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Home > Archive > 2004 > 1 > 21 :: Archive

Wednesday, January 21, 2004
Issue Contents:

06:31 Good Morning
Headlines and reaction.
07:26 Daily Swing Trade
Managing the trade.
08:26 Heads Up
What to watch for today.
08:54 Economic Data
Summary of today's key releases.
08:58 Helpful Hint
Relead to read new posts.
16:03 History Repeats
Food for thought.
16:16 Active Trader Transcript
Real time forum log.
16:22 Daily Swing Trade
Review of the top 25 stocks.

Good Morning

I'm up early this morning because potentially, today is a big day in the market.  A scan of the headlines finds:

(WSJ.com) - U.S. stocks were weak on Tuesday as buyers took a break following eight weeks of gains, despite a flood of improved profit reports. The Dow industrials lost 71.85 points to 10528.66, while the Nasdaq composite grew 7.51 to 2147.97.

(WSJ.com) - Motorola's earnings beat forecasts as most of its major divisions posted gains that helped offset weakness at its handset unit.

Techs Seen Weighing on Wall Street

LONDON (Reuters) - U.S. shares were set to open mixed on Wednesday with patchy results from handset giant Motorola late on Tuesday likely to weigh on technology stocks as the next big batch of earnings is awaited.

Nikkei Ends Down After 3-Day Win Streak

TOKYO (Reuters) - Japan's Nikkei average fell on Wednesday as investors took profits on blue chips such as Sony Corp. that had helped power the index to a three-month high the previous day on optimism ahead of the earnings season.

Dollar Take Further Knock After Tuesday's Beating

LONDON, Jan 21 (Reuters) - The dollar continued to lose ground across the board on Wednesday after a two cent hammering against the euro on Tuesday marked the end of a week-long recovery. The euro rose three quarters of a percent to $1.2668 , coming back within sight of record peaks near $1.29 scaled early last week.

BUBA Seeks Option to Sell 600T Gold, Price Static

LONDON, Jan 21 (Reuters) - Gold bullion prices paid no attention to news on Wednesday that Germany's Bundesbank had requested an option to sell 600 tonnes of the metal as part of any renewed Central Bank Gold Agreement (CBGA), which limits sales of central bank gold.

I suppose it's not a surprise to see so many interesting headlines as we enter the two big weeks of earnings season.  One of the worst things from a trader's perspective is a deluge of expected news, particularly when the market is so stretched to the upside after a year-long rally. 

Somehow, traders are going day to day, minute to minute, because we know that this is actually a minefield.  Even if the news is good, the place we are at in the sentiment cycle makes it so that while companies exceed analyst estimates, it's virtually impossible to beat the expectation of the crowd.  It's simply priced for perfection and beyond.  

It's almost ironic to see how investors welcome what the traders dread -- with open arms too -- by buying cheap stocks hand over fist this late in the game, but what do I know?  I'm not a fortune teller.  My job is to find opportunities where the risk is in line with the reward. 

^ 04.01.21 06:31 #

 

Daily Swing Trade

In case you missed the announcement, we are splitting the Daily Swing Trade into two sections so that we can increase output, yet finish work shortly after the market closes.

The plan yesterday was to exit my stubborn short position in DIA if the Dow Industrials did not close under the January 8 swing high.  The $INDU closed under the mark, and we are still short.

This is the daily chart of the Dow Jones Industrial Index.  After the ExtremeADX Reversal to the first downside target (20-day EMA), buyers came for the retracement.  As of last Friday, the upside target of the January 8 swing high was hit. 

The only thing we needed to do was watch what happened on the classic M Test of Top.  The two-day Japanese Candlestick formation is a bearish engulfing pattern.  Once again, confirmation is required in terms of price action on the downside. 

Once we have identifed the generic formation, we can look at specific trade setups for the test of top.  In the Trader's Handbook, we show you the variations on the theme: The Trader Vic 2B, The StreetSmarts Turtle Soup and Turtle Plus One. 

Since $INDU closed above the January 8 swing high last Friday, this test of top sets up the StreetSmarts Turtle Plus One short sale in case it fails the test.  Aggressive traders who wanted to short would have done so intraday yesterday as $INDU came back below the January 8 swing high -- where we know sellers showed up before -- with a stop loss in place just above yesterday's high. 

Another way about this is to use the swing to execute the Trader Vic 2B sell short principle (since the book was vague) where traders place sell stops under the lows of the green bars of the upswing.  This would have triggered intraday, with an initial stop loss placed just under yesterday's high.

In any case, most short sale setups have been triggered and traders will be looking for price confirmation on the downside today. 

MY PLAN: Define and stick to the sell stop should the test not fail. i.e., if the $INDU looks to close above 10,600 with a half hour to go, I will sell the FEB 106 PUTS for whatever I can get. 

^ 04.01.21 07:26 #

 

Heads Up

Most of the economic data on the U.S. Calendar will have been released by the time stock trading opens.

As discussed yesterday, the most aggressive traders will now be short the Dow Industrials on this test of top seen on the daily chart.

The S&P 500 Index is flashing what I would call an Extreme ADX Divergence, a potential spike top.  The two-day pattern here is a harami (the pregant pause, or so they say), and needs a third candle, a tall black one, to confirm, although traders, particularly intraday, can take advantage of early entry by looking for shorting opportunities under yesterday's low.  The first downside target is the January 8 swing high below.

On this latest runup, the NASDAQ 100 is the "least overdone" one of the three majors with a 14-period ADX of 44 for the daily chart.  We should not consider this as "having futher to go on the upside" since the tech stocks were the frontrunners from the beginning.  They might have simply peaked early, which the truly broken ones such as NT, LU, and JDSU did not come to life until last week or so.  Note that the Japanese Candlestick pattern here is the Hangman, which is self explanatory.

