Wednesday, July 14, 2004
Issue Contents:
| 09:28 | Today's Strategy Preparing for the gap down. |
| 13:25 | Quick Take: Euro Retesting the trend-change range. |
| 16:15 | TrendVue Trader Talk Today's transcript. |
| 16:15 | TrendVue Morning Trader Today's transcript. |
| 16:30 | Symbol Scanner Results Wednesday July 14th closing data. |
| 19:58 | The Really Big Picture An essay. |
Good morning.
Its hard to escape hearing about Intel this morning as INTC has dominated the news for a solid 24 hours. Its report after yesterday’s close has put enough weight on the shoulders of the semiconductor space to weigh that entire group down – we can expect a gap down at the open more or less across the board.
INTC was last trading at 24.26.
Thus the question for today is whether price action after the initial gap will bounce and hold – indicating some sort of short term exhaustion in selling; or bounce/no bounce and continue selling off.
In the non-tech indexes, we are watching to see if the low of the last three days is broken and what the follow through is – trendline watchers for SPX, NYA and INDU have a target dead ahead.
Given that sentiment has followed INTC blindly here, our first thought is we should look for a gap and at least short term exhaustion in selling with a potential to reverse and retest the underside of the gap at the least.
After checking several dozen semiconductor and tech stocks the picture is similar for all.
The setup thus will be the same for most symbols – if we want to get short, wait for the gap to bounce and sell the first bounce as it keels over and move to a break even stop at the earliest possible opportunity. If we want to go long, follow price down after the gap and buy the first attempt to bounce – but be prepared to sell in an instant, as the trade should put you in positive territory right away and you want to move to a break even stop ASAP, in case the gap, bounce, and fail scenario comes to pass.
We never know if price gaps are going to signal the end of a move, or set up a new leg, until after the fact, so there is little we can do but monitor the intraday price action here and be ready to act. In the meantime, scalping is the order of the day – pick a side (long or short) and act decisively with exit stops. Or, as we say all the time, opting to do nothing (no new trades) until the coast is clear is often the preferable solution.
An intraday update will follow shortly.
Carrying on with yesterday’s Quick Take: Gold and Currencies theme, lets look at the EURUSD pair.
First, a quick comment on the importance of trading ranges, and we’ll use EURUSD as an example.
The shaded blue area marks out the uppermost trading range for this currency pair. Going back through the archives here at TrendVue you’ll see I’ve had that trading range mapped out since Februrary/March of this year. Why is this important?
Lets use a rising chart like EURUSD as an example of how we can spot a change in trend. First, we locate the potential end of a trend by identifying the (current) uppermost trading range. Its important that the range follow a trend of some duration.
When price has trended for some time, its only natural that buyers will take a pause. This is what sets up the trading range as buyers and sellers debate whether price has more room to go. We won't consider tests of tops in this discussion – we'll revisit that topic at a later date.
Its important to remember that the a change in trend is not confirmed by the highest tick at the top but by a failure to hold the bottom of the uppermost trading range.
Back to our example, when early this spring we noted EURUSD had failed to hold its uppermost range bottom, we then had no choice but to immediately change our bias and presume that a change in the long term trend was at hand.
Once the change of trend is in place, we hold that bias – until proven otherwise – which means until price can regain the range low and hold.
Sounds great. How do I use this information? Whether you trade currencies or stocks, the principle is the same. We know from long experience that trading with the trend is by far the easiest and most reliably profitable approach for investors and traders to employ. Knowing that a trend has changed from up to down tells us what we need to do: we look for bounces to sell, we _do not_ look for retracements to buy.
Back to the subject at hand: EURUSD is at a very interesting juncture here, as price has pushed back up into the highest trading range, pulled back a few days, and is making an attempt to push higher again here.
IF EURUSD can hold this level, it will signal a) the trend in the bigger picture is back to UP, as opposed to DOWN then SIDEWAYS, and b) open the possibility of a rally to previous highs.
Such a development would put the US$ under pressure, impact Gold in a positive manner, and potentially increase the volatility in oil.
As you’ll recall from yesterday’s quick take on Gold, it too is testing a range high of sorts – if EURUSD fails here and the US Dollar index strengthens, it will be time to exit Gold again. Whenever we have these related securities performing important tests at the same time, extra vigillance – for new opportunities or to take profits and stand aside – is required.
Today's transcript.
Click on the title above to expand this document.
Today's transcript.
Click on the title above to expand this document.
Wednesday July 14th closing data.
Click on the title above to expand this document.
by Mike Watkins
Repeat with me, three times, the following:
- Think in multiple time frames.
- Think in multiple time frames.
- Think in multiple time frames.
Whether we are sizing up a minute chart for a fast moving intraday futures scalp, or examining a pattern or trade setup on a daily chart, we should all be in the habit of thinking at least one time frame higher than the time frame in which we plan to trade. For example, the in and out scalper might use 5, 15 and 45 minute charts as primary tools; where swing traders and investors will more often consult daily, weekly and monthly charts.
