All posts by Tate Dwinnell

Industry Spotlight

Homebuilders Hanging On.. Barely

Leave a comment

On February 23rd, Robert Toll, the CEO of Toll Brothers defiantly declared on CNBC after reporting blowout earnings that "shorts would get crushed" (it should be noted that the Robert cashed in 110 million just 2 days following – in fairness he cashed in the same amount two months earlier so could be part of a sell program).  Since that day, shorts have been anything but crushed.. and are on the verge of racking up more gains if key support levels can’t hold.  The stock has been digesting recent losses and consolidating in a tight pattern below support of the 50 day moving average.  Based on the deteriorating technicals, its highly likely the consolidation will give way to more selling and and provide a clear short entry.

Taking a look at the Housing Index, it too is hanging on to the next level of support around 475 after slipping below the 50 day moving average.  Its clearly finding resistance here and I wouldn’t expect 475 to hold either.  Next stop – 450.

Stocks of a few other homebuilders show similar scenarios.. barely clinging to support.  KB Homes still has support of the 50 day moving average, but I can’t imaging it hold there for much longer.  Support levels on the way down tend to occur in 10’s and will provide clues to the health of the stock.

The chart of Hovanian looks almost identical to the chart of the housing index – below support of the 50 day moving average, but holding at previous areas of consolidation and psychological support at around 50.  A drop below this support area would signal that it’s headed for 45, which is the next area of support to watch.  Note the heavy institutional selling throughout 2005.

State of the Stock Market

Equities Oil Slicked, Slips Below Support

Leave a comment

Just when you think oil can’t go any higher.. it just goes higher.  60 a barrel anyone?  It’s hard to believe that the price of oil was just $10/barrel in January ’99 and $17/barrel at the beginning of ’02.  Unbelievable.  Since bouncing off support around 45/barrel in early February, oil has traded higher in 21 of the past 27 trading days.  The rapid ascent has without a doubt kept a lid on any major market rally.  Yesterday, another spike in oil along with GM’s poor report sent stocks into a tailspin, sending both the Dow and S&P below critical support levels.

You see the Dow slipping below critical support of its upward trend line as well as the 50 day moving average.  The next likely level of support is the 10,500 range.  If the market can get a bounce from short term oversold conditions, it will be interesting to see how it responds to these new resistance areas.  It will provide more clues to market strength.  Now is certainly not the time to be making big bets on the long side.  Yesterday’s move indicates that opportunities on the short side probably have a much greater chance of success.

The scenario is nearly identical for the S&P.  Next level of support to keep an eye on is around 1175

The Nasdaq continues to stay submerged below resistance and continues to show no signs of life.  Key support to watch in the coming days is the area where the 200 day moving average and psychological support of 2000 converge.

State of the Stock Market

No Follow Through

Leave a comment

The following is a portion of the report I sent to free members of SelfInvestors.com on Sunday (if you’d like to receive a market report like this each Sunday you may sign up on the home page by following the link).  I’m posting the original report and an update section to reflect the market action over the past 3 days.

Another choppy week ultimately finished with a surge above three and a half year highs on news of a better than expected employment report. It’s the move we’ve all been waiting for and was an important milestone for both the Dow and the S&P. You would think that a surge in volume would accompany a move like this, but it wasn’t the case. Buy volume remained surprisingly weak on Friday across all indices, adding skepticism to the breakout move. In addition, the Nasdaq continues to struggle below major resistance levels and isn’t showing any many signs of conquering those levels anytime soon. Clearly, the market continues to be led by commodity based stocks… tech, finance and medical just aren’t participating with any significance. In order for this breakout to hold, there has to be participation from other sectors other than commodities. Strength in retail towards the end of the week as well as an improving picture for semiconductors is a start, but until the Nasdaq bursts out of its depressed state, it’s best to remain a bit cautious. All eyes will certainly be on the next big milestone .. Dow 11,000, which is would provide a nice headline for the major news outlet and perhaps prod the bull into a final run.

Here’s a look at the Nasdaq, which has two major resistance levels to contend with in the coming days. The first is at the 50 day moving average , where it was turned away on Wednesday. The second point of resistance is around 2100, an area it has had trouble with in the past. It will be very interesting to see if we get any follow through from the market early next week and if so, how will the Nasdaq handle these resistance levels. Next week should reveal some important clues as to the strength of the market.

You see that the S&P has cleared 3.5 year highs, but there have been no days of accumulation (institutional buying) in the last several days. The market can’t stand up for very long without the support of institutions.

