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3/04/02 Investment House Daily
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SUMMARY:
- Indexes continue to surge as Nasdaq posts follow through session.
- All three major indexes starting to row the same direction.
- Transports and small caps doing more than their share.
- Nasdaq stocks still mixed: some rise on strong volume, others on falling volume.
- Team Trades
Nasdaq joins Dow and S&P with a follow through.
On the seventh day the Nasdaq followed through. After putting in a reversal session two Fridays back, the Nasdaq continued Thursday's sharp reversal over the down trendline with a strong volume 3.1% gain. The percentage price gain coupled with the sharp volume increase gives the index a follow through session that shows there was finally some continued buying in the tech index. That will help back up the Dow's move it started in February after the S&P 500 gave its own follow through session last week. For once all three major indexes are swimming together, and that provides more foundation for the recent move higher.
The move was bittersweet. The majority of investors only get fired up when the market moves up, but as we have seen over the past year and the last two months as well, the downside can be very profitable as well. Today's early relief slump from Friday's rally was not much, and we were forced to exit more of the put positions that were under water that we opened during Thursday's selling. The sharply stronger economic news Friday changed the character of the market at least for the short term, and we had to react. We made some great money on the downside action and we cut our losses from Thursday short on this reversal, but we hate giving back any money. The Nasdaq move may not last, and indeed as discussed below it has a lot of work to do, but you have to play the percentages and cut losses when the character changes as sharply as it has.
Nasdaq not the only mover today: Dow, S&P, Transports, and small caps all surge.
The Nasdaq is the laggard. The Dow reversed, followed through in February, and then broke out Friday. The S&P followed through Friday with its own breakout. The action in these two indexes was also punctuated by a very broad rally in NYSE stocks.
Since the January selling started, we have been looking at a lot of small and mid-cap stocks mainly because they tend to do better early in a new year and also because they were in some of the better patterns, i.e., patterns that showed accumulation was ongoing. Well, the S&P 600 small cap index broke out to a new all-time high today. Not just a 52-week high, but an all-time high. That underscores the strength and breadth of the move on the NYSE.
In addition, the Dow transports have been mirroring the Dow, and they too broke out Friday and today, moving over the summer 2001 highs. While they still have overhead from January 2001 and then way back (and way up higher) May 2000, when the transports and the Dow industrials move together over prior highs, Dow theory says economic recovery is at hand. That means more gains ahead for the stock market. Not exactly a leading indicator, but nice to see the indicators all falling into place.
Nasdaq showing strength, but still has work to do.
The fact that the Nasdaq provided follow through means it will help support the move that the Dow is making. It does not mean it races to new highs. Volume shot up on the follow through, but the A/D line was 1.84 to 1, not even meeting the minimum threshold of 2 to 1 we like to see on a follow through. As discussed last week, the better A/D line shows breadth in buying, and that usually gives a greater base to move off of. The Nasdaq can rally indefinitely on a narrow A/D line, however, as we saw in 1998. Thus, while it is not the strongest follow through, it is one that can support the Dow and continue in its own right.
Again, that does not mean it goes straight up. Look at most of the big name techs. It was 50-50 as to whether a big tech moved up on higher or lower volume today. Higher volume indicates real buying; lower volume means it is just along for the ride with no real conviction in the buying. Those will tend to rally and then run out of gas.
Further, with the exception of names such as KLAC and AMAT, most of the well-known techs are making knifepoint turns from nose down dives since very early January. That means there is a lot of overhead back up where the stocks started this last plunge. There has been no accumulation of these stocks since early January, and when they move up they are going to hit that resistance as disgruntled shareholders unload them to get 'even.' They will undergo some selling pressure at that point or earlier. We watch at that point to see if a double bottom pattern forms as on the S&P recently, or if they scratch out a cup pattern where they rise almost to the point where they started to correct and then back off to form a handle that shakes out the final sellers.
That is the best-case scenario because it will show that the stocks have been under accumulation once again and then if they breakout with force, they are really going to make some sweet moves. At that point they are not as subject to being yanked back and forth by the latest news story as the sellers have been worked out and longer term owners are holding the stocks. The worse-case scenario is where they rally sharply higher a few days and reverse on high volume at resistance, selling down again on strong volume. This is more of the 'flash in the pan' rally seen throughout the bear market. The follow through action makes this less likely, but it is not out of the question when you look at the continued tech overcapacity in the economy.
