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THE MARKETS

The strongest session since the Fed rate cut on the Nasdaq and S&P 500, while the Dow fiddled around again. More strong volume and good breadth as money flows into beaten sectors.

Overall market stats:

VIX: 28.69; -1.46. VIX dropped below 30 on the strong moves, but it is still not plunging. Again, we like the wall of worry.

Put/Call ratio: 0.48; -0.09. Falling further as puts are not the place to be, at least to buy. Put sellers have been scoring huge daily gains on stocks such as JNPR, but that is a high-risk venture given the stock's volatility.

Sentiment: There has been a lot of contradictory information about sentiment. Brokers all over the country were reporting their clients were in despair that the Fed had not reduced rates (before the actual cut occurred), and while this was showing up in many surveys, it was not showing up in others. For example, IBD measures sentiment of newsletter writers, and while it decreased, it did not drop to historically low levels for a reversal. At the same time, bearish writers rose, getting closer to a reversal point but still not there. With this recent rally, bulls have shot up and bears have slid lower.

We often talk of a 'wall of worry' that markets climb. If there is anxiety out there, that keeps the market from burning out too fast. Moreover, a high level of bears and low number of bulls gives the market longer legs; as more bears switch sides, new fuel for the rally emerges. If bulls are too high, there is now new blood to jump in to keep things going.

Spirits are higher, but as the recent parade of big-name, negative analysts on the television shows us, there are still many who are very cautious about putting much money to work right now. That shows us there is still room to move.

NASDAQ: Third day of solid gains on excellent volume. As you all heard, the first 3-day rally since 9-1-00. The index is at the down trendline right now, and that poses some resistance for the next leg. The index kept rising today showing that power we have not seen in a long time. Still, it cannot move up without a rest forever.

Stats: Up 116.39 points (+4.6%) to close at 2640.67.
Volume: 2.761 billion shares (+12%), again well above average. Up volume crushed down volume 2.432 billion to 333 million shares to the downside. Beautiful price/volume action.
A/D and Hi/Lo: Advancing issues stretched their lead 2.38 to 1 (2.03 to 1 Wednesday). This breadth lends more power to the confirmation where we like to see 2 to 1 advancers or better. New highs rose to 67 (+2), but the new lows really dropped, falling to 26 (-35). Remember the 400 and 500 and higher new lows back in November? Yuck.

The Chart: http://www.investmenthouse.com/cd/$ndx.html

As noted, the index tapped the down trendline on the high (2661.93) and pulled back slightly to the close. This is the critical stage for the index as this is a strong downtrend that has turned the index back since September. It would be almost poetic justice that it break over the trendline now as this is the first three-day rally since the day this downtrend started on September 1, 2000. Before that, however, we may see a bit of a pullback.

Dow/NYSE: The Dow struggled once again, up and down all session (in contrast to the Nasdaq's power up all day) before settling for a small gain on higher NYSE volume. It continues to hold up at support at 10,600, and it is showing signs of life right here.

Stats: Up 5.28 points (+0.05%) to close at 10,609.55.
Volume: NYSE volume was higher and above average at 1.364 billion shares (+5.2%). Up volume lost some of its grip, coming in at 857 million versus 476 million to the downside.
A/D and Hi/Lo: NYSE Advancing issues continued to lead, but that shrank to 1.3 to 1 (1.76 to 1 Wednesday). New highs continued to rise, coming in at 178 (+9) while new lows fell to 17 (-3).

The Chart: http://www.investmenthouse.com/cd/$dja.html

The Dow tapped lower once more intraday (10,552.62), but recovered again to close above support at 10,600. It remains below the 50 day moving average (10,658.04), but it showed a tightening doji on the candlestick chart on rising volume. That often signals a turn back up.

S&P 500: The big caps were running again today, again mirroring the Nasdaq. They even sold off in the last half hour as well. Volume was up, another positive sign. The index is approaching but has not yet reached its down trendline at 1345. On its high it did hit 1331.96, another point in a range that has acted as resistance before. This move is strong and it should take out this interim resistance, but it might wait until the Nasdaq is ready and then take on its down trendline at the same time as it will be coming down to meet it each session.

Stats: Up 13.55 points (+1%) to close at 1326.82.
Volume: NYSE volume was again higher and remained above average. (1.364 billion, +5.2%). Again the right kind of price action.

