What Acampora said today, mostly talking about May/June lows;
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U.S. Stock Market Outlook
Near-Term
Tuesday was another very volatile and deceptive day—despite the fact that the DJIA ended up slightly, both the NASDAQ Composite and the Russell 2000 broke their respective ten month uptrends. This is a clear trend change and puts us all on watch that key support levels in individual stocks must be respected and they must hold in order to prevent further serious deterioration. In this regard, many internet stocks broke below their May/June lows (critical support areas)—this behavior is ushering in considerable investor nervousness and further downside potentials. Be very careful—avoid this sector until evidence is in place suggesting that an important low has been made. So far only major downtrends are seen in these stocks.
We are purposely leaving in the text of our Monday morning's near-term stock market outlook (directly below) because we want to make sure that our readers understand that most key market averages are definitely exhibiting signs of near term problems—loss of recent upside momentum will require a period of reparation. The unimpressive intraday rallies over the past several days suggest that we are not getting what we want. Expect more of the same frustrating behavior—stock selection is extremely important. Use strength to sell stocks that look technically unattractive. See our section entitled "Attractive Technical Stocks" and "Unattractive Technical Stocks".
The Dow and S&P 500 are still trading within their 5% to 10% trading ranges (taken from their respective 1999 highs)—this is normal activity but we caution that their May/June lows MUST hold or we will have to revert our trends from neutral to down. Stay tuned.
Our main job as technicians for Prudential Securities is, as we define it, to identify the market's major (primary) trend. In early July we extended the market's primary uptrend beyond our original target of Dow 11,500 to over 12,000. And during the first two weeks of July most of the important averages (Dow, S&P 500 and the NASDAQ Composite) made all time new highs. Even the big stocks, like Lucent, IBM and Microsoft scored all time new highs.
The second part of our job as technicians is to inform you whenever the primary trend has changed. Well, the second two weeks in July were quite different-the great earnings reports were just not good enough and many of the leaders, like LU, IBM and MSFT, were sold down dramatically. In just two weeks, the Dow lost 5.7% (or 645 intraday points), the S&P 500 lost 6.3% (or 90 intraday points) and the NASDAQ Composite fell 8.7% (or 250 intraday points).
Just a normal correction you say for these two averages? That's true! And it is also true that we can expect these types of normal corrections to occur at any time, for any number of reasons.
However, during this most recent decline the primary trends changed-the Dow and the S&P 500 both broke their respective 10 month uptrend last week. These primary uptrends began in early October 1998 when Greenspan dropped interest rates. The stock market is now putting us all "on-notice". "Watch me, it is saying. Watch me very carefully!"
We don't mind if the primary uptrend is broken a little bit-we would prefer that it didn't happen-but we can still live with it as long as it doesn't do more damage. The market must now contain its recent damage and it must repair this loss of momentum. And this is possible as long as the primary support levels remain intact.
The critical (primary) support levels now represent the May/June 1999 lows on most market averages and most individual stock chart patterns:
On the Dow, 10,334.42 is its June intraday low.
On the S&P 500, 1292.20 is its June intraday low.
On the NASDAQ Composite, 2340.00 is its May intraday low.
As of last Friday's close the Dow is 320 points (or 3%) away from its critical June low. The S&P 500 is 38 points (or 2.8%) away from its primary support registered in June and the NASDAQ Composite is 300 points (or 1.4%) away from its respective critical May support level.
If these three averages were to successfully retest their May/June lows in the days ahead and were to stabilize above these levels for a while, then they would be tracing out neutral trading ranges. From their recent all time intraday highs to their May/June lows they would be in respective ranges of 8.5% for the Dow, 9% for the S&P 500 and 18.5% for the NASDAQ Composite. We can live with this range bound market for a while until it repairs the damage that was inflicted upon it recently.
Today, we are going to give the stock market the benefit of the doubt-we are willing to wait for a successful retest and rebound off these primary support levels. Hence we are not changing any targets offered in early July. We are maintaining the same market opinion, except that we appreciate the need to stabilize for a while in order to repair the market's lost momentum.
