Monday, February 7, 2005
Issue Contents:
| 08:43 | The Day Ahead Economic releases and news. |
| 08:49 | Swing Scanner Results Friday February 4th closing data. |
| 08:51 | Market Statistics For Friday February 4 |
| 09:06 | Quick Take: Currencies |
| 09:29 | Swing Trade Setups Featured charts for Monday Feb 7th |
| 10:03 | Quick Take: Gold |
| 11:06 | Swing Trade Followup Review of Friday's trade setups. |
| 11:59 | A Note on Stops |
| 13:20 | Roach on real interest rates and savings. |
| 16:15 | TrendVue Trader Talk Today's transcript. |
Good morning as we start the sixth week on this the 38th day of 2005.
Before the regular open, stock index futures are trading flat to marginally higher. With a light economic release calendar early this week, continuation – or not – of the recent rally is likely to depend more on corporate earnings and investors taking their own pulse.
US Market Calendar
- 8:15 am: Federal Reserve Governor Edward Gramlich participates on a panel discussing current U.S. economic issues, in Pittsford, New York
- 3:00 pm: Consumer Credit – Dec.
- 3 & 6-month T-bill auction
Canadian Market Calendar
- 8:30 am: Building Permits – Dec.
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.
Friday February 4th closing data.
Click on the title above to expand this document.
Statistics for Friday February 4, 2005
Note: Statistics are compiled based on our custom symbol universe of the most heavily traded stocks.
| Symbols in Up Swings | 499 |
|---|---|
| Symbols in Down Swings | 266 |
| Up/Down Swing Ratio | 1.87 : 1 |
| Up Bars | 58% |
| Down Bars | 18% |
| Inside Bars | 11% |
| Outside Bars | 9% |
| Close > 20EMA | 76% |
| Close > 50SMA | 52% |
| Close > 200SMA | 64% |
| 20EMA > 50SMA > 200SMA (trend up) | 39% |
| 20EMA < 50SMA < 200SMA (trend down) | 21% |
US Dollar Index – breaks out above the rising wedge this morning. When this happens we look for one of two scenarios:
- Failure of the push up that brought price there and price sinks within the triangle one more time. Trading plan: Aggressive traders will attempt a short at that point; patient longs will stalk the pull back into the triangle with a buy stop above price (use the daily highs plus a couple of ticks as an alert or trigger) in case price slams back out of the triangle.
- Direct continuation, confirming one of the most bullish patterns around – the running triangle. This is not the case at present, however if today’s high is broken and holds this scenario may be on again. Trading plan: Trading a fast-moving breakout is paradoxically both simpler but also more risky, as it essentially means we close our eyes, and go long (or short as the case may be) as price is pushing away from the pattern in question. In the early going we don’t know for certain if we have a tiger by the tail or not. Consequently this trade setup is one arrow less frequently used from my quiver.
Supporting Charts
USDCAD – more than a week after we identified a long-opportunity in USDCAD price has pushed through the first major target and has set up a test of top. Its natural for price to stall at such tests; this is also the spot where we look for potential reversals.
EURUSD – following the CAD against USD in many respects, EURUSD has broken through its test of bottom. Again we’ll be looking for any attempts to reverse here, or the start of a new leg in the existing trend (down).
EURUSD – weekly – if we back up to the big picture we see that this is a retest of a significant prior high from 2004 as well as a retracement to the 50% level of the fall rally. IF a quick reversal is to happen, it will generally get going quickly here or not at all (implying a much deeper retracement in the EUR against USD).
GBPUSD presents a bear flag within the range on this weekly view.
Featured setups from Friday February 4, 2005 closing data symbol
Jump to: Long Setups | Short Setups
Notes for the Day
Today is all about continuation—we managed to get in the rally very early on Friday so swing trade positions in ETFs and Futures are probably ok to let run with break even stops, which in a strong market, will not now be hit.
Still we’ll look at some opportunistic shorts just in case. Weak stocks are the best bet there. In the meantime its going to be difficult to find stocks which have not moved up to climb aboard – so we are hunting a pause. More charts will be published in the first hour.
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.
Retracement or Pause in Up Swing / Up Trend
AAPL – I won’t be trading this one myself, but I have to point out the 2 day pause here which offers another opportunity in AAPL.
APC – so far a fairly straight forward bull flag in the making, provided it does not dip much more.
ATML after a test of bottom hits target one; if this bull flag retracement plays out the next targets are 3.50 and ~ 3.75.