The Chart: http://www.investmenthouse.com/cd/$spx.html

TOMORROW

We have pretty much tipped our hand as to how we feel. The Nasdaq has run hard and is at the down trendline; a natural place to take a breather. Futures are down, but that does not mean much. We will see how the PPI and retail sales play out, but if they are near expectations we don't expect that to add much either way. If retails sales are weak, that keeps the Fed under the gun.

We may see a continued attempt to run higher in the morning, either right off the bat or after a lower open. If a lower open, watch out for that down trendline at 2660 to stop an attempted run back up. On a move higher at the open, on a fall we have to watch to see if the 2660 to 2655 level holds and the index can bounce back up. If not, the index will most likely pull back some more for some of the profit-taking selling we have been discussing.

Again we will use any move up to exit short term positions if the down trendline does not act as support to bounce the index back up. After that, we will wait and watch for stocks to hold support and start the move back up. Maybe Friday (probably not), but more likely at some point in the first half of next week.

A final consideration. If the market is performing well tomorrow but on lighter volume, we may get the profit taking later in the day before the long weekend. Decide what you want to do at that point. If the index is well above the down trendline, it might take another session to test to see if it will hold. It would be outstanding if it could break and hold over to the close tomorrow, then test that break next and have it hold and bounce back up on strong volume. Might be wishful thinking, but with the move we are getting of late, why not?

Support and Resistance Levels

Nasdaq:
Resistance: The down trendline at 2655 to 2660.
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.

1-8-01
Consumer Credit for November (3:00): $8.0B versus $16.7 B prior.

1-10-01
Wholesale Inventories for November for 1/6/01 (10:00): 0.3% versus 0.3% prior.

1-11-01
Initial jobless claims for December (8:30): 370,000 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.

1-12-01
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): -0.5% versus -0.4% prior.
Retail Sales (ex. Auto) for December (8:30): 0.2% versus 0.2% prior.

SUBSCRIBER QUESTIONS

Q: Will Mr. Greenspan's 50 basis point hike prevent the "ship" from running into the "dock" as you explained most amusingly in your analogy several months ago?
A: That cut alone will not do it. What we like is the fact that it was an aggressive move (it was needed last year) and the Fed said it stood ready to do the same. It will take more cuts and quickly; there are still those last 75 basis points of hikes out there that will hit the economy. The 50 basis point cut does not simply negate that last hike as there were plans scuttled because of the slowing economy. Those are not put back on the table just because the Fed has cut rates. Companies need to come to their own conclusions about whether the economy is back on track to put money to work. The ship is still heading at the dock even though the captain cut the engines after May 2000 and nudged it into reverse on January third. He needs to throttle up soon.

TEAM TRADES

Today was a day that was set up several sessions before when we were taking positions as stocks set up for what looked to be good gains. We took some profits today, and we did start some new plays.

EMLX: We had averaged in on several option positions as EMLX pulled back to support on a few occasions. Today the stock was raging, but it started to have some trouble near resistance at 89-90. With an hour to go, it started showing some doji's on the intraday chart after pulling up in a sharper ascent above its 15 minute MVA than it had all session. It jumped a point higher in the next five minutes, but started to stall as it hit 89.25 several times over the next 10 minutes. Our options were April $70 calls, and they were trading about 27.25 by 29. We slipped in a stop order at 26.50 when the stock started showing the doji's. We decided to move the stop to 27. When it spiked higher we moved that up to 27.13 (the off-round theory). When it could not break 89.25 the options were at 28 by 29.50. With the stock looking as if it would stall and the fact that there was only 1 contract traded at that time, we did not have a lot of confidence in the stop order. So we had converted the stop loss to a sell order at a limit of 27.13 right as it spiked up a bit. We were taken out at 28.

The stock sold back to 87, but after 20 minutes it broke back over the 15 minute MVA, hitting a high of 90. The bid on the options was 28.50. The stock then fell back down at the close and the options closed at 26.62. We could have squeezed out another 50 cents, but that would have been risky given the weakness we saw in the market. Turned out fine. Now we will wait for the stock to perhaps form a handle on this somewhat ragged double bottom and catch it again on the breakout.

Good Investing!
Jon Johnson and the Tech Traders Report Staff.

All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners of Online Investment Services, LP or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.

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