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Begin Part 2 of 2
Support and Resistance
Nasdaq: Closed at 1868.30.
Resistance: 1875 is the bottom of the November consolidation. The 200 day MVA (1896.13). The top of the November consolidation at 1934 to 1941. After that is 1980 (the December gap up point) and some minor resistance at 2000. Then the January top at 2098.88.
Support: 1850 was able to hold as support last week. After that, it is pretty sparse down to 1800 to 1775.
S&P 500: Closed at 1166.16
Resistance: The December high (1173.62) and the January high (1176.97). That point also marks roughly the lows of summer 2001 consolidation that runs up to 1240. Before that point there is some resistance at 1183 from March 2000.
Support: 1150 and the 200 day MVA (1146.94). After that, 1125 is the hump in the double bottom, and the simple 50 day MVA (1128.52) and exponential 50 day MVA (1131.27) are converging. 1100 has acted as support as well.
Dow: Closed at 10,607.23
Resistance: The top of the June, July, and August 2001 trading range at 10,600 (10,679 intraday high), is still in the way. 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 held as support during this consolidation. That is followed by the January high at 10,300. Then the 200 day MVA (10,006.84) and 10,000.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
3-19-02
Trade Balance, January (8:30): -$26.9B versus -$25.3B%
FOMC Meeting (2:15): Results announced
3-20-02
Housing Starts, February (8:30): 1.63M versus 1.678M prior.
Building Permits, February (8:30): 1.65M versus 1.706M prior.
Treasury Budget, February (2:00): -61.0B versus -$48.2B prior.
3-21-02
Initial Claims, 3/16 (8:30): 377K versus 377K prior.
CPI, February (8:30): 0.2% versus 0.2% prior.
Core CPI, February (8:30): 0.2% versus 0.2% prior.
Leading Indicators, February (10:00): 0.3% versus 0.6% prior.
Philadelphia Fed, March (12:00): 17.8 versus 16.0 prior.
FOMC Minutes, 1/30 (2:00)
SUBSCRIBER QUESTIONS
Q: When an analyst upgrades or downgrades a stock, does his big money clients get advance notice?
A: This is one of the overlooked conflicts of interest. Surprising in this time of supposedly heightened scrutiny of all transactions. What has developed in recent years is the rise of the big name stock analyst in a particular sector. Each big brokerage house wants a few of them to get the name out there when these big market, stock or sector calls are made. They have made a lot of fuss lately about how tough their analysts have become, some even giving bonuses for downgrades that turn out to be 'the best.' They have been chased around with big salaries much like baseball free agents.
The way things have been set up is that these big name analysts often are given free rein to make whatever calls they want without having to necessarily conform to what the brokers are selling to or telling their clients. The idea is to give them intellectual freedom to make calls as they see them and then avoid the very question you raise: controversial calls being made but the big money clients getting word of it first.
So in theory, they do not get the inside scoop ahead of time and neither does the average investor. Some of my brokers handle accounts that contain millions of dollars. When Jonathon Joseph of SSB made the controversial chip call back in September 2000, the brokers did not get a heads up on this. One broker complained to us that he had just put some big clients into some semiconductor stocks just in time for the call to come out and for them to get whacked. Many brokers complain of not getting the information ahead of time and being able to properly position their clients. Again, these include accounts with millions of dollars in assets in them. Not only do they not get an alert before the big calls are made, but all calls from these 'semi independent' analysts. Seems they carry the brokerage's name but don't have to reveal to the brokers or their clients the calls they are going to make.
To us that sets up a conflict of interest in the other direction. It is not the well to do clients getting the scoop before the street (although that may indeed happen for those in the very inner circle), it is the client getting the shaft. Many of these clients rely on their broker's advice as to where to put their assets to work, particularly in managed accounts. If the brokerage house is taking in fees for this service and then a call from one of their big name analysts runs contrary to that advice and loses the client's money, that appears to breach a duty owed to the client. You pay money for advice and expertise, and then one of the firm's analysts makes a call contrary to that advice given and paid for and you lose money. Seems you bought the shaft with your fees.
