Wednesday, December 8, 2004
Issue Contents:
| 09:03 | The Day Ahead Economic releases and news. |
| 09:04 | From The Archives Potential Returns |
| 09:18 | Market Internals and Direction NYSE, Nasdaq and TSX |
| 09:28 | Swing Trade Setups Featured charts for Wednesday December 8th. |
| 11:53 | Crude Realities Comparison of Crude and Stock Markets |
| 12:56 | Quick Take: Market DIrection Intraday update, comments on short term and longer term trend. |
| 13:23 | Quick Take: Nasdaq A divergence in performance. |
| 16:15 | TrendVue Trader Talk Today's transcript. |
| 23:54 | Swing Scanner Results Wednesday December 8th closing data. |
| 23:58 | Market Statistics For Wednesday December 8th. |
Good morning, on this the 343rd day of 2004.
Housing starts in Canada bounced back in November1. In the US, mortgage applications rose last week2.
Perhaps the housing sector will remain alive for a while yet, given economic results on both sides of the border seem to be signalling a slowdown in growth, rates may remain where they are for a while. Yesterday’s Bank of Canada rate policy announcement3 that held interest rates steady, marked a significant turnabout from only a few weeks ago where a rate hike was expected by virtually all.
That just goes to show that sometimes fundamentals or perceptions of same turn (almost) as fast as our charts do.
In a “shades of Enron” deja vu moment, China Aviation Oil Chief Arrested:
Police on Wednesday arrested the suspended chief executive of the main supplier of jet fuel to China following massive trading losses that led to allegations of insider trading. Chen Jiulin, 43, was detained after flying back to Singapore from China to answer questions from investigators about the biggest financial scandal in the city-state since the collapse of Britain’s Barings Bank in 1995.
What lies ahead in markets for today? After a big down day within a strong uptrend we generally expect either a significant attempt at a reversal, or, a narrow range “pause” day before possible continuation. Of course there is always the outside chance that the market could continue much lower straight away. Today’s market-moving economic news feature is the weekly petroleum status report, due out at 10:30.
US Market Calendar
- 7:00 am: MBA Mortgage Applications Survey
- 10:30 am: EIA Weekly Petroleum Status Report
- 11:00 am: Consumer Comfort Index for the week ended Dec. 3
- 1:30 pm: Treasury refunding, 5 year note
Canadian Market Calendar
- 8:15 am: Housing Starts – Nov.
- 2-year bond auction
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 Housing Starts Bounce Back in November
2 U.S. mortgage applications rise last week-MBA
3 Bank of Canada Leaves Overnight Rate at 2.5 Percent
About a year ago today we published ‘Potential Returns’ – the message remains valid today as it was then:
Of all the email that we receive, the top question is always concerned with how much money a trader can expect to make. While it might seem straightforward, the fact is that, regulatory concerns aside, we simply believe that we cannot set expectations for gains, mainly because we can only make as much money as market conditions allow, regardless of what we want. More >
Market Internals and Direction
If you haven’t glanced at yesterday’s Market Statistics its worthwhile to do so in order to appreciate how quickly the picture is changing here.
Please keep in mind that until recent trading ranges have been broken we can not call a top to this market. We certainly are justified in exercising extreme caution. Note that I’ll be buying selected stocks on the long side myself if conditions present themselves – caution should not freeze us into inaction, but prepare us to take action. Use stops, take profits where required and remain alert.
NASDAQ Composte
- Declining new highs even as the market made new highs for 2004 was, as always, a clear sign that the market was starting to stall
- New lows continues to expand – the laggards of this market are heading lower
- Advancers – Decliners has taken a sharp hook downward
- Declining volume is starting to assert itself
- Total volume was high – that was a significant sell off yesterday
- Drew a “bearish engulfing” candle on the daily and started a new downswing.
NYSE Composite
- shares all the same comments as COMPX and,
- the a/d volume line has turned sharply upward; I plot a/d volume inversely to make it easier to spot changes, so a rising line = rising declining volume.
TSX 60 – has pulled back to the rising trendline here and may be setting up for an “island reversal” pattern (a gap down today or in the next day or so could complete this) which is a significant reversal pattern.
TSX Composite – fails a test of top and breaks the base of support by filling the gap.
Featured setups from Tuesday December 7 closing data symbol scan
Jump to: Long Setups | Short Setups
Notes for the Day
After a big down day, some bounce is to be expected. The challenge here is to avoid being stopped into certain stocks only to have a sell off continue later in the day or tomorrow; but we also want to avoid missing what might be a buying opportunity we’d later regret to have missed.
There is only one option – STOPS. Well, there is a second – CAUTION.
Cheers all.
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.
Retracement or Pause in Up Swing / Up Trend
SBAC – communications
Test of Top – Continuation
HMT a nice looking chart with a test of top. Note that tests sometimes fail, so get stops in under this if long.
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.
Retracement or Pause in Down Swing / Down Trend
CPN – energy
CCU – media – if this does not trigger today, follow any minor bounce up with a sell stop below, for 1 – 2 days more.
