Tuesday, December 7, 2004
Issue Contents:
| 09:03 | The Day Ahead Economic releases and news. |
| 09:29 | Swing Trade Setups Featured charts for Tuesday December 7 |
| 14:53 | Sales Rise, Slip, all at once. Is the cup half full or empty? |
| 16:15 | TrendVue Trader Talk Today's transcript. |
| 22:29 | After the Bell Caution warranted, our yellow alert proved timely indeed. |
| 22:45 | Swing Scanner Results Tuesday December 7th closing data. |
| 22:46 | Market Statistics For Tuesday December 7th. |
Good morning, on this the 342nd day of 2004. This morning’s retail sales report for the last week of November showed softness in the sector; according to some analysts this matches a pattern noted last year and stronger sales may be ahead1.
Regardless, I’ve noted that only the retail drug store sector, and to a lesser extent retail foods, are still pointing up – all the others including broadline, specialty, apparel – are in down swings and in danger of starting new down trends.
US Market Calendar
- 7:45 am: ICSC-UBS Weekly Chain Store Sales for the week ended Dec. 4
- 8:30 am: Productivity and Costs
- 8:55 am: Johnson Redbook Retail Sales Index for the week ended Dec. 4
- 10:00 am: Challenger Job-Cut Report
- 3:00 pm: Consumer Credit
Canadian Market Calendar
- 9:00 am: Bank of Canada Policy Announcement
Earnings and the Federal Reserve
For earnings highlights, please see today's WSJ Earnings Calendar.
For a list of upcoming speeches, congressional testimony, Federal Open Market Committee material, and statistical releases, please visit the What's Next page of The Federal Reserve Board website. Recently released Federal Reserve Board material, including market moving FOMC decisions and speeches by members, will be found on their What's New page.
1 Chain Store Sales Slip in Latest Week
Featured setups from Monday December 6 closing data symbol scan
Jump to: Long Setups | Short Setups
Notes for the Day
Keeping in mind that the indexes remain within easy striking distance of the recent top, until a confirmed break of the upper most significant intraday trading range occurs, we have to assume that the market can still power up. Truly the market is on the knife edge here of passing or failing this significant test – that’s why we are swing traders, to exploit such times.
I’ve posted a number long and short trades; in TrendVue Trader Talk we shall bring more up once direction is clear (which may not be today…).
Entry and Exit Strategies
(Repeated for new clients)
Entries: Each chart posted includes the TrendVue High/Low indicator in the chart legend, showing the high and low of the prior day. We refer to these values frequently for setting stops, alerts and initial protective stops.
Our trade entry methodology stresses that price should prove to us where it wants to go, consequently all of our setups involve placing entry stop/stop limit orders where a trade will be initiated for us automatically, if price is able to move in the expected direction.
When price does not comply, we evaluate the setup to determine if it is either a) an expanding pattern or b) an invalidated setup. For example, a 3 bar bull flag setup that does not trigger can be followed up the next day with a buy stop above the new 4th bar, provided that price doesn’t invalidate the bull flag pattern.
Exits: Once in a trade, we must place an initial protective stop as soon as possible. Consider this stop your crash stop – an emergency measure which you hope will never get used, but is there for your protection in case you lose all connectivity to your broker or some other unforseen event takes place. The initial protective stop, unless noted otherwise, is always at the opposite end of the bar used to trigger a trade.
For example, if our trade setup for a long trade is based upon a break of yesterday’s high, we will use yesterday’s low as our initial protective stop.
The next task for us, once in a trade, is to find the earliest reasonable opportunity to move stops up. Trade and risk management is a highly personal topic; we can only relate to what works for us. In general, once a trade is substantially profitable, or has started to trend on a 10 or 20 minute chart intraday, I move to a break-even stop immediately.
