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us stock market, trend trading stock
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2/23/02 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERT SERVICE
Target hit alert issued on JNPR put (+$2.45 per option). Target hit on ROIL (+3.80; +27%).
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Some positives to end the week.
- Financials not really a missing link.
- Economic indicators point to recovery, maybe a bit stronger that thought.
- Now they are ready: Big tech names look ripe for a relief move.
- Team Trades
Friday action adds a bit more to Wednesday's signs of life.
Wednesday the S&P 500 tapped again down at 1075 on the low and sparked a rally led in large part by short covering though there was buying as well. Volume moved higher on the gain. Thursday there was a lower volume pullback as it looked as if the sellers once again took control. Friday, however, the S&P again tested 1075 on the intraday low, and as on Wednesday, it rallied again on higher volume.
The Dow continued to build on its follow through session, taking Wednesday's failure at the 200 day MVA in stride and running right back up to 10,000 on rising, above average volume. With IBM recovering, INTC holding the line at the 200 day MVA, and the big financials not tanking, the Dow was able to advance once again and continue its move to take out the 200 day MVA and the January high (10,300).
Thus the S&P and more particularly the Dow continue to perform better. The improving price/volume action is a recent plus, showing there is some accumulation ongoing in the old economy stocks that include cyclicals, machinery, materials (e.g., paper, metals), and energy. In a time of uncertainty relating to accounting and continued overcapacity in technology, investors have been going to the companies they can understand.
The volume action is key. Over the last three sessions as the S&P tested the 1075 support, NYSE volume has climbed back above average. It did this in early February as it tested the same level just before the big caps made a 50-point upside move. The higher volume as the index holds above this level (that has turned out to be important support) indicates that buyers are coming in and supporting big cap stocks at this level. Moreover, this time around we see price/volume action positive: up on up sessions, down on down sessions. As noted, that indicates accumulation ongoing as it tests 1075 this second time this month. We could very well see the index double bottom right here for a better move higher.
Nasdaq still a drag.
All of this was possible primarily because tech stocks did not tank once more. They did not rally, but they avoided the selling that dragged the market back down on Thursday. Technology stocks continue to take the brunt of the uncertainty regarding the economic recovery. It actually makes sense: when the recovery signals were first emerging and there was talk of stimulus that would encourage business investment, technology took the lead. If there are tax credits and accelerated deductions for buying new systems, that would spur more buying of tech goods. Thus techs led to the upside. With no stimulus package and continuing questions about overcapacity and the strength of the recovery, the reason for that leadership is not there.
Financials not totally missing from the economic recovery.
We have talked about how financial stocks are usually a key element in any market recovery. We have also discussed the lack of participation by financial stocks as a missing element to a real stock market rally. Are they missing? Yes and no.
Looking at the big money center banks and financial services companies, you would conclude that they are just not there. JPM has been hammered with its Argentina and then Enron ties. Other big financial center companies are also under that cloud of uncertainty: what ENE-type relationships are on their books? What happens if there is another Latin American hiccup? Investment banks have no merger and acquisition activity. These big banks and financial institutions are suffering because of it. They looked promising heading into the new year (e.g., C), but have tailed off with the ENE story and related issues.
Regional banks, however, are not missing. They have quietly been moving up and hitting new highs. They do not have a lot of those big loan/finance relationships that the big boys do and thus they are more of a true barometer of the economy sans the ENE mess. They are giving some punch, some credence to the notion that the economy is on the recovery track.
THE ECONOMY
Last week was a good economic numbers week. A big one is ahead as well, including a speech to Congress from Greenstro.
LEI and Philly Fed. The big news last week was the LEI (leading economic indicators) that rose again for the fourth straight month and the Philly Fed that jumped to 16 from 14.7 (10 was expected). The Conference Board chief economist that compiles the LEI stated that the strength over the last four months is a "strong signal from the indicators . . . that the recession is ending and that the recovery could be more vigorous than earlier anticipated." He added "we might be out of recession already." It was the largest jump in the LEI in 20 years. The Philly Fed reading was the highest in two years with new orders and shipments, the key subindexes, rising.
