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us stock market, stock trading
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2/20/02 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERT SERVICE
Target hit alert issued on CA puts (+$3.50 per option). LMT hit the target and an alert was issued (+$9.20; +20%).
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- S&P bounces at support and ignites rally.
- Volume increases on move up in a mix of buying and short covering.
- Dow follows through, but the advance was too narrow.
- Nasdaq forced to rally.
- Team Trades
Rally session as indexes hold support.
There were a few moves today that helped trigger some short covering, that led to some buying in cyclicals, and that lead to some more short covering late in the session. The first was the S&P 500 undercutting the recent low at 1077 and then quickly returning above that level. The second was the Nasdaq completing a full 50% retracement of the rally off of the September bottom. And, if you want to carry it a step further, the Dow, the 'stalwart' of the big three, held again above its January down trendline, refusing to undercut Tuesday's low.
When the S&P did not plow lower after making a fresh low for the year, the shorts decided to cover some. They had had a good run down, and decided it was time to cover. That led to a bit of a rally. Then buyers stepped into cyclical stocks and pushed the Dow and S&P further ahead. The pattern: the S&P could have formed something of a small double bottom test of the September bottom. All indexes moved higher on significantly higher volume. A true reversal or just another attempt at reversing the selling?
Volume up. Was it all true buying?
Volume surged higher on the Nasdaq (1.9 billion) and the NYSE (1.42 billion) as the indexes posted gains. That is the first above average volume on the Nasdaq in eight sessions. Not bad action, and it indicates there was some accumulation ongoing. Still, there was a lot of short covering that got it going, and more short covering came in late as the market surged higher in the last half hour.
Now short covering is not bad. Indeed, that is how most rallies start: shorts cover, buyers come in, more shorts cover, etc. Looking at the intraday volume, however, it was not totally convincing that the rally was because institutions, the big money we follow, were jumping in on a follow through session. Up volume lagged down volume until there were less than 2 hours left in the session. When talking with some floor traders, much of the late surge in the market was due to shorts closing their positions given the strong recovery and close above the S&P's support level. So, not all of the buying was that institutional variety we like, but again, many rallies start with shorts starting to cover. On the flip side, however, short covering rallies in a downtrend tend to come and go frequently.
Dow delivers something a follow through on the eighth day.
The Dow has been the workhorse of the market (at least of the big three), and today it delivered a follow through to the rally that started two Fridays ago. It never undercut the low on the reversal session, it rallied over 2% today, and volume moved back above average on the session. The cyclical basis of the Dow helped deliver this follow through as stocks such as MMM and UTX surged on strong volume. Cyclical stocks tend to perform better when there is the belief that the economy is recovering. Cyclical stocks have been attempting to rally steadily, but get tossed back by each new accounting worry. If accounting becomes old hat, the cyclicals could win out. Indeed, it appears they are trying to do so now.
Cyclical stocks, however, have never led serious, long-term rallies. They move up ahead of better economic times or when there may be some concerns over safety, and then they go about their normal business. That normal business is underperforming the rest of the market. Looking to them for continuous leadership is similar to asking a figure skater to play hockey forward: he can skate around and handle the puck until that first body check.
Again, that is not bad. If there are other players to come in and take the skater's place to handle the puck. Right now there are not a lot of those around. After the recent selling technology is more or less in disarray; there are some leadership groups still performing well in retail and healthcare, but a large part of the growth areas are still in shambles.
That was evident today in the A/D line. On a good follow through you want to see a minimum of a 2 to 1 advance, preferably much higher. Today the NYSE gave a 3 to 2 at best (1.55 to 1). The broader rally shows that institutions are buying stocks across the board. Those rallies have the best chance of making it as they are not dependent upon one area. That has been the failing of many rally attempts since the January high, and this one was too narrow once again.
Finally, the follow through session came on the eighth day of the rally. That does not mean it is a dog and should be ignored, but historically, the strongest rallies occur when follow through takes place 4 to 7 days after the rally starts.
