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trading system, day trading
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8/16/07 Technical Traders Report Update
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts: DIA; NITE; SIRF
Buy alerts: FLIR; GRMN; GRA
Trailing stops: None issued
Stop alerts: MR
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the SSR alert service you can sign up at the following link:
http://www.investmenthouse.com/alertttr.html
SUMMARY:
- Another day in the wild, wild market ends with a massive upside reversal.
- Housing starts at 10 year lows, bonds surge, gold declines, Philly Fed is flat, sentiment is lower: just how long should the Fed wait?
- And in the end, the US Treasury is still the world's preferred shelter from the storm
- 'Unprecedented' another way of saying 'it's different this time'?
- After the flogging, the rebound. For now that is all it is.
You could feel the despair and then came the reversal.
After six days down you would think the market needed some air, but early Thursday the downside was suffocating with futures diving well below fair value. It was more of the usual, but the marquee story was the Fed. It injected another $5B into the system and before the say was out added $12B more. That was not the rub, however. That came in the form of Bernanke's de facto spokesman on the Fed, Mr. Poole. Poole indicated that the Fed would not cut before the next meeting on September 18, and indeed he intimated that the Fed was more likely to hike rates than to cut them.
That struck a sour chord in a market that has seen this before. The Fed historically has a penchant for waiting to see the whites of the eyes of disaster before acting. In 2000 it took a plunge from 10+% GDP growth rates to flat in just 2 quarters for the Fed to realize disaster was at hand. Its January 3, 2001 rate cut was welcomed, but it accomplished little because the damage was already done and a belated rate cut, indeed a dozen rate cuts, did nothing. That is why it is so critical for the Fed to take decisive action to stave off such a collapse.
You can get bogged down in the moral details of whether the government and its agencies should 'bail out' sectors of the economy or society, but if the choice is bailing them out and exacting some measure of punishment later and preserving the economic expansion versus letting them swim or drown on their own and the punishment ultimately spreading to everyone in the form of a recession, even those wanting the wrongdoers to pay would agree it is better not to risk the economy. It is too easy for these contagions to turn into full blow viruses. A localized credit freeze spreads sector by sector; think of the move 'Outbreak.' A small start then a fast global spread. Just look at how quickly the issues moved from the US over to Europe, New Zealand, Australia.
Thus the market was in a foul mood as the Fed did not appear ready to make an emergency move if needed. Too many are looking at the strong economic data and saying not to worry. That misses the historical point: all expansions are good until something serious takes them under. This global credit freeze where no one wants to take someone else's paper regardless of the money the central banks are injecting is a serious situation. No one is saying let the wrongdoers off, just don't take all of us down because of their sins.
The selling was again impressive with massively weak internals, huge point losses, and massive volume. Weak housing starts (-6.1%) and permits (-2.1%), both 10 year lows, only underscored the glum mood. After gapping lower DJ30 sold down to roughly 12,500, roughly a 10% loss and the point where the head and shoulders top should sell to according to the textbook. At that point the market bottomed though that was hardly a done deal at the time. Up and down was the word for the rest of the session with 150 point swings on the Dow before a last hour rally took all indices positive briefly before a mixed close bracketing the flat line.
You could feel the fear through lunch, and after 6.5 days to the downside and the VIX spiking over 37, when we saw some key stocks such as financials trying to hold the line we took some gain on our downside positions that had moved to or near to their targets. Apparently we were not the only ones covering some downside as the market surged back up. That helped out a lot of positions that gapped lower; it did not heal them, but it took a first step in what is likely a sharp, swift rebound.
Technically the market was pouring out stocks right and left midday no matter what the sector. It was a bludgeoning outside of a few defensive sectors. While some large cap techs sold off, we noted that the majority of techs, while down, were again displaying relative strength.
That was hard to see, however, in all of the muck floating around midday. Breadth was -6:1 on NYSE and -3.5:1 on NASDAQ. Volume exploded again. Fear was palpable on the financial stations as guests had that uncomfortable look as if they were fighting off stomach cramps. When DJ30 touched down at the 10% correction level (10.7%) that was the point where sellers decided to let it go. NASDAQ, SP500, and then DJ30 now all had 10% corrections and that is a subconscious level for the market, and once the midafternoon selling attempt failed the shorts covered manically.