Thinking one or two time frames larger than the time frame you plan to trade in provides perspective which might otherwise be missed. Patterns and targets which are difficult to fathom on a 5 minute chart might be readily apparent on a 15 minute chart. Additionally, moving up in time frame puts what we see in context with what investors managing much larger portfolios are looking at.
Today in Quick Take: Euro we looked at trading ranges and discussed how they can be used to identify longer term changes of trend.
But what defines ‘longer-term’? Some of our subscribers have an investment time horizon measured in months, if not years, while others consider holding a position for more than a couple of days a ‘long time’. Sit Judy Scalper and Henry Investor down for lunch together and watch confusion reign while each talks about the bigger picture and longer term, from their own perspective.
For the purpose of this discussion, the bigger picture means using the daily chart as our baseline, and we'll review the major indexes in multiple time frames out from there.
On the daily charts of COMPX (Nasdaq Composite), NYA (NYSE Composite), INX (SPX or S&P 500), and INDU (Dow Jones 30 Industrials) indexes, three of four are actually in unconfirmed up swings. A break of today’s high would confirm the upswing, conversely a break of today’s low will reverse the swing direction back down.
- COMPX
- has reversed the uptrend on the daily, evidenced by continued trade below the upper-most trading range.
- retraced approximately 76% of the rally from the spring 2004 lows
- NYA
- has not yet reversed the uptrend on the daily, but remains within the upper-most trading range.
- presents a small congestion pattern – a ledge – just above the range bottom.
- INX
- has reversed the uptrend on the daily, evidenced by continued trade below the upper-most trading range.
- retraced approximately 50% of the rally from the spring 2004 lows
- INDU
- has reversed the uptrend on the daily, evidenced by continued trade below the upper-most trading range.
- retraced approximately 50% of the rally from the spring 2004 lows
Lets move up to the weekly time frame:
If we forget the math for a moment, its tempting to laugh off the recent declines. What is immediately apparent is that all markets have performed spectacularly well since early 2003. Forgetting for a moment that stock market indexes mask real performance of individual equities, clearly long term value-oriented investors that were buying in late winter 2002 have done extremely well for themselves.
But do they know when to sell? What criteria does the longer term investor have? Valuation? We’ve seen valuation contract, but not implode (even after the largest market bubble in history). Valuation is based on sentiment, and the most important sentiment indicator are price charts themselves.
All four indexes share the following characteristics:
- all are in down swings.
- the rising trendline from spring 2004 has been broken – more a result of time (side ways consolidation) than price decline at this time. Note that a break of a trendline does not a new trend make.
- a series of lower swing highs and lower swing lows are now in place on the weekly chart – this is the very definition of a down trend and affects our bias.
- price remains within the trading range defined here in 2004.
Finally, lets look at the monthly charts. Here we are unconcerned about recent swings – while the recent ranges are visible, in this time frame markets are merely pausing.
- all are in down swings.
- COMPX retraced approximately 25% of the sell-off from the 2000 bubble of our life time. Some consider this a bear-market bounce. We merely call it a long-side trade opportunity that may or may not have run its course for now.
- NYA and INDU retraced most of the decline from 2000, retracing 76% or more of the losses from the past four years.
- The increasingly tech-weighted INX Standard & Poors 500 index retraced almost exactly 50% of the new millenium’s losses.
- all are in their 5th month of decline/sidways consolidation. No reversal of trend is currently in place; price action in this time frame can be summed up as “pause”.
Clearly sentiment has brought valuations significantly higher. The take away from this is that if the market starts to trend and trade below the range on the weekly chart, there is real potential for decline. A fibonacci ruler has been deployed on these charts to act as a sign post in a relatively unfeatured landscape.
For the time being, daily and weekly charts will remain our guides. A retest of the spring lows would be the single most important event facing the market. A reversal up and out of lower trading range present in COMPX, INX and INDU is the bar which market bulls need to clear.
Summing it all up
The primary influence for all indexes is the direction of the weekly chart, which is currently trending down. Yet price is within easy distance of passing or failing a test of the current range bottom, so we know continuation or reversal may be close at hand.
The market can drift sideways for much longer than we would prefer – this process of testing and clearing the lower trading range may be over in a day (lets hope!), may take another five or ten days or more (shudder!). Trading within a range is the very definition of a lack of direction, and this means we have to reduce our trading frequency, size, and expectations. Or, we can consider stepping aside until direction becomes obvious again.
We won’t be frozen into complete inaction in the meantime. While the tide is slack here, all boats are not rising or falling at the same time, but some are moving nonetheless. Identifying sectors and companies that can move in this environment will be our focus.
© 2004 Michael Watkins