THE PLAYS:
Reading the Plays: Please note that when we reference the 10, 18, and 50 day moving averages (MVA), those are exponential moving averages (EMA). The 200 day moving average is always simple (SMA). We will note when we reference a particular MVA differently, e.g., a simple 50 day MVA. Please click on the Yahoo and chart links for company and charting information. A "prior high" refers to the high at the start of a base.
For conserving space on listings of stop losses, the symbol (7%) indicates that the stop is 7% below the buy point.
Good movers: Good day for breakouts for several of our plays! LYTS broke out from the lateral pullback (test of breakout) on huge volume. LUX finally broke out, making a super move Friday from the 10 day MVA; the stock had hit our aggressive buy point (18.25) several days ago on an earlier bounce from the same support. GAP finally made its move on the bounce play, and is close to breaking out over the February high! Looks super! Others that have continued to push higher: KSWS, PETM.
Targets hit Friday: LYTS (21, ascending wedge breakout from 2-16)
Stop Advisory: RGFC (19)
Stocks/Indexes from Thursday's report:
LPX: Nice breakout after a test of the recent run! Cleared resistance at the March high; a hold for the ride.
NVLS: Started the bounce from the 10 day MVA with the chips having a good day.
ADBE: Nice! Earnings bumped it over the 18 day MVA, after it closed at the 50 day on Thursday. Volume was strong, up sharply on the reversal. Target on the report Thursday was in error; it is 46, not 41.
PEGS: Continued the 50 day MVA bounce, but volume fell back just under average, so the move was a little disappointing. Will look for support at 18 if it should pull back in a little breather.
EMLX: Fell over a point for the put play; volume lighter on the move but solid at average levels. Buy point was 29 (closed at 27.86).
Continued Plays: Still like ATK (3-10), NWK (3-09), OII (3-13), SIMG (3-12), JH (2-27)
GE: Strong volume and the stock tried to break the 200 day MVA (resistance) but failed. It is holding the 18 day MVA as it did the previous 2 days; we continue to look for the drop to the 36 range (put).
HRLY: Still consolidating above the 18 day MVA, and volume fell back below average Friday. Aggressive buy point for a move up in the test is over 20 on strong and rising volume. Not a super pattern, but it is trying to settle down.
MVL: Gave us the run starting end of February and now the stock is back at the 18 day MVA, showing a hammer doji (long tail) and huge volume. Could bounce from here! Buy point 7.15 on continued strong volume for stock.
VRST: Formed a new handle to the 10-week cup with handle pattern, and closed with a tight hammer doji above the 10 day MVA. Volume sinking to very low levels in an orderly manner. Buy point for breakout is 21.09, with aggressive positions over 19.60 on strong and rising volume.
Best Plays:
1) CBUK: A small stock breaking out!
2) DLTR: Retail had a good day Friday.
3) CNB: Another breakout!
4) DJX: The index is ready to move.
New play:
CBUK (Cutter & Buck--$7.41; +0.26; optionable): Consumer Non-durables: Apparel
http://biz.yahoo.com/p/c/cbuk.html
STATUS: The company reported Q3 earnings Thursday; sales were flat but the company gave an upbeat forecast for 2003. The stock headed up Friday, with volume surging well above average (232,500; avg. 128,363), breaking it out of a consolidation it formed above support at 7. CBUK broke out over the 200 day MVA in January, tested the 50 day and short term MVAs, then moved somewhat laterally until taking off Friday. Looking for a continued breakout with the stock remaining a buy here up to 8. Showing excellent money flow and buying, and the target is 10.
