Tuesday, November 4, 2003
Issue Contents:
| 08:52 | Paul's Watch List Stock picks for intraday and swing trades. |
| 09:10 | Daily Swing Trade This is our swing trade setup for today. |
| 09:39 | Good Morning The Rocky economy. |
| 13:12 | [$XAU, $HUI, $GOX, Daily] Major Gold Indices Time to take a good look. |
| 13:57 | Templeton on the Dollar His big prediction. |
| 16:03 | [$DXC, $HUI, Multiple TF] Dollar vs. Gold A major update. |
| 16:16 | 2003-11-03 Transcript for Real Time Trading Group Real time forum discussion transcript: 2003-11-03 Transcript for Real Time Trading Group |
| 16:16 | 2003-11-04 Transcript for Real Time Trading Group Real time forum discussion transcript: 2003-11-04 Transcript for Real Time Trading Group |
This is Paul's intraday and swing trade watch list for Tuesday. He will review the setups for the Real-Time Trading Group at around 11AM Eastern.
BUY SCALPS:
- AWE @ 7.41
SHORT SCALPS:
- MCHP @ 32.82
- MSFT @ 26.28
- WB @ 45.59
Prices above are used as ALERTS to look for intraday entries. If you need additional ideas, don't forget that we have automated Stock Scan Lists as well.
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Good morning. Yesterday was indeed a good day to make an exit on the short positions, as discussed. After a big up day, we can typically expect a "back and fill" sort of day, unless it's really going to the moon. I'll have to go with the higher probability scenario where the market will pause for a breather today.
Scanned all the stocks in the most active lists, and there aren't a lot of swing reversal trades that can be had, but there is a theme here this morning. Last Wedneday, we pointed out that the last theme was the potential breakouts, and used the BEAS daily chart as an example. You'll note that we define breakouts as a move out of a large congestion area, instead of "a new high on test of top".
CSCO Weekly: Most traders call this a breakout, but it is in fact a test of top. Since this is the weekly chart, there is no swing trade to be set up since we only want to set up swing trades on the daily. If you are in the position to trade intraday, CSCO will be one where you might find some setups on the buy side on the 15-minute chart. Trading back under the pink line will be a sign that the test is not being passed.
MEDI Daily: Here's a stock that has plunged for so long that it's now registering extreme ADX for this symbol and timeframe. In case there is a spike low that is pending and/or some short-covering to be done, we can set up a swing trade here on the BUY side. The trigger price will be yesterday's high of $26.60, and we would purchase November 25 CALLS MEQKE with an initial stop loss of $25.00 and see if it can do a decent sized bungee bounce for a day or two. This trade is NOT for the faint of heart, for we are attempting to buy without a test.
NTAP Daily: Under the breakout category we can now add NTAP. The alternative to waiting is to trade inside the congestion area, but we would have to be able to pick the direction of breakout. Since I'm not Madam Cleo, I'll pass and wait for the market to show me.
SINA Daily: Another breakout setup, but we do know that this one has extreme ADX readings on the weekly chart, so with retail investors all loaded up, the "surprise" direction will be on the downside. If you are extremely aggressive, you could play this one intraday off the 15-minute chart on break of yesterday's low, and if you get a big bonus, i.e. a close under the 50-day MA and the lower edge of the triangle, you can take the trade home and/or swap it for November 40 PUTS to hold for a day or two.
SNDK Daily: Here's one that has not been able to move up on a test of top. Aggressive traders can position this one exactly like SINA, and enter any sell setup intraday off a 15-minute chart if yesterday's low is broken, and decide what to do near the close. The first downside target is the 20-day EMA at 76.29.
TO RECAP: We have one swing trade setup on MEDI, while SINA and SNDK will be intraday setups that might be converted into overnight trades in the last 1/2 hour if they close in our direction.
Well, it's been almost nine months since we originally issued the buy signal of the weekly charts back in February. I think we can all honestly say that no one ever foresaw the market -- and more importantly, the economy -- coming back the way it did.
I recalled the extreme negative sentiment back then, and an interesting thought occurred to me yesterday. I mean, isn't North America the home of a culture that just loves underdogs? In fact, the entire American Dream is an underdog story, so why was everyone so negative? With all of our problems, isn't North America now an underdog, the ultimate Rocky Balboa? Just think about it...
