Monday, August 4, 2003
Issue Contents:
There's nothing on earth like trading the markets from the West Coast. Forces us to be early birds. This week promises to be a fun one. Here's hoping for a move out of this congestion.
Cheers!
- CAT @ 67.79
- RFMD @ 7.72
- NVDA @ 18.90
- BRCM @ 19.99
- DLTR 36.16 (This is not a high volume stock)
[Intermarket, Weekly] Dollar, Gold, Interest Rates
Let's update last week's chart, and take a look at the big picture of the Dollar, gold and interest rates.
The pink arrow points to the yield of the 30-year Treasury Bond, and as of last week, it hit the upside target, which was a test of the upper edge of the triangle in the 5.3% area.
It was only a month ago that everyone was clamoring for the Fed to lower rates to help stimulate the market. With the market doing the reverse, it's hard to imagine how the Fed will be able to do this, whether lower rates are needed or not. Would love to be a fly on the wall at next Tuesday's FOMC meeting.
Observers should be split into two camps when it comes to the bond crash that drove interest rates up. One side must be thinking that the Fed's alledged attempt to articifially hold rates down a la Japan produced a bond bubble that burst and all hell is about to break loose on the downside for the U.S. The other side must be thinking that the worse is over for the economy, and that rising rates simply confirm.
Gold failed to break out on test of the upper edge of the big triangle. That was no surprise.
The surprise is in the Dollar, of course. Higher rates attract capital to the beaten up buck.
[Internals, Daily] Market Direction for This Week
A subscriber sent us this link to Larry Connors' column from July 31:
"Yesterday we looked at the fact that periods of low volatility are followed by high volatility and that periods of high volatility are followed by periods of low volatility. Obviously, we are in a a tight trading range (low volatility) that will likely lead to a substantial breakout one way or another. Which direction that breakout will take is never perfectly known, but let's look at some historical statistics to guide us. And, in my opinion, the best indicator to help get us to an opinion is the VIX."
"Through today, the VIX has gone 9 consecutive days without making a new 20-day high. This ties the longest streak since the VIX's inception in 1986. The other time this happened, it ended on 9/6/00. After making that 20-day high, the S&P immediately lost 10% of its value over the next month and a half. The third-longest period the VIX went without making a new 20-day high was 72 days ending 8/11/87. This preceded the crash of October 1987 The fourth-longest period was 71 days ending 1/24/03. From there the S&Ps fell almost 7% in the following 3 weeks."
"What does this tell us? That at least looking back, when we've seen such sustained periods of low VIX readings, the market has responded by dropping. Now, I'll be the first to tell you, this absolutely does not mean that is what has to happen again. There are many good solid reasons prices have risen over the past 4 months. But, when you look at things on a historical and statistical basis as I do, it's sending us a strong caution sign and saying that it may be prudent to start locking some profits in. And, if you're very aggressive, the better opportunities for outsized gains, may be to the downside, especially over the short-term."
There you have it. From looking the price, we already knew that the market had been in a sideways congestion since mid-June. From studying $VIX, the CBOE Market Volatility Index, we can also divine the same thing, and even make baseball statistics out of it.
We can see that the Bollinger Band has been in a very narrow range since the end of May. This also confirms that the $VIX has been very lacking in volatility. And we know that after a long period of congestion, eventually there will be a breakout.
Last Friday saw a leap in $VIX to the upper edge of the Bollinger Band. By itself, it's not a big deal since it's been up here a bunch of times, but it is significant when we view it as part of overall price action on the $SPX S&P 500 Index. Last Thursday's attempt to break to the upside of the triangle was shut down at the 1000 level, and was followed by downside action on Friday. IF there is a continuation of downside action today, THEN I think this might be the beginning of the real move. On the fundamental front, rising rates might mean that some money is going to leave stocks and head to Treasury notes.
There are two immediate downside targets for the $SPX, the July 21 low, followed by the July 1 low. Until it sinks below these two levels, it's still techincally churning in a congestion zone, $VIX nothwithstanding. IF you are a short seller, THEN this week will find you at work on the aggressive side, as the risk may well justify the rewards.
[Internals, Weekly] Market Direction for Investors
It's so small on this chart, but if you look at the price bar for $VIX, it made an upside reversal bar on the week last week, while the 5-period RSI decisively moved above the 30-line. The price bar for the $SPX made a downside reversal bar on the week.
THIS IS A SELL SIGNAL ON THE WEEKLY CHART. Obviously, we don't know how far down it is going to go, or even if it's going to go, but at this point, prudence overtakes risk-taking behaviour, now that turbulence has hit the capital markets in the wake of the bond crash. In the end, we only have probability, and our duty is to preserve our account first and formost.
What are the downside targets? The 20-week EMA is at SPX 980 and the 200-day MA is at SPX 913. In terms of time, we can just look at the Bollinger Band, and see that the upper band is at 34.19, so the time it takes from where we are now at 22.78 is how long the potential move will be. It can get up there quickly in a few bars, or slowly drift, but given the action we've seen in the bond market, plus the nearly two-month congestion area on the daily chart, I think a fast move is favored.