BUY POINT: 7.50 on continued strong volume. Stop Advisory (7%): 6.98
POSITION: Stock and/or June $5 calls to buy (KUT FA).
http://www.investmenthouse.com/cd/cbuk.html
DLTR (Dollar Tree Stores--$33.81; +1.77; optionable): Retail
http://biz.yahoo.com/p/d/dltr.html
STATUS: DLTR is in a 20-month base, but more recently has formed something of a 6-week reverse head and shoulders pattern at the upper right side of an 8-month cup base (within the larger base). It broke out of the smaller base on Friday, lunging up from the 18 day MVA on strong volume (2.1 million; avg. 1 million). The smaller pattern is functioning as a handle to the 8-month cup, so on a breakout our target is at 41. The initial target for the breakout from the "handle" pattern (r. h & s) is 37. Excellent money flow.
BUY POINT: Breakout: 34.06 on continued strong volume. Stop Advisory (7%): 31.68. A buy on breakout up to 35.76.
POSITION: Stock and/or May or August $30 calls to buy (DQO EF or HF).
http://www.investmenthouse.com/cd/dltr.html
CNB (Colonial Banc--$15.19; +0.29; optionable): Regional Banks
http://biz.yahoo.com/p/c/cnb.html
STATUS: Breaking out of a 7-month ascending wedge on strong volume (619,900; avg. 167,227), racing past the pivot point at 15.08. The stock remains a buy as it is within 5% of the pivot. We have two choices: buy before it hits the limit at 15.85 or wait for a test of the breakout and then move in. After successful tests, the breakout floor is fully established and some good gains can result. This most recent pattern formed after CNB broke out from an earlier ascending wedge back in June of last year; kind of a base on base, and we like that. Showing huge money flow and high relative strength. Target: 18
BUY POINT: 15.25 on continued strong volume. Stop Advisory (7%): 14.13. The stock pulled off the high of 15.33 and may give a test of the buy point before heading back up. That would give a better entry point for aggressive positions. Remains a buy up to 15.85.
POSITION: Stock and/or June $12.50 calls to buy (CNB FV).
http://www.investmenthouse.com/cd/cnb.html
Index:
DJX (1/100 Dj Indu--$106.07; +0.90; optionable):
STATUS: The index has trended up nicely from the September lows near 82.50 and recently broke back over its 200 day MVA (100.08) for the second time this year (first was in January, and after the second move over formed a 2-month cup with handle). Breaking out of the cup, the index is now testing the move in a lateral-type pattern (plateau) with support at 105. It was from there Friday that the DJX rose on stronger volume, and is looking ready for a breakout! Pattern closing high is 106.32. Target: 110 (initial).
BUY POINT: 106.42 on volume of 1.8 million or better (Friday's volume was 1.48 million; avg. is 1.34 million).
POSITION: May $100 calls to buy (DJV EV). Check for deltas. Can also use May strikes up to 106 with a delta of 0.70 or higher.
PORTFOLIOS: Each report, we look at these to see which is in a buy position. We don't cover them all each time, just the ones that look ready to pick up a few shares.
THE LEADERS: DGX, FRX, LLL, MIK, IGT.
Covered Call:
DGX (Quest Diagnostics--$81.25; +0.83; optionable): Health Services
http://biz.yahoo.com/p/d/dgx.html
STATUS: DGX has had a fine run on the breakout from its 8-month base. We are now looking for it to test the move, and since the buy point is back down at 75, a fall from here would offer a good opportunity for a covered call play on positions we have already taken. Even if the stock does not make it back that far, instead holding at the range of its 10 day MVA (now at 76.47 but likely to be a bit higher by the time DGX pulls back to it), it is still a decent drop for the play. Volume remained above average Friday but lower at 782,100 (avg. 523,000), with the stock posting the small gain. We will start looking for the move down to sell the calls; signal to buy them back is when DGX hits near the 10 day MVA and holds.
SELL POINT: 80.50, preferably on continued strong volume.
