InvestmentHouse Weekend Market Summary
investmenthouse.com
7/26/02
TONIGHT:
- Week closes out with a modest positive.
- Ready to rally or ready to tank?
- Patience while the market decides which way it wants to go.
- Subscriber Questions.
Friday all indexes (less the SOX) rowing together.
Thursday the failure of the Nasdaq on the heels of the Wednesday rally was a problem. Any rally was not going far if the indexes moved in different directions. Friday even with the semiconductors closing lower, the Nasdaq was able to post a modest gain along with large caps, mid-caps, and small caps. Volume plunged after an exhaustive week that saw tremendous volume and tremendous volatility.
After the big move Wednesday on the heels of the big selling beforehand, the modest close was really a relief. The market did not burn itself out to the upside and it did not reverse and sell off immediately on the heels of the short covering rally. The Nasdaq threatened to do so Friday, but the shorts were not piling on, and the indexes were able to rally from the lows Thursday and Friday to close near the session highs. A change from the usual action though nothing spectacular. That in itself was a positive for potential upside.
Market trying to transition. Can it do it this time?
Many times during this bear market stocks have attempted reversals only to be pushed back. Sustained moves have been rare, the most recent in April 2001, after the market re-opened in September 2001, then again in February 2002. Did the heavy selling leading up to the 700+ point, massive volume swing on the Dow Wednesday set up a transition to another more sustained upside move?
As we have noted the past two weeks, a lot of sentiment indicators have been moving to extremes; maybe not the extremes of the hyper sell off in 1987, but they have hit historically significant levels. That would indicate the mood is right for a bottom of some sort. The question now is, will the buyers come in to actually buy after a short covering rally starts the move?
What is follow through?
As soon as the bell rang Wednesday to a close the television jockeys were yammering about the need for follow through. They wanted to see three straight up sessions inclusive of Wednesday. When it did not happen, Friday they were back at it saying there was no follow through and that the rally Wednesday was just setting up for another disappointing downside move. Maybe they are right, but follow through is really something a bit different.
Thursday we mentioned the problem with huge point moves: they tend to flameout, running out of fuel early and then when the short sellers move in the rally has shot its bullets and is overrun. The best action you can see is the short covering rally to get things going, then some quiet trade, basically holding steady on light volume, even moving back lower over a few sessions. Then after that first round of short covering is digested, if the time is right and buyers are willing, there will be another big rally. That one usually lasts 2 to 3 days as the long term buyers run in and start buying stocks. Volume jumps up as does the A/D line. It is that delayed follow through that sets the stage for a real rally higher.
In October 1998 and then in October 1999, that is precisely how the moves off the lows came with large rallies resulting. In January 2001 the Fed cut rates a first time. The market shot higher that day but then edged back the next three sessions on lower volume before racing up on a 550 point Nasdaq move. The same commentators were lamenting the lack of follow through on those sessions, but we were saying that the action was actually very good after the huge move on the Fed rate cut.
In April 2001 the indexes careened lower again after the January rally died. After hitting lows and reversing, there was a massive 146 point gain on the Nasdaq. The next two sessions it backed off, moving laterally on lower volume. Over the next 1.5 months the Nasdaq rallied 578 points before it peaked out and started the slide into the late summer.
The follow through comes after the initial rush to cover shorts and after that first big move has been digested. It can be 2 to 3 straight up sessions at that point. Indeed, that is what we want to see as that shows us the final shorts are clearing out and long term money is moving in. Thus, we are not despairing over how the indexes finished the week. To us, they did more or less what they should have done if there is going to be a chance at the Wednesday reversal having any upside potential after those sentiment indicators set the stage.
Still a lot of shorts out there.
Wednesday was a massive short covering session as NYSE volume shot to all-time highs. Breadth was very narrow. Definitely a lot of shorts were covering. Talking with a lot of floor traders and some hedge fund folks, however, there are still a lot of shorts uncovered, expecting a rollover at the near term moving averages. If buyers do come in early this week and start moving the indexes over the 10 day MVA and higher, the shorts will start to cover the remaining positions. That could lead to some big upside.
