January 19th, 2012
Thursday is a big day for Tech as Google, Intel, IBM and Microsoft report earnings after the bell. Sentiment is extremely optimistic but historically, the days following Intel’s earnings report have not been all that impressive for the broader market and specifically for the technology sector. So far earnings season has failed to provide many upside surprises and although still early, this could add resistance to much further upside..
The technical picture for the big cap technology stocks represented in the QQQs suggest that some give back is in store in the days and weeks ahead. The QQQs are trading nearly 3 full standard deviations from the 40 period moving averages on the daily charts and as we have pointed out previously, these are indications of extremes which strongly correlate to pullbacks. Again, these sentiment and historical observations alone should not constitute a trading system because often the timing is imprecise but nonetheless it allows us to be a bit more patient with our thesis.
We closed our SLV straddle today as the silver ETF seems to be stuck within a narrow trading range and not trending in one direction as we had anticipated. The overall market action today is feeling “tired” and so far at least, it seems that we are clearly running out of “steam”. We are moving the market confidence indicator to Cautiously Bearish here as we approach what we perceive as a point of major resistance at around 1325 on the SPX.
Another troubling sign here is the lack of short interest in the market which coupled with excessive bullishness can make markets vulnerable to pullbacks.
In general I am turning a bit more bearish here as I don’t see sufficient momentum building to push stocks beyond this longer term trading pattern.
January 18th, 2012
Yesterday we evaluated the longer/intermediate term trends and today I wanted to drill down and look at the short term outlook for what we could expect over the near term. The longer term studies point to us getting progressively closer to a breakout on the current long term trend pattern and we have pegged our resistance and support points at SPX 1325 and 1190 respectively on the narrowing wedge which means these general levels of support and resistance should continue to narrow over time until, of course, we resolve one way or another.
So with the top and bottom of the trading range identified, we can now begin to look at the shorter term studies for potential short term trading candidates. Recently we traded a bullish Gold (GLD) spread for a nice profit and exited right at the 40 day moving average which was our identified resistance point. The GLD has struggled at this level over the recent days and is trading at around the same general level at 161.50. I want to see how this general level is negotiated and although I am bullish on Gold, I think we will trade lower before pushing through this resistance which is right overhead at 163.50 or so. We would look to get long again GLD positions at around 154.50 on a pullback or on a sustained move above the 163.50 level on momentum. A short term counter trend pullback trade where we go short Gold is a possibility depending on the trading action at resistance if indeed we trade that high before a pullback.
The IWM (Russell 2000) ETF along with the SPY and DIA are all trading above their 200 hundred day moving averages and in the case of the IWM, it is bouncing off of this now support level. Drilling down to the hourly timeframe, we see that the IWM is just peaking above its 2nd standard deviation on the 40 period MA so a pullback to around 75.00 or so from here would equate to a move back down to the 200 day moving average (daily) and possibly make a nice entry point. As in the case with the SPY and most other equity broad based indices, there is room for the IWM to run higher to around $81.50 or so before stiff resistance kicks in. This is based on the same weekly charts I used yesterday for the SPY.
The QQQ’s on the other hand are further stretched to the upside than the other major indices. Based on the same studies, the QQQs have broken above the long term weekly downtrend resistance channel but volume has not accompanied the price action. What happens here is that we are now into overbought territory on the weekly studies without accompanying volume and a break in momentum. Similar set ups in the past have resulted in a move lower. I am looking at around $57.00 on the QQQs or the 1st lower standard deviation off of the 40 period ma on the hourly charts as a target. The last two weeks of January have been rough for the Tech sector for several years now.
On the FXE and the Euro/USD trade. The FXE hit our first exit point today as we traded at the top of the recent trading channel at the 1st standard deviation off of the 40 day ma at roughly 127.85 which covers on of two large trading gaps. This short term pattern has held since late November and we wiggled our way out selling the short 132 strike earlier for a gain and today getting out of the long call and closing the full position for a gain. The FXE (Euro) is in an obvious downtrend and this was a counter trend move but at this level, it becomes less interesting to me. The weekly charts still point to very oversold levels (more oversold than any period in the past 5 years) and even though this is a crowded trade (short Euro) and perhaps a bit more upside may be ahead from short covering and the like, I am only willing to consider a counter trend move when we waddle into the 3rd standard deviation from the 40 period MA on the daily charts. We will consider it again if and when we pullback. The longer term prospects for the Euro are obviously not very good…
Silver (SLV) is stalling out at $30.00 exactly one standard deviation away from the 40 period moving average on the longer timeframe weekly chart. As with Gold (GLD), the SLV has formed a similar wedge from the lows set in late 2009 and the highs of last summer. The ETF has made a series of lower highs and there is room for the SLV to trade higher until around $34.50 which is where resistance would exert pressure from the downtrend line. What I don’t quite like is that during the last upswing in the SLV, marking the last lower high, the momentum failed to push it to resistance. It turned lower well below the 40 period ma and drifted lower. Our SLV straddle is suffering from this “indecision” as we have been zig zaging within a narrow range and failing to break out one way or the other while time continue to erode the value of these February options. We are very close to cutting this one loose…
January 17th, 2012
Wanted to pull back on the wide angle lens a bit today and take longer term view of the broad market. The longer term studies give us a good base before we drill down and look from shorter term trading opportunities. Below is a weekly chart of the SPY going back to mid-2006 and bear with me as I realize that the chart here looks a bit like a pizza pie with everything on it!
I want to call your attention to the $156.70 level reached back in October of 2007. The downward green trend line starts to delineate the first downtrend resistance channel created following the first “lower high” in December of 2007. The upward sloping green line begins at the low established in late 2008 marking the crisis bottom and connecting to the next “higher low”. The lines intersect and the market resolved to the upside initially breaking the uptrend resistance barrier before briefly pushing back before resuming the uptrend. The extended green downtrend line marks the support level on the ensuing pullback.