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
AFL, sell stop just below Friday’s low, must clear 2 day low and hold below there before considering holding this position.
EQR – sell alert and trading plan same as AFL.
It all comes down to this – a classic test of bottom, in conjunction with all the other tests underweigh right now in major currencies.
HUI Gold Bugs Index – stocks are continuing to follow, if not even underperform, gold itself.
TSX Gold Index – a slightly more positive picture here, possibly supported by the speculation surrounding some high profile merger cases. Still we can see price has broken down from the triangle and here too time is running out for Gold bugs on this go around.
Ultimately the Dreaded Yellow Metal is in the hands of central bankers (Greenspan on trade deficit and currency) , the odd policy maker (Gold seen pressured by IMF sales study), and traders the world over.
Finance chiefs from the Group of Seven rich nations which met in London this weekend said IMF managing director Rodrigo Rato would look at proposals to revalue or sell gold reserves to offer debt relief and ease Third World poverty.
“Whatever happens the market is going to be disconcerted and on the back foot until the April IMF meetings,” UBS Investment Bank Analyst John Reade said. Gold prices hovered around $415–416 an ounce.
The International Monetary Fund, which will report back in April on debt relief, is the world’s third biggest holder of gold bullion with more than 100 million ounces.
Under a 1971 agreement, most IMF gold is valued at 50 an ounce, about a 10th of current market prices.
Friday was a classic “minor pause” in an upswing which we took full advantage of. Even before the open we were ready:
Sometimes the first pause is merely a single day, so today we’ll first want to be ready on the long side just in case buyers are willing to step up right away.
And then:
09:30:22 Mike: On the short side there many triggered yesterday but I think for the first hour here we have to give some credit to the potential the market may try to push directly up.
09:33:37 Mike: 1191 buy stop limit ES
09:33:48 Mike: 1513.50 NQ
09:41:38 Mike: 10594 BUY STOP LIMIT YM
09:51:23 Mike: B/E [break even stop] on YM
09:54:37 Mike: Ok I am done for the day ;)
09:54:42 Mike: I hope.
09:55:10 Mike: DIA long swing triggered on daily; lets look at the others…
And the result – Dow / YM hit every one of our targets and in the end exceeded expectations.
Lets quickly review all of the trade setups featured on Friday (all longs, no shorts – which long time readers know is unusual for us):
XLB Basic Industries – after a minor retracement on Thursday pushes directly. Running close to 2005 highs now.
IWM – Russell 2000 ETF
QQQQ. As noted in the transcript I tend to favour both QQQQ and IWM when a major market move is possible since they tend to outperform (in both directions up and down) the S&P 500 or Dow 30.
SPY – S&P 500 ETF easily clears the prior major swing high from back in mid-January and pushes directly higher above Thursday.
DOW (the stock, not the index), a basic industry, passes (so far) a test of top.
GE, the only laggard in the bunch, remains in play however protective stops should now be moved to Friday’s low with a goal of moving to break even shortly. I would recommend moving to a break even stop soon, and certainly once/IF price clears Friday’s high at 36.33.
At this point all but GE should be moved to break/even stops – there is simply no rational reason to hold any of these names which have pushed up so strongly if they retreat all the way to the our entry price.
Our next major task ahead is profit taking, and this requires the traders active participation in the process. Each individuals goals and personality make up will determine their approach to profit taking.
Early on in a trade that has potential to run, I personally will give the trade as much room as it needs to do so, provided that price has moved far enough in my favour to allow a break/even stop to be placed in a location where price is unlikely to revisit if the move is to continue. That is likely the case here with XLB, SPY, IWM, DOW, QQQQ.
As we can see on this big-picture intraday chart of SPY, the 50% retracement from the current highs brings price back to the swing high formed on Feb 2nd. This price level is above our entry price, so while a retracement here would represent a significant reduction in our open trade profit, the trade technically is still alive provided any retest there passes.
For this reason, I will not move my stops up past this point until a 50% retracement of the total move from the swing low marked clears this location. There is every potential that markets could retest the 2005 highs so we don’t want to be too tight on our profit taking stops.
Consider taking only partial profits as price stalls
Its the classic trader’s dillema – you have what appears to be a terrific entry, price moves nicely in your favour, and then stalls and reverses and starts eating into your profits. Unnerved by this, Trader X bails the position with diminished profits, only to find in the next bar or hour or day that price has continued higher without them.
In a trend following trade we can use the trend to help us in locating profit taking stops.
