there is a lot of overhead to overcome, and even the good news coming out is not in great enough quantities to overcome the economic worries and current downtrend. Indeed, CSCO gave an early peak to its Q2 results, but that did not turn the selling tide. Each day another good story or two comes out. Each day it has been insufficient to change the tone. There is a cumulative effect; the evidence of improvement mounts while the selling takes more air out of stocks. Eventually they hit critical mass levels and crossover: prices have fallen enough and economic news has piled up high enough to get the buyers out in force. Buyers are trying right now, but there may be more selling first.
Semiconductors a bit stronger. CSCO alive.
Semiconductors have given quite a few upside earnings alerts or affirmations, and analysts have provided a fairly steady stream of upgrades the past two weeks. Today CA reaffirmed its Q4 numbers while NVDA had its estimates raised. Rising chip prices in Asia is also have helped prop up semiconductor prices.
Propping up seems to be the proper descriptive phrase. With the exception of a few semiconductor stocks such as MU (up today on higher volume) or KLAC (trading in a range), semiconductors are holding in pennant patterns (e.g., INTC, PMCS, TSM, AMAT). A pennant pattern is one where the highs fall and the lows rise until they meet in a point. Picture a cone laying on its side. These are ambiguous patterns. In good markets they can (repeat, can) be a precursor to an upside move. In declining or topping markets they are often a last effort in consolidating before prices drop.
And of course that leads to the next question you are asking: what does it portend here? As we have said before, semiconductors lead tech recoveries. Higher chip prices in Asia are a good sign, and chips have held up better than any other tech area (for what that is worth). So there are signs of recovery and chips are thus stirring or at least holding up. Still, we feel there is some more downside work to do to clean out the last gunk and clear the decks for a stronger rally. If that holds we should see some of these patterns breaking down.
One thing to remember about pennants: they can give you a head fake. Right as they head toward the point they can sell down for a couple of sessions below the up trendline in the pattern. That gives the appearance it has broken down. Many, many times that is the last 'shakeout' of weaker holders. The stock then moves up and breaks out to the upside. So what do you do? You wait to get in on the downside until you see it come up and test the pattern and fall or until the stock tanks on high volume. Then you can enter.
CSCO let slip last night that its numbers were going to be better, and so made it public to everyone this morning. That helped a bit early on, but that is about it. After hours the company reported GAAP earnings at 9 cents per share versus estimates of 5 cents. Those are not pro forma (you know, 'these are our earnings less this, that and the other'), but solid numbers. CSCO jumped on the news but then just got hammered after hours, dropping $2 from its post-session high. Other stocks dumped in sympathy (e.g., BRCM, AMCC, BRCD, etc.) after hours and it looks pretty ugly for the open tomorrow. The problem: CSCO won't give guidance beyond this quarter.
THE ECONOMY
Productivity +3.5%. This was the biggest economic news today, up from 1.1% in Q3 and over the 3.1% expected. Wait a minute. The economy in recession and no capital spending on those productivity-enhancing tools. How can there be an increase in productivity? You probably know. Companies have laid off hundreds of thousands, indeed millions, of workers. Yes business has slowed, but the economy is not dead in the water. Someone has to be making and doing. That would be those still with jobs. With fewer employees, those left have to be there to absorb any increase in activity until it is clear to management that the increase is longer term and new employees are brought on board. They are having to work more and do more things; hence, the increase in productivity. This is somewhat in conflict with hours worked that were down in the last employment report. Still, it is clear that when you have massive layoffs and then an increase in economic activity, those left have to do more.
THE MARKET
Another down day, but the indexes held again at recent support levels, lower volume on the NYSE, about even on the Nasdaq. The buyers and sellers were more evenly matched yet again, and the indexes are trying to make a stand. CSCO impaired the prospects, but after hours action can often give a head fake. The numbers were good; analysts may come out strong in the morning. Chambers said customers were still cautious with an upward bias except for service providers that were still down. Even if analysts are tripping over CSCO in the morning, will it support any rally based on that? Chambers did not come out and say that orders had turned; he said they had been stable and rising a bit since June. That does not sound like a turn.
VIX: 28.20; +1.43. Nice pop on the selling, getting back into the higher end of the 'normal' 20 to 30 range. That range works for 'normal' times, i.e., when the market is chugging along. When it sputters, it needs higher readings (upper 30's, even 40 to 50) to get things really primed for a turn.
VXN: 49.06; +2.32. A sharper rise on Wednesday's selling, but in the bigger picture the index is still just points above the top of the summer of 2001 low range. It needs to continue to ramp higher and faster on further selling.
