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us stock market, trade stock
Begin Part 2 of 3
THIS WEEK
The Producer Price Index (PPI) is out on Friday, and it is expected to be basically flat. Retail sales are also out on Friday, and they are going to be anemic for a December. Still, that is expected; we just don't want numbers much worse than expected.
As for the indexes themselves, we may see some more downside action early on. We want them, especially the Nasdaq, to turn back up before undercutting the start of the move on Wednesday. For the Nasdaq that is 2291.86; the Dow, 10,646; the S&P 500, 1283.27. The Dow has already undercut this point intraday, so its chances of holding are problematical. The big problem will be the continued negative news on the earnings front. As of yet there are still plenty of negative experts out there who are forecasting that the markets cannot recover for some time, basically saying that the bad economic news and earnings news will keep stocks down.
That is always possible. As we discussed in the market summary, there are occasions where the first round of Fed tightening did not result in a sustained market rally. That could be the case here. Still, we have a Fed ready to help the economy, and part of the problem the Fed is dealing with is the lack of liquidity in the stock market. Indeed, there were many economists and financial experts talking with the Fed about that very lack of liquidity right before the initial rate cut. The Fed Funds futures are showing another quick rate cut. Moreover, the markets tend to look out to the future at least six months at a minimum, and usually 12 or more.
Thus while the near-term earnings reports and economic news makes the road harder, we were saying that much as soon as the Fed cut rates. Thus, we are averaging in on additional positions on great stocks we want to own long term, and continuing to maintain shortened time frames and profit objectives on our split plays and other short term plays. Monday we are going to be watching for some more possible weakness as an opportunity for a few more positions to average in on, but we are also going to be very interested in those sectors showing life, e.g., the telecoms. We have some plays that pulled right back to where we wanted on Friday, and we started some positions. We will continue to look there on Monday given the huge volumes they showed before Friday. They are not breaking out, not ready to lead the market, but money is flowing there and they can show us some great gains.
Remember, help is here and it is only going to get better down the road if the Fed and our elected leaders make the right moves. Fed moves to soften are not isolated events, and the indicators are showing us another one coming pretty soon. So far the Fed is making the right moves, but our elected leaders are waffling a bit. We need to hold them to the fire.
Support and Resistance Levels
Nasdaq:
Resistance: Some at 2600. The big point ahead is the down trendline at 2745.
Support: 2200 down to 2000.
S&P 500:
Resistance: The down trendline at 1345 and previous resistance at 1360.
Support: 1270 is possible support. 1254.07 is the 2000 low.
Dow:
Resistance: 11,020. After that, 11,400.
Support: 10,600 and then 10,300. After that, 10,000.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
1-8-00
Consumer Credit for November (3:00): $8.0B versus $16.7 B prior.
1-10-00
Wholesale Inventories for November for 1/6/01 (10:00): 0.3% versus 0.3% prior.
1-11-00
Initial jobless claims for December (8:30): 375,000 versus 375,000 prior.
Export Prices (ex. Ag.) for December(8:30): -0.1% versus -0.1% prior.
Import Prices (ex. Oil) for December (8:30): -0.1% versus -0.1% prior.
1-12-00
PPI for December (8:30): 0.1% versus 0.1% prior.
Core PPI for December (8:30): 0.1% versus 0.0% prior.
Retail Sales for December (8:30): 0.0% versus -0.4% prior.
Retail Sales (ex. Auto) for December (8:30): 0.3% versus 0.2% prior.