When I have doubts about a move, one technique which I have found extremely useful is to tail price with a stop on only a portion of my position – usually 1/4 or 1/3 of the position. Early on in the trade I will tend to take 1/4 off the table if price appears to stall; if a deeper retracement kicks in I’ll take another 1/4 off the table before price hits the 50% retracement level. This chart shows various locations where I would consider locating a trailing stop using this approach:
Unless it becomes clear that price is undergoing a major reversal, I will leave 1/4 to 1/2 in play at a break even stop, until the first significant retracement has occured and price has moved to a new extreme in the direction I am trading.
Roach on real interest rates and savings.
I confess, I like to read Stephen Roach—Chief Economist and Director of Global Economic Analysis for Morgan Stanley. You’ll find his weekly commentary here.
Today’s issue is a keeper, reprinted in full. Roach rips into remarks made by Fed Chairman Alan Greenspan in a speech on Friday which I’ve pointed to at least once or twice since.
Confession Time
At long last, Federal Reserve Chairman Alan Greenspan has owned up to the central role he has played in sparking unprecedented global imbalances. His confession came in the form of a speech innocuously entitled, “Current Account” that was given in London at the Advancing Enterprise 2005 Conference on the eve of the 5 February G-7 meeting. In the narrow world of econo-speak, his prepared text contains the functional equivalent of a “smoking gun.”
Greenspan’s admission came when he finally made the connection between the excesses of America’s property market and its gaping current account deficit. To the best of my knowledge, this was the first time he ventured into this realm of the debate with such clarity. He starts by conceding “…the growth of home mortgage debt has been the major contributor to the decline in the personal saving rate in the United States from almost 6 percent in 1993 to its current level of 1 percent.” He then goes on to admit that the rapid growth in home mortgage debt over the past five years has been “driven largely by equity extraction”—jargon for the withdrawal of asset appreciation from the consumer’s largest portfolio holding, the home. In addition, the Chairman cites survey data suggesting, “Approximately half of equity extraction shows up in additional household expenditures, reducing savings commensurately and thereby presumably contributing to the current account deficit.” In other words, he concedes that a debt-induced consumption boom has led to a massive current account deficit. That says it all, in my view.
The obvious and most important point is that rapid growth of US mortgage debt did not come out of thin air. It was, of course, a direct outgrowth of the Fed’s hyper-accommodation of the post-bubble era—namely, short-term interest rates that have been negative in real terms for longer than at any point since the 1970s. As Greenspan’s dryly notes, “The fall in US interest rates since the early 1980s has supported home price increases.” That’s putting it mildly. Suffice it to say, were it not for the Fed’s aggressive monetary accommodation—especially the post-bubble easing of some 550 bps in 2001–03—the home mortgage refinancing cycle would have been in a very different state. But it wasn’t just lower borrowing costs that spurred equity extraction. It was also the rapid rate of house price appreciation—an outgrowth of what Greenspan notes has been the “unprecedented rate of existing home turnover” that he also attributes to sharply lower interest rates.
Equity extraction has been the pixie dust of America’s post-bubble recovery—the newfound purchasing power that has fostered the biggest consumption binge in post-World War II history. Were it not for this wealth effect, consumers would have been constrained by an anemic pace of labor income generation—long the most decisive variable in the macro consumption equation. Lacking in job creation and real wage growth, private sector real wage and salary disbursements have increased a mere 4% over the first 37 months of this recovery—fully ten percentage points short of the average gains of more than 14% that occurred over the five preceding cyclical upturns. Yet consumers didn’t flinch in the face of what in the past would have been a major impediment to spending. Spurred on by home equity extraction and Bush Administration tax cuts, income-short households pushed the consumption share of US GDP up to a record 71.1% in early 2003 (and still 70.7% in 4Q04)—an unprecedented breakout from the 67% norm that had prevailed over the 1975 to 2000 period.
These are the telltale footprints of what I have called the Asset Economy (see my 21 June 2004 dispatch, “The Asset Economy”). It’s a story that began in the latter half of the 1990s with the equity bubble. And it’s a story that involved the Federal Reserve as a key player at every subsequent twist and turn. Its role can be traced back to December 1996 with Alan Greenspan’s famous “irrational exuberance” speech—his first and only warning of the bubble-related perils to come. Unfortunately, the Chairman was quick to become a convert to the very excesses he warned of—embracing the New Paradigm of rapid productivity growth as justification for why the central bank would be willing to stand by and tolerate faster than normal growth. That acquiescence—putting the Fed Chairman in the dangerous role of a cheerleader insofar as the financial markets were concerned—gave a green light to investors and speculators all the way to NASDAQ 5000. Then when that bubble popped, the Fed went into its well-rehearsed “Japan drill”—unleashing the aggressive easing that gave rise to the excesses of the home mortgage equity extraction cycle. This is the grand continuum of the Asset Economy—wealth effects that morphed seamlessly from the stock market into the property market.
