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option trading, online trading
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2/11/02 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:
- Reflex bounce continues, sporting nice gains and low volume.
- Lead comes from the cyclicals and some retail.
- Today's continuation rally not a significant change in character.
- Subscriber Questions
Slow start, but rally proceeds.
Kind of like old times. The market actually acted bullish today, starting the session slightly lower, struggling in the early going, and then moving solidly higher all the rest of the session and closing at the highs. Lacking: higher volume. Still early for a follow through session to have much meaning (the earliest day would be on Wednesday), however, so it is nice to enjoy the ride for now.
It was the second day of the reflex bounce that started, stalled, and then started again on Friday. As noted over the weekend, the lack of news, economic or otherwise, early in the week would let the market continue to move higher after taking a licking, selling down 5 sessions in a row.
Cyclical stocks lead the way Monday.
Each index scored almost a 1.5% gain, the SOX moving up 3.8%. You name the sector and it was pretty much up Monday. The biggest story was the cyclical stocks. These stocks trend based on the economy, and they usually do better in an improving economy. Today stocks such as IP (paper), CAT (heavy equipment), BLL (packaging) all scored gains on stronger volume. Cyclical stocks were the only stocks we saw rising on stronger volume with any consistency. As they are economically sensitive, that is an indication of a possible change in attitude about the possibility of a bit better economic recovery.
Other sectors were not so positive. Retail was mixed; WMT broke to a new high on increased volume and other retailers were up on stronger volume as well. Still others were in less spectacular patterns and bouncing on low volume. There are definitely some looking solid as they garner most of the retail market during this recession.
Financial stocks moved higher, but they were not strong moves, rising from their recent wreckage but on lower volume. Tech stocks and other growth stocks were up as well (again, most were), but they too had no significant volume to back the moves. Financial stocks should do better in an improving economic climate; they are bouncing with the market, but not leading.
Techs, growth stocks that usually do well when the economy ramps up, were up with the market as well, but we were hard pressed to find any of them rising on strong volume. Techs were the early leaders out of the gates when the market re-opened, but after the market peaked in January, they have lost the leadership role. At first the belief was the economy was on the comeback trail and that techs would lead after being sacked 70% and more. They bolted higher, but when word came out from Greenspan and others that they had priced in too great a recovery, the dumping started. They led to the downside, and now follow as other stocks set up the better patterns with good price/volume action and breakout.
Perhaps they will reacquire leadership if the sense the economy is improving rapidly returns. Then again, the techs ran up 80% in 1999 to early 2000, the Nasdaq moving 45% above its 200 day MVA (basically an unheard of level that had us wondering each week when the crash would come) and then were skewered by rising interest rates, an antitrust ruling against Microsoft, and a realization that the economy was going to stall. That brought the crash, and it is difficult to rise quickly from the rubble of a massive fall, particularly when there was massive overcapacity after the crash and still no real improvement in corporate capital spending.
To be sure certain techs will perform very well, right up there with the leadership in the overall market or even better. The majority of the big names will continue to struggle, however, dealing with big valuations that are not backed up by big increases in sales and earnings. In our online seminars (next session coming in March) we discuss what it takes to be a leading stock. These stocks have to be growing sales and earnings at a rapid rate. Most of the old techs are just not doing that, and without a major increase in the economy, they won't be doing that.
THE MARKET
Still no significant change in the market even after today's rally.
The cyclicals and retailers such as WMT may be up to something, but the second rally session in a row did not produce any significant upside volume. There were not many breaks of recent downtrends either. Without a bigger volume move there was nothing to indicate a real change of character ongoing. Still, it is early for such a signal given that the rally attempt just started Friday.
The key to a stronger rally is institutions coming back in even after stocks have started to rally and buying more shares; typically a big upside day on strong volume 4 to 7 days following the first day of rallying is a signal that institutions are back in and buying stocks. This is indicated by gains on stronger volume. Economically sensitive stocks were showing some signs of institutional accumulation today, but the real test starts Wednesday through next Monday. Then we will know more as to whether the correction from the rally off the September bottom was enough to trigger sustained buying. Indeed, we could see stocks and indexes run into resistance tomorrow and start to fall even before reaching Wednesday.
