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David's Weekly Market Chartmentary July 4, 2005
(Happy 4th of July to everyone!)
Not So Fast
Sometimes the way to see the possibilities of the future is through the study of the past. I'd like to start by going over the correlation between the Mortgage Refinancing Volume and the Personal Consumption Expenditure.
If the stock market serves as a leading indicator of our economy, then the retail sector serves as a leading indicator of the overall stock market. And, the retail sector is directly affected by none other than the most prominent GDP component, the Personal Consumption Expenditure (PCE). As much as I care about the domestic investment, government expenditures, and net exports, the one thing that really matters most is the PCE. Based on the final 2005 1st quarter real GDP report, PCE currently represents 70.04% of the GDP. When the PCE goes, so goes the retail sector, the stock market, and the economy. But, what gets PCE going?
What gets the PCE going is the wealth effect of the housing price appreciation. The home equity is then extracted for consumption through cash-out mortgage refinancing. But, the home price appreciation alone doesn't have as much impact on the economy without the low mortgage interest rates. Low interest rates also induce rate-and-term Refi. Most of the cash-out is directly contributed to the consumption while the rate-and-term Refi is contributed to lower mortgage payments, which in turn provides additional disposable incomes. There's an undeniable inverse correlation between the interest rates and the Refi volume.
Chart 1 is the Refinancing Mortgage Application Volume based on the latest MBA report for the week ended 6/24/2005. Chart 2 is the PCE percent change from the preceding quarter based on the final real GDP report released on Wednesday, 6/29/2005. These 2 charts are not up to scale because the Refi chart is a weekly chart and the GDP chart is a quarterly chart. Nonetheless, I place a 2-quarter simple moving average curve (red curve) on the PCE chart for a better visual comparison with the Refi Volume Index curve.
The Refi volume dropped sharply from the high of almost 5,000 in March 2004 to below 1,500 in June of 2004. This contributed to the drastic decline of the PCE in the 2nd quarter of 2004 (2004Q2). From June through the end of October, the Refi activity was in a steady uptrend (blue arrow). This corresponded with the increase of the 3rd quarter PCE. And, the 4th quarter decline of the Refi volume was reflected in the lower 4th quarter PCE. Although it did pick up after the New Year, the 2-month decline of the Refi Volume in February and March contributed to yet another lower PCE for the 1st quarter of 2005.
Chart 1
Chart 2
Meanwhile, Chart 3 below shows the 30-year fixed rate went up to the 6% level while the 5.6% low appeared to be the support area (black arrow) that's going to hold for a while.
Chart 3
And, the S&P Retail Index chart below (Chart 4) also shows similar weakness at the end of March. It started to break below the bearish Descending Triangle support at 425, with further downside projection of 385.
Chart 4
With higher interest rate, lower volume of Refi application, lower PCE, and lower retail sector performance, the market and the economy certainly looked quite gloomy at the time. And, this sentiment was manifested in the rising VIX. The volatility index, VIX, which usually has an inverse correlation with the market, started ascending in March. After a brief drop in early April, it rose above 18, which was the highest level since August 2004. This corresponded with the market correction that took place in the beginning of March 2004 and lasted through April.
Chart 5
Then, something happened in April that turned everything around. The retail sector (green curve on Chart 6 below) started trending higher, after hitting the low of 390, and it took the market with it on the way up.
Chart 6
The mortgage interest rates took a sudden nose dive after March (Chart 7), and the Refi Volume surged above 2,000, which broke the February high (Chart 8).
Chart 7
Chart 8
What happened in April that suddenly provided a relief on the interest rates, a surge in Refi volume, a big boost to the consumption, and thus the stock market was the falling oil price.
The rising price of oil works against consumption as additional taxes on the consumers. However, in the beginning of April, the cyclical commodity trend indicator, Commodity Channel Index (CCI) crossed below 0 and started forming lower highs. The price of oil fell from $58.20 to $48.05 during this downtrend (red downward price channel). That 17.44% drop in the price of the crude translated to about 8%-10% drop of gasoline price at the pump. This sharp decline of the price of oil was the equivalence of the tax relief that helped turn things around. And, it also gave the consumer confidence a big boost. This was later reflected on the improved consumer confidence reports.
Chart 9
Last week, CCI dropped down from above 100 and briefly dipped below 0 for the first time since May. Despite my long-term bullish sentiment about oil, in the short term this indicates that the price of oil is ready to take a breather. One non-technical indicator of a short-term oil top is that too many people are currently too bullish on the oil and energy sectors.
In the long run, if the declining oil price is a result of the weakening demand, then lower oil price would eventually hit the "diminishing margin of return". At that point, the price of oil would have no effect on the market and the economy, even if it continues to slide. However, in the short term, the declining oil price may help keep the market and the economy afloat. And, that, I believe, is what's happening right now.
As I indicated before the opening bell on Friday that the market should continue to stay afloat on Friday despite the fact that 6 of the past 8 Fridays were down days and that the 2 previous sessions all ended in the red. The fact that the market defied the statistics on Friday was a show of such short-term optimism.
Generally speaking, barring sudden spike in the oil price, oil and the overall market doesn't have a very high degree of correlation on the daily or the short-term basis. And, that's clearly demonstrated on Chart 10 below. In the long run, however, the rising oil price does have a negative effect on the market and the economy.
Chart 10
But, one sector that has a very high degree of correlation with the price of oil is, believe it or not, the tech-heavy NASDAQ index. During the consolidation of the crude price, NASDAQ's 11.47% rise from the April/May low to the June high was the most amongst major indices.