Both indicators look forward, and both have made strong, consistent moves over the past four months. Remember what we said back in August and early September: economic change is much the same as market change. The first sign of change is volatility in the current trend; up and down action indicates there is something upsetting the trend. Then there are several readings in the new direction as the new trend is being established. That is what we are seeing in the LEI, the Philly Fed, and even the weekly jobless claims that have reversed from their 400k+ readings now for four straight weeks.
ECRI say recovery in Q1 while NABE majority says recession is over. The ECRI, a faster read of economic indicators than the LEI, was down for the second straight week last week. Still, the uptrend from October remains in place, and it still predicts a recovery in Q1. Meanwhile, 60% of the economists in the National Association of Business Economics say that the economy is already on the upswing. We are often skeptical when a majority of anything declares an event to have occurred, and we are no less so here.
Still, as we have been saying all along, the indicators are showing a recovery is here or very near. The question is how strong? The strength of the leading indicators and the upsurge in the Philly Fed argue it is going to be stronger than anticipated. We will need to see how other sectors fared last month as this week's batch of reports come out.
THE MARKET
As noted above, the action at the end of the week was better. Better price/volume action, rising volume at support indicating that buyers were coming in at support, and a continued, stubborn climb by the Dow. It is an ongoing process in determining if the market is building or not. Friday's immediate rally back up after a day off Thursday is a good sign for that building process.
The Nasdaq and S&P 500, however, are still in downtrends, both longer term and short term. The Dow has followed through on a short-term uptrend, but it too is still in a longer term downtrend. Indeed, the selling in the techs that past week has left many at the bottom channel in their downtrends, showing doji's at the close of Friday's action (e.g., MSFT, QLGC, BRCM, CSCO, HWP). This pattern indicates that we can expect a bounce in these stocks at least back up toward the down trendlines they have been riding since early January. We said last week that the tech stocks were getting to a point where they would bounce, and it looks as if they are ready to do so.
VIX: 24.89; -0.93. Volatility remains the dragging indicator on the overall market. It can act as a governor on any move higher, but we must defer to primary indicators such as price and volume if they show positive action. We would have preferred a spike over 30 as another trigger to an upside move.
VXN: 48.57; +0.49. The Nasdaq was down and up, closing with a fractional gain. Volatility mirrored that action with a high of 50.21 before the late rally pushed it back toward the flat line. It is still right at the top of the low range of the summer of 2001.
Put/Call Ratio (CBOE): 0.94; +0.12. The ratio continues to hover in a very high range, indicating (contrary to the VIX) that there are some extremes in the market. The extreme shown here is that option players are leaning more and more on puts as opposed to calls, betting the market is going to head down. Two times in the last three weeks (January 30 and February 15) it has closed over 1.0, a signal of extreme pessimism by option speculators. That may be enough to signal a turn if the primary indicators fall in line. Right now Friday's reading in conjunction with the overall high readings would indicate the bounce higher we discussed above.
Nasdaq
1700 held on Friday as the Nasdaq hit 1696.55 on the intraday low and rebounded toward the close on slightly stronger, above average volume. The move capped six poor sessions for bulls and a total of 175 points down. Wednesday it tried to rally and Friday it did the same; the buyers are catching up for at least a short term move up.
Stats: +8.30 points (+0.5%) to close at 1724.54.
Volume: 1.838 billion (+0.5%). Volume edged higher on the session, remaining above average for the last three sessions. The recoveries Wednesday and Friday on higher volume are somewhat positive.
Up volume: 960 million
Down volume: 867 million. Up volume managed to win out on a session where price just managed to win out. Nothing great, but a good recovery indicative of the session.
A/D and Hi/Lo: Advancing issues led 1.24 to 1 after decliners were strong Thursday at 1.96 to 1. Advancing issues still do not have the punch decliners have held the past week.
New highs: 79 (-8)
New lows: 104 (+23)
The Chart: http://www.investmenthouse.com/cd/$compq.html
The downtrend continues but the Nasdaq is now at the bottom of the downward channel. After the action Wednesday and Friday where it rallied well off of the lows on higher volume to close positive it appears that the move down is getting sold out and the index is due a bounce higher. As noted above, many of the big names showed doji's at the bottom of their down channels as well. Thus we anticipate a bounce to test the upper channel near 1800. That is a move we can take advantage of with some short plays.