Thus the Nasdaq big names have rallied well for two sessions and they may move higher from here. For the best long term action, however, they should back and fill these moves, pulling back in controlled slides after every leg in order to fill in and build the base to really breakout of. If not they tend to burn up and fail. In each bull market that recovery, the leaders move out of well-established bases. The techs may not be the leaders in the next bull; they have not led to this point but have taken a backseat to retail stocks of all shapes and sizes. The urge is to chase them higher as money is thrown at them. No doubt the money can be made, but in this environment they are still subject to immediate reversals on news. In the big picture it is safer to let them form up and then pick them off as they breakout, if they do.
THE MARKET
The institutional buying was at work again today, finally moving into technology stocks and financial stocks. Two strong sessions have laid the groundwork for a further, longer term move higher. It does not guarantee the end of the downturn is here in the Nasdaq, but continually improving economic reports are bolstering the idea that the recession is over and that some type of recovery is coming or is here. Our upside plays continued breaking out as we were forced to exit some more downside positions with a bloody nose. Don't like it, but no use worrying about that as the business of making money does not involve second guessing or looking over your shoulder.
VIX: 22.08; -0.05. No movement at all as it appears the 'rock bottom' moniker we used over the weekend appears accurate. Again, you cannot argue with good price/volume action.
VXN: 40.79; -1.15. Lows for the year and back to summer 2000 levels. Again, it indicates continued complacency, but the price/volume action did in fact improve, and that is our primary indicator.
Put/Call Ratio (CBOE): 0.65; -0.01. Held virtually steady on another strong rally. Hanging in the higher side of the range still. Again, well ahead of the 0.4 level that indicates complacency.
Nasdaq
Second strong consecutive gain was fueled by volume as institutions bought into the techs and helped deliver a follow through session the seventh day following the reversal. The groundwork is laid for a further move up, but the techs need to build better bases and we can expect them to pullback and consolidate the moves as they hit upside resistance. The Nasdaq is right at some resistance at 1875.
Stats: +56.58 (+3.1%) to close at 1859.32.
Volume: 2.297 billion (+21.3%). Biggest volume session since the January 9 reversal that started the index down in the test. Volume was easily follow through caliber.
Up volume: 1.752 billion
Down volume: 528 million. The buyers were again in the majority for the session and finally showed stronger numbers than the recent sellers.
A/D and Hi/Lo: Advancing issues led again but actually fell in strength to 1.84 to 1. As indicated previously, on a follow through session you like to see at least 2 to 1 to show a broader rally. Indeed, in the heavier selling in early and mid-February decliners led easily better than 2 to 1. Thus, the follow through lacked some punch.
New highs: 189 (+60)
New lows: 32 (-29).
The Chart: http://www.investmenthouse.com/cd/$compq.html
Broke over the 50 day MVA (1857.32) but remains below the next level at 1875 that is the bottom of the November consolidation range. When the index gobbles up big chunks of real estate as it has, it encounters resistance levels each session. It has found 1875 as resistance and support, so there is something there. After a 7.2% move in two sessions it could find it necessary to catch its breath. If it still has some pop to it, the 200 day MVA is not much higher at 1909.72; that is important resistance. It held the Nasdaq back in November, and it is bolstered by the top of the November consolidation that ranges from 1934 to 1941. Maybe the Nasdaq can blow right up to that level. At some point in this range, however, it will need to take a breather, and that can give the techs a chance to form up better patterns that are better entry points. The relatively weak A/D line is still a concern.
Dow/NYSE
Another strong follow through session for the Dow as took out 10,500 and almost vaulted over the high of the summertime consolidation at 10,679.12. It too will have to take a breather before too long, but it is looking solid.
Stats: +217.96 (+2.1%) to close at 10,586.82.
NYSE Volume: 1.593 billion (+9.3%). Another solid volume day as NYSE volume as buyers continued to put money into NYSE stocks.
Up volume: 1.311 billion
Down volume: 294 million. Another billion -plus up volume session.
A/D and Hi/Lo: NYSE advancing issues remained very strong at 2.4 to 1 for the second straight session.
New highs: 348 (+156)
New lows: 21 (-6). Very broad move as NYSE new highs explode.
The Chart: http://www.investmenthouse.com/cd/$indu.html
The Dow has also chewed up real estate very quickly, and is now right at potential resistance in the 10,600 range (the summertime consolidation high was 10,679.12). Indeed, on the high it hit 10,600.10 before falling a bit off at the close. This is the point where we anticipated it to take a breather, and it reached it in two steps. The next major resistance is at 11,000, but 10,800 is also a potential level that could push back an extended rally. It will have to take a rest soon, and we would anticipate an orderly lower volume pullback to the 10,300 to 10,500 level.