Still many hurdles.
Sentiment was high and there was some massive volume on the NYSE heading into and following the Wednesday action. Still there are pitfalls all around. The obvious is the continuing downtrend in the bear market with just another short covering rally last week. Many of these have made the play but most have been shot down.
Then there is pattern after pattern that is right at near term resistance. We have been looking at stocks the past two sessions showing doji’s at resistance and needing just a push to send them lower. The Dow, S&P 500, 400, and 600 are all just below their 10 day MVA, making the move up to that point the last two sessions on lower volume. That is a classic recipe for a resumption of the downtrend.
THE MARKET
So we have a market that has sold as intensely from a volume, price, and sentiment perspective as any since 1987, and the selling crescendo last week was impressive. Not every possible indicator reached an extreme, but the ones we watch are all in the ballpark, and there was a huge point and volume rally Wednesday. The indexes did not immediately give it up after the rally, showing a decent lateral move.
For now, moral victories. Have to see the buyers actually come back to the market this week.
Sentiment Indicators
VIX: 40.44; -4.21. After giving the highest close since 1987 on Tuesday and then running to 56.74 intraday on Wednesday (just off the September 2001 high at 57.31), volatility is falling as the market steadied the past two sessions. It gave a good enough signal; as always we wanted more, but it was strong enough.
VXN: 69.02; -0.46. Nasdaq 100 volatility did not have the drop off. Thursday’s selling drove it higher, and it hit an intraday peak since September 2001 on Friday’s high (71.51) before it edged lower. Not even as high volatility in March 2000. This is one we would have liked to see get higher.
Put/Call Ratio (CBOE): 0.70; -0.06. Not a lot of put activity, but it has maintained itself at the high end of the range. This is the lowest close in awhile.
Nasdaq
Tested the bottom of the March downtrend channel and modestly rallied. Nothing special in and of itself, but not bad in the bigger picture.
Stats: +22.04 points (+1.78%) to close at 1262.12
Volume: 1.704B (-27.46%). Back below average on the gain. No accumulation on the move up. About the best for upside positions was lack of distribution.
Up Volume: 1.12B (+786M)
Down Volume: 566M (-1.217B)
A/D and Hi/Lo: Advancers led 1.32 to 1
Previous Session: Decliners led 1.23 to 1
New Highs: 18 (+9)
New Lows: 331 (-89). After a couple of big 400+ sessions new lows started to fade.
The Chart: (Click to view the chart)
Tapped at the bottom channel line of the March downtrend on the low (1234.46) and then worked its way higher, avoiding a second straight selloff, avoiding distribution, and holding well above the Wednesday low. If you are looking for a nice lateral move to consolidate gains, the Friday recovery on light volume was what you were looking for. On the other side of the coin, it was a just another low volume rise after another attempt at a reversal in a continuing downtrend with resistance at 1275, the 10 day MVA, the 18 day MVA, etc.
Dow/NYSE
Managed to avoid a selloff after the doji Thursday. It did, however, once again brush the 10 day MVA on the high as volume backed off. There appears to be some more selling in the immediate future.
Stats: +78.08 points (+0.95%) to close at 8264.39
Volume: 1.787B (-26.32%). Volume tanked after all that excitement earlier in the week, but it was still above average even with a 25%+ drop. That is how strong the volume was earlier in the week.
Up Volume: 992M (-5M)
Down Volume: 787M (-615M)
A/D and Hi/Lo: Advancers led 1.56 to 1. Moderate improvement on a moderate improvement.