Chart 11
And, if the NAZ stays afloat, so should the market. It's apparent that the market is not ready to go down just yet. Not so fast.
Trade Journal: NASDAQ 100 (QQQQ) Update
Took advantage of the stagnant market on Friday and placed limit order to add August $37 Call at $0.70. I've just got a chance to check all my emails and found out that order was filled.
The quantity was 1/3 of the August $38 call that I had previously added at the cost of $0.50.
Please see my current Sunday Chartmentary for details.
Before The Bell: 07/01/2005 Is It Going Down?
The past 2 days' market action seemed to indicate that the market is going to continue its downturn. In addition, 6 out of the past 8 Fridays were all down days. While the market may be in a long-term downtrend, it may not be ready to go down just yet.
For one thing, yesterday's market action seemed to be another FOMC effect. Although the market had reacted negatively to each of the past 3 FOMC meeting announcements, it had bounced back every time.
This crude oil chart shows the cyclical commodity trend indicator, Commodity Channel Index (CCI), had just turned negative. It had been staying over 100 since it moved above 0 in May. The last time it fell below 0 after staying over 100 for a while was in March (black vertical dotted line). That marked the beginning of crude's downtrend, and it fell from almost $60 to $48. As a result of that, the market did put a little rally together (blue trendline).
And then, there's the CBOE Total Put/Call Ratios. The negative market action yesterday had actually lowered the ratio. This means there were more call options (right to Buy) than puts (right to Sell). This indicates continued bullish sentiment among options traders. This bullish sentiment is also shown in the new downtrend channel after it reached the recent "oversold" level of 1.02.
This ratio has an inverse correlation with the market. A good example would be the recent QQQQ trade. I began to establish short positions after this ratio hit 0.68 and started rising. I took the profit when it reached 1.02. Right now, this ratio, at 0.77, is not in the "overbought" area where it warrants any major selling activities yet.
Looking at these "non-confirmation" indicators, and others that are not shown here, I'm wondering whether the market is ready to go down just yet.
Trade Journal: Txu Corp. (TXU)
I didn’t have much time yesterday, so I briefly documented the new position earlier yesterday on CashCow board to share with my iHub bud, PieSky, there. I mentioned over there that I was going to write up this trade last night or this morning, but I really ran out of steam. I’ll have to find a moment later today to do that.
http://www.investorshub.com/boards/read_msg.asp?message_id=6829890
For now, I’ll just post these 3 charts that I prepared in May when I started tracking this stock. These 3 charts actually tell the whole story already. The first chart shows the first thing came to my mind as soon as I realized what’s going on with TXU. The next 2 charts are supplements to this theme.
That’s it for me for now! In addition to writing this trade up, I’ll also try to get my usual Thursday Update on my website sometime this evening. Have a great day everyone!
And, don't forget to check out Joss Stone's album, The Soul Sessions.
OBSERVATORY 021: HSBC (HBC) Hong Kong
Your Email: An Appraiser’s Comment on MLS Membership
David, I have been trying to follow you with moderate success. Since you like to look at the whole picture, I would like to advise you of the following.
I am an appraiser member of the Mid-Florida MLS. Most appraisers I know are not paying members and access the MLS on line using other's codes. That is coming to a halt August 15. After that the security (which I could explain if you are interested) will deny them access - no pay, no play. It seems to me that lots of appraisers will be joining the MLS in the next six weeks or so in order to maintain access. I don't know about other areas of the country, but if they make similar security arrangements, the number of Realtors should show a big increase without a concomitant increase in the number of real estate sales people. That would surely skew your analysis of numbers of Realtors/numbers of sales.
I just thought you should become aware of this, as otherwise the new numbers might affect your analysis in a negative way. Keep up the good work. You can never learn too much.
Till then
Tom
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David’s Note:
Thank you for your info in a well thought-out email, Tom.
The MLS membership that I’m tracking requires everyone to pay for his/her membership, and it has been like that for a long time. However, your email reminded me to point out that NOT all MLS members are real estate agents. Therefore, the number’s skewed anyway. Now, as far as being used as a sentiment indicator, I don’t think these details are all that important. It’s the long-term trend that’s important to us. One month of ups or downs doesn't make it a trend. Appraisers are part of the real estate community anyway. Besides, majority of the MLS members are real estate agents.
In addition, this is only one of the 18 indicators that I’m using for my housing market analysis. I don’t look at one indicator and jump on the conclusion with prejudice. I’ll introduce them as I see fit in the future housing market reports.
Email Replies: Course of Action for Trading
"If someone wanted to learn how to trade the market what course of action, would you recommend?"
This is one of the messages I’ve just received. There’s been a few similar PM’s or emails like this So, it’s probably a good idea to put it out here to share with everyone. Let me see if I could be of any assistance. Of course, everything I’m writing here is just my personal opinion.
I really believe that having a full understanding of the economy, macro and micro, is the most important thing in investing or even trading. And, I’d emphasize “full” understanding because everything has to do with everything else in the universe and in life. If the US Dollar dropped suddenly, for example, I’d want to know what happens to the Brazilian soybean crop. In addition, having a full understanding minimizes our tendency of prejudice, which is one of the trader’s worst enemies.