If we use the Edwards and Magee formula to measure the move, we can say that the congestion area was about 96 points tall, and if we add that to the point of breakout at around 1451, this produces an upside target of NDX 1547, so the upside target has also been achived for now. 

Basically, the theme is that it's about as good as it gets on the upside, confirmed by positive, if not outright glowing good news from Corporate America and the economy a la Justin Mamis.   The public is buying the cheapies hand over fist in anticipation of more upside propelled by fun-da-mentals.  If I am right about this, then this group is the I Can't Stand It Anymore crowd coming back to buy after a long weekend on a gap up with market orders.  Yep, the buy panic. 

From my experience, this group has a near perfect track record.  They are always the last to buy, since their apparent mission is to buy high and sell low.   And once they have bought, where do we find Greater Fools to move it up another round?  And if everyone has bought, aren't they all potential sellers?

^ 04.01.21 08:26 #

 

Economic Data

MBA Purchase Applications 501.6

(Econoday.com) - The Mortgage Bankers refinancing index jumped 52 percent to 3,327.3 in the week ended January 16, an enormous gain tied to the sharp decline in mortgage rates. Thirty-year mortgage rates, as tracked by Freddie Mac, fell more that 20 basis points to 5.66 percent last week, the lowest rate since July.

But refinancing is only half the story. The Mortgage Bankers purchase index jumped 13 percent to 501.6, the highest reading in the 13-year history of the survey!

Lower interest rates, the result of the weak employment report at the beginning of the month, have apparently reignited the housing market. If sustained, increased refinancing will deepen the pockets of consumers while increased home buying will add to the nation's wealth. Though the report is largely overlooked, it points to gains for stocks. If refinancing once again disrupts the mortgage-backed securities market, the report could point to dislocations in the bond market.

ICSC-UBS Store Sales -0.7%

(Econoday.com) - Cold weather in the Northeast and a lack of post-holiday clearance sales pushed sales down 0.7 percent at the nation's discount and department stores in the week ended January 17, according to the ICSC-UBS weekly chain store report. The report said the lack of clearance sales reflects strong inventory management at retailers and healthy sales during the holiday. Nevertheless, the year-on-year pace sank to 3.9 percent in the week, the slowest rate since August.

Housing Starts 2.088 Million

(Econoday.com) - Housing starts rose 1.7 percent in December to a higher-than-expected rate of 2.088 million, the strongest monthly showing in 20 years! For the full year, housing starts rose 8.4 percent to 1.848 million, the strongest showing in 25 years! Permits rose 3.3 percent in the month to 1.924 million, pointing to even stronger building ahead.

But there were mild negatives. October and November data were revised slightly lower, while starts for single-family homes, which are especially sensitive to interest rates and are closely watched by the Federal Reserve, slipped 0.6 percent in the month. Note that December's gains were led by an 11.6 percent surge in multi-family dwellings.

Redbook +0.1

(Econoday.com) - Redbook reported a soft 0.1 percent rise in the pace of discount and department store sales for the month-to-date period ended January 17 compared with December. The year-on-year pace for the week was up 3.4 percent, down from a 3.8 percent pace in the prior week. The report said cold weather in the Northeast raised demand for warm clothing and other seasonal items. Redbook together with the ICSC-UBS report released earlier this morning suggest that consumers have taken a bit of a shopping break, understandable given cold weather in the Northeast and the modestly heavy holiday shopping season.

^ 04.01.21 08:54 #

 

Helpful Hint

Don't forget that we typically upload analysis and commentary during the trading day.  Hit the reload button of your web browser once in a while to update today's newsletter.

^ 04.01.21 08:58 #

 

History Repeats

Take a look at the chart below.  The top one is the Nikkei, monthly.  The bottom one is the NASDAQ 100, monthly.

I was able to line up the charts so that the time scale corresponds exactly.  Sure makes you wonder, doesn't it?

 

^ 04.01.21 16:03 #

 

Active Trader Transcript

Real time forum log.
Click on the title above to expand this document.

^ 04.01.21 16:16 #

Daily Swing Trade

This is list of top traders ranked by volume.  Interesting that the names are all still the same.

I reviewed all the stocks in the list, and have comments on the following stocks.

Tuesday saw a 10% turnover of the entire float of JDSU on a huge gap up buy panic into the cheapies.  Today, it backfilled into the gap left from Tuesday, a potential point of support.  This is a pullback in an uptrend that has gone vertical on extreme ADX for this symbol and timeframe, so be on guard for a move up that has trouble breaking Tuesday's high if it goes up to test it.

SUNW is on a test of top on the daily chart.  Will need to see price confirmation on the upside, since we know for sure that the January 13 swing high is where sellers previously showed up.

Watch that $9 level on RFMD, just in case it's a neckline.  One word of caution is that these cheap stocks might look techically overdone or dangerous, but the fact is that if there is more panic buying, the last greater fools are going to pile into the cheapies first, providing more support than the high priced stocks. 

Keep an eye out of this red line, for it is the first downside target for INTC if this downswing continues.

Extreme ADX readings for this symbol and timeframe here for CSCO.  Makes you wonder is last Friday's gap up is an exhaustion one?

Gosh, I wouldn't even trade SIRI with your money.

Extreme ADX reading for this symbol and timeframe, but ORCL is clearly a 2-bar bull flag pullback, and therefore, watch for buyers first.

Well, if we were going to buy a pig-dog like CMGI, there were much better opportunities.  Next.

[No chart] SONS is doing a test of top on the weekly chart.

I think it's best to mark out the large congestion area on DELL.

To be continued...

^ 04.01.21 16:22 #