VIX: 23.54; -1.93. Volatility continues to range at low levels, dropping sharply the past two up sessions and back down July 2001 levels where the market was starting to struggle and prepared to fall of the edge. We cannot use the VIX to say things are going to fall off the table, but it is an indication that the sentiment is not overwhelmingly at a level where a stronger rally would find legs.
VXN: 46.41; -2.87. Dropping again as the Nasdaq climbs. This is the inverse relationship that we expect to see, but the point is that the VXN also did not climb very high on the recent selling. It did spike as did the VIX, and maybe that is enough on this correction. It makes us take any rally with a grain of salt, however.
Put/Call Ratio (CBOE): 0.78; +0.05. A rise on a day of gains, not what you would usually anticipate, but such a small variance it could be due to closing out positions ahead of expiration on Friday. Still at the higher end of the range.
Nasdaq
The techs made it two gains in a row, on par with the Dow and S&P. Volume trailed off even more as it approaches its first test at 1875. So far it just looks like a good relief bounce with the SOX again leading the techs.
Stats: +27.78 points (+1.5%) to close at 1846.66.
Volume: 1.565 billion shares (-12.7%). Way below average as the techs had more buyers than sellers today, but overall buyers were way outnumbered as compared to the sellers in the recent weeks. Not a strong day of conviction to the upside.
Up volume: 1.077 billion
Down volume: 479 million
A/D and Hi/Lo: Advancing issues led 1.29 to 1, well off Friday's 1.95 to 1 lead.
New highs: 84 (+16)
New lows: 52 (-4)
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq cleared no obstacles today after bottoming out Friday below 1800. It did not even reach its 10 day MVA (1856.53), below the first real test of the March 2000 down trendline (about 1865) and the bottom of the November trading range at 1875. To make things even more interesting, the recent down trendline that started in January is right at 1875 as well. The first test is a beauty.
Volume was way off the pace, even for a Monday. Yes it is early for a follow through session after the latest rally attempt started Friday. Most likely the index will have problems at the 1875 level and it may be tossed back a bit. The key will be whether it is thrown back hard. A mild day of selling could just shake out a few ready to sell when the rally is over just in time for a follow through later in the week (high volume, 1.5% or better point gain). That is what we have to watch for with the cyclicals and retail performing better on stronger volume today (economic upturn improvement idea), but that is the track of most resistance right now. That makes it intriguing, but at this point unproven. Even if we get the follow through the Nasdaq has plenty of resistance; it has to clear that last attempt at rallying in late January at 1960 to have any real chance of a stronger move. What it looks like more right now is a head and shoulders pattern with a very weak right shoulder in late January. It may test the breakdown point at 1875 or so, but right now it does not look as if it will break it and hold it. We have taken positions on the upside, but we need to be ready to take what gains we have if the index moves above that point and is going to finish the day below it, or if it tries to clear it but just fails. That is another 30 points, so there still is upside room on those upside plays.
Dow/NYSE
Impressive point gain as the Dow cleared the recent January downtrend and the exponential 50 day MVA. We thought it would clear those. Now it has to deal with the simple 50 day MVA and 10,000. Volume needs to improve.
Stats: +140.54 points (+1.4%) to close at 9884.78.
NYSE Volume: 1.139 billion (-17.5%). Broke below average for the first time in 11 sessions. Declining volume on a rally is not a signal that renewed buying is occurring.
Up volume: 923 million
Down volume: 219 million. Buyers still in the majority, but nowhere near the strength of the sellers over the past month.
A/D and Hi/Lo: NYSE advancing issues turned in another nice performance at 2.1 to 1 (1.99 to 1 Friday). This is where it needs to be (or better) if any follow through comes. Note how the NYSE continues to outperform the Nasdaq and it's A/D line.