The first connotation of the word prejudice comes to mind as something racial, but this has nothing to do with that. One of the Merriam-Webster dictionary definitions is “Preconceived Judgment or Opinion”. And, that’s exactly it. We’ve all carried with us preconceived opinions or beliefs, and we see the world the way it's dictated by our beliefs. Because of that, we usually only see parts of the world that we choose to see, subconsciously. And, we miss out on a lot of important things that we must see in order to get to the next level, personally or financially.
As a trader, it’s important to be able to see what’s not obvious because everyone else is seeing all the obvious. And, the most profitable trades are the ones that no one sees it coming but you. But, you can not take advantage of this unless you have an open mind that’s not cluttered by prejudice. And, you can not NOT be prejudiced unless you have a full understanding of how things really work. And, in order to have that full understanding, we must learn by unlearning. And, we must study like there’s no tomorrow and no TV. There’s simply no time for that. It’s an extremely time-consuming process.
And, once you understand, then you would have your own thoughts and your own ways. You don’t need to quote anyone’s statement as though you’re thoughtless and mindless. You would then have your confidence. Charting and everything else would come naturally. And, you’d see things that no one sees.
And, that, I believe is the course of action that every investor and trader must take.
After the Bell: 6/27/2005 Transports Technical Pattern
For those received John Murphy’s commentary today, he brought up the usual great observation about the Trannies technical breakdown on this chart. As he pointed out that the formation of lower highs indicates a strong chance that the Trannies may not be able to hold the May low, which is at 3348.
Just to add to Mr. Murphy’s comment, this chart I used in my Sunday’s Chartmentary on 6/12 showed that during its 51 months of strong uptrend, Aroon UP (green line in lower pane) only touched the bottom twice (yellow highlights). It didn’t even touch the bottom on the 2 recent declines that fell below 30 (blue circles). Throughout this uptrend, the Aroon UP spent most of the time staying above 70. But then, it started to break down in April.
Things have changed, for the worse, since then.
The Trannies had since fallen below 3500, and, on this updated chart below, it appeared to be in the process of forming an imminent bearish Head and Shoulder’s pattern.
This pattern is to be completed when the Trannies break below the 3250 neckline with the 3rd confirmation of increasing volume on this decline. This would give the Trannies the target of 2807. But, it's still got a way to go.
There are some pretty good trading opportunities in the Transports right now, and more when the Head & Shoulder formation is confirmed. Just make sure you don’t bet on the wrong sector.
Deleting Messages #226-#247
Thanks for your emails. Yes, the more I looked at this thread of discussion, the more I see how it’s not relevant to what this Trade Journal is about. I hear you. I’ve obtained Admin’s permission to delete messages 226 through 247. Now it’s easier for your, the visitors, to read what you’ve come to my Trade Journal for again.
Sorry FA for having to delete your messages. Thanks for your understanding.
Trade Journal: NASDAQ 100(QQQQ)
And, since I observed the technical signs that $37 is where the fall is supposed to stop, why not pick up some cheap August $38 Calls for only $0.50? So I did.
David's Weekly Market Chartmentary June 26, 2005
Real Estate: A Different Look
It's frustrating to see economists or financial analysts attempting to apply the same financial ratios to the housing market. The P/E ratio that works on stocks simply doesn't make sense on someone's residence. It's even more frustrating to hear experts stating, as-a-matter-of-factly, that higher interest rate means lower home price. If that's true than housing prices should be positively correlated with the bond prices. But, that's just not the case. It also doesn't make sense for the interest rate to be so commonly used as though that's the one most significant indicator for the housing market. But, more on the interest rate later.
Here's taking a different look at the housing market.
Real estate market is regional. Real properties don't trade through the same national or international exchanges. Socioeconomic shifts may impact one region negatively while the others positively. Therefore, perhaps the best approach is to analyze the regional markets first, especially the major regions that represent a large slice of the national real estate pie.
Let me start with the East Bay of the San Francisco Bay Area region. According to the Census Bureau, California is the most populous state. These 2 counties in my analysis are two of the 10 most populous counties in California. While this does not represent the entire housing market, the mere size of this metropolitan area may help shed some light on the well beings of the housing market.
I only use 3 of the indicators in this analysis. If this turns out to be something of interest to the readers, I'll exhibit other useful indicators in my future housing market reports.
The Sales
This chart compares the number of pending sales and the number of properties sold. As you can see, there are 2 different time scales, or X axes. The time scale on the top is for the pending sales (blue letters), and bottom axis is the time scale for the sold properties (red letters). The sold properties lag behind the pending sales by 30 days. That’s the normal amount of time it takes for all the inspections, disclosures, loan applications, and escrow to complete. Upon completion of this process, the property is then changed from pending to sold status. The important thing here is that NOT all pending sales lead to successful closing.
Chart 1
When more sales fail to close, it creates gaps between these 2 lines. There are many reasons for an escrow to fall through, but it’s primarily due to problems with buyer’s financing. This is even more so in a hot real estate market. A hot housing market is a seller’s market, which means motivated buyers would generally accept sellers’ terms and sellers’ property conditions. And, unless there are irresolvable problems with buyer’s financing, most escrows do go through.
In a healthy housing market that’s backed by a healthy economy and strong job growth, the number of pending sales usually stays close to the number of sold properties reported 30 days later. The recent market action on Chart 1 shows otherwise. The number of final sales (red line) gaps below the number of pending sales (blue line) consistently since March indicates the fundamental weakness of our housing market.
The Sentiment
Let’s now take a look at this recently updated MLS Membership chart. MLS is the Multiple Listing Service that real estate agents use to upload their listings for marketing. That’s the medium through which majority of the properties are sold. The property database that you searched on the Internet came collectively from these local services.