Longer term the Nasdaq still has problems. Through Friday it was still seeking lower lows on this fall. It has undercut each rally attempt and unlike the Dow and somewhat the S&P, it has not attempted to sustain any near term support. 1700 where it bounced Friday is some possible support. If that does not hold, it is pretty scarce until 1626. First we feel we will get a bounce, and then we see where it goes from there. Thus far it has been a drag on the other two indexes; if it can continue the improved price/volume action it has shown at the end of the week, perhaps it can break the downtrend and assist the Dow and S&P. We are not holding our breath for that; we will just take what is being presented, and right now that looks like a playable bounce higher.
Dow/NYSE
Made another higher low, quickly reversing Thursday's selling. Promising move, but needs the help of the techs and the financials.
Stats: +133.47 (+1.4%) to close at 9968.15.
NYSE Volume: 1.411 billion (+2%). The second session of rising, above average volume on an up day. The past three sessions showed a rise in volume as the index made its higher low, and price/volume action was as it should be: up on up sessions, lower on down sessions.
Up volume: 798 million
Down volume: 599 million
A/D and Hi/Lo: NYSE advancing issues took the lead back at 1.7 to 1 (decliners led 1.43 to 1 Thursday). Again, advancing issues on index gains are stronger than decliners on down sessions. That is another positive change in character.
New highs: 103 (-23)
New lows: 72 (+12)
The Chart: http://www.investmenthouse.com/cd/$indu.html
A good recovery after Thursday's failed attempt to break over the 200 day MVA (10,051.62), moving up toward that level on Friday's high (10,002.54). The Dow has made two higher lows in the past week as price/volume action improves. It did not test 9700 on this move, but turned at the 50 day MVA (9852.93). It is building strength for another test of the 200 day MVA, the December high (10,170), and possibly the January high at 10,300. That is the level of that overhead resistance from the summer of 2001. The index has tested down to the top of the October consolidation and is now building a shallow cup toward the year high. If it can get any help from the Nasdaq it can do it.
S&P 500:
The big caps also remain in a short and long term downtrend. The index closed just below the first January 2002 down trendline and is also below the September 2000 down trendline (at 1098). Given that, the index tapped 1077 two weeks ago and bounced higher. It sold back last week and slightly undercut that level on the lows but rebounded sharply when it did. The price/volume action has improved and it could very easily have formed a double bottom here. At any rate, the improving price/volume action above support looks ready for a bounce higher. What it does from there is the key; it has resistance at 1100 from the down trendline, but it also has to clear the middle 'hump' in the potential double bottom at 1125. On the way there is the 50 day MVA (1118.22), 1150 (200 day MVA at 1156.51), and the January/December double top at 1176.55. One step at a time; it is still in a downtrend after all. It looks ready for a bounce, and we can play that. It has undercut its last rally and needs to follow through on Wednesday and Friday's action this coming week just as the Dow did.
Stats: +8.89 points (+0.8%) to close at 1089.84.
Volume: NYSE volume moved higher again on a gain to 1.411 billion (+2%). A second day of some accumulation.
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
What a full week of economic data ahead: home sales, consumer confidence, durable goods, GDP, Chicago PMI, auto sales, spending, Michigan sentiment, and the ISM index (formerly NAPM). Greenspan speaks as well in son of Humphrey Hawkins. Man. If the data comes in as good as it did this past week, that will have a positive impact on the market. It is at the point where the good economic data is having an impact. We are seeing that in the economically sensitive stocks as we discussed last week.
The Dow looks decent, continuing its base building ways, climbing higher on good volume action as it moves back toward that pile of overhead resistance at 10,200 to 10,300. The S&P looks ready for a bounce to try and follow it. The Nasdaq, well, is ready to bounce up and test its down trendline. Again, very good economic news in back-to-back weeks could propel a relief bounce to something more; a follow through session on the S&P and Nasdaq starting Wednesday would be welcome.
That all sounds good, but in reality the Nasdaq and S&P are still in downtrends, and many of their component stocks are in more of a position to bounce versus patterns that are conducive to sustained runs higher. We are looking at making some of those plays to the upside, including an OEX call play to capture the move. Beyond upside bounces we continue to look at upside plays from the less sexy stocks so to speak. They are less sexy in familiarity only; a good pattern with good moves is sexy when the name of the game is making money.
