January 9th, 2012
Earning season gets underway today and expectations are for a lousy fourth quarter of 2011. Particularly hard hit are the large financial institutions and in recent days, analysts have lowered their estimates for many of these institutions. The first of these to report will be J.P. Morgan which kicks off the financials on Friday of this week. The market seems to be hitting a wall at these general levels and many participants may be opting to take a wait and see attitude on earnings.
The rhetoric from Europe is also impacting the trading action this morning as the euro zone’s two leading powers, Chancellor Angela Merkel and President Nicolas Sarkozy, insisted after talks in Berlin that private sector bondholders must share in reducing Greece’s debt burden, along with new European and IMF lending. They rejected both a call by a European Central Bank policymaker to abandon plans to make private investors take losses, and a leaked International Monetary Fund memo that cast doubt on Athens’ ability to reform its public finances. Angela Merkel even went as far as casting doubt on the payment of the next tranche of Greek aid.
The German “negative yield” bond auction also did not help matters and these events all contributed to the VIX opening higher by nearly 6%. The market has really handled these headlines with composure lately as these headlines would have had a much bigger impact on the market just a few weeks, months ago. This crisis is far from over…
The technical picture based on our studies remains conducive for some more upside although there has been recent change in momentum. This change of direction in momentum is not pronounced enough just yet to prompt us out of the current bullish trades but something we need to keep an eye on. The short term studies show us trading right off of the 40 period moving average on the hourly charts and we have also noted a narrowing of price volatility which means we are close to a break out one way or the other.
We need to see some cash be put to work soon or the current rally may falter once again at these levels shy of 1300.
January 6th, 2012
Today’s employment report came much better than expected although many believe the data was somewhat priced in to the market. The fact that a stronger economy, which the better jobs data suggests, will keep the Fed on the sidelines in regards to any further easing measures.
The already weak Euro took another leg lower as the dollar jumped on the jobs data and the move triggered a bullish signal on our models. I am looking for a move to around 128.50 on the FXE to close the first of several open gaps before another move slightly lower. The fact remains that the Euro will continue to be pressured lower, in an orderly manner, over the course of this year and I envision opportunities to arise for both bullish and bearish trades.
Gold continues to perform solidly even with the extended move higher in the dollar which, as we have come to experience, goes against the recent coupling between the weak dollar and the rise in Gold and commodity prices.
The Nasdaq continues to be the leading gainer of the major indices along with the Russell 2000 small cap index. Whereas as all the major indices have lingering multiple gaps open, the QQQ quickly filled the gap open on the 20th of December and perhaps this has some bearing on the recent short term outperformance.
Next week we kickoff earnings season with Alcoa reporting. We are heading into the earnings season slightly overbought but I am of the opinion that we still have a few weeks of upside bias until trouble knocks on the door once again.
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January 5th, 2012
I am looking at the open gaps on the SPY in relation where they line up versus the standard deviations on the 40 period moving averages to determine where we could expect support . The first open gap comes in at 126 SPY. Looking at the hourly chart below on the SPY we can see that the 40 period also comes into play so I believe that the 125.50 level, which corresponds to the first standard deviation below the 40 period moving average(red line), is our near term target for any downside move. It would close the most immediate open gap and perhaps set us up for a move higher to around 130.
Obviously along those same lines are the open gaps at 121.00 and 116.00…these will be closed at some point in the future but unless there is an immediate black swan type event in the near horizon, it may be an event for later 2012. What we do know is that these will close at some point.
I use standard deviations from the 40 period to gauge the potential downside move based on normal trading patterns. So for example we are trading right at the 40 period on the hourly charts, three standard deviations, and we know that stocks do not trade 3 standard deviations away from the forty for too long, (take a look at the chart below and notice that it is infrequent that we expand between the second and third standard deviations) so that a move lower here to close the second open gap would have to come on the back of an abnormal trading scenario. These are triggered by Black Swans or “mini” Black Swans as I call them which are headline type of events that trigger not of a major magnitude such as standard Black Swans but incite enough of a reaction from traders that in thin (low volume/participation) markets create deeper fluctuations in the price action than is normally expected.
Eventually the market will trade lower and the 40 period moving averages will slope downward. As we trade lower on “normal trading patterns” these open gaps will become more vulnerable
Just fyi on what I am looking at here. I would very much welcome a flush out to close at this open gap today. As always, any questions please let me know.