Today, Wednesday, August 4th-the stock market and Ralph Acampora will both celebrate an important anniversary. It was on this day in 1998 that he turned from a long term bull into a "cyclical bear". That day the DJIA lost 299 points! We are sure that the media will remind us all of this event and will try to make some comparisons.
In the meantime, Ralph was part of a panel discussion on Tuesday, August 3rd. Portions of this meeting were covered by the media and will most likely be reported throughout the day. In anticipation of some "what if …" questions we presented our responses below. Interestingly enough, Ralph was not actually asked these questions but here they are anyway because they are important queries that should be addressed:
Questions: "What if the primary support levels are broken? And could we be in for another period like July/October 1998?"
Our answers: July 1999 is similar and also dissimilar to July 1998 in several important ways:
Similarities:
Breadth (Advance/Decline statistics) on the NYSE, AMEX and OTC markets are now below their respective May/June 1999 lows.
The Dow Utilities broke down last week.
Divergences abound especially between the DJIA and the DJTA.
There is still too much bullishness around as reflected in some of the sentiment indicators.
Leading stocks are now under selling pressure.
Dissimilarities:
In July 1998 we began seeing about 400 new 52 week lows per day. This July we only saw about 170 new 52 week lows per day.
During July 1998 we had no stocks to buy during the decline (we saw massive liquidation). Today we have stocks to buy-this is called rotation and it is a much more comfortable feeling.
During the summer of 1998 we had to deal with international concerns. This summer we have to deal with domestic concerns (interest rates).
Let us now give the reader our definition of corrections:
A normal correction is a market that falls somewhere between 5% to 10%.
A nasty correction is a market decline of somewhere between 10% to 15%.
A very nasty correction is a market sell off that carries into the 15% to 19.9% range.
A bear market is a decline of 20% or more.
These percent declines are from the market's averages' respective 1999 intraday highs.
Question: What if the critical support levels are broken?
Answer: On a strict trend following basis, any close below these critical support levels would, by definition, take the leading averages into major downtrends. We will never fight a primary trend. Such a downside reaction would give us reason to believe that we entered into a very nasty corrective phase. Like last summer, we will then push our Dow upside target(s) into next year. Last August, if you will recall, we pushed our Dow 10,000 target into 1999-if we have to, we will do the same this year. We will push the Dow 12000 + targets into the year 2000 if needed. Why would we do this? Simply because we are still long term bulls and any interruption (or very nasty correction) at this time is not considered terminal.
Here are the technical levels that we believe, if broken, will indicate further upside or downside momentum:
Dow Jones Industrial Average
Primary Support 10,471 (6/24/99)
Secondary Support 10,409 (6/1/99)
Primary Resistance NONE
Standard and Poors 500
Primary Support 1257.46 (3/23/99)
Secondary Support 1205.46 (1/13/99)
Primary Resistance NONE
Nasdaq Composite
Primary Support 2542.36 (6/26/99)
Secondary Support 2397.12 (6/14/99)
Primary Resistance None
Russell 2000
Primary Support 442.49 (06/25/99)
Secondary Support 431.37 (06/15/99)
Primary Resistance None
Source: Bridge Data Service
Intermediate Term
The last two weeks of July witnessed a sharp drop in price for many individual stocks. This loss of momentum has taken some of the steam out of the summer rally, at least for the short term. Yet despite this decline, we are still holding our targets of 12000+ for the DJIA this year. Only if the May/June lows in the DJIA and the S&P 500 fail to hold will we be forced to push these expectations into next year. Stay the course—but, concentrate on individual names and not the overall market.
Long-Term
Now that we are in the month of August, we can now start talking a little bit about next year—the year 2000! Yes, we expect interruptions between now and then; but once these concerns (interest rates, Y2K, etc.) are behind us, we think that next year (an election year) should be an overall positive one. |