So we got the start of a massively oversold bounce and now we see how far it can carry the move and whether the buyers step in next week around Tuesday or so and buy once more. This is either a hot, hard relief bounce or it is the bottom of this selling. We will want to play some of that upside with strong stocks regardless, and indeed we picked up some GRMN today after it tested the prior consolidation range that was pre-earnings and bounced.
THE ECONOMY
Economy is strong until it is not.
Housing starts and permits hit 10 year lows. No surprise about the fall, it is just the rest of the economic data that is just not as strong as it was coming out of Q2 and that resurgence of the expansion. Things looked good at that time, but quickly this disease has spread. Oil is down; great because it is too high, but why is it down (closed at 71.00, -2.33)? Because there is a worry that this credit freeze is going to impact global growth and thus oil demand. A category 2 storm is cranking toward the Yucatan peninsula, and those have a bad habit of turning through the production areas in the Gulf. Oil is dropping even with that. Not a good sign. Other commodities were slaughtered as well, the coppers, steel, aluminum, etc. Those are global growth stocks and they were killed even with the late rebound. Gold was again down (658, -21.70) as fear spiked. That is not normal response to fear, and it suggests there indeed is something serious brewing in the world economy as a result of this virus.
The US economy is softening as well. The Philly Fed was flat, and while it is not necessarily a barometer for the rest of the economy, it was picking up the pace in the expansion. Sentiment is falling as energy prices fall. As we noted above, things are not reacting as they normally do. Back in 1999 we noted that there was severe drought in the US corn and wheat belt yet commodity prices were in the tank. Nonetheless the Fed was hiking rates fearing inflation. Drought and low commodity prices; something was not right, and the Fed missed it, worrying about inflation that might be instead of deflation that was coming. Just as then, these strange divergences are something that the Fed should investigate, and if it does it would likely back off the rate hike demagoguery.
Bond yields plummet as investors stampede into US treasuries.
China threatens to sell dollars. Korea talks of diversifying its currency holdings. Japan mused publicly along the same lines. Growth is stronger in China, India, Brazil, eastern Europe, etc. Who needs US assets?
Apparently everyone. When the stuff hits the fan and the future is uncertain, the US paper looks awfully good. In June the net foreign purchases jumped to nearly $121B after hitting $107B in May. With all of this contagion turmoil spreading to the rest of the world, can you imagine what July and August will look like?
Sure you can. Just look at the 20, 60, 90 and 2 year notes. Their yields have tanked as money as fallen all over itself to get into safety during this contagion period. Intraday the 2 year yield was down to 4.06% before closing at 4.22% as the market roared back. The 10 year bond hit in the mid-4.5% range before rebounding to 4.66% on the close. Just a few weeks back it was at 5.33%, sparking fears of inflation. Now it is the other side of the coin.
And that is another reason the Fed needs to look deeper. When the 90 day note yield falls well below the Fed Funds rate that is a sign of trouble. There is something brewing that is causing a flight to safety. Historically the Fed has to react to such a decline; failure to do so courts economic downturn. It is another indication that Fed needs to take this current episode a bit more seriously.
THE MARKET
MARKET SENTIMENT
Whenever we hear the phrase 'it is different this time' we know it is not and that the negative sentiment is right. Of course, now everyone knows that (we have taught a lot of people), and you have to listen for the same feelings expressed in different words. We heard that today with many saying this market action due to the contagion was 'unprecedented.' That means that it is something new, i.e. it is different this time. I commented to one of the traders here when I heard that not once but three times today, that that sure sounded like the capitulation statement: when you say it is unprecedented that is your excuse for chucking it all and throwing up your hands. Interesting indeed. Add that one to your memory banks.
VIX: 30.83; +0.16. Hit 37.5 intraday, the highest since early 2003 when the market sold back after that first run off the October 2002 lows, testing that move. That is a significant level and it is strong enough for a short term recovery. Bigger picture, we are still concerned about all of those higher spikes in volatility as the market made higher highs this summer.
VXN: 29.03; +1.06
VXO: 30.77; -1.44
Put/Call Ratio (CBOE): 1.53; +0.04. 19 straight sessions of 1.0 or more on the close. Put activity is basically blown out the top in this selling, an indication of excess speculation. Coupled with the massive fear on the lows, that was enough to close out some downside positions.
Bulls: 43.8%. Surprisingly, and quite disappointing, bulls held steady at 43.8% for a second week. Down from 47.2% and 53.9% the week before. Below the March level on that market decline, hitting the low for the year. Would not complain about a move below 40, and this kind of continued selling can do the trick. Hit 56.7% hit two months back and moving toward that drop below 40% to really show the kind of dent in optimism that stronger runs are built upon. The 55% level is considered bearish, and it topped that level on this last run. Hit 60% in December 2006. For reference it bottomed in the summer 2006 near 36%, and 35% is considered bullish.