The daily BBH Biotech HOLDRs chart is a rising wedge that is just testing the lower edge of the pattern. Given the degree of advance over the past six months, this pattern is most likely to be a "rising wedge as climax".
After the breach of the lower edge, there is frequently a one or two-day bounce that can be shorted. In this case, it would be a bounce off the red 20-day EMA. We will be watching for the bounce to enter a short sale on a swing trade basis.
Obviously there will be times where there is no bounce. If you are extremely aggressive and don't want to wait for that perfect setup on the daily chart, you can attempt to find an intraday bounce to enter after Friday's low is broken, using a 10- or 15-minute intraday chart. I would suggest that the position size be 50% of the dollars that you allot to each trade if you enter aggressively and use last Friday's high of 134.70 as a stoploss.
Second downside target is the 50-day MA at 127.50. The ultimate target is the base of the wedge, at 120ish. We take our trades one day at a time, and watch each level as it approaches to see if it provides support. If it does, we take profits and find a way into the trade again.
[QQQ, Daily] NASDAQ 100 Index Tracking Stock
The daily QQQ chart is a good example of why it always seems easier to wait until something really breaks out before trading it. We've been writing about it for two weeks, and it keeps hanging in. This is the life story of a breakout player: stalk and fake, stalk and fake. The strategy is to reduce size while stalking, since it might not go, and then trade every single setup inside the chop zone. There is no other way to get it, short of being psychic. Or simply wait for the move and then slam one in.
In the Handbook, we call this stealth bear flag, and so far, while it has not broken down, there is no evidence of any ability to go up. Volume is shrinking as well, so unless it can show us the money, the vulnerability is on the downside.
[USU3, Daily] September Treasury Bond Futures
After last Thurday's expanded range down day, we discussed that this plunge must be getting near a climax.
On Friday, the USU3 gapped down and reversed. The two-day Japanese candlestick is almost a piercing pattern, but would have been good to see it claw back to the middle of last Thurday's trading range before the close. Nevertheless, it did try to reverse, so if the bounce starts from here, it will be no surprise. We can say that the T Bonds have factored in no lowering of rates at the FOMC meeting next week. LOL!
ADX is 49 on the daily chart, and this is definitely an extreme for this symbol and timeframe. It's even high now than it was at the parabolic top in May, if you can believe it.
We've put on the old fibonnaci ruler here to mark out upside targets, should there be upside continuation. Given the extreme that we've seen on the ADX, it would not be surprising if there is a big bounce after the big plunge, but perhaps supply and demand will not allow it. Suffice to say that initially we should look for our usual 25% to 40% bounce of the last leg down, producing targets between 107^06 and 108^31 with last Thursday's high of 108^17 rounding out the projections.
Obviously, the gutsy swing trade is to buy after Friday's high is taken out, and see if there is a one or two-day bounce.
Monday, August 4, 2003
- 10 a.m. Factory Orders for June.
Tuesday, August 5, 2003
- 7:45 a.m. BTM-UBS Warburg Sales Index for Aug. 2 week. Previous: -0.3%.
- 8:55 a.m. Redbook Retail Sales Index for Aug. 2 week. Previous: +0.8%.
- 10 a.m. Institute for Supply Management Non-Manufacturing Index. Consensus: 59. Previous: 60.6.
- 10 a.m. Challenger Layoffs for July. Previous: -13%.
Wednesday, August 6, 2003
- No major economic indicators scheduled.
Thursday, August 7, 2003
- 8:30 a.m. Initial Jobless Claims for Aug. 2 week. Consensus: 395K. Previous: 388K.
- 8:30 a.m. Productivity, preliminary for second quarter. Consensus: +3.4%. Previous: +1.9%.
- 8:30 a.m. Unit Labor Costs, preliminary for second quarter. Consensus: +0.6%. Previous: +1.5%.
- 10 a.m. DJ-BTM Business Barometer for July 26 week.
- 10 a.m. Wholesale Inventories, for June. Consensus: Unch. Previous: -0.3%.
- 3 p.m. Consumer Credit for June. Consensus: $7.5 Bln. Previous: +$7.3 Bln.
Friday, August 8, 2003
- No major economic indicators scheduled.
****
...that Mike is back from vacation, and he'll be tidying up the site. We have a few more things to fix up, such as the calendar and the auto-refresh, before we launch the next batch of features in a couple of weeks.
So...don't forget to click the reload button once in a while to see the newest posts. Also, if you click on the Latest Issue link on the calendar, you'll see the posts arranged so that the newest one is on the top. If you click a day on the calendar, you will see the entries in the order that they are posted.
[$INDU, Daily] Dow Jones Industrial Index
Way back in the time before computers, technicians had an old saw that went something like, "The Dow is the last to top."
Last week, there was passing mention on CNBC that the Dow Industrials had made a new high, while the other major indices did not. They also mentioned that the Dow Transports were confirming. Somehow they left out the part where they were supposed to notify the public that the Dow alone made the new high, so that means there is a "divergence" of sorts, just like in the good old days.
...that I want to add a table for support and resistance levels for all the symbols that we follow on a regular basis. Now that Mike is back, I will not fear breaking the website in the process!