[$XAU, $HUI, $GOX, Daily] Major Gold Indices
It's been a while since we updated these two indices. The last time we looked, the $HUI was making some sort of stealth rising wedge on the daily chart, looking toppish.
GOLD INDICES Daily: There was no breakdown off the little wedges, and popped up to test the September high. Right now, having fallen back underneath, the jury is still out, pending the outcome of the test of bottom on the Dollar.
I'm not one to make bold predictions, much less bet the wad on a long-term outlook. My plan is to take things one day at a time, and we'll end up in the same place.
I've been sent the following article by a number of subscribers. The bottom line is that Sir John sees Doom ahead. What we find most interesting from the sentiment analysis point of view was the fact that a number of people felt that it was important enough to send the link to me, in addition to the fact that the article showed up on October 14, just as the weekly chart went to new lows, on a test of bottom where they usually start to scream...
This post will be followed by a detailed analysis of the Dollar and Gold.
SARASOTA -- Legendary investor Sir John Templeton is worried about the U.S. economy and stock market.
Gary Moore, a Sarasota investment adviser who met with Templeton last week in the Bahamas, says Sir John has never been more bearish.
Moore says Templeton is telling investors to avoid U.S. stocks and sell off excess residential real estate. He's also suggesting they buy bonds -- not U.S. bonds, but Australian, New Zealand, and Canadian bonds.The reason for all this, Moore says, is that Sir John, who founded the highly successful Templeton Growth Fund and Templeton World Fund, believes the dollar will lose 40 percent of its value against foreign currencies in the coming months, especially the Japanese Yen and Chinese Yuan.
This depreciation will cause the Chinese and Japanese, who own 36 percent of all U.S. foreign debt, to sell their bonds and mortgage obligations and take their money out of the country.When that happens, market forces will cause interest rates to rise, choking off investment in residential real estate and forcing the construction industry to contract.
Stagflation, a combination of economic stagnation and inflation, will then set in, Moore said.
U.S. manufacturers will face higher costs of production, but they won't be able to pass on price increases due to continued competition from lower- cost manufacturers in China and India. Profit margins for U.S. corporations will be squeezed and stock values will suffer."Stagflation is hell on equities," Moore said.
In turn, U.S. consumers will see their living standards decline, causing them to pull back on spending, sending another negative shock through the economy.
Templeton, who is 92, could not be reached for comment. But investment advisors contacted by the Herald-Tribune did not dispute his logic.
They all agreed that the greatest fear hanging over the world economy at the moment is the possibility that the value of the U.S. dollar will crash."I think Templeton is a good source and good long-term thinker," said Dave Anderson, president of Gold Financial Services in Kansas. "If I have one concern right now, it's the same one he voiced."
In Gold Financial's most recent newsletter, Anderson confirmed what Templeton is saying.
"We continue to see the greatest danger in our outlook coming from ongoing debasement of the U.S. dollar in the world market and the (Bush) Administration's wish to have flexible exchange rates," Anderson wrote.Under pressure in this election year to do something to protect U.S. manufacturers, the Bush administration has been advocating a weaker dollar, Anderson said. A weaker dollar would make U.S. goods less expensive, allowing manufacturers to sell more both domestically and abroad.
Although Anderson and other investors believe the threat of a falling U.S. dollar is serious, they are not predicting as dark a future as Templeton.
Anderson thinks there will be a stock market correction, but he doesn't see the dollar and the U.S. stock market going into free fall.Susan Moseley, president of Moseley Investment Management in Bradenton, agrees. But she added that comments coming from Templeton should be evaluated carefully.
She said Templeton's advanced age could count against him. But then again he called it right in 1999 when he predicted the stock market would fall, Moseley said.
"He does have an incredible ability to look at the world," she added. "When he says something, you definitely have to take a step back and think it over."Gary Wood, owner of Wood Asset Management in Sarasota, also agreed with Templeton's logic. But Wood said he did not expect a precipitous drop in the dollar or the stock market.
"I don't expect a decline like that," Wood said. "I think the Bush administration will want a reasonably strong dollar and will take steps to ensure that happens."
For Moore, Templeton's arguments make perfect sense.
