Wednesday, February 4, 2004
Issue Contents:
| 08:23 | Good Morning The day ahead. |
| 08:50 | Daily Swing Trade Today's stock setups. |
| 10:26 | Economic Data Summary of key releases. |
| 12:54 | AEP, Daily Chart Stock survey. |
| 12:59 | AIG, Daily Chart Stock survey. |
| 13:03 | ALL, Monthly Chart Stock survey. |
| 13:09 | ALTR, Weekly Chart Stock survey. |
| 14:00 | AMAT, Daily Chart Stock survey. |
| 14:11 | APCC, Daily Chart Stock Survey. |
| 14:26 | Going to Extremes Contrary opinion. |
| 16:16 | Active Trader Transcript Real time forum log. |
Well, well, it was totally predictable that as earnings season wound down, there would be less and less reasons to hold on to stocks purchased in anticipation of ever-better news.
As the risks began tilting toward the downside, first there was noticeable erosion in price, and now, between the change in pose of the FOMC and Cisco's earnings as excuses to press the sell button, we are about to see if a major top is in place in the broad stock indices.
I thank goodness everyday that we trade on technicals. Imagine what an investor would do, when faced with the tale of two newspapers?
(WSJ.com) - Cisco reported its strongest revenue growth in three years, as sales surged 15% to $5.4 billion in its fiscal second quarter. But the computer-networking equipment company said the rebound in technology spending remains tentative.
NEW YORK (Reuters) - U.S. stocks were poised to fall at the open on Wednesday after a disappointing earnings report from technology bellwether Cisco Systems Inc. cast a pall over the market.
"It's going to open down hard," said Tom Schrader, managing director of U.S. equity trading at Legg Mason Wood Walker. "I think it's primarily due to Cisco. It's got the Nasdaq world shaken."
Cisco, the world's largest maker of equipment that directs Internet traffic, posted a lower quarterly profit after an accounting charge after the closing bell on Tuesday, but it said sales rose more than expected as corporate customers boosted technology spending.
Lower markets in Europe and overnight in Japan were also cause for concern, Schrader said.
"To me, a lot of signals are going off," he said. "It's probably not a bad time to head to the exits."
Chartwise, as far as CSCO is concerned, it already gave warning when it failed on the test of top on January 27, and now, on the big dip to the 50-day MA below, we'll see what happens.
This is what we had to say along the way:
(January 26) - CSCO closed the gap, and now, we can peg resistance at 28.34, the point of breakdown from last Friday. It's still trading above the 20-day EMA, so we'll see if one last group of buyers come in for this one.
(January 27) - Yesterday, we identified CSCO, ORCL, ATML and QCOM as buy setups on a swing trade basis.
If you are long any of these stocks, your stop loss should be moved up to an area around yesterday's low as we see if these can go up one more day today.
Again, the initial upside target is a test of the swing high where the pullback started, but there is no guarantee that it can actually get there. If you own it now, you're interested in defending against a lower high that forms on a test of top that is followed by a reversal to the downside.
That's all you have to do today -- ensure that your capital is protected, and be on the lookout for an elegant exit.
Yesterday, we set up the short on the Dow Industrials and the S&P 500 Index on a swing trade basis. Although the triggers were not hit during the day, our analysis has not changed. The swing trades can be done on the $INDU ($DJX puts), $SPX ($SPX puts), DIA (or DIA puts) or SPY.
In fact, the markets traded in an extremely narrow range to form a doji, and I'm sure it must have been what traders call an NR7 day, the narrowest trading range day out of the last seven. They are looking for breakout conditions today, and we'll see if they can capitalize on the CSCO catalyst and take out last Thursday's low.
Since the market is poised to often gap down here, traders will be forced to initiate any potential swing trade on an intraday basis. Good thing I wrote the instructions just in time! If you are a new subscriber, don't forget that we have a number of articles in the Knowledge Base on swing trading principles.
When I surveyed the stocks earlier in the week, a number of them were already in what I would call full scale reversals. For example, AMZN breached a big swing low on the weekly chart in yesterday's trading, and is now sitting on that "last stop", the 200-day MA.