THE MARKET
Last night we said the market was getting ready for a move higher but it was not ready to do that. Well, today it tested 50% on the Nasdaq and held at the S&P recent low and that was enough to get things moving upside.
Accounting issues were again present, but the damage was limited to specific issues (e.g., CA) while the rest of the market rallied on stronger volume. The Dow continues to lead the action as it made a higher low and staged a follow through even if it was late. The S&P undercut the recent low intraday and then staged a strong reversal on strong volume. That has the look of a small double bottom test of the move off of the September bottom. Problem is, there are very few stocks in rally good patterns to lead the overall market higher; the advance today was narrow. The market can move higher on the back of the cyclical issues while the other stocks form up better patterns, but that may take some time.
VIX: 24.26; -2.11. Hit 27 on the high before turning back around and giving up what it gained Tuesday. It never made it over the 30 level that we were looking for to give a really good signal.
VXN: 46.70; -0.53. The Nasdaq was not coming along willingly today, and the VIX did not fall much as the Nasdaq rallied later in the session.
Put/Call Ratio (CBOE): 0.86; +0.02. Slight rise on the reversal session. Gave us two readings on the close above 1.0 in the past three weeks, and that can signal enough fear in the market for a reversal. Other indicators were not at extremes, however.
Nasdaq
The Nasdaq undercut a 50% retracement on its low and then turned with the rest of the market to rally to a positive close on higher volume. It was not a willing turn for the techs but most of the leaders turned to post gains on stronger volume. Patterns are still in a tailspin from the recent selling. The best of the 'big' names are the semiconductor equipment stocks such as KLAC and AMAT.
Stats: +24.96 (+1.4%) to close at 1775.57.
Volume: 1.918 billion (+9.7%). Nasdaq volume increased on a gain, indicating some accumulation. Short covering was a large part of it (tech stocks were in deep sell-offs, and shorts were ready to cover). Encouraging, but we have seen many short turns wash out.
Up volume: 1.285 billion
Down volume: 606 million. Up volume finally overtook down volume in the last two hours.
A/D and Hi/Lo: Advancing issues took over decliners but barely at 1.3 to 1 (decliners led 2.38 to 1 Tuesday). It was not a strong reversal.
New highs: 81 (+24)
New lows: 113 (-9)
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq touched down to 1729.20 on the low and then reversed on higher volume to close positive. It touched down below the 1743 50% retracement of the move off of the September bottom. A nice reversal, but the Nasdaq is still locked in its downtrend and most tech stocks are in poor patterns to recover from. The weak A/D line indicates it was mostly dragged back up on the heels of the Dow as shorts covered their positions on tech stocks that had been hammered of late. The index stopped right at some resistance at 1775, right at the point where it touched and bounced in early February. It could rebound up to the 1820 level from here where it runs into the January 2002 down trendline.
Dow/NYSE
The Dow made a higher low, holding above the January down trendline. It gave that late follow through as cyclicals moved higher again.
Stats: +196.03 (+2%) to close at 9941.17.
NYSE Volume: 1.403 billion (+17%). Nice above average volume gain on the session, outpacing last Friday's selling volume. The cyclicals were being bought today.
Up volume: 922 million
Down volume: 490 million. Up volume finally overtook down volume late in the session.
A/D and Hi/Lo: NYSE advancing issues moved ahead 1.55 to 1 (decliners led 2.09 to 1 Tuesday). That was not follow through caliber. It was a cyclical rally with those stocks taking in the volume and the gains.
