Monday, January 10, 2005
Issue Contents:
| 08:55 | The Day Ahead Economic releases and news. |
| 09:17 | Quick Take: Crude |
| 09:19 | Swing Trade Setups Featured charts for Monday January 10th. |
| 09:20 | Anatomy of a Trend Change Looking at how the process begins. |
| 10:39 | Looking Back, Seeing Forward |
| 16:15 | TrendVue Trader Talk Today's transcript. |
| 16:20 | Fed Chatter Atlanta Fed Bank President Jack Guynn and Fed Board Governor Donald Kohn stir the pot. |
Good morning – its January 10th and a fairly light day from an economic news perspective:
US Market Calendar
- 10:00 am: Wholesale Trade – Nov.
- 11:00 am: 5-year note auction announcement
- 11:00 am: 10-year TIPS auction announcement
- 1:00 pm: 3 & 6-month T-bill auction
Canadian Market Calendar
- 8:30 am: Building Permits – Nov.
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.
Crude is trading closer to Friday’s highs than lows, and on the daily chart:
We can see that the crude contract is up against resistance. IF price can break higher, the key level of resistance resides near the $50 level, a convenient round number that will make for good press (people seem to love round numbers, especially in headlines) should a rise that holds from here occur.
Featured setups from Friday January 7, 2005 closing data symbol scan
Jump to: Long Setups | Short Setups
Notes for the Day
On the long side there certainly are more opportunities, however as I’ll discuss later today in “Anatomy of a Trend Change” the key question we’ll have to keep in the back of our minds for a while here when taking long-side trades is whether we are in fact trading on the “right hand side of the mountain”—in other words, the slope that is heading down.
Entry and Exit Strategies
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 Bottom – Reversal
ADBE – hammer at the bottom edge of a range, however note cautions. A single minor up day here would make this a good stock to stalk short.
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 Top – Reversal
TWX – single up bar at a test of the range bottom.
Retracement or Pause in Down Swing / Down Trend
JNPR – harami in a tall down bar – 3 inside up setup, however if trading this long be very cautious on the long side – any minor bounce here will be hunted by short sellers, including us for a couple of days. Will discuss this stock as an example in a subsequent post this morning. Sell short alert at Thursday’s low, if the 2 day low broken find a place intraday to enter.
NVLS
Test of Bottom – Continuation
AA – stealth bear flag forming here at a retest of prior swing low.
by Mike Watkins
A number of times last week we discussed how the uppermost trading range is a key tool in helping identify whether a change of trend is underway.
First Review:
Market Update: COMPX – Jan 4 2005
Lets look at how this concept can be used to evaluate a stock on the daily chart. Our victim today, Juniper [JNPR].
I plan on turning this quick review into a more detailed Knowledge Base article, but after last week (Trader Talk Transcript, January 5th) it became clear to me that we have to do a quick refresh of key concepts. This article will be entered into the Knowledge Base as a DRAFT discussion on trend change and other concepts until I can complete a number of inter-related projects and get on with the revising of all our KB content.
Basic Terms
- Up Bar – High > High(1), Low > Low(1), or in English, the bar high is higher than the prior bar’s high, and the bar low is higher than the prior bar’s low, irrespective of where price closes.
- Down Bar – the reverse of Up Bar. High < High(1), Low < Low(1)
- Inside Bar – price is entirely contained within the bar before. High < High(1) and Low > Low(1)
- Outside Bar – the bar high is higher than the prior bar’s high and the bar low is lower than the prior bar’s low. High > High(1), Low < Low(1)
- Up Swing / Down Swing – the simple way of determining if a stock is in an up swing or down swing is to see if price has broken a 2 or 3 day high (new or continuing up swing) or low (new or continuing down swing). Our automated tools (and our eyes) use a more sophsticated algorithm than this, but for most purposes this basic rule will allow one to draw or visualize price swings with enough accuracy to then determine the price trend of a stock or market.
- Trend – idenfifying a trend is very simple – map out the swings and determine if price swings are making:
- higher highs and higher lows (up) or
- lower highs and lower lows (down) or
- highs and lows within the range of recent highs and lows (sideways – no trend)
- Retracement – when price is moving directionally up, a retracement is a relatively minor pull back in price, generally 2 – 6 bars in length for the time frame we are trading in, be it 1 minute charts or weekly charts. When price is moving directionally down, a retracement is a relatively minor bounce in price.
- Pause – one or more inside bars or very narrow price action that does not change a trend.
How and where price exits a range is of critical importance to us as swing traders as the exit from a trading range leads to a number of trading setups we employ every day:
- After pushing through the range high, the first retracement (minor decline) can be used to position long-side orders just above the retracement, following it down provided that price does not retrace very deeply into the range below.
- After pushing through the range low, the first retracement (minor bounce) is used to locate sell alerts below price.
The most important use of a trend is as a direction sign – when price leaves a trend and starts to draw out new Up or Down Swings, then we can state with certainty that price has confirmed or reversed a trend.
The Example
JNPR in the late summer initiated a new up trend out congestion. Here we see that price had made a set of higher swing lows and highs leading into the middle of November.
Then, for a period of approximately one month, JNPR traded within a range. We can clearly see the up and down swings were contained within the last up swing that formed the high at the start of the range. This is the classic definition of range bound.
We shall discuss Test of Tops and Bottoms, and the “2B” variation, in a future article
Following the 2B Test of Top failure, price quickly revisted the lower end of the range and without hardly a second glance backwards, left the range. This is the first warning sign of a change in trend.
As price was unable to regain the range and indeed weakened further, we can state categorically that the up trend which started in late summer has now reversed into a new down trend, until proven otherwise.