Now the red regression channel simply delineates the next trading pattern and note here how neatly the green extended line meets with the red channel support at around SPY 105 in mid june 2010. This trading channel was important for us traders over the past couple of years and notice how it neatly fails at the midpoint of the channel at around 134.45 in February of 2011 and again at around 136.85 in May of 2011. The channel pattern is finally broken lower at SPY 127 in early August of last year. Here is where it gets interesting…
If we go back to the bull market highs of late 2007 and draw a trend resistance line to the highs of this past year (blue line) and subsequently draw an uptrend line from the closing lows set in March of 2009 to the closing lows created in October just passed, we see another long term triangle wedge pattern develop. If we use these channels as support and resistance for our trading, we should run into strong resistance at 132.50 (1325 on SPX) and perhaps lower as time goes by on the downtrend resistance channel and support at 119 and perhaps slightly higher as time goes by on the upward sloping support channel. Note that these conveniently correspond to the first standard deviations above and below our 40 week moving averages.
This is the next pattern which will be resolved over the coming weeks. Which way we break will be dependent (as always) on what is happening in the day to day of the markets. The take away here is that we should see some narrowing of the ranges (as we have already seen) and a drop in vol (also as we have already seen) for the next few months as we negotiate this very dominant long term pattern.
To make a call on which way this will break at this time is really a bet I am not willing to make a the moment. Who knows what will be the tune of the day 2 to 3 months from now? What we do know is that a major trend pattern is set to resolve in the next few months and we will be ready to trade it whichever way the winds blow.
CJ Mendes
January 13th, 2012
The resistance on that wedge pattern we spoke about yesterday made markets vulnerable to any negative catalysts. Below is a copy of the same S&P500 chart and note that the pullback today hit the brakes at the first standard deviation from the 40 day moving average.
This pullback has so far been orderly and not out of the ordinary. The fact is that this downgrade by S&P has been priced into the equity and currency markets and the issues in Greece, which perhaps are more serious than the downgrade, have only had a measured impact on the market. A few months ago, news of such would have sent the market for a trip to much lower levels. This is evidence that the market is not surprised by the current state of affairs in Europe and although I am not of the opinion that we have priced in Armageddon, ie: a collapse of the EURO, I am reasonably confident that the market has discounted quite a bit of the near term volatility coming from these headlines.
Again, the behavior of the stock market today is very encouraging. Quite frankly I did expect more of a washout today on these headlines. If we are able to hold the 1275 level today (1st standard deviation) then it would make the likelihood that we are embarking on a new trading channel at between the 1st and 2nd deviations that much greater. These channels (between 1st and 2nd deviations) are excellent trading channels and I highlighted the last uptrend channel from early 2010 on the chart below. If we can actually break the overhead wedge resistance here, it bodes well for a solid move higher.
Also encouraging has been the trading action in the currency markets particularly the Euro/dollar pairs. Here is how I am handicapping the current events:
Perhaps the most important supportive action for the Euro today is the fact that the Fed is about to embark on another easing program (QE3). They (the Fed) have been hinting at this for some time because of the stubbornly weak job market and we could very well see something as soon as later this month. This would be supportive of the Euro and very bullish for Gold. I am of the opinion that this fact has been the only reason the Euro has been able to maintain its strong value in the face of this crisis.
Again, to drill down to on current trade, it does not mean that I am bullish the Euro in the intermediate term but I believe that because it is not in the best interest of anyone ( Europe, U.S. China) for a disorderly break down in the currency, I do believe a bounce higher is in the works. The likely scenario is for an orderly devaluation of the Euro and that entails gradually lower trading bands not a complete fallout.
Below is an hourly chart on the FXE. I am looking at a bullish divergence in the price oscillators. The FXE bounced off the 3rd standard deviation when we took off the short calls this morning and is now stabilizing at around 1 standard deviation below the 40. I look for a move to around $128.00 in the near term to cover the recent open gap.
January 10th, 2012
Bullish momentum has steadily improved since early December. The percentage of stocks trading at least 2 standard deviations above their 40 day moving averages has climbed to around 19% from the low single digits in early December. I tend to use this as a true measure of market overbought/oversold conditions and the current 19% reading is right about midpoint between what are generally true overbought levels at points above 35% or so and oversold at levels below 5%.
While this is generally a good thing for the bulls, for it to be sustainable we would need to see more participation. So far in the new year, participation has been anemic during a time of the year when we would expect to see it ramp up. This lack of participation along with the advancing levels of stocks pulling away 2 standard deviations from their 40 day moving averages puts the market at risk for sharper corrections.
We took off the IWM position today due to how it traded at the highs of the day which put it squarely 3 standard deviations away from the 40 period moving averages in the hourly chart. Usually when there is a gap higher into the 3rd standard deviation on the hourly charts and there is a break in the volume and momentum indicators, what we usually see is a reversion to the mean. The gap opened at 75.17 and the 40 period MA comes into play again as support at 75.00 and that is where we should gravitate to next.
The set up for Gold is solidly bullish here. We did make a break on the widely followed 200 day moving averages today and it is important we hold this level into the close today. The upside open gap we are looking at closing on this leg higher sits at around 166.00 or so on the GLD. Money flow into the GLD ETF confirms participant interest and I think we may trade near this resistance level quite soon.
The Euro remains stuck at these general levels although there is some indication that it may be ready to make that move higher to test 130 on the FXE. Our trade is for a counter trend move from very real oversold levels within the downtrend channel. At the moment we are trading 2 (nearly 3) standard deviations away from the 40 day ma.
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C.J. Mendes
cjm
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