New highs: 118 (+38)
New lows: 31 (-24)
The Chart: http://www.investmenthouse.com/cd/$indu.html
The Dow was on the prowl again with IP, CAT and other members rising on stronger volume. Not the entire NYSE, however. The Dow is fast approaching the simple 50 day MVA (9917.32) where it ran into resistance in late January and early February before the last test down toward 9500. This is an important level for it to break, and after that it has to face 9992 to 10,000, points of some prior resistance. If it can manage that on strong volume it still has the 200 day MVA (10,083.50) and 10,250 (January high); that is getting ahead for now. It still has a very toppy pattern. It has been holding above 9500 on the low, but it has three overhead supply levels (9992; 10,125; 10,250) to clear and no volume. It has been outperforming the other two major indexes, so it has one of the best chances to do it. On the side of caution, however, we still are targeting 9900 to 10,000 as our target on our DJX calls. We might get a jump over that level intraday tomorrow, but we will be ready to close out positions at signs of trouble; rather bank an upside gain right now versus risk losing it.
S&P 500:
Another nice price move for the big caps, clearing the September 2000 down trendline in the process and closing on the high right below the 18 day MVA (1112.96). It still has plenty of upside room before significant resistance at 1125 (former price consolidations and the 50 day MVA at 1125.51). NYSE volume tanked on the move higher off of 1075 to 1080 (proving to be decent support), showing a dearth of buyers in the bigger picture. That is the target that we are looking at for our OEX call options taken Friday. As with the Dow, in this market we would prefer to lock in a nice upside gain when it is there as opposed to seeing the index turn again and sell down on us. There is no change in character yet, so we have no reason to abandon our targets on this upside move.
Stats: +15.72 (+1.4%) to close at 1111.94.
Volume: NYSE volume tanked further below average to 1.139 billion (-17.5%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Again a lack of economic news will most likely let the indexes move higher again, but tomorrow we have to start looking for the rally to top out unless more volume comes in to drive it higher. If we see an early, strong run start to falter, we will close out DJX and OEX call options taken Friday. As discussed earlier, a follow through day would not be due until Wednesday at the earliest, and there could be a move higher and then some light selling, and then a follow through Thursday or so.
That is a possibility we have to keep in mind right now, but we won't let it change our short term upside plays as discussed. The reason: there has not been a whole lot of anything to change the character of the market. Cyclicals performed better and so did some retailers, and that is an indication that there is some economy related buying, but there is no groundswell change out there right now. Indeed, we have to watch volume very closely; it would be hard for it to fall much lower on either a rally or selling tomorrow. What we will watch for is a jump in volume either way. Quick distribution after a rally attempt usually kills it. That is our biggest concern right now on the upside short term plays.
We have not been taking many strictly upside momentum plays because they simply are not there; the upside plays are in solid patterns, and thus have more to withstand any selling in the laggard groups. Indeed most of the stocks have been more or less in uptrends while a lot of the recent selling was ongoing. Still, we have set targets, and we will not abandon them in this market that has yet to prove itself to the upside.
So, tomorrow we anticipate more of a rally to the upside earlier in the session, and then we will see if there is anything there in this rally. We will look to close out our upside call plays on that move, taking our profit off the table, to batten down the hatches in case the selling resumes. At the same time we are eyeing some stocks that are setting up on low volume rallies up to the down trendline as those will make good downside plays if the selling resumes on higher volume.
Support and Resistance
Nasdaq: Closed at 1846.66.
Resistance: March 2000 down trendline at 1865. Bottom of November consolidation and January down trendline at 1875. The 50 day MVA at 1912.94 is next. Then the 200 day MVA at 1933.49. The 1934 to 1941 range represents the top of the November consolidation. After that we look at the simple 50 day MVA (1933.49) that stopped the index in late December.
Support: Turned at 1772 last Friday, below some support at 1775. The November gap up point is 1745. 1743 would be a 50% retracement. Support at that level looks to be anywhere from 1700 to 1750.
S&P 500: Closed at 1111.94.