I'm off to trade the first hour. Be back later.
...keeps the creditors at bay.
Remember, these setups are all documented in the Technical Trader's Handbook, and coming soon to a theatre near you is the CD-ROM.
(09:32 AM) Teresa_Lo: And here comes the bounce.
(09:33 AM) Teresa_Lo: **SELL STOP AT ES 97700
(09:33 AM) Teresa_Lo: There is a small gap overhead left from the open.
(09:33 AM) Teresa_Lo: Up to about 97950
(09:33 AM) Teresa_Lo: We'll see if there are sellers lurking here.
(09:34 AM) Teresa_Lo: **SELL STOP UP TO ES 97750
(09:34 AM) Teresa_Lo: Morning low so far is 97675
(09:35 AM) Teresa_Lo: STOP LOSS AT 97825
(09:35 AM) Teresa_Lo: BAR 1 IS COMPLETE
(09:35 AM) Teresa_Lo: WE WANT TO SEE IT GET TARGET ON BAR 2
(09:35 AM) Teresa_Lo: DOES NOT LOOK LIKE IT WILL GO DOWN.
(09:35 AM) Teresa_Lo: THIS IS WHERE WE CAN BAIL OUT
(09:35 AM) Teresa_Lo: BUT I'LL LEAVE IT
(09:35 AM) Teresa_Lo: IT'S UP TO YOU
(09:35 AM) Teresa_Lo: NOT GOING
(09:36 AM) Teresa_Lo: BAR 2 IS COMPLETE
(09:36 AM) Teresa_Lo: I AM GONE
(09:36 AM) Teresa_Lo: AT 97800
(09:36 AM) Teresa_Lo: SINGLE GREEN BAR ON THE 3M ES NOW.
(09:37 AM) Teresa_Lo: SELL STOP AGAIN AT ES 97750
(09:37 AM) Teresa_Lo: I AM DOING IT OFF THE 1M.
(09:37 AM) Teresa_Lo: Small stealth classic bear flag on the 1M ES.
(09:38 AM) Teresa_Lo: Sell stop off the 3M ES green bar is 97725.
(09:38 AM) Teresa_Lo: SELL STOP IS HIT
(09:39 AM) Teresa_Lo: WE WANT TO SEE IF TAKE OUT THE MORNING LOW
(09:39 AM) Teresa_Lo: OR WE GET OUT AFTER BAR 2
(09:39 AM) Craig M: 976.75 is the early low
(09:39 AM) Teresa_Lo: SUGGEST STOP LOSS TO BREAK EVEN NOW.
(09:39 AM) Teresa_Lo: SINCE WE ALREADY TOOK A SMALL LOSS THIS AM.
(09:39 AM) Teresa_Lo: TARGET IS HIT.
(09:39 AM) Teresa_Lo: EXPANDED RANGE BAR ON THE 1M ES
(09:39 AM) Teresa_Lo: EXIT ANYTIME NOW.
(09:40 AM) Teresa_Lo: IF YOU WANT TO KEEP THE TRADE, YOU SHOULD MAKE SURE THAT YOU CAN ACCOUNT FOR BREAKEVEN AND TRY TO RECOUP THE LOSS ON THE FIRST ONE.
(09:40 AM) Teresa_Lo: WANT TO GET BACK TO EVEN FIRST BEFORE WE DO ANYTHING
(09:40 AM) Teresa_Lo: HERE WE GO...THIRD BAR
(09:40 AM) Teresa_Lo: AND I HAVE MY TWO POINTS.
(09:40 AM) Teresa_Lo: READY TO EXIT FOR ME.
(09:41 AM) Teresa_Lo: I KNOW IT MIGHT BE THE BIG TREND DAY
(09:41 AM) Teresa_Lo: DOWNSIDE BREAKOUT
(09:41 AM) Teresa_Lo: BUT MY JOB IS DONE.
(09:41 AM) Teresa_Lo: GETTING READY TO EXIT ...
(09:41 AM) Teresa_Lo: SUGGEST STOP LOSS AT 97575
(09:41 AM) Teresa_Lo: THIS IS CALLED A BREAKDOWN
(09:41 AM) Teresa_Lo: AND FAST
(09:41 AM) Teresa_Lo: NICE.
(09:41 AM) Teresa_Lo: ANOTHER EXPANSION
(09:41 AM) Teresa_Lo: I AM
(09:41 AM) Teresa_Lo: GETTING OUT
(09:41 AM) Teresa_Lo: OUT AT 97400
(09:42 AM) Teresa_Lo: WE ARE DONE IN 12 MINUTES.
It's a good thing I can get this all done. Otherwise, who would be writing this newsletter?
****
[QQQ, Daily] NASDAQ 100 Index Tracking Stock
QQQ hits the 50-day MA. The July 21 swing low is the next level of support.
Real-Time Trading Group Transcript
We'll be back with more posts overnight.
Today, we turned the sound back on in our PalTalk trading room. With four of us around now, there are actually people to talk to. No one has to do the monologue thing and maybe we can re-create that trading room feel. We continue to adjust our format based on feedback from participants.
Take care and have a good evening.
Teresa