Once the trade has surivied its first day, we are already on watch to look for our profit exit. Here your personal objectives come into play. A longer-term investor using swing trading techniques to improve entry and exit will tend to give a trade some room. Our recommendation is to use the break even stop until the stock starts to trend (higher highs, higher lows or the reverse in a down trend).
Short term swing traders will tend to use price extension estimates and pre-place exit orders at these estimates. This discussion goes beyond the scope of our daily swing trade service, however we are happy to entertain questions in TrendVue Trader Talk on any subject.
Long Setups
General common strategy: Unless noted otherwise, buy stop just above the “high” value, with an initial protective stop at the low value of the bar, not below the bar.
Test of Top – Continuation
SMH – semiconductor ETF – test of range top here, buy stop or alert on break of yesterday’s high. Move to break even stops asap, even intraday – do not allow a minor wiggle up to reverse and sink deep into yesterday’s range.
AMAT – semiconductors – follow SMH rules.
TQNT – semi
QCOM – this was a great pick of ours a number of days ago – swing traders will have taken profits on Friday at the test of top. Now another opportunity to attempt a long is here; caution should be paid to the resistance at the top. Also, if still long QCOM a break of Monday’s low should shake out any remaining swing traders who may have been hoping for more.
BCE:C (TSX) – frankly this could go either way – two inside days or harami in a row and a possible bear flag. This one is probably worth watching with both long and short in mind.
CLS:C (TSX) (Also CLS:NYSE) – inside bar at a test of range high and ascending triangle. Buy stop 18.91, initial protective stop if filled 18.48 but do move this up quickly.
G – consumer
BBH – biotech ETF, a safer choice than an individual name like ABGX if planning on turning a swing trade into a medium term or longer hold.
ABGX – biotech – following a 2B test of bottom in early November has pushed up strongly. Buy stop just above this small retracement; do not allow price to sink into the range below.
Pauses in Up Swings
LTXX – still intact upswing.
Short Setups
General common strategy: Unless noted otherwise, place a sell alert at or just below the low of the setup bar, and look for the first failed intraday bounce after the low has been broken. What we are looking for is price to push down, bounce a little, and fail again – this is where we want to get short.
Test of Bottom – Continuation
KSS – retail – flirting with failing its range low – find an intraday entry for a short if the 2 day low is broken.
BBBY – retail – if this doesn’t trigger today keep it on the short list for another 2 days.
JCP – retail
Sales Rise, Slip, all at once.
Noted this morning:
Chain Store Sales Slip in Latest Week
NEW YORK (Reuters) – Chain store retail sales continue to fall during the week following the Thanksgiving holiday, a retail report said on Tuesday.
Sales fell 1.7 percent in the week ended December 4, compared with a 1.5 percent decline in the previous week, the International Council of Shopping Centers and UBS said in a joint report.
And then a little later today once the Redbook numbers come out:
NEW YORK (Reuters) – U.S. chain store sales rose in the week ended December 4, as average sales were generally ahead of last year, but customer counts were down, a report said on Tuesday.
Compared with December a year ago, sale rose 1.8 percent, following a 0.9 rise in the previous week. But compared with November, December to-date sales were down 0.8 percent.
“This disproportionate sales pattern has intensified in recent years as customers have learned to shop either at the last minute before the holiday or in the week after Christmas to exploit merchant markdowns,” said Redbook Research, an independent company.
So which is it? Are sales going up, or going down?
Today's transcript.
Click on the title above to expand this document.
Today the S&P 500 turned in its largest sell off in the past 10 days. No doubt many market participants were surprised, but around here, we’ve been sounding a cautionary note for a while.
In Market Direction, Thursday December 2 we started to zero in on the pending test of top in S&P 500 futures.
What does caution mean?
What I’ve done is raise trailing stops now quite tight to positions held – in most cases I have my exit stops at the low of today’s daily bar, or, off of intraday patterns using 20 or 78 minute charts.
