Today’s big white bar on strong volume was a follow-through day, confirming the rally that began last week (see the “Abandoned Baby Part Dux” post from 5/17/04). We blasted back above May’s range top around $35.5, shooting right through the 200-day and 20-day moving averages. The main black mark today was the volume, which should have been higher. Therefore, we have some stink on this thing. Still, the Cubes could run up to the top or tier range at $37 or so. Stocks and indexes could finish bases with nice handles and breakout, or we could fail at the top of the range and head back down. Personally, I won’t be chasing new long positions right here, although I did unwind some short positions today. I prefer a multi-day bout of fear and capitulation before getting seriously long again and the needles on my gauges just didn’t get there completely. We did get some mutual fund outflows when we touched what many consider extreme levels on some sentiment indicators, such as option volatilities, put/call ratios, A/D readings, and the number of new 52-week lows. We also got oil and gas prices splashed across the front pages. We will see! Gotta be fast if you want to trade this volatility!
Archive for May, 2004
As shown on this chart, the Nasdaq’s 20-day moving average has crossed below its 200-day moving average only three times in the last four years, the most recent being this week. You can see that in the past these crossovers have lead to tradable market declines. Of course, history doesn’t always repeat itself, but it often at least rhymes. Note: this chart shows the moving averages only so it’s easier to see the crossovers.
Only have time for a quick post today. As shown above, the Cubes — and many other stocks and indexes — gapped up at the open on bullish news from HPQ and some others, set the day’s highs and tested the 20-day EMA about an hour later, treaded water on light volume for a few hours, then turned tail around 2:00 and sold off hard into the close, basically ending at the day’s lows. Throw another red flag onto the pile. By the way, the Nasdaq closed below its 200-day EMA again after trying and failing to retake that level for the past days. I’m running out of red flags over here!
Today’s volume seems suspiciously light for an upside gap off of a possible reversal formation. At about 95 million shares, it was the lowest volume since 4/27/04 (circled on the chart). And today we also got a candle with a tallish upper shadow, at least relative to the trading range, which was tight. The same “low volume off the possible reversal formation and tallish upper shadow” thing happened last week… and the following day we undercut the lows (but put in a huge volume reversal candle). Both today’s and last week’s meek volume and candle contract with the upside gap off of the three day island formation that set the March lows (see chart). You see the nice pickup in volume and large white candle on that day? That is how a rally kicks off! We’ll see what happens over the next few days. Pop, pop or fizzle, fizzle?
Decisions determine destiny.
-George Patton, U.S. Army general
Exactly one week ago I posted about a doji candle and possible abandoned baby formation (circled). It materialized with the gap up open the next day, but the rally subsequently failed and undercut the doji lows two days later, only to close strong for a big upside reversal, launching another rally attempt. Today is a mixed signal: we undercut last week’s intraday lows but closed above them (good), and we closed below the 200-day EMA for the first time in over a year (bad). You would think the undercut and close below the 200-day EMA would put more fear into the market, but it did not (at least not authoritatively). For example, QQV and VXN took out the March highs, but VIX did not. The May 7th employment report looked a little extreme, but much of that was bonds, closed-ends, and preferred taking out their lows. That suggests that more fear may be necessary to cleanse things before much more than a snap-back rally can develop. So today’s doji and potential abandoned baby show hesitation to the downside, but the close below the 200-day EMA and fact that fear may not have spiked enough are important warnings for any bulls out there. This could be easily turn into a big-time volatile options-expiration week!
Well, on Wednesday Jack in the Box beat earnings and raised guidance, gapping up the next day only to sell off and close at the bottom of Wednesday’s and this week’s price range. Zooming out a little bit and looking at that big 5-point, high volume white candle five weeks ago raises the question, “Wha happen?” That’s when the company raised its guidance for the quarter and year. Since hitting that high JBX has retraced about 2/3 of the move, checking back to its 50-day moving average. Both the retracement and 50-day average can be support areas. However, though this weeks gravestone-looking, large upper shadow candle is a warning sign. The other times something like this occurred above the 10-week EMA are circled on the chart. You can see that on previous occasions the long upper shadow candles came after rallies and resulted in short-term correction. What’s different this time is that JBX has spent the past 6 weeks quietly correcting. I guess the point is that things could go either way, especially with the market in a volatile mood.
Now the Cubes are into their third week cruising below the 40-week (200-day) simple moving average, which is not a particularly healthy thing for them, or the market, to be doing. And check out the volume since the January 26th peak — you can see it’s been rising as the Cubes decline. And that the two highest volume weeks — last week and nine weeks ago — were to the downside. Although last week’s heavy volume failed to push the Cubes down much, suggesting that there’s been some support and/or short-covering coming into the market. Also interesting are the fairly tight weekly closes for the past three weeks. Seems like that March low at about $34 is the proverbial pile of gas-soaked rags piled in the garage waiting for junior to experiment with dad’s matches. Will he escape unharmed? Singe his eyebrows? Burn down the garage?
