Archive for October, 2011

Sunday, October 23rd, 2011

We continue to believe that North America will outperform the rest of the globe. Canada has been strong and the US, while in a difficult slow-down, is a lot safer than anywhere in the Euro zone. Emerging markets are a bit too risky for now. There are some clues that the US is trying to stumble along. If you look at the sectors, it is strange that the rails, chemicals, and packaging/ containers are on the top 11-12 best performing sectors. It shows us that the economy is trying to turn positive but is doing so a very slow pace.

We believe that this market is trying to get back into rally mode so that we can have a good yearend rally. By the way, mutual funds close their books this coming week so, they will take whatever loses are necessary and paint their portfolios so that they look good. Although the market remains in the rectangle that it has been in since early in August, we believe that it will breakout to the upside and try to enjoy a Christmas or Santa Claus rally.

The 20 minute chart of the S&P 500 mini contract shows an upside bulge in volume as the resistance of the upper boundary of the rectangle was removed in the Friday session then the retreat once the stops were completed. After the initial bulge the market retreated a bit and then, on light volume, it rallied into the close. This is a weekend and it is reasonable to expect that the risk trade will be put on hold until Monday. It is also likely that Monday we will open to the upside and continue our move to the upside. Again, for us to believe this, we have to see the upside momentum continue for another trading day.

A little explanation as to why stocks and commodities tend to trade above/below resistance levels only to return to their predetermined ranges. There is a one-word answer for this question and it is MIT orders. What does MIT mean? Market if touched, these are stop orders that rest above/below the markets and are the safety net orders. Once a specific level is reached, the order becomes a market order. Depending on the size of the orders and insomuch as the crowd has a lemming mentality, you will see spurts either up or down upon this election. Thus, the market moves above/below the line. That is the main reason why I need to see a two-day confirmation on a move above/below a resistance/support line. My theory is that I might be late to the party but I will be assured that it is the correct trade rather than being whip-sawed by the market.

Just to keep you grounded the small capitalization Russell 2000 did not breakout to the upside in Friday’s session. The NASDAQ 100 was weaker than it should have been for a true breakout. Remember that we are in tax selling season and the Russell 2000 is seen as a source of funds.

Tuesday: October consumer confidence is released at 10:00 and S&P/Case-Shiller index at 9:00.

Wednesday: September durable goods are released at 8:30, the Greek deadline, and September new single family home sales are released at 10:00.
Thursday: 3rd quarter GDP is released at 8:30, Chicago Fed survey is released, and mutual-fund sales/redemptions for September are released.
Friday: personal income/spending for September are released at 8:30 and October University of Michigan Sentiment survey is released at 9:45-10:00.

The US Dollar index did not have a good day in the Friday session leaving a very large red candlestick on the chart. The stochastic indicator is oversold and is pointing lower filling the feeling that we are bearishly oversold. We expect to see some support at the 76.165 level which is a Fibonacci 0.618 retracement number from the high seen on October 4,, 2011. Our own indicator, the RSI and the Thomas DeMark Expert indicator are all pointing lower. Only the stochastic indicator is oversold. The RSI is almost there and the other two have plenty of room to the downside. The 5-period moving average is at 77.224. The top of the Bollinger band is at 78.208 and the lower edge is seen at 76.192. The high volume area on Friday was near the lows of the session. We are above the Ichimoku Clouds for the daily time-frame but are below the clouds for both the weekly and the monthly time-frame. We need to see some support for this index at the Fibonacci 0.618% level or risk a retreat to the downside. Yes, we believe that this index will bounce within a day or so, but this chart looks awful and we would not be long without some really close stops. You could use the ATR for stops rather than percentages.

