Monday, August 8, 2005
Issue Contents:
| 09:25 | Swing Trade Setups Featured charts for Monday August 8th |
| 13:22 | Market Direction - Update |
| 16:15 | TrendVue Trader Talk Today's transcript. |
| 20:34 | Swing Scanner Results Monday August 8 closing data |
| 20:35 | Market Statistics For Monday August 8, 2005 |
| 20:41 | New Symbol Lists |
Featured setups from Friday August 5, 2005 closing data symbol scan
Jump to: Long Setups | Short Setups | Special Situations
Notes for the Day
- Its the day before a FOMC meeting and announcement – following a big down day. We can probably expect some rally action to develop, provided crude doesn’t do remarkable things today. As is, CL is up more than 1/2% now at 62.69 and natural gas appears to have made a new record high for this contract.
- If short we want to see any rally that develops generally hold below the mid-point of Friday’s move down, or the mid-way point of the total top to bottom range of Thursday and Friday.
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
PX – first pause following range breakout, follow up one or two more days
CDE – Gold
AA – aluminum
N:C / N:NYSE – nickel and other metals – complicated congestion zone under the prior high – giving this a one-day try on long side myself.
TLM – energy – rumoured as take over target, again, but downgraded to market weight from overweight at Lehman.
NKE – shoes and sports
AGI – gaming – ascending triangle, nominally a bullish formation but also following a failed test of top means stay on guard and
BEAS – tech, software
ADSK – tech, software
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
MRK – pharma – stalk any weak bounce which would form a stealth bear flag here
MAT – toys
Special Situations
ATY:C / ATYT – long – a possible, but tricky, bottom may have been set earlier this summer. Generally price will hold near the 1/2 way point of a tall breakout bar if the stock is going to hold support at all – trying long here one day only.
MYL – pharma – tricky long here – see next chart
MYL – weekly chart shows why we ought to stalk this on long side but if price this week pulls below the trendline just below I would put this one aside.
A day before the Federal Open Market Committee meeting, we generally do not expect much movement in markets as a whole, yet its impossible for the broad market to completely shake off such a strong move up in crude and natural gas.
Ignoring energy for a moment, lets have a big-picture look at the major stock indexes – we’ll use the weekly charts to filter out the noise present in shorter time frames.
Major market indicies, weekly bars
There’s a good news / bad news story here but the bad news is perhaps not what you might think. Good news for a trader is a trend – we aren’t picky about direction. While there appears to be potential for a new down trend, we do not yet have a new down trend to work with on the daily and weekly charts. As of today:
- Three of four major indexes are in the process of tentatively failing a test of top on the weekly chart. These are signals we can not ignore.
- The Dow 30 has already started a new down swing on the weekly chart and the S&P 500 and is not too far behind. A significant down day on the Nasdaq and NYSE composites is required before new down swings in this time frame are initiated on those markets.
- The Dow 30 merely needs to start trending under the range of the last couple of weeks, in a significant intraday time frame such as 15 or 45M bars, in order to cement in the minds of short to medium term traders that a new trend, down, is underway.
What matters most here is the potential for a significant bend in the overall market trend. Add to this the tests of tops appearing on weekly charts and we know this is a time for us to pay close attention to the market.
The weakness observed in markets over the past few sessions is not unexpected – regular readers know we’ve been stalking failure at these tests of multi-year highs (and record highs in the Russell 2000 index)
The Dilemma
Once traders are comfortably settled into trading with a trend, being human we tend to be reluctant to change. What worked in the past over and over starts to feel very comfortable, well understood, and safe. Changing our approach is rather like being asked to throw out an old comfy t-shirt – we just want to keep on wearing the same shirt everywhere we go, even if the circumstances are changing around us.
The dilemma we always face is picking a time frame for switching our shirts. Do we change at every minor wiggle? Of course not, but we have to be ready to switch at a moments notice just the same. This may be one of those times.
