Wednesday, July 30, 2003
Issue Contents:
| 06:17 | Real-Time Trading Group Transcript |
| 06:40 | Good Morning... |
| 06:58 | [Internals, Daily] Bird's Eye View |
| 07:09 | [$SPX, Daily] S&P 500 Index |
| 07:17 | [$NDX, Daily] NASDAQ 100 Index |
| 07:38 | [QQQ, Daily] NASDAQ 100 Index Shares |
| 07:48 | Economic Data |
| 08:20 | Household Debt Service Burden |
| 12:56 | Quick Note... |
| 13:02 | A Trade A Day... |
| 15:03 | In Search Of... |
| 15:11 | [@SI, Monthly] Silver Futures |
| 15:17 | [@SI, Daily] Silver Futures |
| 15:28 | [SIU3, Daily] September Silver Futures |
| 15:37 | [@GC, Daily] Gold Futures |
| 15:50 | [@GC, Monthly] Gold Futures |
| 16:07 | [GCQ3, Daily] August Gold Futures |
| 16:43 | Real-Time Trading Group Transcript |
| 16:47 | Paul's Intraday Stock Picks |
| 16:52 | Good Night... |
Real-Time Trading Group Transcript
Finally, the deflating bond market is starting to register in the collective consciousness of the market, as headlines start to get excited at WSJ: "Stocks and bond prices fell. Treasury yields rose to the highest level in a year. The Dow industrials fell 0.7% to 9204.46."
It's actually quite easy to take the market's pulse. You can always tell when the clouds above start to gather. Excitement turns to complacency, followed by a jarring event. Prices start to tilt as the negative stuff starts to bubble up. It's as if editors in the financial media select the articles to meet the mood of the market. For example, right now, we are starting to see the story list at the Wall Street Journal Online begin to focus on the negative, featuring stories such as MGM pulling out of the Vivendi deal, American anxiety about China's export prowess, an SEC request for documents from AOL, etc. The kicker today is in the Editor's Picks section near the bottom, where the selection of articles even includes one on "how some singles are experiencing the latest in courtship humiliation -- being rejected by online dating services."
Seems like the market is just another slice of life. This whole process almost mirrors a couple in a squabble over something trivial, but gets increasingly ugly as the past is dredged up.
[Internals, Daily] Bird's Eye View
Over the past week, I've set up a bunch of charts, hoping that it's easier for you to see when we post them online.
The first chart here plots the number of 52-week new highs and new lows on the NYSE, followed by the $VIX CBOE Market Volatility Index. At the bottom is a bar chart of the $SPX S&P 500 Index with the 5-period RSI of the $VIX.
The reason why we do this is to look for extremes using the simple VIX reversal setups documented by Larry Connors and Bernie Schaeffer. While I personally do not use their methods to actually initiate a trade, I have found it useful to watch. In my experience, when the two combine to flash the sell signal -- $VIX at the lower Bollinger Band, while the 5-period RSI moves back up through 30 -- it's a good idea to pay attention.
This is the same chart, but with the $VXN, the NASDAQ Volatility Index and the $NDX NASDAQ 100 Index plotted.
Both charts are flashing the sell signal here. Since most of the major market indices have formed what would be interpreted as "continuation patterns" such as the big triangle on the $SPX, the potential for a downside surprise is obviously lurking for those who are holding on to long positions in anticipation of a further move upward.
We can zoom in on the market internals chart to take a look at the $SPX daily chart.
Over the past few weeks, the trading range has narrowed considerably while the number of NYSE new highs has dropped and the number of NYSE new lows has increased, particularly over the past few days. It is possible that the number of new lows is skewed due to the fact that there is a large number of bond funds listed on the NYSE.
The bottom line is that the congestion area is down to less than 20 points between approximately $SPX 980-1000. After the "pipecleaner" action of last Thursday and Friday where the breakout sellers and buyers were "cleaned out" in turn, so to speak, we should be on high alert for a real breakout.
[$NDX, Daily] NASDAQ 100 Index
We also zoom in on the $NDX daily chart, and note that we don't find the same sort of increase in the number of new 52-week lows, possibly due to the lack of bond funds that are listed on NASDAQ.
With a little help from the trendline going back a few months, plus the July 21 low, we can peg nearby support in the $NDX 1230-1260 area.
[QQQ, Daily] NASDAQ 100 Index Shares
On July 23, we discussed stalking the QQQ daily chart on the short side as a setup for extremely aggressive options players. While the pipecleaner action might have stopped out the trade, qualitatively, the price action is still within the realm of "failing bounce" in that we've seen a very narrow trading range on contracting volume and the inability to lift up. Therefore, we have to call it a stealth bear flag at this point, and it can only be invalidated by a thrust up through the boundaries of the flag as marked below.
The analysis from last week remains the same for any move to the downside. The suggested sell stop alert is a break of Tuesday's low of 31.23, and traders should note the use of an intraday entry to avoid whipsaw, which worked wonders last week. This trade is what we would characterize as low probability with high reward, justifying an allotment of 25% of the maximum position calculated from your account size.