Put/Call Ratio (CBOE): 0.99; 0.00. Another strong put session, but still refusing to move over 1.0 on the close. Nonetheless, it has put in three consecutive sessions at 0.98 to 0.99, and those are strong indications there is downside speculation. Again, only one close over 1.0, so no signal of reversal yet. It usually takes two closes over 1.0 to show conditions are right for a reversal. With that, the ratio often closes several times in the 0.90+ range.
Nasdaq
The Nasdaq slid lower along the downtrend today, undercutting again its previous lows since the post-September peak. Today it tapped at the next logical support level (1800) and held there. Volume was still strong. Trying to make a stand.
Stats: -25.81 points (-1.4%) to close at 1812.71.
Volume: 2.104 billion (+0.8%). Fractionally higher on still strong volume (second straight 2 billion share session). Again, more distribution.
Up volume: 617 million
Down volume: 1.469 billion. Continued downside strength.
A/D and Hi/Lo: Declining issues jumped back up to 1.96 to 1 (1.5 to 1 Wednesday).
New highs: 61 (+6)
New lows: 108 (+18)
The Chart: http://www.investmenthouse.com/cd/$compq.html
A short upside move gave way as expected and the techs rolled down toward next support at 1800. It hit 1805.01 on the low and bounced ever so slightly. Slightly. The index still finished near its low. 1800 is not a hard level of support; 1775 is next, and then the gap point at 1745. That is right at a 50% retracement of the move from the September low to the January high near 2100. That is just a relatively small drop (in the big picture) from Wednesday's close. Remember, as a rule of thumb, a 50% retracement is what you look for. Unlike the Dow and S&P, the Nasdaq is still feeling for a level where it can make a turn or at least try to make a stand. It is not bumping against support and trying to find footing; the big techs have been underperforming and broke below the first level of support where the Dow and S&P hung on. We would be surprised if the techs held at 1800; more likely they will test toward 1700.
Dow/NYSE
The Dow again tried to hang on above 9600, the new bottom of the November to February trading range. Volume backed off on the session as the buyers and sellers battled to more or less a standstill once again. It looks as if it wants to try and bounce, but in the bigger picture a test of 9500 looks necessary.
Stats: -32.04 points (-0.3%) to close at 9653.39.
NYSE Volume: 1.670 billion (-7%). No distribution, a good sign as the buyers remained almost equal to the selling. Still strong, but the dumping was not as evident.
Up volume: 619 million
Down volume: 1.035 billion. Down volume backed off 200 million shares.
A/D and Hi/Lo: NYSE decliners moved up to 1.7 to 1 (1.36 to 1 Tuesday).
New highs: 78 (-9)
New lows: 92 (+15). Fourth day over 50. Another session indicates potential further selling according to Dow theory.
The Chart: http://www.investmenthouse.com/cd/$indu.html
Another session where the buyers and sellers traded blow for blow. The index held above Tuesday's intraday low (9608.21 today) and rallied to close with a loose doji. It held above the January low (9618.24), another signal it is trying to put in a bottom here, at least one that it could try to move up to test the recent tops near 9900. It could try; there is nothing to change the character overall. There are some buyers stemming the selling, but even a rally higher to test the top of the range needs some change in outlook to have any sustaining power. That has not appeared yet. Maybe the S&P or the Nasdaq will take the brunt of the test lower and the Dow will sell the least. In 1974 it was the Dow that sold all the way back in a 100% retest of the low; maybe it gets the 'bye' this time around. Still, it appears that in the bigger picture, a test of at least 9500 is in the cards.
S&P 500: Tapped down toward the 1075 support level on the low (1077.78), but then it turned and rallied back to close over the 1080 level that has been trying to form up as some support. It was not much of a recovery. Still, NYSE volume was lower (though still sharply above average), indicating that some of the selling strength is trying to abate. 1075 is some decent support; 1060 is a 50% retracement. Very close. Whether it will be enough remains to be seen. Right now there is nothing to change the current downtrend though it might try, after so much selling, to bounce up to resistance at 1100 or the down trendline at 1112.50.
Stats: -6.51 points (-0.6%) to close at 1083.51.
Volume: NYSE volume edged lower (1.670 billion; -7%) but remained well above average.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Initial jobless claims out before the open, and after the Challenger survey released earlier in the week showing 212,000 new jobs lost, this will get some attention. The big story will how CSCO is treated. It was abused after hours (along with the entire Nasdaq 100) when it did not give guidance beyond the current quarter. The numbers were good, but if no one comes to its defense tomorrow morning, the session could be ugly early on, i.e., a faster test of the next support levels.
We think we are going to see many analysts come out and up CSCO in the morning. Maybe not, but the two we heard from tonight were gung ho about the earnings. If they back it, we may get that rally up to the resistance levels that the Dow and S&P are trying to form up to try.