UPDATE

The market has in fact revealed some important clues as to its strength… and it’s indicating the rally is in trouble.  What began as an unconvincing break to all time highs in the Dow and S&P, followed by a break above resistance of the 50 day moving average in the Nasdaq has quickly faded, bringing us once again to a point of uncertainty.  In the last few months the foundation for the market has been commodities, which in the past couple days have shown signs of cracking.  Oil sold off hard at the end of the day today and steel stocks have been hit in the last two.   If the market is going to be able to pick itself up and make charge ahead to new highs, there must be leadership in other areas.  Retail and semis have shown signs of life, but it may not be enough.  We shall see.   With the bull market that began in 2002, nearing the end of a run it will be more important than ever to keep close tabs on price and volume action.  I still think the market has enough gas for one last run.

Here a look at the latest charts of the Naz and S&P:

The Nasdaq showed signs of hope on Monday by surging above the first level of resistance at the 50 day moving average, but was quickly turned away at 2100, which has proved to be a formidable area of resistance since the beginning of the year.

Looks like the S&P will continue to drop and test that support area where the short term term trend line and the 50 day moving average converge.

State of the Stock Market

Waiting For Confirmation

Leave a comment

(The following is a small portion of the free market report sent to members of SelfInvestors.com..  if you’d like to receive the free report via email each weekend, you may use the sign up form on the home page)

The market hasn’t provided many additional clues in the past week as to its future direction, although the distribution day on Thursday adds a bit of skepticism.  Until the Dow and S&P can clear those 3.5 year highs and the Nasdaq can surge above resistance of the 50 day moving average, it’s best to retain a somewhat cautious approach.  Continuing to keep 50% in cash is a wise strategy at this point.  With earnings season winding down, the market will focus its attention on interest rates and inflation concerns.. which all of a sudden became a big issue with the release Friday of an unexpected jump in the core Producer Price Index to a level not seen since 1996!  The market remains resilient though.  Even with the jump in the inflation  number and the continued rise in oil, the market held its own on Friday and halted the downward momentum of Thursday’s sell off.  How the market holds up next week will be interesting.  I still believe that the Nasdaq will retest the lows of this recent consolidation somewhere in the 2000 range.  Combine the retreat from resistance of the 50 day moving average (which was discussed in the last report) with Thursday’s day of distribution (institutional selling) and the scenario looks highly likely.  As for the S&P and Dow, they continue to hold above their support levels of the 50 day moving average (10650 for the Dow, 1195 for the S&P.. it’s close to that now).  Those are key levels to watch.

Industry Spotlight

Bull in Commodities & Basic Materials Continues..

1 Comment

While the rest of the market struggles to get off the ground (ie tech and finance) – oil, metals and basic materials soar to new heights.  In the market report posted January 26th (sent to free members of SelfInvestors.com) I highlighted the oil industry as several stocks began to break out of consolidation, which proved to be the beginning of another major oil advance.  A few top rated SelfInvestors.com  oil stocks highlighted in the report have catapulted to gains of more than 30% since then! (specifically GDP and TGA).  Well, now steel stocks are beginning to make that same kind of move.  At the end of last week, several leading steel companies made tremendous moves, some with record buy volume indicating institutions are jumping in again with both feet.  You can see the thinking behind the purchase of Metal Management (MTLM) in a previous post.

The surge in metals doesn’t end with steel.  Copper, gold and silver are showing big buy interest in the last 10 days after struggling since the beginning of this year.  Below is a chart of the Gold and Silver Index, which has managed to clear both major sources of resistance (the 50 and 200 day moving averages) in the last several days.

Now lets take a look at a chart of the new gold ETF, streetTRACKS Gold Trust Shares (GLD).  As I’ve mentioned before, studying the movements of widely followed ETF’s gives you insight into the movements of industries that you can’t get with index charts, such as the Philadelphia Indices charts.  Reason being that the ETFs are traded like individual stocks and provide volume levels.  Volume levels reveal the conviction behind the move.. the greater the volume, the greater the conviction.

It shouldn’t come as a major surprise that the last big move in gold topped soon after the new gold ETF became available near the end of November.  It was the subject of much conversation on CNBC and it brought the idea of purchasing gold stock into the comfort zone of the average investor.  You know when the average investor begins to purchase anything in major quantities, the end of the run is near.. at least temporarily.  After a big shakeout, gold looks poised for another run.  The break above resistance of the downward trend line in black with good buy volume indicates that a bottom may have been found at 41.  I would expect some consolidation in the near term as it battles resistance of the 50 day moving average, but a sustained move up looks promising at this point.