A number of the stocks that investors fled to safety such as GE, have formed that telltale head and shoulders top on the daily charts. While it is a tiny one, I'll admit, it doesn't change the fact that it's sitting there for all to see. Will they come back for one last dip, or will they get pulled down by the weight of the market? This is about the last question we have here. Since there has been so much commonality in the market, we might as well trade entire indices instead of trying to pick one stock here or there at this time.
MBA Purchase Applications 444.0
(Econoday.com) - The Mortgage Bankers purchase index slipped 1.7 percent to 444.0 in the Jan. 30 week, still holding at high levels and indicating continued strength in the nation's housing market. The refinancing index also slipped in the week, down 1.4 percent at 3,250.6 and continuing to indicate steady activity. Thirty-year mortgage rates edged higher in the week (about 4 basis points to 5.68 percent according to Freddie Mac).
ISM Non-Manufacturing Survey 65.7%
(Econoday.com) - The business activity index from the ISM non-manufacturing survey jumped nearly 8 percentage points in January to 65.7 from December's level of 58 percent. This was significantly higher than expected and should bode well for the equity markets, although it could be considered negative news for the bond market since it is showing strength in the economy.
Among the other components in the survey, new orders accelerated to 64.9 in January from 59.5 in December and supplier deliveries increased from 52 in December to 56.5 in January. Other components remained well above the 50 percent mark, but dipped slightly from the December pace. These include: employment, prices, backlog of orders, and inventory sentiment.
Factory Orders +1.1%
(Econoday.com) - Factory orders rose 1.1 percent in December, significantly higher than expected by market players due not only to an upward revision in durable goods orders (+0.3 percent) but also to a strong 2 percent rise in nondurable goods orders. The goods news on factory orders doesn't stop there -- November orders were revised up to show a smaller decline than previously estimated. While nondefense capital goods orders rose 0.8 percent for the month; defense capital goods rose 1 percent. Aircraft and parts were a major boost to factory orders in December. While new orders for semiconductors are no longer part of the report, shipments for semiconductors declined 3.8 percent in December after rising only 0.3 percent in Noember. These remain a weak spot. Factory shipments rose 1.5 percent while were unchanged and unfilled orders rose 0.4 percent.
More to come...
Here is a good example of a harami pattern, with the one big up day and now a small range day. Notice how good it looks but the ADX on the daily chart is 68, and this sets up a potential Extreme ADX Reversal.
On Monday morning before the open, we detected a classic bull flag on this timeframe, backing into the 20-day EMA.
As of Monday after the close, AIG hit both upside targets, and is not on a test of top on the daily and weekly charts.
ALL has reached an important upside target. We know that this area is where sellers showed up before, and might again if it cannot punch through resistance.
ALTR failed on a test of top in the $26 area, and is now closing in one the last swing low. Note the 200-day moving average is not that far below.
Big triangle identified on AMAT was broken and now, on the bounce, we will be watching for resistance overhead between the backside of the broken lower edge and the 20-day EMA. Watching for a pennant or a classic bear flag here first.
APCC is another one where there is a potential head and shoulders top here as it closes in on the neckline, which is just above the 50-day MA below.
by Teresa Lo
I remember when my daughter used to come home from kindergarten and play "backwards day". Yes would be no, while no would be yes. I guess there is also a market version of this when the trend reaches an extreme, and so I'll share these gems with you because they reflect the change in psychology in the sentiment cycle so beautifully.
January 29, 2004: Market Sentiment Near a Top
Self-proclaimed Market Guru:
Good Morning all. While it took the FED to get the markets to pullback, I was already looking for that same event to occur 1-2 weeks ago.I want you all to be ready to get nicely long on this expected pullback..we are setting up to buy and hold for position trades into April.
Forget all the noise out there, the gurus and wall street pundits arealways wrong at these times. We needed to "re set" the charts for the next best move up.
Rates will not go up for the foreseeable future and once the change of wording is digested lookout. There's a ton of sideline cash out there ready to buy stocks on sale...
My people will be in the right sectors and right stocks well ahead of the maddening crowd...
Be brave and relax...this is going to be real pretty.