In short, CSCO's numbers were good, but they did not give anything near a glowing report on where the economy is at this juncture. The earnings did nothing to instill confidence the economic recovery is going to be robust and thus boost corporate earnings, and that is the real problem behind all of the selling.
Thus the overall picture has not changed: if CSCO is supported there may be a bounce in the indexes to test that resistance. Without more, however, the downtrend will more than likely remain in place and give us another leg down to really test those retracement levels. We have to remember that no stock or index moves in a straight line; they trend up, down, or sideways. In a downtrend they move up to test the trendline and then succumb to a new bout of selling that takes it to newer lows.
Again, if no one comes to CSCO's aid, the selling well be brutal on the open if the after hours trading sets the tone. We will issue a pre-market alert as usual about the morning tone. We will continue to ride and take new puts in that case, but we also continue to have good upside plays that are giving us very good, consistent returns.
Support and Resistance
Nasdaq: Closed at 1812.71.
Resistance: 1875 to 1900 is the bottom of the November consolidation. Then 1934 to 1941 represents the top of the November consolidation range. The 50 day MVA (1925.21) and the 200 day MVA (1938.38) are still right in the midst of this consolidation level. After that we look at the simple 50 day MVA (1962.27) that stopped the index in late December.
Support: The Nasdaq continued its slow slide to 1800. There is some support near 1775 and then the November gap up point is 1745. 1750 would be a 50% retracement. Support at that level looks to be anywhere from 1700 to 1750.
S&P 500: Closed at 1083.51.
Resistance: 1100 could try to stop it on the way back up. Then there are the price consolidations at 1125, and the 50 day MVA (1129.21). 1150 is after that, with the simple 50 day MVA (1138.96) right below that.
Support: 1080 is still holding on a closing basis, but it is thin. 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 9653.39.
Resistance: 9691 to 9750 represent the bottom of the November, December and January range. The 50 day MVA (9843.26); the simple 50 day MVA (9923.58). Right behind that is 9992 to 10,000. Then the 200 day MVA (10,096.68). The January high at 10,300 level is last.
Support: 9500 is the next level, and it held on last Wednesday's intraday selloff. 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.
2-04-02
Auto Sales, January (time not supplied): 6.0M versus 5.2M prior.
Truck Sales, January (time not supplied): 6.8M versus 7.8M prior.
2-05-02
ISM Services, January (10:00): 49.6 actual versus 51.8 expected and 54.2 prior.
Factory Orders, December (10:00): +1.2% actual versus 1.0% actual and -3.3% prior.
2-06-02
Productivity-Prel., Q4 (8:30): 3.5% actual versus 3.0% expected and 1.1% prior.
2-07-02
Initial Claims, 2/2 (8:30): 395K versus 390K prior.
Consumer Credit, December (15:00): $9.0B verusus $19.9B prior.
2-08-02
Wholesale Inventories, December (10:00): -0.5% versus -1.1% prior.
SUBSCRIBER QUESTIONS
Q: You have written about 'even trades.' What are those?
A: In a choppy market it is easier to get whipsawed as stocks move up and down. And in any market condition you can have some great trades and get hammered on one that gaps down on you past your stop point and just does not come back. One of the things we did when we were getting started and when there is a choppy market is to keep our several investments (and it was not 20 or 30, just a handful at most at a time) of equal dollar amounts. For example, if you have a stock that is $8 you want to invest in and one at $30 you want to buy, you don't buy 1000 shares of each. That would make one investment $8000 and the other $30,000. You could make a 20% return on the $8 stock ($1600) but lose 7% on the $30 stock ($2100) and be in the red. If you invested $8000 in the $30 stock (266 shares) and lost 7%, you lost $560. You are still in the black by $1040. In a choppy market, you don't want to let one trade where you exercise reasonable stop losses wipe out your hard won gains.
TEAM TRADES
Again upside and downside action was to be found today as upside and downside sell targets were hit as well as upside and downside buys.
MMM: A TTr put, MMM has been struggling below some serious resistance at the 50 and 200 day MVA and 110. Today it closed positive, but volume was lower, it did not take out the resistance on the high, and it looks ready to head lower. We wanted to take advantage of that once again (just ran it down back in January). The stock had rallied up to 110.40 on the early rally attempt, jostled around that level for a half hour, and then started to fall. It hit the buy point at about 9:20CT (just what we wanted; a test of resistance and then a fall) and that was the entry point with some March puts. The stock continued its drop down to the 108 level but it caught support there and moved higher the rest of the session until it fell in the last half hour, giving back a point of the gains and closing below the entry point. Thus, the stock finished up on the session, but we are still in good shape as it did what we thought it would (though the rally back up was not what we wanted. Volume was lower, it could not take out the upside resistance on another test of it. Now we are going to watch for a fall to 100.
End Part 1 of 2
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