Short, Medium and Long Term Investors
Exiting positions is tough, but tougher still if we have no framework with which to logically and critically analyse our positions in the context of market direction. Lets look through the eyes of three different traders / investors – each with a different time frame perspective ranging from short to medium to long term.
Until the upper-most trading range is broken and price starts to trend below, in this time frame, we can’t yet say the trend has changed… in this time frame. In the smallest of significant time frames – 45 and 135 minute charts – there are indeed trend changes very close to confirming.
A short term trader will decide the trend has changed when the upper most trading range, marked out on the 15 or 45 or 135 minute charts, has a) failed a test of top and b) failed to hold the bottom end of the range and c) started a new trend below the upper most range (a new down trend is lower swing highs and lows) in at least a 5 or 15M time frame. Its a logical and simple framework. This process will take several days to play out, more often than not, once the uppermost trading range has been broken.
A longer term investor will apply similar logic but use the daily time frame charts to define the ranges, and a longer term intraday time frame, such as the 20 or 45M time frame, to conclude that a new down trend below the upper most range on the daily charts is in place. This process may take days or weeks to play out.
A very long term investor will use the weekly charts to define ranges and will tend to rely on daily charts as their shorter term confirming trend. Therefore a series of lower swing highs and lows, below the upper most trading range, will be required before they are comfortable that a significant trend change has taken place. This process may take weeks if not months to play out.
Trade-offs
What does this mean in practice? A “very long term investor” in Nasdaq names won’t consider the trend to have changed until price starts to trade under 1900 – that’s a 14% drop roughly from the highs of 2005 at this point.
Moving down the time frame scale, a “long term” investor might use the low of the range which developed from June through mid July as their cue to exit stage right, thus giving up 150 points of index movement and an approximate decline of 7% from the 2005 highs.
For myself, a short term trader, I take my cues from much smaller time frames, but use the bigger picture to tell me when to be more and more cautious.
If a big test is underway on the weekly time frames, I will consider the trend to have changed from up to down if the lows of the uppermost trading range (on a 45 or 135M chart) are broken and price starts to make lower swing highs and lows on a 15M chart. In principle that means I give up very little of my open gains, usually less than 1% as open positions are stopped out using trailing stops which are always brought tighter as a test of top comes nearer. The reality is that more often than not I’m short fairly close to the top in some markets even as remaining longs are still in the process of being stopped out. I find this works well for me personally, but the real downside is that it requires more work on my part.
Moving Forward
What we don’t know is how the market will react to tomorrow’s FOMC announcement, nor how the world oil market might push equities around. Market-friendly developments on either front tomorrow could mean we need to be long again in a hurry.
I prefer to err on the side of caution – markets have failed test of tops on the daily charts and have been acting weak despite relatively positive earnings reports. Without overthinking the situation we can appreciate that market participants are not convinced at the moment that their biggest risk is not being long enough.
Today's transcript.
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Monday August 8 closing data
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Statistics for Monday August 8, 2005
Our custom symbol universe of the most heavily traded or liquid US stocks is used as the base for analysis.
| Symbols in Up Swings | 180 |
|---|---|
| Symbols in Down Swings | 506 |
| Up/Down Swing Ratio | 0.35 : 1 |
| Advancers | 35% |
| Decliners | 63% |
| Unchanged | 2% |
| Up Bars | 27% |
| Down Bars | 44% |
| Inside Bars | 16% |
| Outside Bars | 7% |
| Close > 20EMA | 35% |
| Close > 50SMA | 58% |
| Close > 200SMA | 65% |
| 20EMA > 50SMA > 200SMA (trend up) | 44% |
| 20EMA < 50SMA < 200SMA (trend down) | 18% |
Updated versions of our “most active” stocks on US and Canadian exchanges have been posted to the member files section of the web site:
US stocks meeting the following criteria :
- Average daily range of 1.75% or more
- Average daily volume 1.5M shares or more.
Canadian (TSX only) stocks meeting the following criteria :
- Average daily range of 1.5% or more
- Average volume in the upper tier of all TSX traded stocks