SUBSCRIBER QUESTIONS
Q: Can you give me some guidance on trading the QQQ? I have occasionally gone long or short depending on the market, but I find that the QQQ doesn't seem to move as much as the market does. Today I shorted the 55 Put when QQQ was at 55. I closed at the end of the day for a profit, but it was very small. Less than a point. Logically it would make sense that when the Nasdaq is plummeting, QQQ is the place to be rather than try to hit one stock. But I do not seem to get enough bang for the buck. What am I overlooking? Would I do better with the OEX? The QQQ is cheaper so I would rather put my money there, but something is wrong with the picture. Any ideas? Thanks
A: The problem with the QQQ is that it has options for every point value of the index, not just every $5. Thus the deltas tend to be fairly poor unless you go well into the money. If you are used to trading on $5 option increments, however, that is not such a bad deal as you just treat it as a $5 increment and buy $5 in the money or so. But, on the triple Q's, you have to go even farther at this point in time. For example, the index closed at 56.62. The February $56 puts have a delta of -0.427; that is not going to give you much movement. The $61 puts have a delta of -0.583. You have to go all the way to the February $64 puts to get a delta over 0.70 (-0.774 on that put). At that point you get some movement, but you had to go $8 into the money to get the delta. The cost? The February $56 puts closed at 4.62 by 5. The February $61 closed at 7.38 by 7.75. The February $64 closed at 9.5 by 9.88. You pay an extra $5 (100% more) to get another 33% move in the option for each dollar the QQQ moves. But, you can get more of a gain when the index moves and get out quicker. In this market we feel that is the way to go for now.
The OEX can give you huge moves, but not as big as it used to before it was split. The options trade in $5 increments as opposed to $1 as on the QQQ. The cost is high for the options; whereas you are looking at $10 for a fairly deep in the money option on the QQQ, you are looking at over $100 for a near-term (January) option that is slightly in the money for the OEX. We play the OEX, but we do it as day trades near expiration.
TEAM TRADES
As noted in the summary, we were pretty active at the close when we saw the volumes stocks were going to close at. Yes the indexes and certain stocks were finishing near their lows, but we were averaging into positions bit by bit this week, anticipating another good run soon. So, we were willing to plunk down some more money when we saw low volume and certain stocks holding at levels we wanted them to hold as support.
AMCC: Subject of another 'we love this stock but have to lower our target' valuation call. The stock sold on heavy volume, but it tried to bounce with about a 40 minutes to go. That failed, but it did not completely re-test the lows. When it turned back up near 60.50 with about 25 minutes to go, we bought some more calls and stock. The options were trading at 7.62 by 8. The stock was a bit soft for a few minutes, so we dropped an order in for 5 more contracts at a limit of 7.88. It took a minute or so, but the stock worked in our favor and the fill was made. Of course the options when right down as they took us out (7.25 by 7.75), but the stock turned right back up and raced up to close at the 63 level. The options closed at 8.13 by 8.62; we were not expecting it to run up, but it did not hurt our feelings.
EMLX: Another stock we were looking to pick up a few more shares and options on toward the close. EMLX was also showing signs of life with the stock holding right over 70, a support level. The April $75 options we had started taking some positions on earlier were trading 16.62 by 17.62. The stock was showing a lot of volume spikes in the last hour as the bulls and bears fought it out. It was trying to move up, so we dropped in an order for a few more April calls at 17.50. We had to wait a bit, but the fill was made. Immediately the options went to 16.38 by 17.38. They usually wait until the last minute to take out your order, waiting for selling pressure then dropping the bid and ask. No different here. The stock ran up to 71.50, but then dove back to 70 for the close. The options were back up, but then closed at 15.38 by 16.88. Not the best entry point, but our goal was to take advantage of the dip to average into a few more option positions.
For a review of frequently asked questions, please use the link below:
http://www.investmenthouse.com/1questions.htm
THE PLAYS: Many of the food, drug, drink and defensive plays recently covered have been removed, though several others are listed at the bottom of the report for short positions, as they are primed for a move down as the techs look ready to move up next week.
All prices reflect prices at the close on Friday
SOME LEADERS TO WATCH:
AMCC (Applied Micro Circuits--$63.50; -9.88; optionable (AZV)): Semiconductor
http://biz.yahoo.com/p/a/amcc.html
STATUS: The 50 day MVA (68.24) may have held the stock were it not for an analyst's valuation downgrade. AMCC broke that support and closed just under the 50 day MVA (simple) on above average volume (27.7 million; avg. 15.6 million). Nevertheless, the stock showed a doji on the move, pulling up from the low of 60.19. On a continued pullback AMCC can catch at 62.75 (hit twice since November); if not there, the stock stopped at 60.50 three times since October. Otherwise, the doji signals a possible move back up from here. AMCC surged up to its down trendline (currently at 74) last Wednesday on the interest rate cut.