January 4th, 2012
Stocks started the New Year with a bang and today seems to be content in consolidating the gains. Traders are watching to see if the first five trading days of the month will be positive, indicating a possibly positive January as investors allocate funds to the market. The S&P materials sector, down nearly 12 percent in 2011, was the top performing sector Tuesday, gaining nearly 3 percent. The financials were up 2.8 percent, after an 18 percent 2011 loss. On the other end of the spectrum, utilities, up nearly 15 percent in 2011, fell 1.7 percent Tuesday as the worst performing of the major sectors.
Today, traders are already anticipating the December jobs report, which could make or break the current rally. Economists forecast that 150,000 jobs were created in December, but already there is talk that the number could be higher. The factory orders data was solid this morning and traders will begin to look toward the upcoming earnings cycle. Thursday we will also get a glimpse into the December retail sales data as many companies expect to show gains over the previous year.
The wild card continues to be Europe. The threat still looms of a possible downgrade of the Euro zone members across the board including Germany and France. How much of this is priced into the market may be debatable but it could nonetheless cause a short term ripple which we could exploit for trading purposes. I think this downgrade may very well come around the middle of this month.
Gold continues to trade solidly today even as the US dollar index trades nearly 2/3 of a percent higher. Following a much publicized change of heart regarding Gold, Dennis Gartmann, who is widely followed by many commodity traders, has admitted to being wrong on the recent call to sell Gold and is now looking to pick up Gold on any pullbacks. If we believe that the Fed will continue to embark on easing programs, which I do, then it stands to reason that Gold will perform well. If the ECB joins the printing party and decides to embark on a more aggressive easing program, then we could see an even more robust pick up in the metal.
The long term Gold support channel from back in 2009 was only briefly breached and should, for the moment, be considered intact from a technical perspective (+-2% from support/resistance). The 200 day moving average looms close at around 158 or so on the GLD and the recent strength should continue to attract speculative capital.
January 3rd, 2012
Hope you all had a great New Years holiday. Its time to turn the page on 2011 and the question traders should be asking is where to now? The holiday trading pattern should wind down this week (many don’t know this but the so called “santa” rally historically covers the first 3 sessions of the year. January is historically a good trading month as capital tends to be reallocated from the higher performing sectors of last year into the laggards and new money tends to flow into funds from bonuses etc. As we all know, the past few years have taught us that we are living through a period of unchartered waters in regards to market behaviors so we have to take all of these historical norms with a degree of skepticism.
Obviously all of the issues we have dealt with for the past several months and years have not magically gone away and we have to continue to put a huge premium on these potential headlines swaying the market one way or another.
The technical backdrop to the start of this year favors the bulls although this favorability could be very well short lived. In looking at the IWM of which we currently hold a position, we can clearly see that we are nearing an area that could move the market. The IWM is approaching the highs set on October 31st 2011 after that moon shot higher started early in the month. This level also corresponds to several lows set back in December of 2010 and several times since. Now these “straight line” points of resistance and support tend to be some of the toughest to negotiate. The reason for this is that these levels are set points of accumulation and distribution. In this case we say that there is plenty of “overhead supply” as many traders set stops to generally correspond to these levels. As the market trades at or slightly above the supply is exhausted and the instrument generally is set to trade briskly one way or the other. So if there are lots of sellers at the point and not enough buyers, the stock will bounce around and eventually shorts will step in and push the price action lower.
For the IWM, I am looking for a move to test $77.15 or there abouts and I think there may be a bit more upside from here as we are trading around $75.00 at the moment. Once we trade at this level, the dynamics I have described above will dictate were we trade next. The IWM $77.00 area also corresponds to the second standard deviation from the 40 day ma which will also offer some resistance although to a much lesser degree. The 40 day moving average is our support and in this case it is an upwardly sloping line. We will make our decision on what to do with the position based on how we trade between these levels. If we don’t make a push above this level by the middle of the month then it is possible that we will trade lower first before making another push.
My point here is that these straight line support and resistance points act as catapults one way or another so we should move with gusto one way or another.
Also from a technical perspective, the GLD still has some room to push higher although I think we will hit stiff resistance at between 165 and 168 as we negotiate that downtrend lower lows lower highs pattern. At around 156.00 on the GLD we should have some room and I am using the 40 day moving average as our potential exit point. The 40 day in the case of the GLD is downward sloping so we could very well trade up to meet it quickly over the next few sessions.
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C.J. Mendes
cjm
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