Today's U.S. economic calendar is light, but traders should put up a sticky note to be careful at around 2PM Eastern when the Fed Beige Book comes out. After the unexpected drop in consumer confidence, the Beige Book will be closely scrutinized.
Other than that, we await the bumper crop of numbers to be released tomorow and Friday.
Today's interesting factoid is the Household Debt-Service Burden computed by the U.S. Federal Reserve. The data goes back to the first quarter of 1980 when it stood at 13.16% of disposable personal income during a time when interest rates were up in the stratosphere and unemployment stood at around 8%.
Today, 23 years into a declining trend in interest rates, we find the total debt burden to be about the same, with the mortgage component some 45% higher. Sure makes you wonder what could happen if interest rates have seen the bottom, while unemployment rises. Perhaps the man on the street does know something after all...
Some other links to reports containing good graphs:
- Economics from Washington, February 21, 2002 issue.
- Federal Reserve Bank of Cleveland, Money and Financial Markets Part 6.
- British Columbia Ministry of Advanced Education, Concerns Over Structural Unemployment Rising.
- Economic Policy Institute, EPI Issue Brief #148.
- Ray C. Fair, Yale University, Actual Federal Reserve Policy Behavior and Interest Rate Rules.
Please note if you have bookmarked or clicked Latest Issue on the calendar to view The Bottom Line, you will see the last post at the top, and then it goes backwards in time. If you click a day on the calendar, you get the posts in chronological order. I guess Mike has this all worked out!
For the time being, please click the reload button now and then to see new posts. The auto-refresh will be enabled soon, and you won't have to do that anymore.
...keeps the creditors at bay.
Today took two trades before we were done. Here's an excerpt of the transcript from the Real-Time Trading Group.
(09:52 AM) Teresa_Lo: **1/2 SIZE SELL STOP IN AT ES 99850 OFF THE 1M CHART
(09:52 AM) Teresa_Lo: in case it cannot bounce off the lower edge of the triangle. Keyed off the 1M chart.
(09:52 AM) Teresa_Lo: **98925 STOP LOSS.
(09:53 AM) Teresa_Lo: Tiny stop loss, since we are stalking a potential breakout, and it might not come.
(09:54 AM) Teresa_Lo: STOPPED OUT.
(10:05 AM) Teresa_Lo: In the meantime, we have this slow erosion here at the lower edge of the pattern...
(10:05 AM) Teresa_Lo: Like I said, stalking the breakouts is a lot of work for very little pay.
(10:06 AM) Teresa_Lo: And the larger the congestion area has been, the more stabs one must take, so if you take one and it doesn't work, don't try it again. Not even at home.
(10:06 AM) Teresa_Lo: ;o)
(10:09 AM) Teresa_Lo: **BUY STOP IN AT ZB 107^15 ON THE 20M T BOND CHART.
(10:14 AM) Teresa_Lo: Here's the 20M ZB chart
(10:15 AM) Teresa_Lo: I drew the downtrend line through the 10AM spike from yesterday...
(10:22 AM) Teresa_Lo: **MOVING BUY STOP DOWN TO ZB 107^11
(10:29 AM) Teresa_Lo: **BUY STOP HAS BEEN ELECTED ON THE ZB AT 107^11
(10:29 AM) Teresa_Lo: **STOP LOSS PLACED AT THE LOW OF THIS PRESENT 20M BAR AT 107^04
(10:30 AM) Teresa_Lo: (And now, it's like "Please God, get me out of this one and I'll never, never, never, trade again!")
(10:30 AM) Teresa_Lo: Remember that 107^04 is the worse stop you'll accept.
(10:31 AM) Teresa_Lo: You can always bail before that.
(10:31 AM) Teresa_Lo: One way would be to see it move up a little and then zoom in on a smaller timeframe and use the 5WMA bands as we show you on in the Handbook.
(10:31 AM) Teresa_Lo: Let's measure the location of the downtrend line here...
(10:32 AM) Teresa_Lo: seems to be at around ^18.
(10:32 AM) Carlos 92: ZN rising above prev. 20 min bar here
(10:33 AM) Teresa_Lo: Right Carlos - ZN buy stops elected also at ZN 111^240.
(10:34 AM) Teresa_Lo: DOWNTREND LINE TARGET 1 IS HIT ON THE 20M ZN.
(10:34 AM) Teresa_Lo: THIS IS THE FIRST PLACE WE CAN EXIT.
(10:36 AM) Teresa_Lo: Initial risk was 7 ticks on the ZB setup.
(10:36 AM) Teresa_Lo: So we would like to get 7 ticks if possible, which happens to be the downtrend line.
(10:42 AM) Teresa_Lo: This is what the ZB trade looks like after Bar 1
(10:42 AM) Teresa_Lo: We are gone, but we'll see if it gets Bar 2.
(11:25 AM) Teresa_Lo: Bonds and notes get Bar 4 into the reversal.