Chart 2
Chart 2 shows an uptrend that forms consecutive higher highs since November 2004. That’s an impressive and strong uptrend. And, as though that’s not impressive enough, it had also set all-time MLS membership records in each of the last three months – March, April, & May. The record is now at 4,731.
This extreme euphoric sentiment toward real estate business stems from the perception that real estate is where the money is. And, that motivates more and more people to obtain real estate licenses and to join the MLS system. Unfortunately, the perception, in this instance, is not reality. This is what makes this MLS membership data a legitimate Sentiment Indicator.
From a contrarian point of view, the topping process of this sentiment indicator represents the beginning of the end of the real estate boom. Usually, the commencement of the market deterioration is not visible to the public or even to most real estate agents. The divergence between the MLS membership data and the Number of Units Sold (Chart 3) demonstrates the validity of this contrarian perspective.
Chat 3 shows the total number of units sold in May this year actually declined 7.18% from May of last year – from 3,328 units to 3,089 units.
Chart 3
Last May, there were 4,205 MLS participants (refer to Chart 2). This May, the new record was 4,731 – an increase of 12.51%. Last May, each MLS member sold 0.79 units per month (3328/4205). This May each MLS member sold only 0.65 units per month (3089/4731). The number of units sold per agent dropped 17.50% from last year. And yet, there are more MLS participants than ever. Intriguing, isn’t it?!
Now that we’ve established the MLS membership data’s legitimacy as a contrarian sentiment indicator, all we’d have to do is to monitor whether it begins a bearish reversal pattern of forming lower highs.
From these indicators and the others that I'm using, I can see visible weaknesses in the making. But, I've yet to see any of my indicators signaling this so-called "bursting of the housing bubble". We'll know if and when this happens from the study of the language of the market.
The Interest Rate
So far, I’ve not based any of my analysis on the interest rates, but I’m certain you could see the underlying housing market weaknesses addressed by the above referenced technical and fundamental points.
Here’s a table showing some of the recent years with the double-digit mortgage interest rates happened to be the years with the double-digit YTY median price growth, namely 1986, 1988, and 1989. And, 1993, the year with one of the lowest interest rates happened to have a negative growth in housing price. Who came up with this idea that higher interest rates mean lower home prices?
I’m sure we could get into extensive debate, or discussion, about this phenomenon, but that’s beyond the scope and the relevance of this article. The purpose here is simply to point out that while interest rate is an important factor, it’s not the most important factor that affects the housing market.
Interest rate’s influence on the housing market is only relative to the other more relevant factors such as population migration, employment, demographic shifts, real incomes, and the overall economy, etc. If the economy and the real incomes are growing and home buyers can financially afford the payments, why would higher interest rates even matter?
The Economy and The Market
In case you didn't see my post on Your Economy board, below's the link to my quick (relatively speaking) post. This is one aspect of the fundamentals that I believe in. A big part of my self-discipline is to make sure I don't forget that, especially in the heat of the battle (trading).
http://www.investorshub.com/boards/read_msg.asp?message_id=6790838
Trade Journal: NASDAQ 100(QQQQ) Closed for 88.6% Gain
35 seconds before the closing, I sold all of my July $38 QQQQ Put Option.
Since additional quantity of put was half the original order, the ratio between $0.60 and $0.55 is 2:1. Thus, [(0.60x2) + 0.55x1] / 3 = 0.5833. The cost per Jul $38 Put was then averaged down to $0.5833. I sold all of them today at $1.10 for a gain of 88.6% ($1.10 / $0.5833).
Here’s why...
This chart should be quite self-explanatory, so I only have one additional remark. You can see price didn’t come off the downtrend trendline until it broke the fall and started to level off at about $37. For the last full hour of the session, it then tried and tried again to break that 37 support without much success. It did make it below 37 briefly, but that shouldn’t be considered as a convincing breakdown.
This chart below provides a longer term perspective on the strength of that 37 support line. In addition to that strong support, whenever the 5-day RSI dropped to this low level, it’s quite probable that the decline is coming to an end for the time being.
I thought it’s a great idea not to fight these technical signs. Why not cash in my chips and enjoy a nice weekend? So I did.
If the above computation is confusing, here’s an easier but longer way of calculating the numbers. This is assuming that I bought these number of put option contracts. We multiply the number of contracts by 100 because each option contract is for 100 shares of the underlying stock.
BUY TO OPEN
$0.60 x 20 x 100 = $1,200
$0.55 x 10 x 100 = $ 550
TOTAL COST $1,750
SELL TO CLOSE
$1.10 x 30 x 100 = $3,300
GAIN: $1,550 = 88.6%
billkat- As always, good seeing you here taking advantage of the Happy Hour. I’ll keep your suggestion in mind and apply them to my future posts.
Here’s for the real Happy Hour... Cheers!!!
still here reading, thanks for your efforts. could you sometime do a post on money flow indicator pertaining to a stock, and how to think of what options traders are doing at the same time? just don't even get it...when you get a chance, of course. sure would be appreciated....bill...have a great weekend!
After the Bell 6/23/05: The Not-So-Obvious Observation
Crude oil hit all-time settlement price, potential trade war with China, FedEx earnings miss, etc. were all said to be the reasons for today's market plunge. But, for us, true students of the market (by definition), we know better. We know the recent market action is simply a manifestation of the socioeconomic plight. The market action today shouldn't come as a surprise. In fact, today's decline was relatively minor. While it may be a very profitable day for us Bears, it's only a small step towards the inevitable. Traders' overall sentiment continues to be quite bullish nonetheless.