The following is a screenshot of the Top Industries table in the SelfInvestors.com Premium area.  It’s a table that provides a quick look at top performing industries based on 10,20 and 30 day performance (only 10 and 20 are shown here).  The number in parenthesis indicate the number of stocks currently in the Breakout Tracker (breakouts and near breakouts).  You can see it’s been all about oil, metals and chemicals recently.

Blogroll

Buying Stocks: A Look at Intraday Action (Gap Ups & Downs & All Around)

4 Comments

How’s that for a confusing, convoluted title… hopefully this post will make more sense!

Much of the discussion here has revolved around price and volume action on a daily or weekly basis, but what about when it comes to actually pulling the trigger on a buy or sell.  In other words, what are some of the things to look for on an intraday chart (I use the 5 minute) that will help us to achieve the greatest probability of success.  I say "probability of success" because nothing is certain right?  First of all, there are certain pit falls to absolutely avoid which over time will improve your results dramatically.  It’s actually quite simple.  AVOID TRADING in the first 30 minutes to an hour of the market open (of course there are exceptions which I’ll get into in  a bit – it wouldn’t be a rule without an exception!).  Why?  The first moments of the trading day are the most volatile and ruled by news events, amateur and/or retail trading, overnight orders and market maker manipulation.  With few shares traded at the open, it’s easy for a stock to swing wildly up or down at the open resulting in a gap up or down. 

Rule to trade by: Don’t buy or cover a gap up and don’t sell or short a gap down at the open (first 30 – 60 minutes of trading).  An exception to this rule would be a major news event announced.  If a company announces a formal SEC investigation is taking place, it is probably not in your best interest to ride it out for the first half hour.  You’ll most likely want to cut losses or lock in gains as quickly as possible… then go find the Tums and the aspirin.  Now, it’s important to point out that the opposite of the rule above can be applied to lock in profits or to initiate a new position.  For example, let’s say you’ve purchased a stock and the technicals are telling you it might be a good time to lock in profits.  Maybe the stock has reached an upper trend line and you’re already sitting on a 30% gain.  If the stock gaps up at the the open with a significant move, I’ll lock in profits in the first minutes of trading.  Conversely, if holding a short position and the stock gaps down to a major support area, it might offer a great chance to get out with nice profit at the open.  Using the opposite of the above rule to initiate a new position (ie. shorting on a gap up and/or buying on a gap down) should be used sparingly and with much caution.  A scenario where shorting on a gap up might be useful is if a stock has been hit with institutional selling and has plummeted below major support.  The selling subsides momentarily and the stock works its way back to that support area (which now acts as resistance).  One day the stock gaps up following some good news from a competitor, but hits resistance and retreats immediately.  It may offer a good chance at a short.  Very rarely, if ever, is it a good idea to make a long purchase on a gap down even if the stock bounces off support.  It’s much more of a gamble.

If you’re new to this stuff, reading it might make little sense.  This kind of discussion is best illustrated through the use of annotated charts (thankyou StockCharts.com for great charts!).  I’ll begin posting more intraday charts and lessons here at the blog to better illustrate these points.  For now let’s take a look at OMI Corp (OMM) which illustrates the bolded rule above well.  Below is the daily chart which represents trading up to the end of the trading day on February 14th.  This is a great looking base with nice price and volume action in the right side and declining sell volume in the handle.  It was a bit quick to form in the right side, but hey, no base is perfect.  This is certainly a stock that should have been on many watchlists for a possible breakout.

The following morning, the company announced earnings and beat Wall St. estimates.  The stock gapped up at the open on the news quickly rising to $20  a share.  Yes, the stock soared past the pivot and NO, you should not have jumped in at the point.  (Remember: don’t buy the gap up at the open even if the stock blows past its pivot point.)  Almost immediately, the stock reversed course on heavy volume and closed below the low point of the gap up within minutes.  Taking a look at the first half hour on the intraday chart of OMM below, you see that the stock peaked at 20.09 and reached a low of 19.50 in the first half hour.  These are the support and resistance areas you are concerned with on an intraday chart.  If the stock clearly finds support at the low point of the first half hour with declining sell volume, there is a good chance the breakout will hold (of course you’d want to confirm that by waiting for price and volume to begin to spike higher – i’ll have an example of this later).  In the case of OMM below, the breakout clearly failed at 11AM EST as the stock plummeted below the low of the first half hour with heavy volume, confirming that the gap up has failed.  This is not a breakout that should have been purchased. (click for larger image)

Let’s assume you had purchased the stock at the the open and held throughout the day.  Your hope has turned to frustration, but you’re still in the stock with less than an 8% loss.  What to do?  First of all, you want to remember the first half hour rule of no selling on a gap down in the first 30 minutes (unless of course the company has come out with catostrophic news and/or you’ve hit your max loss allowed level – I use 10% as an absolute max on the loss i’m willing to take, but my average loss is around 6%).  Next, you’d want to map out your exit strategy if the stock continues to slide.  You’ll want to look at the daily chart and ask yourself these questions:  Where on the chart is a 10% loss on my purchase? Where is the next possible support area? Take another look at the daily chart of OMM below. 

