Tuesday, August 10, 2004
Issue Contents:
| 09:02 | The Day Ahead Economic releases and strategy. |
| 09:34 | Swing Trade Setups From Monday's stock scanner. |
| 10:21 | While We Wait From the archives... |
| 10:53 | Intraday Update 3 Inside Up trade scenario triggered. |
| 14:20 | FOMC Release 1/4 point hike. |
| 16:15 | TrendVue Trader Talk Today's transcript. |
| 16:15 | TrendVue Morning Trader Today's transcript. |
| 19:16 | The Oil We Eat Linking the food chain to energy. |
Good morning – please be sure to review the strategy notes for today, and take note of the caution we suggest in advance of the FOMC interest rate policy announcement at 2:15 p.m.
You’ll be able to find the news release once released (as well as past releases and meeting minutes), at the Federal Reserve website.
US Market Calendar
*7:45 ICSC-UBS Store Sales
*8:30 Productivity and Costs1
*8:55 Redbook
*9:00 FOMC Meeting Begins
*1:00 4-Week Bill Auction
*2:15 FOMC Announcement
Canadian Market Calendar
*8:15 Housing Starts – July
*8:30 New Housing Price Index – June
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 U.S. Productivity Stronger Than Expected—WASHINGTON (Reuters) – The productivity of U.S. businesses rose at a swifter-than-expected pace in the second quarter but labor costs still gained at their fastest rate in two years, the government said on Tuesday. Nonfarm business productivity rose at a 2.9 percent annual rate in the second quarter, the Labor Department said, well ahead of the 2 percent gain expected by Wall Street.
Featured setups from Monday's closing data symbol scan
Jump to: Long Setups | Short Setups
Notes for the Day
Lots of potential shorts showed up in our scan today – mostly of the “one up day wonder” variety where a single up bar in a down trend, typically at a test of low, offers a relatively safe place to lurk underneath in case price decides to resume the dominant trend.
We've published these even though there is a high likelyhood that few of them will get triggered - its all up to reaction to the FOMC today, in particular reaction to the wording that accompanies the rate decision.
Important: In advance of a FOMC announcement, we generally cease trading by approximately 12:00pm, particularly in highly leveraged vehicles like index futures and options. Please see the strategy note for today for the rationale on this position.
Entry Strategies
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.
Long: Unless noted otherwise, buy stop 1 penny higher than the high value, with an initial protective stop at the low value.
Short: Sell alert 1 penny less than the low value, go short intraday after the stock makes a minor bounce and fails. Initial protective stop at the high value.
Long Setups
Test of Bottom – Reversal
BRCM inside day at a test of bottom and a potential exhaustion gap. Buy stop 32.85, protective stop if filled 32.04.
DIA subject to all cautions noted in today’s strategy briefing, intraday traders may wish to explore going long index futures. Personally, I will be stepping aside until well after the FOMC announcement. Just want to bring to your attention that DIA is testing an important range bottom which can go either way up or down from here. We won’t be at all surprised if it goes BOTH ways before the week is out.
Short Setups
Test of Bottom – Continuation
ESV “one up day wonder” variety of a test of range low. Sell alert at 28.26.
BSV “one up day wonder” variety of a test of bottom. Sell alert 32.04.
GE “one up day wonder” variety of a test of a range bottom, after having broken down from an ascending triangle (the A.T. is typically a ‘bullish’ pattern). Sell alert 31.48, aggressive intraday traders only.
BBY “one up day wonder” variety of a test of of bottom. Sell alert 44.78.
MRK “one up day wonder” variety of a test of bottom. Sell alert 43.57.
ACS “one up day wonder” variety of a test of range bottom, sell alert 49.51.
MSFT has a small Head & Shoulders pattern here, measured move is marked out. Is likely to trade in whatever direction the broad market turns next.
From the archives, this time last year:
- The EX/RC/EX Pattern : This article documents a setup used by Carlos Plech.
- The Divergence Trade : Example of indicator divergence trade setup.
- The Anti Trade : Example of the Buy Anti.
Unsurprisingly, off a NR7 day even the smallest movement has triggered a long setup known as the 3 Inside Up (refer to yesterday’s strategy notes for today for a brief discussion on this).
We prefer to use short term intraday instruments – primarily stock index futures – to capitalize on these moves since we know that we want to be flat or at least out of today’s positions before the Fed speaks up this afternoon.