Ok, Trend Changed, Now What?
As price ground sideways in the weeks following the range low breakout, price ground sideways in a very tight range – we call this price action a pause, and particularly since price did not regain the range and hold, we would consider JNPR from this point forward to be vulnerable to further selling and would:
- prepare to sell, or
- look for another change of trend in the future, from down to up, or
- avoid going long and find another stock or market still moving up on the left-hand side of the mountain.
As traders we have to remember that there are three important trades we can do – go long, go short, or do nothing! It turns out tha the latter is frequently the right answer, but it takes learning traders a long time to discover this secret.
We’ve identified that JNPR is now in a down trend on the daily chart. Our next task should be to look up one time frame and see what is happening on the weekly chart:
Here we see that JNPR is still in an uptrend on the weekly chart. This could be a bonus for those long the stock – the recent decline may simply be a relatively straight forward pull back in the big picture. Unfortuantely we can’t know this except with hindsight, and as it takes a very long time for trends to change on the weekly and monthly charts, longer term investors are the most at risk in a changing trend scenario.
Back to the daily chart, at this point price has moved from the left hand side of the mountain (price rising, trend up) to the right hand side of the mountain (price declining, trend down) until proven otherwise. So what will change the picture?
- A classic *re*test of an important swing low, setting up a test of bottom
- Price must pass a range test near the test of bottom and begin to trend above the lowermost range high. Thus price will have been in a down trend, then in a range, and then in a new up trend.
There are two opportunities for long-side trades when a price undergoes this process.
- First is the test of bottom, which we shall discuss in a future article.
- Second we seek to locate the first retracement as price leaves the lowermost trading range.
We shall discuss both these setups in more detail in a subsequent article. This article will be entered into the Knowledge Base as a DRAFT discussion on trend change and other concepts until I can complete a number of inter-related projects and get on with the revising of all our KB content.
After markets sold off very strongly in the first two trading days of the year, the three major markets we follow most closely finished last week moving dead sideways in the lower end of the very large range. Nasdaq took the worst of the beating, losing all of December’s gains in only three days.
On the weekly chart we see:
- a new down swing initiated in all markets on Daily and Weekly charts.
- a failed test of top on Nasdaq COMPX and Dow 30 INDU weekly charts.
- a lower low than December’s bar on the monthly chart of COMPX.
- price remains above the prior range / break out levels on NYSE Composite NYA and INX S&P 500 indexes.
This week, the recent ranges – all below important resistance – are the first challenge for buyers to overcome, if they can.
Last week on Monday I used current market conditions to illustrate a point for the Knowledge Base – how support and resistance change places with one another. Support and resistance are among the most important of concepts for traders to grasp. Fortunately, its one of the easier subjects we have in our continuing education. There will be new Knowledge Base articles on this and other subjects in the coming weeks.
Once we’ve identified support or resistance we then look for evidence that price is overcoming resistance or failing to hold support, while knowing that what was once resistance will become new support if price can push through resistance and hold. We also want to carry these lines forward for a period of time to see if support or resistance change places again.
Being able to consistently identify key areas of support and resistance adds a powerful tool to our arsenal. We start out with a simple tool – a straight line, mostly horizontal – and map out the obvious points of support and resistance on weekly, daily, and important intraday time frames. Its an easy skill to pick up and refine.
Scroll forward to the current picture:
And we see that multiple levels of support have been broken, and are now effective resistance.
What to expect next?
IF the market can push up above the narrow trading ranges that have formed, and IF price does not fail right then and there, we can expect that sellers will again come out at the first overhead resistance – whether price can regain the more important ranges above will be the biggest test of the market in 2005.
IF we can find stocks which remain in up trends (getting to be fewer and fewer) and IF we can find a reasonable long-side setup, THEN we should exploit the opportunity while keeping in mind that the market may simply engineer a minor bounce and then fail in the hours or days to come.
We won’t be able to rest easy on the long side until the low end of the upper most trading range in the relevant index of interest to us has been regained; we won’t be able to relax more fully until the high end of the upper most range has been broken and holds. That’s a lot of work and worry for price to climb. Until price is again on the “left hand side of the mountain” – the upward trending side – we have no choice but to be more cautious, be more conservative, and have lower expectations.
Today's transcript.
Click on the title above to expand this document.
Suddenly it seems that everyone is listening to every utterance from Fed Reserve Governors and area Presidents.
Fed Warns ‘Measured’ Action Not a Pledge
Fed Board Governor Donald Kohn, who said on Sunday that initiatives to boost Fed transparency must not lock the bank into a predetermined course of action.
While Guynn saw no imminent threat of inflation, he cautioned that signs of wages and price increases demand close scrutiny, although he said he was comfortable, “at least for now,” with the Fed’s current policy to gradually raise rates.
”Although I do not think a significant pickup in inflation is imminent, I continue to be struck by talk of price increases that my business contacts say they are planning as the economy expands,” he said.
On Sunday:
Fed’s Kohn says market reaction to minutes not surprising
Federal Reserve Governor Donald Kohn said on Sunday that he did not find financial markets’ strong reaction to last week’s release of minutes from the U.S. central bank’s December policy meeting surprising.
”The markets clearly saw some information that they did not have before,” Kohn told Reuters when asked about the reaction to the minutes from the Fed’s Dec. 14 meeting, which included a warning about potential inflation pressures.
Kohn turned aside a question whether the Fed was pleased or displeased by the reaction.
“I don’t think we are seeking reactions. I think we are putting out information waiting for reactions to occur,” he said.
Simply and clearly put.