He said that if the dollar plunges, foreign investors will sell off their investments in U.S. Treasury bonds and real estate mortgages.To attract more money to finance the growing Federal budget deficit and to continue to finance real estate mortgages, the Federal Reserve and U.S. banks will have to increase interest rates.
Rising interest rates make it more difficult for home buyers to borrow money. According to Business Week, someone wanting a $200,000 mortgage must have an annual income of $57,500 when interest rates are at 6 percent, but when interest rates rise to 8.6 percent, that same person needs an annual income of $74,700.With fewer people able to purchase homes, the value of existing homes will stop rising. In turn, fewer homes will be built, stalling one of the great engines of economic growth in recent years -- the construction industry.
The impact of rising interest rates on the real estate market, is why Templeton is advising investors to sell residential real estate investments, Moore said. The reason Templeton is advising against U.S. stocks is that they never do well in a period of stagflation.U.S. bonds are a safe bet, Moore said. But a better bet would be to buy foreign bonds. If you buy foreign bonds when the value of the dollar is declining against foreign currencies, you make money.
The reason Templeton recommends Canadian, New Zealand, and Australian bonds is that these countries are major exporters of agricultural commodities. During periods of inflation, prices of agricultural commodities often rise, Moore said.
Moore said it may take more than a few months for Templeton's scenario to work itself out."But I'm worried," he said.
Michael Braga, Herald Tribune
October 14. 2003 12:00AM
[$DXC, $HUI, Multiple TF] Dollar vs. Gold
It's been a while since we updated the big picture. They first caught on that the classic bear flag had broken on the weekly Dollar chart in September.
To us it was in the W Test of Bottom formation (reverse of the M Test of Top), and the amount of screaming was going to be the key, hence the interest in the Sir John article from a sentiment analysis point of view. I think it would be correct to classify his vision as "extreme negative" sentiment and the fact that so many people are referring to it is a good indication of the extent of this belief.
DOLLAR and GOLD BUGS INDICES Weekly: As discussed before, the 2 + 2 = 4 reason why the price of gold ("POG") was going up was due to the fall of the Dollar, since POG is denominated in Dollars. So long as the Dollar is weak, there is a solid underpinning of support for POG to stay up.
The setup on the weekly chart is a special kind of W Test of Bottom, the Trader Vic 2B Test of Bottom. It's called that when a new low is made. Usually this takes place after a long downtrend, and when it "goes to new lows", there is panic selling accompanied by extreme negative sentiment.
DOLLAR INDEX Weekly: If you look at the ADX, it reached an extreme reading for this symbol and timeframe around the June 2003 swing low. On the way down, ADX has made a lower high, what we call the ADX Divergence setup. What this means is that after a long decline there has been a big intervening bounce, and particularly when accompanied by extreme negative sentiment (typically forecasts of ever-lower prices around the corner), the probability of a decent bottom forming rises considerably.
The thing that the sellers of the new low always forget is that it is actually a test of bottom, not a breakout. There is also the fact that the last time the price was here, buyers showed up.
DOLLAR INDEX Weekly: What are the upside targets IF a reversal is in place? The 20-week EMA is just under 95 where there is a gap. That is the first upside target. The second upside target is the August 23 swing high just under 100. In the meantime, we now have a trading range marked out by the dotted blue lines betwen 94 and 100.
DOLLAR and GOLD BUYS INDICES Daily: You can see that on the daily chart, the Dollar Index also set up a Trader Vic 2B Test of Bottom. In this case, both upside targets have been met. The question now is if 93 can be confirmed as new support on this pullback. Can you see the big bars thrusting up after the failure to go lower? That's the sort of action that one is looking for when it comes to price confirmation.
In the meantime, the Gold Bugs Index is doing an important test of top in the big picture. This is not surprising given our premise, but it is interesting that the Dollar has reversed more to the upside compared to the $HUI on the downside.
So, as we get ready to trade currencies, we have the stage set for exciting happenings...
2003-11-03 Transcript for Real Time Trading Group
Real time forum discussion transcript: 2003-11-03 Transcript for Real Time Trading Group
Click on the title above to expand this document.
2003-11-04 Transcript for Real Time Trading Group
Real time forum discussion transcript: 2003-11-04 Transcript for Real Time Trading Group
Click on the title above to expand this document.