Monday, January 12, 2004
Issue Contents:
| 08:54 | Good Morning Headlines and reaction. |
| 09:06 | Daily Swing Trade Today's stock setup. |
| 09:26 | Market Internals $VIX and $VXN. |
| 12:47 | Gold and Silver A rising tide... |
| 14:35 | Good From Far But far from good. |
| 14:51 | Subscriber Mailbag Extreme ADX reversals. |
| 15:53 | Dollar, Dollar on the floor. |
| 16:16 | Active Trader Transcript Real time forum log. |
Not much of interest this morning in the headlines. The Dollar hits new lows against the Euro as earnings season kicks off.
On the U.S. economic calendar, we have the 3-Month and 6-Month Treasury Bill Auctions at 1PM Eastern. U.S. President Bush is in Mexico to attend the Special Summit of the Americas. Today's earnings highlights include: MTG, STI, AULT, FRS and HORC.
This Friday sees the expiration of January index and equity options.
We continue with the saga of the DIA short. With options expiring this Friday, we would like to close this trade today or tomorrow, so let's see what "options" we have to achieve our goal.
The premise for the trade was clearly laid out. In case of a spike top after a parabolic move up as measured by extreme ADX for this symbol on the daily chart, we stalked a short sale.
The reversal came last Friday. We note that the upswing that had been in place since December 5, 2003 has ended with this reversal, but where do we go next?
First of all, even though this may well be a big spike top, there is no guarantee that buyers don't show up again to buy the dip. After all, extreme ADX measurements tell us only one thing, that it's a big buy panic. This is something that the public has no problem with, since they love to buy. If they sniff out some great whisper numbers on earnings that are coming down the pipe, it might be enough to make them all come back for one more push up.
Let's take a look at the Japanese candlestick chart of the Dow Jones futures. What we have here is a tall black candlestick, on a reversal. Typically, after a big move, we will get a one day pause, and then it either goes down more, or starts to bounce a little. Depending on what happens, we would like to either get out, or roll over to February options.
For now, we'll move the stop loss down to last Friday's high, and see what happens in today's trading. If we get another day down, it is also an opportunity to just get out, and take profits. The 20-day EMA below at $INDU 10314 is the first downside target.
Over the weekend, Mike began to produce volume filtered lists by sectors, and we'll be able to start picking stocks again this week. It looks like my friend Bob at ChartSmart will be discontinuing our lists at ChartScreener shortly due to lack of subscribers.
Last Friday, we alerted you to a pending Connors VIX Reversal SELL signal that was also a bounce off the lower Bollinger Band.
CBOE Market Volatility Index with NYSE 52-week new highs and lows.
NASDAQ Volatility Index with NASDAQ 52-week new highs and lows.
At the end of the day, the 5-period RSI uphooked above 30 from below. The daily bar of the $VXN and $VIX also reversed. Whenever we find all the ducks lined up like this, the probability of a solid signal is increased significantly, so here we are, the bell having gone off. What we now need to see now is continuing price action over the next day or two.
A rising tide floats all boats. Nowhere is this more true than in the stock market, particularly in the end stages of a big buying binge. As the market goes higher and higher, latecomers find that they've been priced out of the quality highfliers, and they typically focus on lower quality also-rans. This is how even boats with holes manage to rise if the tide is strong enough.
And so it is gold and it's poorer cousin, silver. Almost immediately after I wrote the piece on the big spike move in the yellow metal, imagine my surprise to see Ross Beaty, the CEO of Pan American Silver (PAAS) as a guest on Kudlow and Cramer this past weekend. Of course, they had to bring PAAS Director and SuperBear Bill Fleckenstein on for an "I told you so" encore.
I couldn't help but to laugh out loud before calling my friends, because the background behind Mr. Beaty was the corner of Robson and Burrard streets in downtown Vancouver, a few blocks from my old haunting ground of the Vancouver Stock Exchange, that notorious place crowned as the Scam Capital of the World by Forbes magazine in 1989.