New highs: 108 (+34)
New lows: 77 (+27)
The Chart: http://www.investmenthouse.com/cd/$indu.html
The Dow made that higher low, holding above the mid-January lows at 9730 and the January 2002 down trendline now at 9650. Unlike the other indexes, it never undercut the reversal session two Fridays back before making the turn. It was an unlikely turn, sparked in part by the S&P's ability to turn after a slight undercut of the recent low. It now is in good shape to try 10,000 and the 200 day MVA at 10,061.48. This was a possible but unlikely scenario as the Nasdaq plunged lower Tuesday, but the reversal in the S&P appears key. The Dow is forming out a nice saucer pattern with a top at 10,250 to 10,300; another week or two of sideways action and it could be ready to take that out. It will need support by the Nasdaq, however.
S&P 500:
While the Dow had the strongest pattern of the three, we think it was the S&P that made the difference today when it slightly undercut the early February low at 1077.78 (low today at 1074.36) and bounced. Shorts viewed this as significant resistance, and when it held they started to cover. That covering sparked buying. That is the snowball effect that left the indexes higher on increased volume.
The move pushed the big caps back over the January 2002 down trendline though it is still below the September 2000 downtrend now right at 1100. That level marks other resistance where the index has found resistance and support in the past. Still, the pattern on the strong reversal is a potential double bottom that could mark the end of the correction after the rise off of the September bottom. The middle of the hump, and thus the breakout, it right at 1125, another point of prior price consolidations and the most recent top on the index. With today's move, if it can clear 1100 it could have momentum to that point where it would most likely need to rest and form a lateral handle for a further upside move. If the Dow's cyclicals continue to perform well, the big cap index could make that move.
Stats: +14.64 (+1.4%) to close at 1097.98.
Volume: NYSE volume jumped higher and above average to 1.403 billion (+17%). Tuesday's selling on lower volume help set up today's action.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Last night in this section we said the key would be how the S&P handled the 1075 level. It appears to have handled it quite well with an intraday reversal on strong volume. It has set up a very neat double bottom pattern that could be a great ending to the S&P's test of the rise off of the September bottom.
That would be neat indeed. The problems confronting the indexes are still the same: how strong a recovery? If the indexes can get over the accounting issues (as they ignored today) they could start tuning into the better economic numbers and price in a recovery. Nonetheless, there has been nothing to change the current outlook other than lower prices (something we pointed out before). The economic reports have continued to show stronger economic signals, but they still do not show a massive recovery and with the continued strength in the consumer and housing sectors. Up to this point the market had priced in a good recovery and then was backing it out on the lack of a stimulus package and accounting issues. Has enough water gone under the bridge for it to now think the recovery will be better?
We have to keep an eye on the market to know the answer. Today's activity was interesting. The cyclicals are indicators of both economic recovery and defense. Materials, packaging, retail and other early cycle stocks continue to perform well. At the same time, the big name financials stink. That, however, may be mostly related to accounting issues, Argentina debt, and the lack of M&A activity. We see some of the regionals and S&L's starting to look better once again. Financials are the missing link to an economic recovery scenario. They usually are in the leading group on the way up. As noted, there are reasons the big names have been lagging. It will be up to the small names to start the financial recovery. Until that happens we view any bounce here as just that.
Today's action makes tomorrow a harder read. The indexes have some momentum and the Dow can certainly move higher. The Nasdaq and the S&P have immediate resistance to deal with though they will probably clear it for at least some of the session. The Nasdaq is still lagging and still in a down trendline; it can rally up over 1800 and then run into its down trendlines near 1815. Thus today for now appears to be another reversal attempt after some more hard selling. The Dow looks better but the Nasdaq is the anchor that could reverse right back down when it bangs into that down trendline.
So, we take advantage of the upside as we did today after the indexes reversed. We closed out the QQQ puts as planned, not letting them ride even in the face of heavy selling. In this market it is key to set your targets and then abide by them. We used this support level as our reason for setting the target where we did, and it worked perfectly. We will treat this bounce as just a bounce, taking upside targets but closing them out when we hit our targets, watching with trailing stops.
Support and Resistance
Nasdaq: Closed at 1775.57.
