Friday, October 14, 2005
Issue Contents:
| 09:39 | Trendvue Trader Talk |
| 09:52 | Market Direction: Early Morning View |
| 10:20 | The Day Ahead Economic releases and news |
| 11:23 | Energy Sector An Update |
| 12:05 | Market Direction Intraday Update |
| 15:27 | Market Direction Afternoon Update |
This would be funny, almost:
Our java-based chat server just died for reasons unknown – will advise once we get to the bottom ot it. If problems come in threes (my office internet was out for much of the morning too) I wonder what’s next… Yesterday
About three minutes after writing that, 10 square miles of the city was plunged into darkness in a power outage… I kid you not.
That outage, however, was completely unrelated to our chat server. What appeared initially to be a software problem much later in the evening was proved to be hardware related. I’m told that the machine should be back up and running later today, so TraderTalk will return to the air for Monday.
This morning I’ll be publishing within the newsletter. The basic drill remains – 10265 was initial resistance and must turn into support. More details and charts to come.
Market Direction: Early Morning View
Lets recap the trading action fo the last few days – a period of grinding down consolidation – choppy but headed lower – culminated in a quick flush below 10,200 on the Dow 30 futures. As we’ve seen many times, such an acceleration in selling often marks at least a short term bottom.
Dow 30 futures 5 minute time frame
That low was retested in the early afternoon yesterday and price moved up sharply, but only reluctantly held those some of those gains as price consolidated, stalled under 10265, the nearest point of resistance. That resistance must soon form new support today, or its very likely that buyers will throw in the towel and go on strike, and a new low, formed on even larger panic, will be more likely than not to follow. If support is found the first major target is the high of day and then 10,330.
We’ll know the market is in a better frame of mind when price starts to hold up even in the face of bad news. Perhaps today will be one of those days – the first retracement playing out right now is an opportunity for the market to prove itself, and for us to nab new longs.
Good morning, today is Friday October 14th, the 287th day of 2005.
Following a fairly busy morning of news releases the market is… stalled. Ordinarily the market market will find solace in tame inflation news – this morning’s update on that front is a relatively tame Consumer Price Index core price report:
Prices paid by consumers increased 1.2 percent in September, after a 0.5 percent rise a month earlier, the Labor Department said in Washington. Excluding energy and food, core prices increased 0.1 percent, less than the median forecast in a Bloomberg News survey for a 0.2 percent rise and matching the increase in August.
The core inflation rate hasn’t accelerated since March, suggesting companies are having little success passing along higher fuel costs to consumers. Federal Reserve policy makers will keep raising interest rates to ensure inflation doesn’t take root in the economy, economists said.
``The Fed is worried about pass-through, and even if they don’t see it in the September numbers it won’t make them feel secure about the future,’’ said Stephen Gallagher, chief U.S. economist at Societe Generale in New York, who predicted the 0.1 percent gain in core inflation, before the report. ``This will help the markets remain confident that inflation is low but not necessarily convince the Fed.’’1
Energy prices have of course backed off substantially since the period this report covers; whether investors are willing to look out into the future and assume energy prices will be lower in the winter remains to be seen. Yesterday’s EIA Weekly Petroleum Status Report showed that demand growth in petroleum products continues to trend negative year over year, although I noted that raw demand declines appear to have bottomed out, and, also observed that the on-air pundits did not raise this point yesterday.
If gasoline demand is indeed fairly inelastic and the easy cuts to usage have now all been wrung out of the system, usage may hold at 8.8 – 9.0 million barrels per day; if ultimately that trend is confirmed, steady usage will lend support to crude and product prices. We’ll be watching closely for any confirmation that demand decline is bottoming out over the next days and weeks; sector stocks are likely to signal this before the raw data is available to us.
US Market Calendar
- 8:30 am: Consumer Price Index – September1
- 8:30 am: Retail Sales – September
- 9:15 am: Industrial Production – September
- 9:15 am: Capacity Utilization – September
- 9:45 am: University of Michigan Consumer Sentiment Index – Oct. Preliminary
- 10:00 am: Business Inventories – August
- 10:30 am: Weekly Leading Index for the week ended Oct. 7
- 2:00 pm: Daily MMS Gulf of Mexico Shut-in Report
- 3:00 pm: Daily DOE Office of Energy Reliability Situation Report
Canadian Market Calendar
- 8:30 am: Manufacturing Shipments & Orders – August
- 8:30 am: New Motor Vehicle Sales – August
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. Sept. Consumer Prices Rise 1.2%; Core Rises 0.1 Percent
While it may seem that lately all I think about is energy, its simply not true. Yet with major carnage in the sector playing out in front of our eyes we have to be alert to potential opportunities as they arise.
Lets put the sell off in context first, so that we can understand the risks present.
To the moon
Pick almost any big cap oil and gas producer and you’ll see strong trends have been in place for longer than we can remember, culminating in parabolic rises.
APC – even the more sedate names have risen 100 – 150% over the past year.
For weeks now I’ve been adding as a suffix to every energy trade opportunity “the top is likely near, be careful”. There’s a lot of “hot” and unsure money that climbs in at the top of a parabolic rise, and when the tide turns, as it always does, these folks all lean on the sell button hard.