What is little known, of course, is the fact that the subsequent cleanup by the regulators of the B.C. Securities Commission was so zealous that by the time the Bre-X fiasco came to pass in 1996, about the only exchange that *did not* have it listed for trading was the VSE. The pendulum swung so hard the other way. Listing requirements for speculative stocks became so stringent that most of the scam artists moved to Florida to do deals on the OTC Bulletin Board or "pink sheets" in the United States, where abuse and fraud run rampant.
For a few years after the big overhaul, business ground to a halt and what money that was raised was done by way of private placements with institutions and high net worth individuals. And now, what's the result of a decade of tight regulation and rising gold prices? The public, particularly U.S. persons, are basically shut out, while institutions and people who were already rich simply get richer.
Of course, I am sure they will find a way to open up the market at some point. Perhaps it will take a few years, just in time for the public to show up -- at the top.
Another day, another spike.
This is the daily chart of silver futures. With ADX at 51, it's an extreme reading for this symbol and timeframe. Gap up, with the open and close around the same produces a doji, hinting at indecision. It's time to be really careful out there...really.
by Teresa Lo
A subscriber sent this question via email today:
Teresa:
Just read your article on Major Market Indicies and I have a question. Could you discuss in the chat room or an article the difference between high ADX on a daily and high ADX on a monthly chart?
ADX on SPX hovered in the 50's for two years between '96 and '98 before it corrected and of course it was another two years before the big decline. Is that a discrepancy or just a really drawn out time in which ADX is not particularly predictive?
For reference, here is the monthly chart of the S&P 500 index.
We scroll back and take a look at the period in question. The ADX was extreme for the timeframe and symbol, relative to the past. This alone only indicates that it's tremendously overdone on the upside, but it does not mean that price will stop there. In fact, if price continues up without a significant pullback, the ADX can rise even higher. The bottom line is that overbought conditions can be "worn off" in two ways. A pullback of decent size can "correct it", OR it can simply go sideways until market participants are willing to buy again. In the case of the $SPX monthly chart, it went sideways for a while, and buyers came in after that. It wasn't until later on in the game that the $SPX made any decent pullbacks.
We laid out the reasons why we wanted to short the DIA on the daily chart. The basic principle is that the higher the ADX relative to the timeframe and symbol, the higher the probability of a big reversal. To enter the trade, we trailed a sell stop under the up bars (higher high and higher low than the bar before) in the upswing. Once the sell stop was triggered and we went short, we began to look for confirmation in terms of price action within one to two bars. If the trade is set up on the daily chart, that means we need to see price collapse within one or two days to confirm a potential spike top. We will not hang around if it goes sideways, since buyers might come in and take it up one more time for a test of top, which is another potential sell short setup.
We have to remember that regardless of how high the ADX reading is, any pullback will still be a pullback in an uptrend, and therefore, we anticipate that the Extreme ADX Reversal setup -- the "top picking" short -- is a hit and run trade, since buyers might be lining up below.
Examples:
2004.11.06 Net Stocks Spike, on weekly charts.
2004.01.15 Lost Luster, as gold craps out.
2004.03.23 Focus on RIMM, breaking down after a 1-2-3 pattern.
Hmm...do we detect signs of life?
We've discussed at length that POG is directly related to the Dollar, since it's denominated in Dollars. With gold reaching our upside targets, daily charts reaching extreme ADX readings while the Canuck Buck, the Aussie Dollar while the Euro launches into the stratosphere, we have to be prepared for a surprise reversal too.
Here's the Dollar futures, continuous contract. That's as close to a piercing pattern as we are going to get, on extreme ADX for this symbol and timeframe. As usual, this is a Japanese candlestick reversal pattern that needs a third candle to confirm, meaning tomorrow must move up in a big way.
The daily chart of the Dollar Index forms a little hammer. We'll see what happens tomorrow.
Real time forum log.
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