Since NASDAQ Composite intraday minute chart doesn't provide volume data, I'm using QQQQ, the NASDAQ ETF, for better visual illustration. This 15-min 8-day intraday chart shows why today's tumble shouldn't come as a surprise. It's just a small part of the sequence of events.
First thing worth noting is that after Q gaped up above 37.65 on 6/15, it had made 8 attempts to move past the 38 resistance to no avail. The more times it tried and failed, the weaker it became. And, every failed attempt brought in additional resistance to reinforce that threshold. This can be best illustrated by the increased frequency of its retreat to the breakout level, which is now the support.
Not even once had Q dropped back to the 37.65 breakout level in the first two days after the breakout. That was a show of force fueled by the momentum from the gap-up. And, at the time, as I wrote last Thursday, Q was in the process of forming a bullish Cup and Handle pattern. That strength started waning when it briefly violated the 37.65 support level on the third day, 6/20. Today was the second day in a row that support was challenged. As a result, the 37.65 support is now annihilated. There is one equally significant technical development occurred today.
The past intraday lows were marked by yellow highlights. If you'd look closely, you'd see that today was the first time in a while Q closed lower than the intraday low. This further confirms market's weakness. Buyers or the Plunge Protection Team didn't come in to save the day like it used to. But, having repeated pattern of that happening in the recent past may help explain why the option traders sentiment continues to be quite bullish. Traders who anticipate market to recover quickly may deem this as an excellent bottom fishing opportunity. The total Put/Call option ratio actually declined to 0.77 from yesterday's 0.88. Equity Put/Call ratio also declined to 0.47 from 0.52.
Most people thought these option ratios serve as an important precursor to market movement because option traders are smart traders. The fact remains that option traders are not necessarily any smarter. They're just faster. The leverage in option trading makes it exponentially riskier than equity trading. They have to be fast. We'll see how fast they are tomorrow.
“Don't try to buy at the bottom and sell at the top. It can't be done except by liars.” -- Bernard M. Baruch
After The Bell: The Subtle Shift 6/22/2005
Looking through 20 of my daily indicators, everything looked pretty much the same. Bears and Bulls spent another day at a standstill. I guess I didn’t really miss anything going in and out of meetings all day. None of my stop or limit orders got filled. It appeared to be another yawner except for a couple of very subtle shifts in progress.
Before we get to that, I’d like to bring something up as a reminder. We, traders and investors, sometimes forget that, in addition to buying and selling, there’s a third action we can partake. We can wait. And, that may not be a bad option in this type of range bound market. I haven’t seen much trading opportunities except for hedging against my long positions and some usual nibbles on technical patterns. There’s really nothing experimental enough to make it to this journal.
Anyhow, one of the subtle shifts is in the contrarian indicator I use comparing the market action to the Total CBOE put/call ratio. I use Wilshire 5000 to cover broader market. Rising ratio indicates bullish sentiment as the market advances at a faster clip than total put option (short) to call option (long) ratio. Rising ratio usually correlates with rising market.
This chart shows the recent rising trend of this ratio had started to breakdown. It began to pull away from the upper channel trendline (parallel blue trendlines) and forming a series of lower highs in the process of this pullback. It had also fallen below the lower channel trendline and had stayed there for a couple of days. In addition, its 20-day simple moving average, blue centerline, had begun to break to the downside. Of course, this moving average trendline is also the centerline of the Bollinger Band. These are confirmations indicating that this ratio had just topped out.
Next, let’s take a look at the CBOE Total Put/Call Option Ratio itself. This chart shows the Total Put/Call Option Ratio seems to be in the process of reversing its recent downtrend. Higher put to call ratio usually correlates with bearish market sentiment. While this process has been confirmed by a series of higher lows, the actual reversal has not. The actual reversal can only be confirmed when a series of higher highs is formed. And that’s not happening yet. However, the fact that it didn’t close below the 20-day moving average (blue centerline) is another solid step towards the reversal.
So, we will see... Just call me Papa Bear.
Trade Journal: NASDAQ 100 Trust (QQQQ) UPDATE
Added more Jul $38 Put at $0.55. The quantity is 50% of the original position.
Am I bearish on the near-term or what? :)
OBSERVATORY 020: DRL LYO
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After the Bell: What's the market telling us? 6/20/2005
What do we see when we look at this chart?
For traders with keen observation, we see a couple of very profitable trading opportunities. But, more on that later. Before we see these trading opportunities with high probability of success, we must be able to see what the market’s telling us first.
If we’d take a step back and look at this NASDAQ 3-day intraday 10-minute chart, we’d see the closing price on Thursday (red circle) is about the same as the closing price today. That’s much ado about nothing after 3.2 billion shares changed hands over the last 2 trading sessions. It would seem as though market’s telling us this 2088 area is where it belongs for now. It refused to go any higher or lower than that.
When the market was pushed way up to 2098.53 with a big gap up on Friday morning, the RSI immediately signaled overbought (red circles in upper pane). Market then fell right back to the 2088 area (green line). And, vice versa, NASDAQ weaved its way back up today after being pushed down to the 2076.42 intraday low. However, it did go overboard and rose to 2096.77 before it once again retreated to the 2088 comfort zone. Today, NASDAQ closed at 2088.13. RSI also went below 30 and signaled oversold on today’s big gap down.