Now we’ve seen panic set in on the second big move down over the past three weeks, so naturally our thoughts turn to what if scenarios. What if most of the weak holders are shaken out now; what if energy product demand is bottoming out, as the latest EIA report is just starting to hint at. Could these lows form a lasting bottom? Yes, its possible – its at least time to give the sector the benefit of doubt.
We won’t know if price has bottomed here until its able to demonstrate that the lows of this week are now new support; indeed a real bottom can’t be observed until later in time once price rises above its nearest point of resistance. For many of these stocks that point is this week’s highs.
The charts will be our guide
A distinguishing factor of a bottom is that price stops falling. Even those who don’t follow charts and claim to disavow all technical analysis still look at price and note when it stops following. That’s all support is… the balance point where buyers weigh in heavier than sellers.
Thus if we are able to detect where support may be forming, we can often improve our chances at nabbing a position near a relative low.
Clearly then finding an entry as close to potential support as possible is to our advantage, as it reduces our risk if our entry is also near where we should exit. If price fails to hold, we sell, preferrably automatically using sell stops.
The down side
We’ll find as we look out across the oil and gas and services sector that a great many charts are today stalling out near potential support. But before we get overly excited, let us first contemplate what happens if these nascent bases fail to hold – another significant 10 – 20% clunk down and real, blood running in the streets, panic evident across the spectrum.
MRO – take Marathon for example – I’m not highlighting it for any particular reason, as we can make a similar argument on the charts of most of the sector.
With that cheery picture in mind lets look be open to locating long entries near the test of prior swing lows here, but be sure you know what your personal exit plan is. Myself, I favour buying aggressively on intraday dips, selling part of the position as it rises, and holding the balance at or near break even, funded wholly or in part by the profit taken earlier. In all cases I have an exit plan that costs little or nothing by way of capital. Do not hold on to losing positions here on the right hand side of the mountain!
Stocks near potential support
Here are just a few charts as examples – you’ll find these patterns all over the sector – pick almost any decent mid to large cap producer or oil service company and the chart will look similar. I personally prefer domestic producers over international and have a bias towards those with substantial natural gas holdings as well as oil.
PXD – attempting to hold on to the 50 period moving average and a retest of recent lows on the daily chart.
APC – picture the MRO head and shoulders on this one too.
ECA intraday showing the potential for a test of bottom to hold up here; overhead resistance near 48.40 will be its big hurdle to cross in the days to come.
XTO – some mid cap producers are still hanging on to their longer term trendlines here, and also retesting the prior swing low for a 2B test of bottom setup.
RIG – much of the oil services sector (RIG, DO, ESV and the like) have charts similar to RIG’s; those that are much weaker you’ll find typically have had significant damage from Rita or Katrina.
YM – Dow 30 Futures – so far, so good – price is making a real effort at trying to make 10250 – 10260 new support where it was once resistance. There is a rising wedge consolidation pattern within the last two days of trade—the typical resolution of such a pattern is a clunk to the lows of the pattern – in this case the lows of the week. However, we should always judge consolidation patterns for what they really are – points of indecision, and not prejudge the ultimate outcome.
If price breaks the lower trendline and fails to move fairly directly back above the tentative new support line, then we would want to be stalking short-side trades with a goal of price revisting the week’s lows.
If price breaks above the upper trendline of the rising wedge, and holds above (say holds 10300), then a bullish outcome and pattern – the running triangle – will be evident on the chart and in that case we are likely to see some considerable speed and upside.
As the swings narrow in amplitude we know that the decision point is coming up.
So far on the daily chart the move today is doing what it needs to; follow through is now key. If buyers can muster their courage on Monday as well, then the next targets ahead for the market are marked out – we generally expect price to at least reach the 20 period moving average following a long multiday, fast, sell off.
Is this the bottom for 2005? No one can tell you that for certain; those that suggest they can presume to be able to read the minds and emotions of a world full of investors, not to mention read the future for every conceivable event that may occur. Its simply not possible to predict with any long term accuracy.
But it is possible to detect when trends change and to be aware of the preconditions required for a change. Those we’ve been sensing for the past two days, and the result here is we were ready for a tradable long opportunity, which may turn into more in time. We sensed the top back in August and prepared and now are giving the market the benefit of doubt at a possible bottom.
Close up stops, take a little profit, and let some run just in case…
So far so good – price has passed the first test and held the 10255/10260 area as support, yet a rising wedge remains.
YM – Dow 30 futures: The risk of a breakdown either back to support, or much deeper down the rising wedge, can’t be discounted, at least not until 10300 becomes new support. Given that its 30 minutes before the close, we can imagine that a little profit taking may step in. A relatively strong close (market participants haven’t seen one of those in a while) will tend to put buyers in the right frame of mind to follow through on Monday.
Its time to pay particular attention here – a failed test of top is in place in small duration intraday time frames; in the early going following a marginal new high we do give price the benefit of doubt, and in fact need to be stalking new long opportunities (or reloading opportunities) if price can reclaim 10295 and press higher today (or on Monday morning).
Over in energy and energy services, price has performed nicely – up 3+% in services and solid 2 – 3% gains in many of the mid and large cap producers. Yet… one up day against a whoosh down does not a confirmed reversal make. Its a good start and we can at least move all stops in the sector to break even; short term traders will also want to tke a little profit, nudge stops up a little on the remaining balance and sit back and see if more shows up next week.
Conclusion: a good start overall.