Resistance: 1100 did not stop it today, and neither did the September 2000 down trendline both right at 1110. Then the 50 day MVA merges with price consolidations at 1125 (50 day at 1125.51).
Support: 1078 to 1080 continues to hold; it has been growing as a support level with each successful test. There is a jumble of prices in a range from 1075 to 1050, perhaps the reason this 1080 level has held well for now. 1050 was tested twice in October, holding both times. That is right at the 50% retracement (1060).
Dow: Closed at 9884.78.
Resistance: Moved through the January down trendline at 9800 and the exponential 50 day MVA (9833.27) with relative ease. Now the real test is the simple 50 day MVA (9917.32) that stopped the move in late January and early February. That is backed up immediately by price consolidations at 9992 to 10,000. Then the 200 day MVA (10,083.50). The January high at 10,300 level is last.
Support: 9691 to 9750, the bottom of the November, December and January range. 9500 was tested on the January intraday low, and it seems the level is continuing to act as 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.
2-13-02
Retail Sales, January (8:30): -0.2% versus -0.1% prior.
Retail Sales ex. Auto (8:30): 0.2% versus -0.1% prior.
2-14-02
Business Inventories, December (8:30): -0.5 versus -1.0% prior.
Initial Claims, 2/9 (8:30): 376K versus 376K prior.
Export Prices ex-ag., January (8:30): -0.4% versus -0.4% prior.
Import Prics, ex oil, January (8:30): -0.3% versus -0.3% prior.
2-15-02
PPI, January (8:30): 0.2% versus -0.7% prior.
Core PPI, January (8:30): 0.1% versus -0.1% prior.
Industrial Production, January (9:15): 0.0 versus -0.1% prior.
Capacity Utilization, January (9:15): 74.3% versus 74.4% prior.
Mich Sentiment-Prel., February (9:45): 94.3 versus 93.0 prior.
SUBSCRIBER QUESTIONS
Q: Is extreme hi VIX bullish? Is a high put/call ratio bullish? I know they are but lately this got to be confusing when I read other commentaries.
A: Yes you have them correct. The VIX is something that is a little harder to get a fix on. It moves inversely with prices. It measures volatility components on S&P 100 options. The higher the volatility, the more fear in the market and the higher the VIX reading. That usually happens at extreme selling levels. The 'normal' range is 20 to 30 when the market is running along in a rally or in light selling. If it gets down near 20, there is low volatility, and the likelihood of a correction. If it gets near 30, that can be enough to turn a mild correction. If selling gets heavier, however, volatility needs to get much higher. The forties, and more likely the upper fifties are needed to really jack up the fear and end a bear market. In September, volatility shot 57.31 intraday; not the highest on record, but it showed extremes. That was a good signal along with the put/call ratio and massive volume that a turn was coming.
The put/call ratio is another contrary indicator. The higher the close, the better it is. Typically a 0.4 reading or lower shows excessive bullishness (no one buying puts; everyone thinking the market is going higher) and can indicate a correction coming. 0.7 and up shows some healthy fear. Again, you look to the extremes for the best signals a change is coming. For the put/call ratio, those are closes above 1.0, i.e., more puts being traded than calls. Option traders overall are speculative. They buy short term out of the money options trying to hit the home run. When the majority get bearish and buy a lot of puts, that is a signal a change is most likely coming. One such close usually does not get it. Two is better. Back in September we saw 4 out of 5 trading session close with a 1.0 or better ratio.
THE PLAYS:
Good movers: USAI, DLTR. Several of the plays continue to set up for the expected move. The OEX was up on lower volume, almost hitting our initial target at 566 (the index closed at 565.08 and tapped 565.20 on the intraday high). That target is at the level of the 18 day MVA and the short term down trendline (January closing highs). We may get a surge tomorrow and perhaps then a stall here; that will be time to close it out.
Trailing Stop Advisories: BORL (16)
Stop Advisories: VIA (42), FLR (33), ITMN (43.10), CELG (28.50), MMM (112.65)
End Part 1 of 2
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option trading
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