As for downside action, there are some plays, but not a ton of them. It is a lot like the slalom in skiing: it is getting the rhythm of the gates. As we noted Friday, it was not a great time to chase a lot of puts or upside action; we had to let them set up. Now we did open more downside and upside positions Friday, and we will continue to let them both run as long as they do not violate our stop points. As we saw Friday, several put positions taken in the prior couple of weeks made it down to the target levels as we maintained good stop points that rode out the up and down action until the stocks hit the targets right at support levels.
For now the character of the market has not changed. It is showing indications it wants to change with the improving price/volume action and the Dow making a higher low once again, but it has to have help from the S&P and Nasdaq. Continued better than expected economic reports could usher in that change of character. The economy is improving; stronger economic numbers could change the view of how strong that improvement is and how fast it will be. For now we play what is there, and that looks like a bounce higher. Where it goes from there we will see.
Support and Resistance
Nasdaq: Closed at 1724.54.
Resistance: 1745, the November gap up, could be upside resistance. 1775 remains resistance from the October closing high. The January 2002 and the March 2000 down trendlines are roughly at 1805. The bottom of November consolidation at 1875. The 50 day MVA follows at 1877.70; something bulls hope to worry about.
Support: 1700 held loosely on Friday's low. After that, there is not much until 1626, the early October gap up point.
S&P 500: Closed at 1089.84.
Resistance: Right at the January down trendline at Friday's close (1091). Then the September 2000 down trendline at 1097. The 50 day MVA (1118.22) is next, and then price consolidations at 1125 where the index stopped stalled earlier in the month (the middle of the potential double bottom). After that there is more, but we will take it a stone at a time.
Support: 1075 to 1080 continues to hold tough. There is a jumble of prices in a range from 1075 to 1050, perhaps the reason this 1075 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 9968.15.
Resistance: There is still some resistance at those price consolidations at 9992 to 10,000 (three times turned it back in the past 6 sessions). The 200 day MVA (10,051.62) remains the real resistance, however. 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 has been providing some support. There is some support at 9691, the bottom of the November, December and January range. The January 2002 down trendline is at 9630. 9500 was tested on the January intraday low, and it continues to look good as 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.
2-25-02
Existing Home Sales, January (10:00): 5.2M versus 5.19M prior.
2-26-02
Consumer Confidence, February (10:00): 98.0 versus 97.3 prior.
2-27-02
Durable Orders, January (8:30): 1.0% versus 1.7% prior.
New Home Sales, January (10:00): 925K versus 946K prior.
2-28-02
Initial Claims, 2/23 (8:30): No information yet.
GDP, preliminary Q4 (8:30): 0.6% versus 0.2% prior.
Chain Deflator, Q4 (8:30): -0.3% versus -0.3% prior.
Chicago PMI, February (10:00): 47.0 versus 45.1 prior.
Help-Wanted Index, January (10:00): 46 versus 46 prior.
3-01-02
Truck Sales, February (Time not supplied): 7.1M versus 7.1M prior.
Auto Sales, February (Time not supplied): 5.3M versus 5.3M prior.
Personal Spending, January (8:30): 0.4% versus -0.2% prior.
Personal Income, January (8:30): 0.1% versus 0.4% prior.
Mich Sentiment-Rev., February (9:45): 91.0 versus 90.9 prior.
ISM Index, February (10:00): 51.0 versus 49.9 prior.
Construction Spending, January (10:00): 0.1% versus 0.2% prior.
TEAM TRADES
PH: As we said, sexy names are not always where the money is: PH is an industrial equipment manufacturer, and that sector is doing well. Friday it broke out of a wedge early in the session, and we were looking at getting on board. The buy point was 49.50, but it gapped past that and was at 49.70 a half hour into the session. Volume was so-so, but we were seeing some good volume buys coming in so we decided to take a partial position and see where the volume came in later. The stock surged up to 50 but then fell right back to 49.80. That gave us the opportunity to get in and we did with a half position of what we had allocated to the trade. Almost immediately the stock shot up to 50.40, but there it flamed out, falling back to 50. It regrouped over a half hour and made another run at 50.40. It fell back to 50 again but held. It then drifted the rest of the afternoon, closing at 50.12. Volume was huge, so it was a good breakout; just not a lot of price movement as it works to definitively clear 50.
End Part 1 of 2
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