Knowing this is where the market wanted to be for now, we should recognize these big gaps that took the market out of its comfort zone. They had a high probability of getting filled. And, if you had recognized that and traded in and out of Jul $38 call option today, you should’ve gotten yourself a nice 25%-50% profit all in a day’s work.
I did document a gap reversal trade a while back on this Journal, but it's not as practical for me to document every such trade. These trades usually went pretty quickly. Please look that post up here for more details.
As a word of caution, just because this is what happened today (and also on Friday), and we’ve made some nice profit, there’s no guaranty this is going to work all the time in the future. That’s why it’s so important to be able to recognize what the market’s saying first and foremost. If the language of the market’s telling us that it’s going down for sure, it would be quite foolish to bet your money on the gap reversal.
OBSERVATORY 019: BAX USMO (Bearish Doji Star)
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David's Weekly Market Chartmentary June 19, 2005
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NOTICE: I'm sorry about the missing images on some of my previous Weekly Chartmentaries. I had to do some house cleaning on my website folders. Too bad we can't re-edit the post after the initial 15 minutes. Please visit my website for these Weekly Chartmentaries. Thank you.
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The Dollar Just Happened To Be There
A week ago when gold spot price was still trading below $425, a large fund manager bought 12,000 August $445 gold calls for $200 each. For an "out of the money" strike, this is a large trade. A day later, he bought another 3,000 of the same options for $210 each. He is making a $30 million bet on gold.
Unless something like this surfaced as a reminder, I normally don't pay much attention to the price of the gold bullions. I just accumulate them and put them away as part of the capital preservation and as an insurance policy. I also don't look at the direction of the Dollar as the primary force in gold bullions. Gold moves when smart investors sensed instability in the global financial system. The Dollar just happened to be there. It could've been any paper currency, and it wouldn't have made the slightest difference.
This Wilshire 5000 chart with the overlay of gold and the USD (the U.S. Dollar Index) shows that gold was already on the move during the 2001 recession. That's before the USD topped out in January 2002 (red circle on green curve). The stock market continued with its downtrend after a brief pickup from the 9/11 aftermath. Again, I use Wilshire 5000 to represent the broader market than the other indices. The US Dollar Index topped out at about the same time Euro Dollar was introduced to the world as the then 12-country European Union's official currency in January 2002.
Gold was ready to make its move after it completed its bottom consolidation almost a year before the Dollar made its top. Gold's uptrend was subsequently confirmed when it hit $275 and made that 2nd higher low (blue numeral 2).
"O.K. the price of gold has gone up, but it's only gone up in Dollar term."
While this is a correct statement that we heard all the time from the gold bears (and sadly from some gold bulls), this is not a complete statement. And, an incomplete statement that only mentions part of the fact could become a misleading statement. This kind of statement gives the false impression that gold has gone down in other currency terms.
Here's gold and the Euro 4-year chart.
And here's gold and the Swiss Franc 4-year chart.
And, so we see from these charts that the complete statement should've incorporated the fact that not only gold has gone up in Dollar term, but it also hasn't lost any value against other major currencies. In fact, as we're well aware of now, gold recently has gone up in other currency terms as well.
One simple question comes to mind after looking at these 2 charts. Why would anyone bother buying other paper currencies or bonds as hedge bets against the USD when you could own the real money, gold, instead?
In any case, I'd like to conclude this Sunday's Chartmentary by examining the correlation between the Dollar and Gold since they're on a collision course. Here's a chart that I posted on the Internet trade group forum on May 10. I noted that the gaps between Gold and the USD had been narrowing. Since this gap narrowing pattern could not continue indefinitely (Yes, I know, mathematically it can), something has to give eventually. And, back in May I was very curious to see what's going to happen next.
Something different did happen this time. Let's check out this updated chart below.
In the past, whenever the USD moved up, it seemed only natural for gold to back down. Not this time. This time, gold refused to submit to the Dollar. As soon as the USD started to break higher, Gold started to move upward just as swiftly. And, gold continued to rise even after the Dollar's recent retreat.
From the interaction of them two, it would seem very likely that gold is looking to cross above the USD soon. And that "may" take gold bullion price right over the $440-$445 range. Had that fund manager seen the same thing when he put the $30 million bet on gold? Or, did he know something about China's currency revaluation timeline that none of us know yet?
Finally, a chart of caution.
USD may have lost some momentum last week, particularly after the record current account deficit report came out on Friday, but its uptrend is still technically sound. For one thing, it hadn't dropped below its 20-day simple moving average (SMA) yet. The 20-day SMA is also the centerline of the Bollinger Band. Next, the 14-day RSI is still above 50, and the Aroon DOWN (red line in the center pane of the chart below) is still trending lower highs. This means there's no technical sign of Aroon DOWN gaining any reversal momentum yet. Aroon DOWN would have to rise above 30 to be considered momentum building. And, Aroon UP is still staying above 70. Before Aroon UP breaks down below 70, the uptrend is considered intact.
It's also quite likely for the USD to move back up to the target of 90.49 as a result of the Double Bottom bullish reversal pattern. The breakout of that center peak between the two bottoms was done with three days of strong up moves. Those moves could've formed a strong Candlestick pattern called "3 White Soldiers" if this chart were prepared in Candlestick format.
Nevertheless, the fact that the USD is still technically sound doesn't mean that Gold would have to just roll over. I've always believed that any correlation, inverse or not, between the USD and gold was simply incidental. Gold is destined to continue its move up because of the loss of confidence in the global financial system. It doesn't have to be against the Dollar. It would rise against whatever fiat currency gets in its way.