COMS – communications tech; if it doesn’t trigger today, follow up.
Test of Bottom – Continuation
Special Situations
LTD – retail – isn’t a “test” but a tricky long here would be to lurk just above yesterday’s relatively narrow range down bar.
VLO (and virtually all of the energy sector – perhaps wait to see what happens at 10:30 before considering any tricky longs in this sector)
Something interesting happened yesterday: instead of rising on falling crude prices, the stock market sold off, and sold off big.
CL – January vs S&P 500 futures
A week ago stock markets surged in tandem with a huge drop in the price of oil. Since then oil had been mostly trading in a sideways range, until continuing to sell off yesterday. What’s unusual – and definitely a departure from what we have come to expect, is that markets tanked even as oil itself declined.
This is the first significant sign of a decoupling of these two markets which have been linked for a long time now. It probably signals that markets believe crude oil’s decline is closer to the end than the begining, and thus one of the legs underneath the stool which the market had been sitting on may be in the process of being taken away. Its not actionable information today, but useful to note for the future.
Weekly Inventory Reports – Up or Down?
From the EIA Weekly Report:
U.S. commercial crude oil inventories (excluding those in the Strategic
Petroleum Reserve) increased by 0.6 million barrels from the previous week. At 293.9 million barrels, U.S. crude oil inventories are in the middle of the average range for this time of year. Distillate fuel inventories rose by 1.4 million barrels last week, but are just below the lower end of the average range for this time of year. Almost all of the increase was seen in low-sulfur (diesel fuel) distillate fuel. Total motor gasoline inventories increased by 2.4 million barrels last week, and are at the top of the average range. Total commercial petroleum inventories rose by 5.7 million barrels last week, and are around the middle of the average range.
Yet the American Petroleum Institute weekly status report, also released today, had this to say:
The American Petroleum Institute (API) said today distillate inventories fell. For the week ended Dec. 3 inventories dropped 1.2 million barrels to 120.8 million. Crude stocks rose 583,000 barrels to 295.1 million, gasoline stocks rose 2.6 million barrels to 207.3 million barrels.
With daily contradictions coming in, even on base statistics which you would think are absolute, is it any wonder that we let price be our primary guide?
Dow Futures – yesterday’s break down followed a failed test of top which we shorted at 10667 on Friday and again at the arrow marked here. I’m holding 1/2 that original short, having covered part of the position this morning on an intraday reversal.
Marked out overhead is where significant resistance comes in at two locations; if the market is really weak, price won’t even bounce to the first target.
S&P 500 Futures – ES 45M chart – this is officially a change of trend in this time frame (the 45M chart) from up to down. I’ve marked off the two likely spots for resistance. If this market is really weak, it will trade mostly below the 50% line on yesterday’s daily bar.
Bottom Line: Unless or until price can regain the upper most range marked out here on the S&P 500, the market is now in a new down trend. Confirmation of this will only occur once a set of lower swing highs and lower swing lows appear on the daily charts—clearly that point is many days away from here, and price is not likely to head there in a straight line, if at all.
What we can take away from this is that if the market can’t regain this trading range fairly quickly, then a deeper retracement is highly likely. We won’t be able to call a top (or not) to the market until a number of days from now.
So – a local change of trend is in place, but the primary trend on the daily, weekly and monthly charts remains up. We are cautious on the long side, but also open to new long ideas.
If price can firm up and act strongly here, tomorrow we’ll be more encouraged to hunt down new long opportunities; longer term traders and investors should use any bounce to tighten up stops further under profitable positions, just in case.
Of the three major indexes, the Nasdaq is putting in the best performance relative to price and pattern action alone.
NQ – NDX 100 Futures
What we see here is that NQ has bounced to the underside of the upper most range and COMPX has moved roughly to the 50% point of yesterday’s tall down bar. This is the first major area of resistance we look to price to weaken at. Keep in mind that in this time frame, price is trending down – with a lower swing high and lower swing low than the former. The feature of most importance to us is the bottom of the trading range here ~ 1605 – if price can continue to push higher and hold, the long game in that market may well be on again.
What happens next will tell us a lot about the remainder of the day and perhaps the rest of the week…
Today's transcript.
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Wednesday December 8th closing data.
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Statistics for Wednesday December 8
Note: Statistics are compiled based on our custom symbol universe of the most heavily traded stocks.
| Symbols in Up Swings | 189 |
|---|---|
| Symbols in Down Swings | 580 |
| Up/Down Swing Ratio | 0.32 : 1 |
| Advancers | 55% |
| Decliners | 44% |
| Unchanged | 1% |
| Close > 20EMA | 55% |
| Close > 50SMA | 74% |
| Close > 200SMA | 66% |
| 20EMA > 50SMA > 200SMA (trend up) | 44% |
| 20EMA < 50SMA < 200SMA (trend down) | 11% |
Reminder: Thursday is rollover day for stock index futures - March 2005 will become the lead month contract, the "H" month i.e. ESH5.