Wednesday, December 3, 2003
Issue Contents:
| 08:17 | Paul's Watch List Stock picks for intraday and swing trades. |
| 08:53 | [Weekly] Major Stock Indices The big picture for $INDU, $SPX, $NDX and $SOX. |
| 09:28 | Daily Swing Trade Today's stock setups. |
| 12:37 | [Multiple Timeframes] Dollar Index The 411 on $DXC. |
| 16:23 | Economic Data Roundup Summary of today's key releases. |
| 19:34 | Return to Afghanistan Video presentation on the web. |
This is Paul's intraday and swing trade watch list for Wednesday. He will review the setups for Level 4 Active Traders at around 11AM Eastern.
BUY SCALPS:
- SPLS @ 27.62
SHORT SCALPS:
- MMM @ 80.77
- MEDI @ 23.89
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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WEEKLY CHART PANEL: There are a lot of reasons why we look at the big picture. We can often develop themes that apply to all sectors of a certain class of instruments. For example, we have here a panel of weekly charts: Dow Jones Industrial Index, S&P 500 Index, NASDAQ 100 Index and the Semiconductor Sector Index. We can see that across the board, this is a test of top on the weekly chart, after a one year advance, and since February 2003, they have been making higher swing highs and higher swing lows, the hallmark of the classic uptrend.
I've drawn a line at the top of each chart, to show you that this is what we call a M (shaped) test of top. Most traders and investors will tell you that this is a breakout. It is most definitely NOT a breakout, which we define as a move emerging from a long congestion period. A test is a test. What this means is that we know for sure that there were sellers at swing highs achieved on the week of November 7, and now as we go back there, we will find out if they are there again.
This is the point where investors will be on guard, for if the major market indices cannot pass the test, the first downside target will be the swing lows made the week of November 21. That's where buyers last came out before, and if they don't come out again as the market comes down to that level, then we will know that the pattern of higher swing highs and higher swing lows will have been broken, the first sign that a pullback of larger magnitude is looming.
WEEKLY CHART PANEL: I want to point out that with the exception of the Semiconductor Sector Index, we can observe that the last few up and downswings for the three broad indices have been getting progressively smaller and overlap each other's trading range. This has produced daily charts with an ever-smaller trading range, making it hard for things like day trading. Given that market sentiment is extremely positive out there, we have to make allowance that these rising wedges could be the "wedge as climax" pattern, therefore, making this M Test of Top even more important. The only other alternative to this is what the Elliott Wave people call the Wave Four Diagonal Triangle, a pause before a straight up climax move to make a Wave 5 spike high. Obviously, that would require the markets to pick up steam and just blast up in a near vertical trajectory. So far we have not seen that yet.
CBOE MARKET VOLATILITY INDEX: How does this relate to the sell signal observed on the weekly $VIX chart? The main feature of this chart is a glaring divergence between the RSI and the $VIX. As $VIX creeps lower, the RSI is making higher lows. This is a classic divergence where we can say that $VIX is moving down without any momentum, and therefore, subject to a sudden reversal to the upside. That would happen on a jump in the amount of fear in the market, something that usually happens when price of the major market indices go down. There is no change in our observations here, but please note that as far as indicators go, RSI is an oscillator, and that means that the divergence might "take a while" to kick in. That's why we have to look at how price behaves on the test of top on the weekly charts of the major indices, which we knew was the major theme from looking at the daily charts of the components of these broad indices.
We have four setups today. Yesterday was a very narrow range day across the board for most of the major market indices, and today intraday traders will be looking for breakout conditions.
MAXIM: This would be an intraday high and run candidate. We can draw a neckline that also doubles as the lower edge of a potential triangle of some sort. After a narrow range day, traders will look to play in the direction of any first hour breakout to see if it can hit and two day high or low and keep going. Best to play this intraday, off a 10- or 15M chart, and enter on a small retracement pattern such as a 2-4 bar bull or bear flag, once yesterday's high or low is broken.