The Dollar just happened to be there.
billkat- Your conscientious effort of using the Happy Hour to post your thought here is very much appreciated. You’ve taken up a warm spot in my heart.
Thank you so much.
hey, david...still reading and learning..thanks for your efforts and hard work communicating your knowledge of the markets...bill
Chart Talk: Newmont Mining Corp (NEM)
NEM's recent action intrigued me. In case some of you didn't see my technical analysis on "Your Economy" board, here's the link. After reading that 1st post, then just click on "Replies(1)" to get to today's technical note follow-up that's based on this chart below.
http://www.investorshub.com/boards/read_msg.asp?message_id=6685898
After the Bell: 6/16/2005 THE WICKED GRIN
I posted this 1-minute intraday chart last night to show yesterday's intraday action (6/15/2005). Looking at this chart, the very first thought came to my mind instinctively was a smiling face. Now we know what's up with the grinning.
It's grinning because the market knows you could never have it figured out. It keeps us guessing and second guessing.
I've written about how that yesterday's price swing could've trapped some traders, so I won't repeat it here. But, there's something else up its sleeve.
This 5-minute intraday chart shows yesterday's round bottom was actually the formation of a bullish reversal "Cup and Handle" pattern. The "Cup" was completed yesterday, and the "Handle" was just completed today with the breakout took place towards the end of the day. The breakout was backed by larger than average volume.
So, you've been bullish, and you thought you got it all figured out way ahead of this latest technical development. What's with all the smile and the drama?
Today wasn't the first time this "Cup and Handle" formation occurred. This 6-day intraday 5-minute chart shows there was another Cup and Handle formation started as recently as Friday, 6/10/2005, and the formation was completed on Monday. But, what happened after that was intriguing. The price dropped about 1.70% two days after the breakout. That breakout was also backed by above average volume. The bullish reversal didn't happen.
As much as I would like to agree with some "experts" bullish take on this so-called "summer rally", I'm not so sure that's what's going to happen. Tomorrow or next week's action may just surprise a few people. We shall find out. One thing we do know now. Whether you're long or short, it just never feels right in this market.
And, it's all about that conniving grin.
BUILDING PERMITS
May 2005 Housing Start report released this morning by HUD is considered "old" news as far as the market's concerned, but it does provide some confirmation of the weakness of our economy. Probably the best way to look at this report is to look at the "Permits Issued" rather than the construction that had already started. That statistics, to me, is "newer" than the housing start statistics. After all, permits would have to be obtained before the construction could begin.
Privately owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 2,050,000. This is 4.6% below the revised April rate of 2,148,000 and 3.7% below the May 2004 estimate of 2,129,000.
In addition, I'd like to also take a look at the Not Seasonally Adjusted statistic since it's not mentioned in the press release.
This chart below shows that the Not Seasonally Adjusted permits issued in May had also experienced a decline of 1.90%, from the rate of 192,248,000 in April to the rate of 188,600,000 in May.
I'm very concerned about where our economy's headed. And, I'm not even convinced this is just going to be a "soft" patch.
After the Bell: 6/15/2005 NASDAQ QQQQ
A strange market action day today... All the excitement and the swing of 1.66% between the intraday high of $37.87 and the intraday low of $37.25 for almost nothing.
I couldn't think of anything better than putting on a smiling face along the curve of this intraday QQQQ price action. Since NASDAQ Composite doesn't show the intraday volume, I'm using QQQQ for better illustration.
But, all kidding aside, this is where it could get "dangerous" for traders. If one had bought, for an example, Jul $38 Put at $1.05 at the intraday bottom, thinking that Naz was going down for sure. And from the way it's sliding, I wouldn't be surprised that many had bought in at that time. The final Put price for that same option at the end of the day was $0.75. That's a 40% loss - on paper if the position is still open.
Just by looking at this 3-day 5-minute intraday chart below with the remainder of today's action blacked out, it's understandable that some traders could've been led to believe that once QQQQ broke through the support (red trendline) of the price channel, QQQQ was doomed. Hence, it's time to go short.
So, that exemplifies even shorting the market could be hazardous. That's what happened with low market participation and with program trading.
Yesterday's end of day (6/14/2005) chart below shows the 20-day SMA (Simple Moving Average) was at $37.84 and the closing price was $37.58. Today's opening price was $37.83. Within minutes, it hit the intraday high of $37.87 and began its convincing descend.
Now with program trading accounted for 60%-70% of the total trading volume, I wouldn't rule out the fact that the buy and sell signals were pre-set at the 20-day SMA. Program trading is the simultaneous purchase or sale of at least 15 different stocks with a total value of $1 million or more.
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The combination of low overall volume and high program trading volume could be disastrous for day trading. Perhaps during this period, it'd be prudent to set up longer term trading strategies, from a week to a month or maybe even longer.
Trade Journal: Verizon Communications (VZ) Position Closed
Almost forgot to make the Journal entry for closing VZ position. Sold it at $35.16 for a measly 1.09% gain - lunch money.
I'm just very disappointed with how these big MCI shareholders would care more about squeezing a few extra dollars now than the long-term prospect of the company and its employess. And because of this, it looks like Qwest could get back into the bidding war. That's why VZ has been going nowhere but sideways.
Well, way too much drama for my taste. The little rally today is as good a time to unload it.
I've tried...