Previous Session: Advancers led 1.32 to 1
The Chart: (Click to view the chart)
A modest gain on very low volume that stopped at the 10 day MVA (8271.79). Again it was a late session rally that that salvaged the session, the third day in a row the action shifted from closing with late afternoon sell offs to late afternoon rallies. That is more bullish action but one would hardly conclude that the Dow was ready to race ahead: big reversal on high volume led by short covering, a doji Thursday on lower volume that touched the 10 day MVA, and then an even lower volume rise Friday that closed right at that resistance. That has usually been the recipe for further selling. Indeed we anticipate the Dow will sell some early in the week. The key will be whether it does what the Nasdaq did: pullback on lower volume and then hold at say 8000 and then rally with follow through numbers.
S&P 500:
After Thursday’s doji, the large caps rallied late again and closed at the session high. That happened to be just below the Thursday intraday high and right at some price resistance at 850. Lower volume on the move up after a major short covering rally. As we have said, this is very familiar action in the downtrend. We expect the S&P 500, as with the Dow, to sell back early in the week holding near 825 if it is going to attempt a follow through.
Stats: +14.15 points (+1.69%) to close at 852.84
NYSE Volume: 1.787B (-26.32%)
The Chart: (Click to view the chart)
THIS WEEK
The market is definitely poised to either resume the downtrend or try some more upside. The Dow and S&P 500 have risen to their 10 day MVA on lighter and lighter and lighter volume after a big short covering rally, a typical recipe for selling in this downtrend. The Nasdaq was looking relatively stronger before the selling hit it as well early in the week. Not a recipe for something new.
Yet, those sentiment indicators hit levels easily extreme enough to start a rally. The VIX hit a closing high not seen since 1987 (when it was really high); some safe haven sectors were finally torn down to mingle with the previously mangled; NYSE volume clipped Nasdaq volume three straight sessions; new lows exploded to the downside; decliners crushed advancers; the Dow shot below its September 2001 lows; bears eclipsed bulls for the second consecutive week; corporate executives were hauled off in handcuffs; Business Week put the ‘angry’ bear on the cover; Congress railroaded through the first corporate ‘reform’ bill it could get its grubby hands on; IBD implied that things were different this time. Hell, on CNBC they were looking to the stars for guidance. Interestingly, the stars say there is a bottom at hand.
Thus we are anticipating that the Dow and S&P will sell down a bit early in the week, but we also anticipate the selling to be cut short and a rally to ensue. We won’t believe it until we see it, but we do anticipate one coming and thus we are looking at upside positions with renewed interest. It may take a day or two for them to be ready (some early week selling), but then we look for that move higher. And for longer term positions it will take even longer for them to develop off of this heavy selling. We may be way off base; after all the market is still in a downtrend and until it is broken, we don’t try to fix it. We just see a lot of factors coming together, including a re-emergence of some small cap stocks.
If we are correct, will this be the bottom everyone is wondering about? There is a lot of disbelief out there right now. Just as everyone was conditioned to believe each dip was a buying opportunity, now everyone (traders included) believe every rally is a false rally and something to sell into. That goes for the average investor as well as the floor trader. Problem is, markets cannot go up or down forever even if the overall trend stays in tact. The action at the end of the week along with all of the other factors are flashing some sort of rally.
As for whether it is the bottom, it may be the start of the last part of the bottom. Mid to late summer is a bad time for the market to actually form a bottom. It has rarely done it in history. What we anticipate is a rally starting some point this week. That rally will take the market up 20% to 25% or so through August, and then it starts to sell back in September and October. At that point it may actually bottom.
May. For that we will have to wait and see. Even the current strong downtrend has not been broken and we are talking about ultimate bottoms. It has to rally next week, something that is hardly in the bank. On top of that there need to be some good patterns. While we are starting to see some double bottoms form, good patterns are not that easy to come by. We have to be very patient here and let the play and the market develop and show us what their intentions are.
Support and Resistance
Nasdaq: Closed at 1262.12
- Resistance: The March and May down trendlines at 1274. The 10 day MVA (1301.29) and the 18 day MVA (1339.88). 1357.09 is the October 1998 bear market low. Then 1418, the interim test after the September low. After that is the 50 day MVA (1457.65) and the second March down trendline at 1466. That is followed by 1500.