Today’s 198 million shares traded was the second highest ever for the Cubes (record was 220 million on 6/24/02). We tested the March lows and undercut Monday’s lows, reversing to close up after being down 2.6% in early afternoon. The candle formation is an unconfirmed hammer, making this a potential spot to enter a trade to the long side, with a stop under today’s low. I’m still skeptical of the market, which is actually a good sign, as are the past few days’ spikes in fear indicators, such as implied volatilities and trading volume in puts and calls. Whatever happens, there’s a good chance it could be fast and furious, especially with options expiring next Friday. So, with that in mind, and being in the mood to roll the dice, I bought 20 QQQ May $36-strike calls. These are basically lottery tickets, but if this rally fails it could get ugly and I prefer to cap my downside right now. And if the rally succeeds it could take the Cubes up $2+ pretty quickly. Time will tell. Have fun and don’t get hurt is the rule of the day!
I’ve been fond of this baby ever since discovering it for late-night super tacos, sourdough burgers, and curly fries in college. You see that jump on April 1st? That’s when the company raised its earnings outlook. Then the stock dribbled down to it’s 50-day average, offering a reasonable entry point (or re-entry point for me, since I bought and sold this stock for a nice gain in 2003). Now JBX has done what it said would do — reported strong earnings. And it raised its outlook again. But analysts are still — as usual — behind the curve. They do a great job of telling you what happened after the fact, which is not worth much in the stock market. It just reinforces the point that analysts are a lagging indicator and even when new information presents itself they are slow to react. Now analysts will raise estimates. By the way, JBX has a reasonable valuation, which is something that is more important than ever in an environment where high valuation momentum and glamour stocks are getting whacked. JBX enterprise value-to-revenue (EV) = 0.6 and EV-to-EBITDA = 6.0. For comparison, MCD EV-to-revenue = 2.4 and EV-to revenue = 10.
As you can see, the abandoned baby pattern mentioned in yesterday’s post was completed, but it isn’t very convincing for these reasons: 1) comparatively weak volume on today’s gap compared with the volume on March’s breakaway gap, 2) smallish real body and noticeably upper shadow on today’s session compared with the large real body and small upper shadow on March’s breakaway gap. Any rally will have to be confirmed by a follow-through day. If the bounce is weak then it could be a good shorting opportunity. Next week is options expiration, so going into that the market can act funny and might not show its true intentions until the week of May 24th. We will see!
This would be a good place for a bounce to develop. Today’s action could be — depending on what happens tomorrow – an abandoned baby formation. Not that I’m particularly bullish on the market confirmed downtrends — lower highs and lower lows — in numerous stocks and indexes, but it’s worth pointing out this formation. Here’s what it is and what it means:
I’ve exchanged a few emails with Briefing.com about the Google IPO. They don’t think it’ll be priced to pop on day one and I do. Note, I’m still not going to buy any Google shares for a number of reasons, ranging from valuation and disclosure to corporate governance and technology issues. Anyway, I think Google will pop because a first-day gain is what investors, bankers, and most companies expect and want on the first day of trading. Granted nobody wants too big of a pop except flippers, but it is a negative if an IPO stays flat or falls on the first day. If I were Google I’d say offering price = 90% of clearing price (the clearing price is the highest price in a Dutch Auction that will clear all of the shares the company wants to sell). That would be high enough to avoid leaving a lot of money on the table and low enough to ensure a decent 1st-day gain, creating goodwill among investors, employees, and bankers, not to mention journalists. At least as important as the money are the stories on the nightly news, the headlines in the next day’s newspapers, and the covers of that week’s magazines. Assuming no major news surprises or events that trump Google, every major newspaper in the country will have above the fold articles and the headline will read “Much Anticipated Google IPO Gains x% on First Day of Trading.” The company or bankers don’t want that headline reading “Google IPO Flops… Did Investors Pay too Much?” I’ll leave this post open for comments if anyone wants to chime in…
A bold heart is half the battle.
-Dwight Eisenhower, 34th U.S. President
This blog software is on the blink so I couldn’t post a chart. I’ll add one in a day or two I hope, if these techies ever get back from their Star Trek convention and reboot their servers or whatever they need to do. In the meantime you’ll have to pull up your own QQQ chart to see what I’m talking about, which is the fact that the Cubes, the Naz, the Spyders, and many other stocks and indexes have closed on a weekly basis below their respective 200-day moving averages for the first time since crossing above them back in March 2003. The SMH broke down a week earlier, too. This breakdown coming after March’s bounce failed in its test of the January highs. Also lots of failed breakouts and momentum stocks that reversed off of their climax tops — TASR being the prime example. Even the much beloved YHOO is back to where it was before it gapped 15% on earnings news. I guess you could say it got googled.*