February 21, 2003: Market Sentiment at the Low
Subscriber: Teresa I've been reading your newsletter now for several weeks. If you recall, we had a difference of opinion in Jan when you said there were no sellers and I said there were no buyers - the ensuing action proved that I was right about that, because demand collapsed and we got the natural test of 800 support. I managed to catch the whole move from Jan 13th to Feb 13th because I anticipated the mainstream was already long.
Teresa: Actually, I think we correctly identified that wedge at the end of December, and we certainly didn't tell people to buy or anything like that. Remember the Ralph Acampora spoof that I did?
Subscriber: So now, I think you're wrong about the next "pain trade" - everyone is still ALREADY long, there are very few unhedged shorts. Too many people think the market will blast higher on expectations of a quick victory in Iraq - all that does is set up disappointment. Everyone bought in early Dec and early Jan expecting the Oct lows to hold on a test. Everyone is counting on these lows as concrete
So the pain trade is that the October lows come out quickly, not that we go back to 954 SP. I expect it go lower in the next few weeks after this consolidation is over (by end of Feb?), because sentiment is still too bullish, fund redemptions are just starting, and fund managers have no cash reserves to meet the large redemptions they're going to get when the market breaks SP760. So it's going much lower IMHO, prob 700 won't hold even.
Teresa: The people I talk to are mostly bearish and the market is going down, so I think it's good to know the surprise direction. But I guess the point is that you think that down would be a surprise rather than up.
Subscriber: In any event, it would be useful for the reader to hear from you not the various what if? scenarios, but where the "uncle" or pivot points should be, to determine the direction of the next wave in advance, and to catch the meat of the move . So what I'd like to know on a daily basis what the "early warning" points would be in both directions, and I don't mean that we have to hold 805 or get above 905. Something closer to where we are now. Anyway, I still want to make the point that, it would be helpful to know in advance the pivot points for a change in trend.
Teresa: Yes, I'm always thinking diabolically, what will kill 'em all. I think the Conquer the Crash people are not going to do anything, they are BIG PICTURE Dow at 400 position traders...so they are going to go big or go home with nothing.
Subscriber: Those Prechter devotee people are fringe players, and by definition they are in the minority. they don't control much money, and can't affect the markets.
Teresa: Maybe so, but I think the market strategists for the big firms expect it to go down for the count too. Did you hear Glen tell us about Louise Yamada's analysis last week? Expects new lows - advising institutional clients to get out/short - and so does a number of the big hedge fund people, most notably that guy who was on Wall Street week that I wrote about a few weeks back...this is why I think it's going to be a very interesting turn, potentially, since on the monthly chart, it's a big test of swing low.
Subscriber: The other Major point is, as a bear market gets into the second half, people will naturally get more bearish as they get in gear with the trend. So you can't use them as contrary indicators anymore. Otherwise, how would we make the ultimate bear market bottom (which is when bears predominate and disbelieve the lows are in until well into the new bull)?
All these sell-side people who are appearing bearish are just closet bulls waiting for the next low, whereupon they will once again proclaim a new bull market in March. It never ends the way we have it now. The sucker move is that this appears on a bar chart to be a tested low of October - but it isn't. At real true bottoms institutions have at least 10-12% cash.Teresa: Well maybe I don't know anything...but I think that you would agree that the surprise move would be up.
Subscriber: I totally disagree. Every big fund and all retail investors are already positioned long. There are very very few naked shorts - the majority of NYSE shorts are offset by hybrid bond longs. most bearish hedge funds are 20-30% short here at best.
The only way to trap the majority is when the October lows come out - and they will. How can we make a true bottom when households own more stock now than they did even in 2000? It's impossible that we have seen the bear market lows yet - and since this is a minority view, the failures of support will keep coming until most investors finally give up. Which is why secular bears take so long to educate the masses. At the end of this bear it will be like every other - the public will have already sold (they haven't even started yet); the public will hate stocks and they prob. will prefer cash for an entire generation more. We're only 1/2 way into this bear market. The next swing low will come around 680-695 SP, probably in the next 4-6 weeks.
Real time forum log.
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