NEWMONT MINING: Gold stocks are seeing the public dive in big time at this point, because they all know that the Dollar is going to zero. With this straight up trajectory, all I know is that sudden reversals might materialize out of the blue. If you look at the Dollar Index chart, you can see a harami pattern forming here, so maybe things will get exciting. Be on the lookout for John Murphy on CNBC, and see if he will be asked to predict an upside target for gold, to which he will certainly say "$450". Any reversal is best played intraday.
XILINX: Stalked this one for ages, and now we can do it again. If yesterday's low of 36.91 is broken, I will wait for a few minutes for the smoke to clear, and then purchase December 37.50 PUTS with an initial stop loss at 37.88.
CISCO: Reaches the upside target of the ABC Correction to the 20-day EMA and is now on a test of top. Watch for intraday breakout conditions should yesterday's low be broken and you can scalp off the 10- or 15-minute charts. Same on the upside, should it be able to lift off...
That's it for today's picks.
[Multiple Timeframes] Dollar Index
It's always great to take a walk down memory lane to check our perceptions against reality. Remember the catalyst that triggered the Crash of 1987? After a bunch of shocking trade deficit figures early in the year, James Baker made a fateful comment regarding the Dollar the week before Black Monday. According to History News Network:
Another important trigger in the market crash was the announcement of a large U.S. trade deficit on October 14, which led Treasury Secretary James Baker to suggest the need for a fall in the dollar on foreign exchange markets. Fears of a lower dollar led foreigners to pull out of dollar-denominated assets, causing a sharp rise in interest rates.
MONTHLY CHART: Funny when we go back to the chart, it's almost bizarre to find that the so-called 1987 Dollar Crash actually began in 1985. And by the time the world "puked" on Baker's comments, it was much closer to a bottom than a top.
MONTHLY CHART: As we zoom in on more recent price action following a nearly two year bear market on the Dollar, we can mark out potential support levels. Nearby, 88.15 is where the Dollar broke out on the upside before, a point of support where buyers showed up in the past. This number is nearest downside target.
DAILY CHART: With new lows being made daily on headlines around the globe, it's a no-brainer to figure out that there is extremely negative sentiment all around. With gold is blowing off on Dollar weakness, and the Euro going to new highs, you know it's starting to get a little carried away. Yes, it's a downtrend, and we can trade it, but we know that the sounds are starting to get familiar as it forms a harami pattern here, which might set up a tiny bounce on the daily chart. Resistance is the November 19 swing low overhead.
MBA Purchase Applications 441.8
Econoday reports: The Mortgage Bankers purchase index, which tracks home buying in the U.S., slipped off year highs in the November 28 week, down 3.9 percent to 441.8. The refinancing index, which jumped sharply last week, fell back 20 percent to 2100.0.
Nonfarm Productivity +9.4%
Unit Labor Costs -5.8%
Econoday reports: As expected, third quarter productivity soared by a revised 9.4 percent, up from the original estimate of 8.1 percent. The growth in nonfarm productivity is the strongest since the second quarter of 1983, when it rose 9.7 percent. When compared with last year, productivity was up 5.0 percent. Manufacturing productivity increased 9.0 percent in the third quarter. In durable goods industries, productivity rocketed 14.8 percent. In nondurable goods industries, productivity was up a more sedate 3.1 percent.
Unit labor costs plummeted at a 5.8 percent rate in the third quarter after sinking 3.2 percent in the previous quarter. Analysts had expected unit labor costs to fall by 5.4 percent. Labor costs are 2.2 percent lower than the third quarter of 2002. Not surprisingly, unit labor costs also posted the largest decline since the second quarter of 1983, when they were down 6.5 percent.
ISM Non-manufacturing Index 60.1
Econoday reports: The November business activity index reading was 60.1, down from the very high level of 64.7 in October. This index is akin to the production index in the ISM manufacturing index. The employment index climbed to its highest level since March 2000 at 54.9. Other components remained vibrant and grew in November despite some declines in their levels. A level over the 50 percent mark means that all components grew during the month.
Excellent footage and update is available free at the Washington Post:
Travis Fox, washingtonpost.com video journalist, spent three weeks in Afghanistan chronicling the country's transformation.