(12:32 PM) Teresa_Lo: I'm just doing some P/L here on the day...
(12:33 PM) Teresa_Lo: Bonds are just so liquid and good to trade when there is a decent setup.
(12:38 PM) Teresa_Lo: This is what I get here, for today's P/L.
(12:38 PM) Teresa_Lo: First trade, lost 3/4 ES points on 1/2 size.
(12:41 PM) Teresa_Lo: That's .75 X 5 contracts = 3.75 points loss x $50 = $187.50.
(12:44 PM) Teresa_Lo: Second trade, make 7 ZB ticks on full size. Since margin on ZB is about 70% of the ES, full size adjusted for margin is 15 contracts.
(12:45 PM) Teresa_Lo: 1 tick = $31.25. 7 x $31.25 = $218.75 x 15 contracts = $3,281.25
Score another one for not overtrading, and sticking to the plan as outlined in our Investment and Trading Philosophy.
...was not just a Leonard Nimoy show. I've been searching high and low for setups in my panels of charts - indices, currencies, energies, financial futures, grains, mentals, softs and even meats. There is really nothing compelling on any of the daily charts so far...
Here's a look at the @SI monthly continuous contract chart. If this isn't a classic, I don't know what would be.
The 1997 low is overhead resistance, and no surprise that it's also where the move up in 2002 and where it is stuck now, in 2003. A move up beyond this 1997 low is going to ring some alerts.
Let's close in a little, to the daily @SI chart.
I've marked out the resistance area just above $5.00. I left the fanned upper edges of the congestion area prior to the upside breakout so that you can see how it often takes a few false moves before the real thing happens. That's why I always dump it fast if a trade doesn't show price confirmation in the time that it's supposed to take.
At this point in the game, we'll be waiting to see if traders come back to buy this dip. I think it would be a surprise if it could move up, since there is so much resistance going back for years, and the the ADX on the daily chart is 43, For this symbol and timeframe, this is an extreme.
[SIU3, Daily] September Silver Futures
Here's the daily SIU3 chart, as we zoom in some more.
This is the first pullback after the upside breakout last week. You'd think that with so much resistance overhead, it will not be able to go up from here; therefore, the upside is the surprise direction.
Today's price action forms the second bar of the pullback, so this is Bar 2 of a simple, one swing bull flag. On a swing trade basis, the buy alert goes off on break of today's high. The first upside target is the July 28 high. If elected, the initial protective stop loss should be placed just above the July 30 low.
With an extreme ADX reading for this symbol and timeframe, I suggest that this setup be alloted 25% of the maximum position size based on risk and money management parameters. It's another one of those low probability, high reward setups.
This is the daily chart of the @GC Gold futures continuous contract.
No surprise that sellers showed up a the upper edge of the giant triangle. I don't like to play inside well-defined congestion areas, since I'm not particularly psychic. You can also see that the 20-day EMA and the 50-day MA are right in there with the apex of the pattern too.
Personally, I think it's best to wait until it really breaks. The bigger the congestion pattern, the more liable it is to fakeouts, and the less likely we are able to pinpoint the moment of breakout down to a single bar, since it's just a matter of probability.
Take a look at the monthly @GC Gold futures continous contract. Do you see something interesting?
Can you feel them willing this with all their might to be a...yes...Head and Shoulders Bottom formation? In case we need these numbers later, let's do the Edwards and Magee measurement now. Potential neckline is at $400ish. The distance when you measure the April 2001 low to the neckline at that point is about 102 points. Add that to 400 and you get an upside target of $500ish.
[GCQ3, Daily] August Gold Futures
Here's a look at GCQ3 August Comex Gold.
It's another one of those low probability, high reward setups where we don't really expect to be able to pick off the point of breakout in either direction down to a single bar after going sideways for most of 2003. However, we do know that as the pattern continues, the range between the upper and lower edges becomes smaller and smaller to a point where one might want to take a small position in case it goes, because if it does go, it should be a good gain, similar to the SIU3 September Silver chart.
As discussed, GCQ3 failed on approach to the upper edge of the big triangle. Today even made a gap down. IF it is able to move up and try for an upside breakout, then closing the gap by trading up through it would get traders excited; this is the kind of price action we would be looking for. The extremely aggressive attempt to buy in case of upside breakout would be to have an alert on break of today's high. Between there and the July 29 low is the gap, and the spot for many traders to sit up to attention would be the ability of the yellow metal to UPfill that gap.
Real-Time Trading Group Transcript
These are Paul's intraday stock picks for Wednesday. He will review each setup for the Real-Time Trading Group at around 11AM Eastern.
BUY SIDE:
- AIG @ 64.21
- ERICY @ 14.15
SELL SHORT:
- SNDK @ 56.52
- MRK @ 55.16
****
...signing off after a long day of waiting. One can only hope that this sideways chopping in the major market indices gives way to a move shortly, and given what's on deck over the next couple of days on the U.S. Economic Calendar, we will hopefully get our wish...