Resistance: 1775 is some resistance from the October closing high. The January 2002 and the March 2000 down trendlines are roughly at 1815. The bottom of November consolidation at 1875. The 50 day MVA follows at 1890.71, still a long haul from Friday's close.
Support: 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 1097.98.
Resistance: 1100 from former prices and the September 2000 down trendline. The 50 day MVA (1120.95) and price consolidations at 1125 stopped the index cold (the middle of the potential double bottom). Then 1150 and the 200 day MVA at 1158.32.
Support: 1078 to 1080 holds again on the close; it has been growing as a support level with each successful test and is now significant. 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 9941.17.
Resistance: The simple 50 day MVA (9915.17) did not stop it today. The next issue are those price consolidations at 9992 to 10,000. The 200 day MVA (10,061.48) turned the index back on the last test. The January high at 10,300 level is last, but the resistance starts at 10,200 (June, July and August 2001 trading range).
Support: 9730 is the first January low and did provide might provide support. There is some support at 9691, the bottom of the November, December and January range, and the January 2002 down trendline is at 9670. 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.
2-19-02
Housing Starts, January (8:30): +6.3%. 1.678M actual versus 1.595M expected and 1.579M prior.
Building Permits, January (8:30): +3.1%. 1.706M actual versus 1.6M expected and 1.654M prior.
2-20-02
CPI, January (8:30): 0.2% actual versus +0.2% expected and -0.2% prior.
Core CPI, January (8:30): 0.2% actual versus +0.2% expected and 0.1% prior.
2-21-02
Initial Claims, 2/16 (8:30): No information.
Trade Balance, December (8:30): -28.5B versus -27.9B prior.
Leading Indicators, January (10:00): 0.6% versus 1.2% prior.
Philadelphia Fed, February (12:00): 10.0 verus 14.7 prior.
Treasury Budget, January (2:00): $52.0B versus $76.4B prior.
TEAM TRADES
One of those days where we were looking both ways. Some trades started better than others!
LLTC: In a descending wedge the pat 2.5 months, LLTC closed Thursday right at the bottom of its pattern. It showed a doji that could indicate it was ready for a modest bounce before breaking down, but we were ready to open some positions if it did hit our buy point at 38.50. In the first 25 minutes, LLTC did roll down and hit our buy point, but we waited for it to test the move. That is exactly what it did, bouncing to 39.25 in a quick move. That bounce ran out of steam as anticipated, and we really like to see a stock test our entry point, bounced and then come back. Thirty minutes later it had moved back to the buy point and that is when we entered. The options were trading 6.50 by 6.80 and we put in a limit order at the ask. That did the trick and the stock fell to 38, bounced again to test the breakdown at 38.50, and then fell to 37 over the next 2 hours. The options were looking good. Then the S&P hit bottom, and it dragged the Nasdaq back up with it. LLTC bounced up to 38.50 (the bottom of the pattern), and if fell back to 38. So far, so good. Then, however, it found legs in the last hour and rallied to close above 38.50 on some decent volume. Intraday reversal hurt this play, but the Nasdaq was a reluctant follower today, so we will give the play some room to work.
GAP: A grocery retailer in an ascending wedge, we were watching it to hit the buy point all session long as volume was building and the stock was rising. Right before 2:00CT the stock hit our buy point at 26.26 on almost 250% average trade. It was a cyclical day, and food stores were doing well. We love ascending wedges, and when the buy point was hit we wasted no time getting in on GAP. It had several attributes we liked. First, the pattern was solid: an ascending wedge after a cup with handle breakout. Many, many stocks make really strong runs out of this combination pattern. Second, it hit the buy point later in the session, giving a full day's look at volume and action. It traded in a range all morning, building up steam, and then a very flat, narrow range for the next two hours; it was building up pressure. Then the breakout came and it was a big push. When the buy point was hit, volume was really rolling. That is what we like to see.
End Part 1 of 2
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