Hooray, the S&P 500 finally broke out of the range that it has been bouncing around in. Will that breakout continue? That should be answered in either the Monday or Tuesday session. Perhaps there will be a continuation to the upside as we approach the end of the month of October. It should be noted that although October is known for declines it is also known for turn-arounds. All the indicators that we follow herein are pointing to the upside with only the stochastic indicator and our own indicator in overbought territory. We seem to be bullishly overbought. The RSI continues to point higher and is approaching overbought and the Thomas DeMark Expert indicator is pointing higher with plenty of room to the upside. The market closed above the rectangle that has been holding the market in a range. We notice that the surge of buying came as we approached and cleared the resistance level and then again near the close as some stubborn shorts exited the market. The 5-period exponential moving average is at 1213.75. The top of the Bollinger band is at 1250.58 and the lower edge is seen at 1096.51. We closed the Friday session at the high leaving a shaven head on the candlestick. As you can imagine that is “a good thing” for the market. We closed above the Ichimoku Clouds on the daily chart and are above the clouds for the monthly time-frame. We are inside the clouds for the weekly time-frame. The point and figure chart looks good. Market profile shows us that there is little in the way of overhead supply until we get to 1286.52. Looks good for the bulls for now, and although we would not buy until the up move is confirmed we are inclined to be long the US markets.

The NASDAQ 100 rallied 33.25 points in the Friday session but did not breakout to the upside. Yes, we are above the Ichimoku Clouds for the all-time-frames but we were disappointed that this index was not the leader and rather the follower in the Friday rally. The S&P 500 rallied 2.09% while the NASDAQ 100 rallied 1.45%. The down-trending channel lines are 2342.375 and 2252.81. The 5-period moving average is at 2327.60. The top of the Bollinger band is at 2414.92 and the lower edge is seen at 2081.80. The stochastic indicator is issuing a buy-signal at overbought levels. Our own indicator is issuing a buy-signal with plenty of room to the upside. The RSI is pointing higher. The Thomas DeMark Expert indicator is pointing lower. We did have a nine count on the chart on Tuesday. The market profile charts shows that we have decent overhead supply until we clear 2422.50, then there is nothing.

The Russell 2000 rallied in the Friday session and cam fairly close to breaking out of its trading range. We have signs of exhaustion and a nine-count on the chart. The stochastic indicator and our own indicator are both very overbought but continue to point higher. The RSI is pointing higher and has plenty of room to the upside. The Thomas DeMark Expert indicator is flat just below neutral. We closed inside the Ichimoku Cloud for the daily time-frame and remain below the clouds for the weekly time-frame. The 5-period moving average is at 698.68. The top of the Bollinger band is at 727.68 and the lower edge is seen at 619.86. As you know, this index seems to be the source of funds during tax selling season which is beginning now. The market profile chart shows little supply once we clear the 714 area and we will likely melt to the upside.

Crude oil looks as though it would like to trade higher. We seem to be stuck in a rectangle with borders at 74.95 and 90.48. Until or unless we break this support/resistance lines we will be range-bound. We are inside the Ichimoku Clouds for both the daily and the monthly time-frames and are below the clouds for the weekly time-frame. The 5-period moving average is at 83.27. The top of the Bollinger band is at 101.55 and the lower edge is seen at 77.06. The indicators that we follow are pointing higher with room to the upside. We continue to like crude oil but will not recommend a long position until or unless it breaks out of its rectangle. For nimble traders, this trading range can be traded easily just keep your stops in place above and below the market.

Gold closed higher in the Friday session but remained below the downtrend line of 1664.93. We do see gold above the uptrend line of 1609.78. Gold as oil seems to be stuck in a trading range from 1585, with an outlier at 1532.7 to 1681.16. All the indicators that we follow herein are issuing a buy-signal. The 5-period moving average is at 1646.92. The top of the Bollinger band is at 1689.63 and the lower edge is seen at 1601.38. We continue to like gold on pull-backs and would not chase this market. We are below the Ichimoku Clouds for the daily time-frame but are above the clouds for both the weekly and the monthly time-frames. We see a point of inflection on Friday at 1628. That will only be seen if the market remains between the uptrend and the downtrend lines. Should we see the point of inflection, the rule is to go with the trade, certainly not against that trade.