Clearly, the stock has massive downward momentum at its back (based on the magnitude of the reversal in terms of price and volume).  It should come as no surpise that the stock would most likely continue that downward momentum (at least according to Sir Isaac Newton..) in the first moments of trading the next day.  So, looking at the daily chart, how much room would you give the stock to run?  I have highlighted the area around 18 as an area I would be willing to let the stock run to if I were holding the position.  Why?  For one, whole numbers often serve as support and resistance .. and two, because the 20 day moving average is near by at 17.80 (the 20, 35, 50 and 200 day moving average are closely watched by many traders – the 50 and 200 being the most important).  Not to mention, that is where my max loss of 10% might kick in.  OK, so we’ve taken a look at the daily chart and we now have a game plan for the next day.  A plan keeps emotions of fear and greed from affecting your trading decisions.  Stick to it.  So let’s take a look at the intraday chart once again and see how the trade played out the following day. (click for larger image)

As expected, the stock continued its downward momentum the next morning right at the open.  It would have been difficult to watch the stock continue its slide at the open.  Fear may have set in at this point, but you’re holding firm and watching the support level you laid out yesterday.  You’re going to avoid selling in the first half hour as long as you haven’t accrued a 10% loss… The stock hits 18 and the selling subsides, giving way to a bounce.  On the intraday chart, notice that the second 5 min price bar is a reversal.  Reversals often indicate bottoms.. whether that be on a monthly, weekly, daily or intraday chart.  In fact all rules apply no matter what time frame you’re looking at (ie. support/resistance and price/volume movement).  Ok, so the bottom of that reversal is 18 and that does end up being the low point of the first half hour.  So, that is your support line.  If the stock drops below 18, that is your cue to exit the position.  However, the stock showed some resiliency by bouncing and never looking back.  Notice the high point of the first half hour is 18.50, which would be your intraday resistance level.  The stock manages to get above this area indicating decent strength (although buy volume is lacking) and you’re still holding the stock awaiting the next breakout attempt!  Which brings up another important tip: don’t ever give up on a stock if it fails the first breakout attempt.  If you had bought this stock at the top the morning of the 15th and then sold for a loss, it’s natural to be disgusted with the stock and forever erase the memory from mind.  But this is a mistake.  Some of the most powerful rallies fail once or twice before exploding to nice gains.  The daily chart below shows OMM as of the close today (Friday, the 18th).  With the failed breakout comes a new pivot point to watch.  Look for a break above 20.09 with heavy volume as a buying opportunity. .. and remember, no trading in the first half hour!

The previous discussion of OMM details an example of a gap up failing.  Let’s take a look at an example of a successful gap up breakout.  The stock highlighed below is Metal Management Inc. (MTLM) which was purchased for the SelfInvestors.com Model Portfolio yesterday.

You can see the gap up breakout with very heavy volume as institutions continue to clamor for the stock and steel stocks in general.  Let’s turn to an intraday 5 minute chart to get a closer look at the gap up breakout. (click for larger image)

Notice how the stock quickly gaps up past the pivot point (highlighted in orange).  But you’re not buying because you know better… right?  In this particular chart, you needed to give the stock an hour to give you a firm intraday support area.  In this case, it was the bottom of the gap up at 28.75.  After the wild volatility of the first 30 – 60 minutes, the trading quiets.  You’ll notice the selling volume begins to decrease and the price hovers around 29 for an hour or so.  Given the strength in steel stocks of late and the magnitude of buy volume over the past few weeks I can be reasonably assured that the breakout will be successful.  What I’m looking for at this point is a break out of this quiet consolidation as an opportunity to pull the trigger on a buy.  Some traders will wait until the stock clears the high of the gap up, the "intraday resistance" before entering a position.  In cases like this, where you have a leading stock in a hot industry, I’ll give the stock the benefit of the doubt and purchase at the first sign the breakout will be successful.  For me, that signal occurred at 29.30 as the stock made another move up with increasing buy volume.  Remember that bullish patterns in daily charts can apply to an intraday chart.  Notice the step pattern of quiet consolidation followed by a small surge in price all the way up through the high of the first hour of trade.  So far the breakout looks great.  The next level of resistance to watch is right around 30.  As mentioned before, major whole numbers such as 20, 25, 30, etc. serve as areas of resistance.  I would expect the stock to consolidate for a bit around the 30 level before resuming its advance.