S&P 500:
Another big move from the big caps on that strong NYSE volume. The gain was 1.9%, a minimum for another follow through session. The move pushed it up just past near term resistance at the 200 day MVA (1152.36) and 1150. It still has to deal with the twin tops from December and January (1173 and 1177) and that gets it into the summer 2001 consolidation range from 1165 to 1240. That is a huge range for the index and simply underscores that the index has a lot of work to do. We anticipate that after this strong breakout it will have to consolidate some of the gains for the next leg higher.
Stats: +22.06 points (+1.9%) to close at 1153.84.
Volume: NYSE volume climbed again as more accumulation was evident (1.593 billion; +9.3%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
The picture cleared up to the upside about as good as a bull could ask: the Nasdaq gave the market a follow through session to join the Dow and S&P's earlier follow throughs. It was not raw power as the Nasdaq advance was not broad, but again, it is an indication that the broader move in the market has some support as institutions were back to buying technology stocks along with other stocks. Until the Nasdaq develops some better leadership in the form of solid patterns that show continued accumulation, that is about the best we can say for the index.
We are calling for a test of this move over the next couple of sessions. Breakouts tend to be tested, particularly when they are ballistic as this one has been. A test does not mean necessarily selling back to the starting point, but it can entail a lateral move on lower volume. Indeed, stronger moves tend to be followed by lateral to slightly downward, lighter volume selling. As noted over the weekend, the Dow is in good shape on its move and the S&P is not too bad; thus, we do not anticipate major selling on any consolidation of these moves. The Nasdaq is another story, and the test for it will be the critical test, so to speak. If it gives an orderly pullback on low volume toward 1800, or even better, a lateral move, it may come out in good shape. That will give its stocks some time to consolidate the jerk back higher, and allow another building phase. The follow through sets the stage for a further recovery; it does not guarantee it. If high volume selling resumes, there is more work to be done. Right now all indexes are trying to swim the same direction, and that increases the possibility of an upside resolution to any test.
Tomorrow we may see the indexes continue their march but then run into some resistance and start to take some profits. They are just below some important resistance levels and have run far in just two sessions. Another spurt higher might be the last bit of gain on this move before it needs to be consolidated.
Support and Resistance
Nasdaq: Closed at 1859.32.
Resistance: Still fighting with the 50 day MVA (1857.32). After that is the bottom of the November consolidation range at 1875 that has proved to be support and resistance in the past. A break over that point is the turning point. The 200 day and simple 50 day MVA are next (1909.72 and 1900.71, respectively). That is just under the top of the November consolidation at 1934 to 1941.
Support: 1800 could provide some support. After that 1775 is some support as well, followed by the November gap up point at 1745. 1700 has held loosely. After that, there is not much until 1626, the early October gap up point and the April 2000 intraday low at 1619.58.
S&P 500: Closed at 1153.84.
Resistance: Not totally past 1150 (former support and resistance) and the 200 day MVA (at 1152.36). The next level is 1175 marking the December and January tops. That point also marks roughly the lows of summer consolidation that runs up to 1240.
Support: 1125 is the hump in the double bottom, and the simple 50 day MVA is also there at 1126.75. 1100 has acted as support as recently as two weeks ago. Then 1075 to 1080 continues to hold tough, right at the March 2001 intraday low. There is a jumble of prices in a range from 1075 to 1050. 1050 was tested twice in October, holding both times.
Dow: Closed at 10,586.82.
Resistance: Right at the top of the June, July, and August 2001 trading range (10,679 intraday high). 10,800 represents some resistance. That is followed by resistance at 11,000 on its way to the May 2001 high at 11,345.72.
Support: 10,400 could provide some support, followed by the January high at 10,300. Then the 200 day MVA (10,032.15) and 10,000. After that is 9730, the first January low and has provided some support. There is some support at 9691, the bottom of the November, December and January range.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
3-5-02
ISM Services, February (10:00): 51.0 versus 49.6 prior. Not released today.
3-6-02
Factory Orders, January (10:00): 1.4% versus 1.2% prior.
Fed Beige Book (2:00)
3-7-02
Initial Claims, 3/2 (8:30): 380K versus 378K prior.
Productivity-Rev., Q4 (8:30): 380K versus 378K prior.
Consumer Credit, January (3:00): $3.2B versus -$5.1B prior.
3-8-02
Nonfarm Payrolls, February (8:30): Unch. versus -89K prior.
Unemployment Rate, February (8:30): 5.8% versus 5.6% prior.
Average Workweek, February (8:30): 34.1 versus 34.0 prior.
Hourly Earnings, February (8:30): 0.3% versus 0.0% prior.
End Part 1 of 2
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