On Friday in Market Update we outlined a short swing trade in S&P futures entered approximately 5 minutes after the high of the day and set out a case of even more caution:
Where to?
Since the market is clearly not trending down in daily and weekly time frames, there is no reason for us to yet believe that a significant down swing is before our eyes here, but we do have a number of data points that suggest caution.
On Monday before the open in Market Direction we looked at market internals and noted in particular that new highs have been contracting even as the Nasdaq was pushing to new 2004 highs. This is never a good sign for a rally.
And then last night in Market Statistics I briefly mentioned :
In the meantime we are on yellow-alert for a more significant pull back. It doesn’t hurt to be ready.
Finally, this morning in our real time discussion forum, TrendVue Trader Talk, before the selling really got going we had another look at market internals and noted that the advance / decline stats were continuing to roll over. We’d stalked the short side earlier, and had been prepared to go long as well if it made sense, but all the work we’d done over the prior few days certainly added justification to our bias and allowed us to be on the right side of the market again:
12:32:31 Mike: sorry for the squished view here but I wanted to show two things: 1 the failed test of top on the 1M chart. 2, perhaps more importantly, note that the pattern of higher swing highs and lows is now broken?
12:33:29 Mike: So under any bounce to the trendline I want to sell.
12:38:47 Mike: SELL STOP LIMIT 1/2 size YM 10557 under the last 1M bar.
12:39:10 Mike: 5M bull flag in NQ
12:39:14 Mike: This really is now or never.
12:40:47 Mike: NQ is the strongest of the bunch but if it pulls back much more…
12:44:21 Mike: Short YM
12:44:27 Mike: 10560 initial stop.
And the result: Markets closed at their lows, most clients took profits. Myself I’m hunting larger game here so I finished the day holding both Friday’s ES remaining short position and today’s new YM short with 104 points of profit.
While it might seem that these intraday trades were highly opportunistic and short-term oriented, in fact we’ve been taking a longer term view by keeping in mind what has been happening over the past few weeks and specifically the last few days. What we have been seeing is a steady stream of data points suggesting at least an important short term top was approaching. Having this knowledge in our back pockets gives us confidence to do two things:
- Tighten up stops on existing long positions, to be sure that profit taking is automatic if the market does move down as we were expecting; and,
- Speculate on the short side more aggressively.
Over time we can refine our sense for when price has moved too far in either direction, and this is one of the key abilities I hope to pass on to clients.
Tuesday December 7th closing data.
Click on the title above to expand this document.
Statistics for Tuesday December 7
Note: Statistics are compiled based on our custom symbol universe of the most heavily traded stocks.
| Symbols in Up Swings | 322 |
|---|---|
| Symbols in Down Swings | 447 |
| Up/Down Swing Ratio | 0.72 : 1 |
| Advancers | 13% |
| Decliners | 87% |
| Unchanged | 1% |
| Close > 20EMA | 13% |
| Close > 50SMA | 74% |
| Close > 200SMA | 67% |
| 20EMA > 50SMA > 200SMA (trend up) | 48% |
| 20EMA < 50SMA < 200SMA (trend down) | 9% |
While almost 1/2 of our symbol list remains in up-swings, one can’t help but think that most of these will change with even a marginal down day on Wednesday. Since Friday the number of stocks trading above their 20 period moving average has dropped 43 points from 56% to 13%. While the longer term averages are still underneath most stocks, clearly its time to pay very close attention to the direction of individual stock names we may hold in our portfolios.
Myself, I have not had this much cash in my portfolio since the summer. Trailing profit taking stops have been knocking me out of positions one by one over the past two weeks. Unsurprisingly this behaviour, in a market which everyone seems to believe is going much higher, is another data point that helps underscore the cautionary case we’ve been building.
As we’ve discussed in TrendVue Trader Talk, the market isn’t officially in a new trend down until a number of hurdles are crossed. Price isn’t there yet, and may not go there for all we know, but for the time being caution remains warranted.