There are quite a few details here that may be overwhelming, especially if you’re new to investing and/or technical analysis.  I’d be happy to answer any questions you may have.  Just drop me a line at support@selfinvestors.com.

State of the Stock Market

Good, But Not Great

Leave a comment

The market capped off another solid week, with an impressive advance Friday as weak jobs data temporarily alleviated fears that interest rates will rise rapidly.  On the surface, it looks like the market will shoot to the moon.  But the bulls better keep the champagne on ice for now.  While the S&P500 and DOW have cleared resistance of their 50 day moving averages, the Nasdaq continues to lag.  In addition, buy volume remains tepid.. at least for larger cap names.  Over the last several days there has been a clear divergence in buy interest between small caps and large caps.  Wasn’t this the year that large caps were supposed to lead?  So much for the opinions of highly paid market pundits.. they’ve been predicting the outperformance of large caps for quite some time.  The strength in small caps has been impressive, but buy volume will have to pick up in the major indices in order to declare an all out buy signal.  While it’s OK to initiate long positions at this time, do so with some caution.  Looking ahead to next week, the earnings report from Cisco on Tuesday will provide important insight into the strength of the tech sector and should be a catalyst for market movement. 

Best Strategy: consider being 50% long at this point and adding additional long positions if the Nasdaq confirms a buy signal (by clearing resistance of the 50 day moving average with heavy volume – see chart below)

Here’s a look at the charts of the major indices.. notice the increase in buy volume as you go from the Dow (big, blue chips) to the S&P600 (small caps).

Semis: Is Fourth Time a Charm?

The chart above is of the Semiconductors Holders Trust (SMH) which I prefer to the SOX index because it provides volume levels.  Notice the dramatic shift to buyers over the past 10 trading days, evidenced by the spike in buy volume and the decrease in sell volume.  On Friday, a spike above resistance of the 50 day moving average provided further confirmation of strength.  But the key will be the all important resistance level of the 200 day moving average, which it has failed to move above on 3 previous occasions.  Keep an eye on the semis this week.. a decisive move above that resistance level could provide a real boost for the Nasdaq and the tech sector.  Should that occur, keep an eye on Tessera Technologies (TSRA) which is currently the highest rated semiconductor stock in the Breakout Tracker (with a score of 55/60).  It looks poised to break out from recent consolidation.

Breakout Tracker Highlights

It was an outstanding week for breakouts last week both in terms of the number of breakouts (25) and the success of those breakouts (not one ended the week with a loss!)

  • The highest ranked breakout for the week (with a score of 53/60) was Cal Dive International (CDIS), which you may remember was highlighted in the oil sector report in last weeks Market Report (seen at SelfInvestors.com).  It ended the week with a 4% gain.
  • Top gainers include CTI Molecular Imaging (CTMI) – up 14% and Terra Nitrogen (TNH) up 10%.

Note: For more information on the ranking system used by SelfInvestors.com and the proprietary database of CANSLIM style stocks, please see this page: Breakout Tracker

State of the Stock Market

Zeroing In On A Bottom?

Leave a comment

First off, hats off to our troops and the brave people of Iraq who are providing inspiration to others in the Middle East.  Our troops must be proud.  Whether the news results in another forceful market rally is anyone’s guess at this point, although there is little doubt the market will open strong Monday morning.  While a sustained rally into the close on Monday would provide a signal to begin pursuing long positions, it should be met with caution.  Rarely do market corrections bounce back in a V like formation.  Corrections take time to sort out, often retesting the lows a second or third time before a rally can resume. 

Let’s take a look at the charts to get a look at where we’ve been and where we might be going.  Taking a look at the long term view of the Nasdaq, it’s clear that the area around 1980 – 2000 provides a critical level of support.  It’s an area of convergence of 3 major support levels: the psychological support level of 2000, the 200 day moving average around 1980 and the long term trend line which is also near 2000.  I believe we will hold above these levels, but if not, it could signal the end of the bull run.

A closer look at the Nasdaq.  In this view you get a better look at the short term downward trend line of this recent correction which has acted as a source of resistance.  For the rally to continue the Nasdaq will need to fight through this resistance level as well as resistance of the 50 day moving average.   Also notice that critical support area which was highlighted above in the longer term chart.