Aided and abetted by the conscious policy tactics of the Fed, Alan Greenspan can hardly profess innocence in assessing the current state of global imbalances. By warmly embracing asset appreciation and the debt binge it fostered, the central bank has encouraged consumers to all but abandon traditional income-based saving strategies. Instead asset-based saving has become the “new new” thing of the Asset Economy—as has the debt-induced equity extraction that has driven US consumption to unprecedented excess. This shortfall of income-based personal saving, in conjunction with outsize government budget deficits, has created the very shortfall of national saving that makes ever-widening current-account deficits unavoidable. And that, of course, puts extraordinary pressure on the rest of the world to fund America’s profligate ways. At long last, Chairman Greenspan owns up to the central role he and his colleagues at the Federal Reserve have played in fostering these developments.
Alas, he offers a hopeful prognosis as to how this all works out. Greenspan’s basic argument as set forth in his London speech is that we can all relax—that “market pressures” are likely to play a key role in the coming US current account adjustment and in the global rebalancing that adjustment would spawn. In particular, he is optimistic both on the outlook for public and private sector saving. Undaunted by his mis-diagnosis of the fiscal outlook in 2001—he argued that tax cuts would be the wisest way to spend the government’s budget surplus—Greenspan offers hope that the “voices of fiscal restraint” will finally prevail in Washington. We’ll know more on the fiscal policy front soon enough as the Bush Administration prepares to release its new budget. Suffice it say, a credible program of significant deficit reduction will be tough to pull off as the White House rules out tax increases and focuses, instead, on the 18% of federal expenditures that can be classified as nondefense discretionary spending (excluding homeland security).
Moreover, Greenspan also expresses the belief that “An increase in household saving should also act to diminish borrowing from abroad.” This is a key assertion. What he is saying implicitly is that the Fed will need to withdraw support from the Asset Economy by restoring some semblance of normalcy to America’s real interest rate structure. What he is also implying is the hope that the US labor market will now provide increased support to the American consumer—in essence, spurring the long-awaited “hand-off” from the new asset economy back to the more traditional income economy. January’s disappointing employment survey—just the latest in a long string of subpar gains on the hiring front—underscores how difficult it will be to execute this hand-off.
This may be the toughest nut of all to crack for the US central bank. It underscores the delicate tradeoff between real interest rates and saving as the Fed attempts to wean the American consumer from the excesses of the Asset Economy. Financial markets are presuming that the central bank will err on the side of caution in executing this delicate transition back to the income-based economy of yesteryear. The broad consensus of investors believes that the Fed wouldn’t dare flirt with a meaningful shortfall of economic growth. Futures markets are quite explicit in validating this perception by now pricing in only two and a half measured tightenings of 25 basis points each, between now and midyear. That’s hardly a move that would spur a spontaneous revival of personal saving, in my view. Nor would it be enough of a move to take away what I have called the “candy” of the carry trade that has spawned speculative excesses in a variety of risky assets—including emerging-market, high-yield, and even investment-grade corporate debt. I continue to believe that it will take more Fed tightening than the markets are expecting—in conjunction with a long overdue backup in long-term interest rates—to spur a shift from asset- to income-based saving.
The Federal Reserve is trapped in a moral-hazard dilemma of its own making. It dates back to the Great Bubble of the late 1990s and the central bank’s unwillingness to take away the proverbial punch bowl just when the party was getting good. The close brush with deflation that then ensued was a painfully classic post-bubble aftershock. That experience underscores the greatest shortcoming of modern-day central banking—the inability of monetary policy to cope successfully with asset bubbles and the deflationary perils they engender. The history of the 1930s and Japan in the 1990s are grim reminders of that shortcoming. Alan Greenspan’s confession finally sets the record straight on how he got us into this mess. But it is a confession that is still steeped in denial. The presumption that natural market forces can cure all ignores the lingering perils of an all-too treacherous endgame. Let’s not forget that nearly five years after the equity bubble popped, America’s imbalances—to say nothing of the world’s imbalances—remain in uncharted territory.
Flight to quality safety?
Today's transcript.
Click on the title above to expand this document.