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day trading, Breakout test
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10/22/07 Technical Traders Report
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MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: AMSC; CIEN; NDAQ; STLD
Trailing stops: None issued
Stop alerts: None issued
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:
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SUMMARY:
- Ugly start, better finish as market shows it still has some leadership.
- G7 quiet on currencies leaving selling of dollar unabated until it ended on its own Monday.
- Strong tech, AXP earnings trying to pull market out of its Friday reversal in one try.
Friday selloff continues early but loses its grip.
Got up early to see how the foreign markets and futures were doing. Asia was down following the Friday selloff in the US, and the US futures were down on top of Asia; they were playing one-up. Analysts were swarming in like ants with multiple downgrades (e.g. COF, AXP, AAPB, NVLS). The G7 club said nothing about the euro/dollar dynamic, and that was open season on the dollar. Gold was down 15 clicks. Went back to bed.
Got back up an hour later and there was change. Even with the negative views, downgrades and the like following Friday, futures started to recover ahead of the open, slicing their losses in half. That still had NASDAQ at -12 or so and S&P -10. The dollar had reversed and was no stronger versus the euro than where it ended last week. Oil and gold were on the rebound as well, gold cutting its losses in half.
The market started weak as you would expect with futures in the tank and the sharp selling Friday, but as the futures indicated, it started coming back almost immediately. It was choppy all morning, but after a test of the early move midmorning the indices found traction and rallied through lunch and into the early afternoon session. There was an expected afternoon selling attempt that took the indices back to the late morning range, and then a rally into the close. That turned all of the indices positive. NASDAQ was first, SOX was second, SP600 was third, DJ30 was fourth, and finally along came SP500 with its financial components.
It was an impressive low to high move, and the close positive was a very good indication after a lower open. Not all stocks came back to positive with the market, however. Many gapped lower and came back, but the metals, industrials and materials, all leaders in the prior rally and all just starting the next move higher last week, could not make it back. They gapped lower across the board and struggled. Late in the session they started the comeback with the rest of the market, and they rallied nicely as well, but the gaps at the open were too much and they could not make it back to positive. With the rebounds still running into the close, however, there was no reason to cut them off Monday. We will see if they can continue the rebound Tuesday.
Technically the action was about as good as it could be given the Friday sell off and the early widespread weakness. Low to high action is always good, and the positive close was even better. Would have been really great if there was no Friday downside explosion, but that is a moot point.
The internals were not bad but not an affirmation of the upside close. Breadth swung from very weak to fairly positive on the close (1.2:1 NYSE, 1.5:1 NASDAQ). Volume was lower, though hardly unexpected after the huge Friday expiration trade. Throw out that Friday trade and the volume stacked up pretty well with the prior volume sessions. It was not blowout and a sign of a reversal from the Friday selling, and of course, you cannot just toss out that kind of selling volume, expiration or not.
As for the charts, SP500 tested the June lows (1490) and bounced off of that level. NASDAQ tested and held the July high breakout point, though it did undercut that level on the low. DJ30, SP600, and SOX all bounced of session lows, but their action was basically following the lead of NASDAQ and SP500.
As anticipated in the weekend report, there was some leadership that continued to hold up just fine and indeed moved higher. Technology continued its solid relative outperformance and leadership as AAPL moved up ahead of its earnings and tech in general scored gains as the 1.5:1 breadth indicates. Energy, metals and industrials, however, continued to struggle. They gapped lower on the session, continuing the Friday selloff, and most could not make it back to positive with the rest of the market. On the positive side they were coming back strong into the close, and we did not want to cut them off on this rebound, though we have to see where they go from here. Not all could come back, however, as SLB, despite strong earnings last week, continued its soft performance.
The sum of all of this is just a relief bounce despite the positive close, but it was one that has some leadership that is not only in good shape but is moving higher in the face of danger. A lot of the early leaders in this rally that were just starting to move again were slapped back, but they are trying to recover. More likely than not they have more work to do, but with the tech earnings after the Monday close they may have some time to put in that positive work and set up again as money moves or rotates in the market versus leaving. Sentiment is still too bullish near term, but the market is going through a necessary pullback given that sentiment, and it has some strong leadership as it does. That is a strong underpinning during a pullback.
THE ECONOMY
G7 meets, has tea and crumpets, says nothing about the euro/dollar relationship.
Remember when the euro started trading back in the 1990's and hit its high against the dollar when trading opened? Those days are long gone given the Bush administration's strong dollar (a.k.a. weak dollar) policy. Despite a long and clear economic history that shows no economy ever devaluing its way to prosperity, the current administration believes it can do just that.
