Last night, stock futures took a turn for the worst after Cisco Systems' (NASDAQ:CSCO) reported earnings that handily beat estimates, but the company said it would only give guidance for the current quarter due to a lack of visibility. This morning, the MARKET'S mood has changed and futures have turned green.
S&P futures currently trade higher by 3 points at $1,086, NASDAQ futures are higher by 1 point at $1,452 and Dow futures are bumping higher by 42 points at $9,687.
Fair value for the S&P 500 today is $0.28. HL Camp & Company has their computers set for program buying at $1.51 and set for program selling at $-1.18. Fair value for the NASDAQ-100 today is $2.88.
Based on fair value numbers, it looks like stocks will open marginally higher to unchanged.
Jobless Claims fall by 15,000
Jobless claims fell 15K for the week ending February 2 to 376K, which is better than the 388k economists had expected. The four- week moving average also fell to 380,500 from 386,250. The number of Americans who remain on unemployment benefits fell fractionally to 3.43 million, from 3.48 million. Jobless claims have been consistently lower than economist's expectations so far this year (2002), suggesting that the labor market has been relatively firm after the heavy layoffs in the last quarter of 2001.
Triangles are forming
There are several point and figure charts that are currently forming triangle patterns that will eventually turn into "bullish" or "bearish" triangles that traders may want to monitor and perhaps trade in the coming sessions.
PMC Sierra (PMCS) Chart - $1 and $0.50 box
Last week in premierinvestor.net commentary (January 25th market wrap), I pointed out the triangle formation taking place in shares of PMC Sierra (PMCS) when this stock had been in the recent X column (up) and thought bearish traders might look at shorting a rally in the stock above the $24.44 level of retracement on the thought that market makers would have a "sell bias" in their inventory. The stock did rally as high as $25.45, but the recent reversal down may have the stock eventually trading the $19.50 level and setting off the "bearish triangle" pattern. Since the NASDAQ-100 bullish Percent is "bear confirmed" at 32%, I think most traders would like to see the stock give the "bearish triangle" and then measure that against the probabilities study from Professor Earl Davis' Purdue University study that found this bearish pattern was profitable 87.5% of the time, for an average gain (for the bearish trader) 33.3% over the course of 2.5 months on average. By my calculations, a 33.3% decline from $19.50 (where the bearish triangle would be created) would represent a price target of $13.00.
PMC-Sierra Chart - Daily Interval
Shares of PMCS have traded almost as "predicted" based on our comments dating back to January 25th. My thinking remains that market makers did indeed have a sell bias above the 61.8% retracement at $24.45 and now we're right back at 50% retracement. I've shown a "conventional" upward trend from the bottom and it appears that shares of PMCS are starting to deviate away from that trend (green) as buyers are not as aggressive as they may have been in the past. I've also shown a close depiction of the "triangle" that point and figure chartists are monitoring and here too we see the wedge forming.
In my mind, I find it hard to believe that a market maker that is in charge of making markets in technology stocks has seen some stocks breaking his/her support levels and inventories are starting to get underwater or the market maker has to have taken a more bearish position in his/her inventory. If market makers are entirely long in their inventory on PMCS, then how are they going to be able to step in and make a market in the stock should we see a decline to the $18.89 or $14.39 level?
Yes, we should turn the tables and think... what happens if something spectacular takes place at PMCS (a new product or surge in demand for its products) and the stock breaks to the upside? I would NEVER rule that out. I've shorted/put some fantastic looking bearish triangles that have gone against me. Therefore, I would always recommend using a stop.
However, just as we've seen further deterioration in the NASDAQ- 100 bullish percent, we will note that on January 25th, the Semiconductor Bullish Percent from Dorsey/Wright and Associates (www.dorseywright.com) was "bear confirmed" at 43% and as of last night, the reading was also lower at 38.3%. Again, we still are seeing a net loss of stocks in the semiconductor segment giving sell signals. Will PMCS be next? If so, I'm looking to play the probabilities.
For those interesting the BULLISH triangle is profitable 71.4% of the time, for an average gain of 30.9%, in 5.4 months on average. Again, this is the probability of a bullish trade working out in a "bull market" environment. The problem with trading a "bullish triangle" right now in a semiconductor stock is that the sector is "bear confirmed" as is the tech-heavy NASDAQ-100.
Isn't it interesting that Professor Davis' study on the "bullish" and "bearish" triangle showed that the bearish pattern had a higher probability of success, a larger gain on average, in a shorter amount of time? It's no wonder that some traders have incorporated bearish strategies into their trading discipline. The statistics also hint at how important market psychology plays into things. While most market participants only trade from the bullish side (perhaps due to fear of shorting, or bulk of capital is in a retirement account) "fear" of losing money is often one reason that stocks will decline faster than they rise. It's something to think about at least.
Other stocks with "triangle" patterns
Altera (NASDAQ:ALTR) $23.19 -1.27% is another "semiconductor" stock that is currently building a triangle pattern. A trader may want to monitor PMCS against ALTR and see which one eventually breaks the triangle and what the outcome is. Then if one breaks the triangle before the other, we may then have a "clue" as to the MARKET's response to that break and we may then have a better idea of what to expect.
I will note that the Altera (ALTR) chart did give a sell signal back in December at $21, so that chart currently has a bearish vertical count of $12 associated with it.
Another stock that just gave the "bearish triangle" at $40 and subsequently followed that pattern with a spread-triple bottom sell signal yesterday at $38 was Celestica (NYSE:CLS) $39.56 +0.40%. This one traded right onto its bullish support trend yesterday at $38 and if that's broken, I'm thinking "look out below." The current vertical count for CLS is bearish to $31.
It may not be "as important" for subscribers to perhaps trade these patterns bearish, but if you're holding long a stock that is creating the "bearish triangle" you may now know that the odds/probabilities of the stock advancing are against the position and a hedge strategy may be appropriate.
Yesterday, shares of EMC Corp. (NYSE:EMC) $14.50 -2.55% gave the "bearish triangle" pattern when the stock traded $14.00. Not unlike ALTR, this stock also was on a "sell signal" dating back to December. The bearish vertical count has been $8.50.
Of those stocks listed, I'd paint them with a "broad brush" as technology stocks.
Now stretch your imagination!
There are four stocks mentioned above. Some have given and some might give the "bearish triangle" pattern. If you will humor me (perhaps it isn't funny) and think for a moment about Professor Davis' study of the "bearish triangle." What if these four stocks are "saying" that technology may still have a 33% decline from current levels over the next 2.5 months?
It may tell us that there's still time to do some shorting and a trader doesn't need to go full guns with his/her portfolio to the sort side. Heck, EMC gave a sell signal back in December at $15.50 and currently trades $14.50. If the stock does trade $8.50, there's still plenty of downside.
Overly bearish subscribers that have been a bear since September can't really be puffing out their chests and saying that OI or PI has missed the bearish move. Maybe we have, but we try to not pick the tippy-top to short, as that can often find you riding a bull you wish you never got on top of.
With any trade, follow with a stop and guard against a loss that could permanently damage your account. As history has shown, the markets will be there to trade. Always control your risk, so you can live to trade another day!