What if the market just moves up? Good question. Everyone hates to miss a move, but there is no crystal ball that can accurately forecast what the collective emotion of millions of traders and investors will be in the minutes and hours after a FOMC announcement.
Trading is largely about making decisions on risk – even if you get direction wrong more often than not, you can still be a net winner if you deal with risk properly. Given the past history of market behaviour when the FOMC announces, the risk level is very high, regardless of whether one is net long or short the market. Frequently the initial movement off the reaction to the announcement is not in the direction the market settles on within the following 24 hours.
And what follows the FOMC to move markets? Earnings? Mostly all done. It seems that fear is what we are left with for the next while – the Olympics, Republican National Convention, terror, energy – its a full plate. Post FOMC oil will again dominate talk and therefore emotions (n.b. crude futures just crossed $45 a barrel).
Against this backdrop we can choose to limit our capital at risk or stand aside completely. This seems an appropriate time to remind readers that often the most important decision a trader must make is to do nothing at all.
The Federal Open Market Committee announced its target for the federal funds rate
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 1–1/2 percent.
The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. In recent months, output growth has moderated and the pace of improvement in labor market conditions has slowed. This softness likely owes importantly to the substantial rise in energy prices. The economy nevertheless appears poised to resume a stronger pace of expansion going forward. Inflation has been somewhat elevated this year, though a portion of the rise in prices seems to reflect transitory factors.
The release did not change the stance of the FOMC, signaled through the last committee decision, and repeated today: “the Committee believes that policy accommodation can be removed at a pace that is likely to be measured”.
Today's transcript.
Click on the title above to expand this document.
Today's transcript.
Click on the title above to expand this document.
We don’t stray into politics except to look at issues from the eye of an investor. Quite be accident I ran across this article, while coincidentally looking at agri-business stocks. Its even handed in that meat-eaters and vegetarians both get roasted, and the piece presents a linkage between food and energy which you may find interesting.
The Oil We Eat
Originally from Harper’s Magazine February 2004. By Richard Manning.
Energy cannot be created or canceled, but it can be concentrated. This is the larger and profoundly explanatory context of a national-security memo George Kennan wrote in 1948 as the head of a State Department planning committee, ostensibly about Asian policy but really about how the United States was to deal with its newfound role as the dominant force on Earth. “We have about 50 percent of the world’s wealth but only 6.3 percent of its population,” Kennan wrote. “In this situation, we cannot fail to be the object of envy and resentment. Our real task in the coming period is to devise a pattern of relationships which will permit us to maintain this position of disparity without positive detriment to our national security. To do so, we will have to dispense with all sentimentality and day-dreaming; and our attention will have to be concentrated everywhere on our immediate national objectives. We need not deceive ourselves that we can afford today the luxury of altruism and world-benefaction.” “The day is not far off,” Kennan concluded, “when we are going to have to deal in straight power concepts.” [...]
David Pimentel, an expert on food and energy at Cornell University, has estimated that if all of the world ate the way the United States eats, humanity would exhaust all known global fossil-fuel reserves in just over seven years. Pimentel has his detractors. Some have accused him of being off on other calculations by as much as 30 percent. Fine. Make it ten years. [...]
Prairie’s productivity is lost for grain, grain’s productivity is lost in livestock, livestock’s protein is lost to human fat-all federally subsidized for about $15 billion a year, two thirds of which goes directly to only two crops, corn and wheat. [...]
This explains why the energy expert David Pimentel is so worried that the rest of the world will adopt America’s methods. He should be, because the rest of the world is. Mexico now feeds 45 percent of its grain to livestock, up from 5 percent in 1960. Egypt went from 3 percent to 31 percent in the same period, and China, with a sixth of the world’s population, has gone from 8 percent to 26 percent. Full article
Clearly this isn’t an issue for only the US but for all1 the western2 world3. Little did we realize, as our belts tightened, that we needed to think about our cupboards as well as our gas tanks…
1 The prevalence of obesity has increased by about 10–50% in the majority of European countries in the last 10 years and currently affects 77% of males living in urban areas of Western Samoa in the Pacific. About Obesity
2 Canada’s obesity rate doubles in last 15 years
3 22% of men and 23% of women are now obese – last year’s figures showed 20% of men and 19% of women were obese. British Heart Foundation Statistics Factsheet 2004