More accurately, this administration wants to devalue its way to a smaller trade imbalance, using the current prosperity to do so. The Bush administration provided the correct tax incentives to pull the economy out of recession. Kudos for that, and as usual, it worked. It is trying to parlay the prosperity created due to that recovery into curing the trade imbalance, letting the dollar fall unabated against other currencies despite weak, nod and wink affirmations of a strong dollar policy.
What the administration is doing is spreading the prosperity so thin that it cannot withstand the issues the weak dollar is creating, particularly given that the economy is now in its fifth year. That is asking a lot of it, and it is threatening the recovery from the mid-cycle slowdown that started in Q2 of this year. These 'we are smarter than the market' ploys often backfire because the world is an unpredictable place. The housing issues in the US, the credit crunch, $90/bbl oil; enemies wanting to overthrow us; those are just a few of the issues. No time to be play with fire and letting your currency fall for a reason that really does not matter. Kind of ironic when you think about it: using a policy that historically does not work to fix a problem that historically is not a problem. Like father, like son; Bush I felt the compulsion to do this as well, and he ended up hiking taxes to try and fix his bad policies, basically doubling the damage.
Thus when the G7 made no mention of the euro/dollar relationship the market was disappointed and Monday it was open season on the dollar. The dollar index hit a new all-time low and it was ugly. Just as the futures reversed off their early lows, however, the dollar reversed as well. It sold below the Friday close and then rebounded, showing a reversal. Maybe the selling is finally overdone and the news finally got bad enough to send it back up. That remains to be seen but it was a positive development in the midst of a lot of bad news. Looks as if the dollar has some upside ahead of it near term after this selling.
THE MARKET
MARKET SENTIMENT
VIX: 21.64; -1.32
VXN: 25.26; -0.68
VXO: 21.53; -1.62
Put/Call Ratio (CBOE): 1.01; -0.15. Despite the rebound that sent it back up, VIX closed above 1.0 for the second consecutive session.
Bulls: 62.0%. Up from 60.2% the prior week and continuing the streak higher and well above the 55% level considered bearish. Fourth week above that level, an indication that the market is getting overdone. The theory is that when too many investors or advisors are bullish then most of the money is in the market and there is nothing ready to come in off the sidelines to drive prices higher. On a steady climb from a low of 40.6%, the low for this round. Never made the thirties. Hit 56.7% in June and now it has blown past that. The market peaked about a month later. For reference it bottomed in the summer 2006 near 36%, and 35% is considered bullish.
Bears: 19.6%. Falling below the 20% threshold, continuing the sharp drop. 21.5% the prior week and down 25.0% the week before that. It peaked at 37.4% on this move. Closer to the 18% hit in August, and it topped the June 2006 peak (36%) on this run. That June peak eclipsed 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: +28.77 points (+1.06%) to close at 2753.93
Volume: 1.981B (-17.91%). Volume was weaker but still above average as NASDAQ gapped lower then recovered. Basically on average for the last couple of weeks that have shown elevated trade levels. It was not a clear reversal of the Friday selling, but it was a solid showing.
Up Volume: 1.481B (+1.279B)
Down Volume: 486.251M (-1.715B)
A/D and Hi/Lo: Advancers led 1.51 to 1. Not great, but given the session needed a reversal, not bad.
Previous Session: Decliners led 5.24 to 1
New Highs: 17 (+2)
New Lows: 84 (-69)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped lower to 2700ish, undercutting the July high at 2725, but it held 2700 where we expected it would (or more accurately, did not want it to go below) and that set off a nice rebound to positive and a move that held the breakout. Not a perfect, powerful, overwhelming response to the Friday expiration selling, but a good recovery. With the AAPL earnings after the close it will get some more help on the open as NASDAQ. How tech stocks respond after that surge will tell just how strong NASDAQ is.
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +5.7 points (+0.38%) to close at 1506.33
NYSE Volume: 1.395B (-22.06%). Volume was lower as well but it could not crack average as the NYSE indices tried to recover. Of course they have not cracked average in over a month if you take out the expiration volume. As a matter of fact, it has not traded above average since the September expiration.
Up Volume: 839.071M (+749.829M)
Down Volume: 541.698M (-1.157B)
A/D and Hi/Lo: Advancers led 1.22 to 1. Pretty anemic but it was a reversal session. After -5:1 Friday anything would look rather anemic.
Previous Session: Decliners led 5.32 to 1
New Highs: 20 (+2)
New Lows: 42 (-77)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
A rare gap lower on SP500, a run down to the June lows at 1490, then a rebound to positive. It took all session, and it had to do it twice to make it stick, but by the closing bell it did in fact stick. SP500 remains captive to its financial components, and as they fall and rise, it falls and rise. Monday saw a modest recovery in that sector and thus a recovery by the large cap index. It also has to deal with the large cap industrials, and those were the anchor chain on Monday. If they can continue the rebound they were making into the bell that will help out the index. As it is, SP500 did what it had to do, i.e. stem the selling at a key support level. Now we see if it can improve on this. The sell off put SP500 in a hole and it will have to do some fast shoveling to get out.