Bears: 32.6%. Not nearly as big a run as the prior week's 5 point jump to 31.5% from 26.4% and 18% just the week before. Hit 27.5% in April. Amazing what contagion fears will do to investors. For reference, it hit a post-2002 high in that late June 2006 move (hit near 36%), eclipsing the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005).
NASDAQ
Stats: -7.76 points (-0.32%) to close at 2451.07
Volume: 3.33B (+55.17%). Massive explosion in volume as NASDAQ had a rather cathartic session on the downside and reversed.
Up Volume: 1.111B (+750M)
Down Volume: 2.201B (+245M)
A/D and Hi/Lo: Decliners led 1.24 to 1. It was -3.5:1 intraday but recovered nicely in to the reversal close.
Previous Session: Decliners led 2.34 to 1
New Highs: 36 (-1)
New Lows: 395 (+186)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ gapped lower and was being dumped by the side of the road as the techs were no longer receiving favorable treatment by the sellers. There were some that showed solid relative strength, indeed many did. It was the big name, large cap members getting worked over. Then midday on the low NASDAQ hit a long term trendline out of August 2004 and May 2005. Whether that was the catalyst or not, the techs recovered and turned positive in the last few minutes. The could not hold that gain when the final tape was sorted, and that kept it from a clear 'key reversal' session, but with SP500 doing the deed NASDAQ is grandfathered in. That sets up a rebound that will take it to the 200 day SMA near 2500 as its first test.
SOX (-0.11%) also could not quite pull off the reversal to positive as it tapped in the bottom half of that November to May trading range and then rebounded to close flat. It is still in the depths of the sell off but it is in position to make a rebound back up along with the rest of the market.
SP500/NYSE
Stats: +4.57 points (+0.32%) to close at 1411.27
NYSE Volume: 2.981B (+50.1%). Volume was again a record on NYSE as the indices sold off hard and then reversed positive. That is what you wan to see.
Up Volume: 1.285B (+1.03B)
Down Volume: 1.668B (-48.917M)
A/D and Hi/Lo: Decliners led 1.56 to 1. Was -6:1 and worse intraday, i.e. once again extremem.
Previous Session: Decliners led 5.07 to 1
New Highs: 12 (+1)
New Lows: 1080 (+377). Hmmm. That is extreme.
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Similar to NASDAQ, SP500 reached way down on the low. It matched the March 2007 lows intraday, giving back the entire rally off that short double bottom. That is as good a point as any to start a move; after you give back 100% since the last correction you are either going down or going to make an attempt at rebounding. Thursday it was the latter. Big hole. 1460ish is the level you expect SP500 to try and test on a significant rebound.
SP600 (+1.7%) was the star of the session in terms of recovery. It too was at the March lows, actually undercutting them intraday. Then a furious rebound to close positive. Good reversal off a prior low, but the pattern still is very toppy. A move up to 415, maybe 420 will be a good recovery for it. If it fails there, long term decline in store.
DJ30
The blue chips were the most interesting of the day. The last to give up the 200 day SMA, they did that Thursday, diving the December peaks on the low and then a rebound, and then a sell off, and then a rebound that took it positive just to give it back at the end of the session. It did, however, hold the 200 day SMA (12,836) on the close; nice comeback. Now it is set to try 13,250 to 13,500 on this bounce.
Stats: -15.69 points (-0.32%) to close at 12845.78
Volume: 457M shares Thursday versus 272M shares Wednesday. Strongest volume since the May and June 2006 selling in that correction. That lower selling volume as it made the recent lows showed the selling was abating.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
FRIDAY
No scheduled economic data Friday, just the August expiration. After all of this volatility you could expect more. We anticipate the late reversal will spill over into Friday. There will be some volatility as the sellers try probe to see if they can take it down again, but we don't think they will be successful on the day. After 6.75 days to the downside, this bounce is overdue and though there are still hedge funds out there needing to sell, the Thursday action cleared the pipes for now, and they will wait for the rebound to move in. They might truncate the bounce if they get a bit panicky about redemptions again, but that won't happen on this initial move.