- Support: The bottom of the March downtrend channel (1210). After that, 1190 to 1200. There is some support right above 1100, but to wipe away the gains from 1995 when it rally started a ballistic incline, you look more at 1,000. That is getting way out there, however, and as we said, much fuzzier.
S&P 500: Closed at 852.84
- Resistance: Then 855 and 850 from the October 1997 low and Q2 1997. The 10 day MVA (861.97). The 18 day MVA (891.30) followed by some resistance at 900. The lowest bottom channel line of the March downtrend at 900. The predominant bottom channel line from the March downtrend at 928. The March down trendline at 958. The 50 day MVA (965.47).
- Support: January down trendline at 816. Recent low at 775 still needs to hold if this rally is to live. Then 750 to 760 with an intraday touch to 730.
Dow: Closed at 8264.39
- Resistance: The 10 day MVA (8271.79). 8400 to 8500 is some resistance, backed up by the 18 day MVA (8499.89). The bottom of the channel of the March downtrend at 8675, and some resistance at 9000. The March down trendline at 9080. Then the 50 day MVA (9090.78). After that price resistance at 9250 and then 9500.
- Support: The September closing low is 8235.81 is possible. 8062, the September 2001 intraday low looks like a good point to hold above on some early week selling. The October 1998 lows are at 7400 and 7467, and they held Wednesday. After that is 7000, some 1997 lows and highs.
Economic Calendar
7-30-02
- Consumer confidence, July (10:00): 102.0 expected, 106.4 prior.
7-31-02
- GDP, Q2 (8:30): 2.3% expected, 6.1% prior.
- Chicago PMI, July (10:00): 56.5 expected, 58.2 prior.
- Fed Beige Book (2:00)
8-1-02
- Auto and Truck sales, July.
- Initial jobless claims (8:30): 362K prior.
- Construction spending, June (10:00): 0.2% expected, prior -0.7%
- ISM index, July (10:00): 55.0 expected, 56.2 prior.
8-2-02
- Non-farm payrolls, July (8:30): 55K, exepcted, 36K prior.
- Unemployment rate, July (8:30): 5.9%, expected, 5/9% prior.
- Hourly earnings, July (8:30): 0.2% expected, 0.4% prior.
- Average workweek, July (8:30): 34.3 expected, 34.3 prior.
- Personal income, June (8:30): 0.5% expected. 0.3% prior.
- Personal spending, June (8:30): 0.6% expected, -0.1% prior.
- Factory Orders, June (8:30): -2.2% expected, 0.5% prior.
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SUBSCRIBER QUESTIONS
Q: All of your entry points for trades appear to be volume dependent, so even if the price hits a target you would not necessarily enter the trade if the volume didn't stack up. My question is that your entry volume may be hit by the close but by this time the target price is long in the distance and so have we missed our opportunity?
Please can you explain how to enter your trades at the target intraday with your volume expectations being met.
A: This is always the conundrum we have in taking positions. A lot of advisors say buy at ‘x’ price, but if it does not make a strong volume move, the play can crap out. Volume is always a key in stock moves up or down. It lets us know if there is a lot of interest in the move. We want that wave of buying or selling to carry the stock for us.
That said we also know that in the first hour or two it is hard to gauge what the volume for the session will be. It can start heavy then taper; it can start light and then build. That is why we love to take positions later in the session so we can get a really good idea as to how strong the move is. As you pointed out, however, if a stock is moving early it is not always simple to tell. If volume is already hitting a solid percentage of the target, it is a pretty safe bet. If not, then you have to either wait and see if it tests the move after an early surge (often the case) or go ahead and take some action. One thing that we do is take a partial position early if it is making the move we want. Then we check back later, and if it tests that move and has some good volume we can add to the position. We also do that at the close, checking on the volume. If the stock does not have the volume, that does not mean we sell out, just watch closely and keep our sell point pulled up tighter. It can always have more volume flow in the next session.
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