POSITION: Aggressive: May $75 calls to sell (DGX EO), selling for $8.20 at the close Friday. With a delta of 0.76 and a 4-point move, the calls can fall in value to around $5.25. That will be the buyback order we will set right after the calls are sold. Less aggressive: May $80 calls to sell (DGX EP).
http://www.investmenthouse.com/cd/dgx.html
MIK ($38.50; +1.03): Another stock that may soon offer a covered call sale opportunity; MIK has had a nice run since breaking out over its 50 day MVA and the March/February highs at 35. It has potential support at 36, its 10 day MVA and other price support from earlier this month, but quick players can consider the play. The stock was up on rising volume Friday, pulling off the high at 39.25. We will be looking for stronger topping signs though Friday's close off the high after a $8.50 run looks to be the start of it.
UP & COMERS PORTFOLIOS: BBBY, SRCL
BBBY ($33.09; +0.72): Retail ended the week on a positive note. BBBY did what we thought it would, moving back over the 50 day MVA (and 18 day, too) on a rise in volume from the lateral pattern it set up the last several days. Closed with a doji so will see if it can hold the 50 day MVA here. Looks ready to try and move higher.
SRCL ($65.74; +0.47): Still holding the 10 day MVA (the 18 day MVA is just below) as volume fell back sharply below average. SRCL looked a bit precarious on Thursday, trying to sell below the support on a big surge in volume. Settled back down Friday and held support.
MEMBER PORTFOLIO: CSCO, SEBL, EMLX, BRCM, HDI, BRCD, BUD, AMGN, WMT, ORCL, HB, NOC
WMT (Wal-Mart--$63.75; +1.48; optionable): Such a steady performer since 9-11, WMT broke out of the cup that resulted from the August and September sell-off, then tested the 50 day MVA in January. From there it has bounded up the 18 day MVA just as a strong stock will, and is now on its fourth bounce from the 18 day MVA. Friday's move broke it out of a small, 4-week pennant that again used the 18 day MVA as its support. Big volume (13.3 million; avg. 7 million) on the move can give it a bit more push than its typical $3 to $4 moves off of the 18 day. One thing to consider: WMT has been on a strong run; stocks usually get only 4 to 5 bounces up the 18 day MVA after testing the 50 day MVA. And when they take off late in the cycle (e.g., the fourth bounce) on the strongest volume of the run (indeed the strongest since the market reopened in September), that is a cause for some close attention. It could mean that everyone is rushing into the stock, having to get in on the great retail leader. That can be trouble and we need to keep a close eye on WMT for that very reason. If it shoots straight up on continued heavy volume, it may be an exhaustion move, setting up for some strong selling. That is getting way ahead of the game just now. For the moment, lets enjoy the move; these blow off or exhaustion moves don't usually happen in just a couple of days. If we see it, we can either take some profits when it starts rolling over or we can sell some covered calls on it to lock in some gains and keep the stock if it looks as if it has not shot up too far, too fast.
AMGN ($61.41; +1.16): Broke over its 200 day MVA (60.33) on higher though still below average volume (just under). Still not out of the woods in its recent bearish pattern until it moves convincingly over 64. Has its work cut out.
SEBL ($34.12; +0.21): Still in good position for a move up, holding with a hammer doji at the 18 day MVA, and volume keeps falling. That is good price/volume action. Software as a whole isn't looking great right now, but this is a decent pullback.
HDI ($54.92; +0.22): Holding in the little ascending wedge (see the 3-12 report).
BRCD ($25.54; -1.48): Not looking good, selling off again (broke its 18 day MVA on Wednesday) on still rising volume. February low is at 22 if it keeps falling (potential support).
ORCL ($12.60; -0.84): Still falling, gapping lower on Friday on strong volume. Earnings were out Thursday and the market didn't like the news.
NOC ($109.15; +1.16): Holding the 18 day MVA but still fighting resistance at 110. Tried Wednesday to hold a break through it, but failed. Isn't looking too bad as long as it holds the 50 day MVA.
Good Investing!
Jon L. Johnson and The Daily 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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