BUY POINT: Aggressive: On a move up from 60.50 (or better).
POSITION: Stock and/or February $60 calls to buy (AZV BL).
EMLX (Emulex Corp--$69.88; -8.93; optionable (UMQ)): Computer Hardware
http://biz.yahoo.com/p/e/emlx.html
STATUS: Broke just below the 50 day MVA (71.35) but the move was on lower, below average volume (4.7 million; avg. 4 million). We are looking for a quick move back over the moving average, as strong stocks tend to make quick moves back over such breaks of major support levels. EMLX can pull back to its short term up trendline at 68 before heading back up, however. The trendline is reinforced by other prices at the same level, hit since October, contributing to support. The stock rallied with the rest of the market last Wednesday, and we are looking for a move back up after this low-volume pullback.
BUY POINT: Aggressive: On a move up from 68 on rising volume.
POSITION: Aggressive: Stock and/or April $65 calls to buy (UMQ DM).
Best Plays:
1) FITB: Ready to move up on this hold at support.
2) WFC: Tested the breakout and ready to move up.
3) XOXO: A good-looking ascending wedge pattern.
4) ORCL: Looking for a bounce.
5) LEH: Star doji signals a move up.
6) MXT: Ready for a rally.
7) JPM: Has tested support on a pullback.
8) Puts on defensive stocks: UNH, PFE, CI
READY TO BREAK TO A NEW HIGH:
Continued Play:
FITB (Fifth Third Bancorp--$59.19; -0.62; optionable (FTQ)): Regional Bank (Midwest)
http://biz.yahoo.com/p/f/fitb.html
STATUS: Holding above the 10 day MVA (58.97) after climbing from a low of 57.13 which tested below the 50 day MVA (54.87). The stock ran up on good volume Wednesday in the rally, and is holding in the range of that day's closing price of 59.69. Looking for a move back up when the market rallies back. Continues with good buying, and high money flow and relative strength. We are looking at the financials to remain in position to do well in a market rally and on further Fed rate cuts.
BUY POINT: Over 61.31 (Tuesday's intraday high), on continued strong volume.
POSITION: Stock and/or February $60 calls to buy (FTQ BL).
TESTS OF THE BREAKOUT: Some of these stocks are moving back on low volume to test the breakout. Some of them have already tested and moved to higher ground, but have pulled back from those new highs. We have noted those. On the stocks that are now pulling back to test, we often take profits on option plays when they start to pullback on the breakout move and then get back in when the stock bounces up off of the breakout point.
New Play:
WFC (Wells Fargo & Co New--$52.38; +0.38; optionable (WFC)): Banking
http://biz.yahoo.com/p/w/wfc.html
STATUS: The stock broke out of a lengthy cup with handle base December 15, and ran to a high of 56.38, pulling back from there to tap the 50 day MVA (49.46) twice last week. Support firm there, the stock closed Friday on the 18 day MVA after successfully testing the breakout point of 50.07. Volume continued to pull back from Wednesday (reaching 7.2 million; avg. 4 million), but remains high. Look for a move up to the recent high in a market rally.
BUY POINT: Over the 10 day MVA at 53.20, on continued strong (and preferably rising) volume.
POSITION: Stock and/or February $50 calls to buy (WFC BJ).
Continued Plays:
MMM (Minnesota Mining & Mfg--$117.81; -1.38; optionable (MMM)): Conglomerates
http://biz.yahoo.com/p/m/mmm.html
STATUS: Fell on a Lehman downgrade to a low of 110.56, but on a day of strong volume (4.2 million; avg. 2 million) climbed back to close above support (114.38, a price hit 4 times in December). That support is buttressed by 20 day MVA at 114.39. Look for a hold here until the sector rallies. Other analysts have not lowered earnings estimates, pointing out that management has strategies for handling both national and international economic slowdowns. The stock is attempting to move back up after a breakout test.
BUY POINT: On a move up from here on continued strong volume in a rally.
POSITION: Stock and/or April $115 calls to buy (MMM DC).
End Part 2 of 3
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us stock market
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