SP600 (+1.43%) led the recovery as the small techs bounced from their two week tail kicking. It tried the breakout but failed at the July high and rolled down hard. It tapped at support at on the low and then started to recover. It recaptured the 200 day SMA on the close; a start. As with SP500 it is in a deep hole and this bounce is just the start.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
Similar action for the blue chips as it has elements of financials, energy, industrials and tech. It sold off through some support at 13,500 but then recovered to close positive and right at the 90 day SMA. That still keeps it in the May and June trading range after a 2-week drop. It came within about 100 points of that 13,300 level that represents a 50% retracement from the run off the August low. DJ30 is still in its pullback phase and does not look as if this is the move that is going to take it out of this selloff in a single bound.
Stats: +44.95 points (+0.33%) to close at 13566.97
Volume: 229M shares Monday versus 332M shares Friday. Volume fell off as you would expected, dropping to just below average as DJ30 bounced back. Will see how the strength develops as it continues its attempt to recover.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
TUESDAY
Still no scheduled economic data, but the focus is still earnings in the busiest week for results. Once again there were some strong after hours results as AAPL crushed the ball out of the park and AXP, in the consumer credit arena, reported strong results and good guidance. Doesn't sound like a dead or dying consumer. Of course, as we all hear every day on the tube, that is only a matter of time. Hmmm.
Those earnings gave the after hours a positive glow and that should carry over into the morning, particularly with technology as it has already been the leader, showing it again Monday even before the Apple earnings. SP500 made the test of 1490 on the low and DJ30 came up about 100 points shy of the trendline discussed in the weekend report. They are thus far holding where they have to hold, but one day of relief does not mean a pullback is over, especially one that suffered the kind of selling seen on Friday.
As noted over the weekend, we need to remain patient and let the move show what it is going to do. There are industrials, materials and energy that sold off again Monday but were recovering into the close. Again, time to be patient and let them continue the attempt at the recovery along with the NYSE indices.
As we also noted, there are stocks that have held up well and remain in excellent position to move higher. Indeed they were doing that Monday and we were picking some up as they did. Tech still shows leadership and it will get some more Tuesday after Apple's earnings. We want to see how the techs hold the gains after the stronger open and take advantage of any breakouts or solid recoveries. Steel still looks good along with many other stocks that led higher and have made a test the past week. We will continue to look for opportunity where it presents itself because even with the Friday selling the action in many stocks shows that money is not running away from the market. We will be patient and let the plays set up, but if we see them make the moves we will move in.
Support and Resistance
NASDAQ: Closed at 2753.93
Resistance:
2765 is the November/February up trendline
The 10 day EMA at 2766
2778 from a July 1999 peak
2887 from a September 1999 peak
2920 from an October 1999 peak
Support:
2725 is the July high
2712 is the November/December/February up trendline
The 50 day EMA at 2685
2673 is the early July high
2634.60 is the June peak
S&P 500: Closed at 1506.33
Resistance:
The 50 day EMA at 1515
1516 is the July 2006/March 2007 up trendline
The 10 day EMA is at 1532
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 used to be the all-time peak
1556 is the July intraday high
1576 is the Thursday intraday high.
Support:
The 90 day SMA at 1502
1490.72 is the early June closing low and early August peak.
The 200 day SMA at 1477
1475 from peaks in December 1999 and January 2000
Dow: Closed at 13,566.97
Resistance:
The 90 day SMA at 13,565
The early July peak at 13,671
The early June high at 13,676 (closing), 13,692 (intraday)
The mid-June high at 13,689
The August high at 13,696
The 50 day EMA at 13,696
The 10 day EMA at 13,824
14,015 is the old channel line
The July high at 14,022
14,088 is the early October closing high
14,198 is the Thursday intraday high.
Support:
13,305 is the July 2006/March 2007 up trendline
The 200 day SMA at 13,143
12,845 is the August closing low
12,786 is the June peak
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
October 24
Existing home sales, September (10:00): 5.20M expected, 5.50M prior
Crude oil inventories (10:30): 1.78M prior
October 25
Durable goods orders, September (8:30): 1.5% expected, -4.9% prior
Initial jobless claims (8:30): 320K expected, 337K prior
New home sales, September (10:00): 775K expected, 795K prior
October 26
Michigan sentiment, October final (10:00): 82.3 expected, 82.0 prior
End part 1 of 3
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day trading
Breakout test
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