In the Wednesday report we looked at some strong stocks that were sold back in this hard round of dumping. We are going to continue looking at those as they recover. We are looking at a few more strong names again tonight. As noted above, this one session does not tell us there is a bottom, but with all of the negative sentiment, the amount of decline, where the indices held, and the recovery action indicate we can pick up these stocks and ride them as far as they will go. If it is a real bottom we are in great shape, If not we close them out as well as the damaged positions that are going to rebound in this move as well and look at more downside. After all of the turbulence in the market, after this selling a bit more clarity emerges. Treat it as a bounce, and if it expands from there, beautiful. Keep the expectations grounded in reality and take what the market gives.
Support and Resistance
NASDAQ: Closed at 2451.07
Resistance:
The 200 day SMA at 2500
2509 is the January 2007 high
2531.42 is the February high (post-2002 high); 2525 intraday
The 90 day SMA at 2581
The 50 day EMA at 2581
2601 is the mid-May intraday peak.
2620 is the October/December trendline
2634.60 is the June peak
The November/December/February up trendline at 2660
2676 is the November/February up trendline
2673 is the early July high
2725 is the July high
2778 from a July 1999 peak
2887 from a September 1999 peak
2920 from an October 1999 peak
Support:
2462 is that old trendline from August 2004 to May 2005, and it held on the Thursday low.
2450 is some price support from November and December 2006
2400 is price support
S&P 500: Closed at 1411.27
Resistance:
1427 represents some interim peaks from December 2006
1440 is the mid-January high
The 200 day SMA at 1454
1461.57 is the February 2007 high.
1478 is the July 2006/March 2007 up trendline
1475 from peaks in December 1999 and January 2000
1490.72 is the early June closing low
The 50 day EMA at 1486
1534 is the early July high
1539 is the mid-June intraday high
1541 is the early June high.
1553 intraday high from March 2000 is the all-time index peak
1558 is the late November to February up trendline
Support:
1406 - 1407 from March 2007 and November 2006 interim peaks
1389 from October 2006 interim peak
1375 - 70 from March 2007 low
Dow: Closed at 12,845.78
Resistance:
12,950 is the July 2006/March 2007 up trendline
13,121 is minor support from the April peak
The 10 day EMA at 13,164
The 90 day SMA at 13,382
The 50 day EMA at 13,405
The mid-May peak at 13,556
13,644 is the November/February up trendline that marks the lower channel.
13,680 is the upper channel line in the November/February channel
The early July peak at 13,671
The mid-June high at 13,689
The early June high at 13,676 (closing), 13,692 (intraday)
The July high at 14,022
Support:
The 200 day SMA at 12,836
12,796 at the February 2007 high
12,500 is the December 2006 peak
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
August 13
Retail sales, July (8:30): 0.3% actual versus 0.2% expected, -0.7% prior (revised from -0.9%)
Retail ex-autos (8:30): 0.4% actual versus 0.3% expected, -0.2% prior (revised from -0.4%)
Business inventories, June, (10:00): 0.4% actual versus 0.4% expected, 0.5% prior
August 14
PPI, July (8:30): 0.6% actual versus 0.1% expected, -0.2% prior
Core PPI (8:30): 0.1% actual versus 0.2% expected, 0.3% prior
Trade Balance, June (8?30): -$58.1B actual versus -$61.0B expected, -$59.2B prior (revised from -$60.0B)
August 15
CPI, July (8:30): 0.1% actual versus 0.1% expected, 0.2% prior
Core CPI (8:30): 0.2% actual versus 0.2% expected, 0.2% prior
NY Empire State Index, August (8:30): 25.1 actual versus 19.0 expected, 26.5 prior
Net foreign purchases, June (9:00): 120.9B actual versus 107.3 prior (revised from $126.1B)
Industrial production, July (9:15): 0.3% actual versus 0.3% expected, 0.5% prior
Capacity utilization, July (9:15): 81.9% actual versus 81.7% expected, 81.7% prior
Crude oil inventories (10:30): -5,2M actual versus -4.1M prior
August 16
Housing starts, July (8:30): -6.1%; 1.381M actual versus 1.41M expected, 1.460M prior
Building permits July (8:30): -2.1%; 1.373M actual versus 1.4M expected, 1.413M prior
Initial jobless claims (8:30): 322K actual versus 315K expected, 316K prior
Philly Fed, August (12:00): 0.0 actual versus 8.0 expected, 9.2 prior
Michigan sentiment, August preliminary (10:00): 88.0 actual versus 88.5 expected, 90.4 prior
End part 1 of 3
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trading system
day trading
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