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The Truth about Building Material Inventory-to-Sales Ratio
This morning’s release of the Manufacturing and Trade Inventories and Sales Report is one of my favorites because of its relevancy. It measures business sales and manufacturing inventory activities. And, having these 2 sets of data enables me to calculate the Inventory/Sales Ratio. The Inventory-to-Sales ratio and the Sales-to-Inventory ratio are mirror images of each other. We only have to look at one of them. The category I’m particularly interested in is the “Building Materials”. That’s one indicator of the well beings of our housing market.
From this Inventory/Sales Ratio chart, it would appear that the inventory is not keeping up with the sales as this ratio had been declining for two consecutive months. In fact, it has fallen to the lowest level since July last year. When this ratio’s declining it generally means sales are moving faster than inventory build-up. At least, that’s what some “economists” said on this latest report. And, according to their interpretation of this ratio, it’s a sign of a growing economy where businesses were not burdened with as much cost of inventory while sales were moving ahead of the inventory build-up.
However, mathematically, it doesn’t have to mean the increase of the sales activity. It could also be that the sales are declining but just not as quickly as the decline of the inventory. If us average Joe’s would just take a moment of our time and eyeball the detailed numbers in this report, we could’ve easily spotted that’s exactly what took place.
The decrease of the sales of the building materials between December 04 and January 05 was really shocking. And, yes, I had to go back a couple of times to check on the figures just to make sure I didn’t make any mistake.
That’s a $5.5 billion differential!!! And, that's the real reason this Inventory-to-Sales ratio had improved. The sales were declining except that the inventory was declining even more quickly. Of course, we all know what the slow sales and the lower business investment in the inventory would do to our GDP.
Yes, the market participants get confused by all the news and the institutions program trading, but at the end, the fundamentals will not be denied. All is not well with our economy, fundamentally speaking.
After The Bell: 6/14/2005 McClellan Oscillator
This is probably one of the most peculiar technical pattern that I’ve seen in a while.
McClellan Oscillator is a market breadth and momentum indicator. It’s basically a ratio of the daily advance issues to the total advance/decline issues on the big board. The 0 line is where the 19-day EMA (Exponential Moving Average) crossed above or below the 39-day EMA, and hence the buy or sell signals.
McClellan recent uptrend started on March 24, more than 2.5 months ago. It had just broken this uptrend last week (yellow highlight). This is the longest lasting McClellan uptrend that I’ve seen in a long while, yet the big board index merely advanced 0.977%. The sidetracking of the NYSE Index movement in the upper pane and the McClellan uptrend in the lower pane simply didn’t look like they belong to each other.
I believe this is a good example of how the decimal pricing system had skewed the advance/decline issue statistics. If a stock gained $0.01, it’s counted as an advance. And, the recent low trading volume affects this statistics even more profoundly.
In any case, this divergence spells “Danger”. The fact that McClellan had just broken the recent uptrend makes it even more so. Let’s all proceed with extreme caution.
david - that's a great equivilant to compare "learning financial skills in this financial economy is as important as learning how to operate machineries in the manufacturing economy". once again,...a very clear and concise picture painted by you.
and i agree,... the theory, technical analysis and fundamental analysis, can provide insight to market movement and possibilities but when you place your hard earned dollars on that theory/insight,...all a sudden the psychology that really controls the trigger finger to buy and sell has a mind of its own.
it's a pleasure to read that my comments struck a poignant level of recognition in you. as far as i have read,...you deserve the compliment.
it is obvious that for a publication like Financial Sense Online to recognize your articulate work,..well it appears you will be in a level of demand for your insights.
thanks for your contributions to this market community.
nlightn- Your comment really hit home for me because one of my primary goals is to share my observations with other students of the market on all levels.
I truly believe that learning financial skills in this financial economy is as important as learning how to operate machineries in the manufacturing economy of the past. Unfortunately, schools don’t teach these types of real life skills.
There’s no better way to learn than to experience real life in person. I’m hoping, through my market analysis and my real documented trades, rather than baseless claims of fame, I could achieve my ideal level of financial skills by way of the journey through self-discipline and self-discovery. And, while I’m out here making a fool of myself, I’m hoping that other students of the market, who are willing to travel the same path, could also learn through my experiences.
And, the poignancy of your comment meant a lot to me because I now know that I did reach out to the various levels of audience that I’ve intended. I’ll continue to fine tune my writing so that both the experienced and the not-so-experienced traders can all find some value in my analysis. This is just as much for me as it is for you.
Financial Sense Online 6-12-2005
http://www.financialsense.com/index.html
Thanks again to Mary Puplava for taking interest in my writing.
For those of you that haven't checked out the Financial Sense Online site yet, I would strongly recommend that you do it as soon as you have a moment.
The Saturday Radio show that you can download it to your MP3 players was outstanding.
david - first of all you've created a brillant forum. your comments are clear, concise, speaks to the layman as well as the technician, and allows traders like me to see trades about to develop.
this particular trade is georgeous :) ah,...to find those triple tops. do you have a strategy or set up for discovering triple tops ? double bottoms ?
again,...congats to you for this forum and your willingness to share your expertise, clear and communiative education skills, to the rest of us. i've learned quite a bit about technicals since discovering your link.
thanks !!!!
David's Weekly Market Chartmentary June 12, 2005
Check Up on The Trannies
Dow Jones Transportation Average is probably the most important index as far as our economy's concerned. This average represents the movement of goods and services. Instead of getting confused by all the government statistics, the best way to take the pulse of the economy is to check up on the Transports.
This weekly Dow Transports chart shows a very strong uptrend that started in March 2003, about 51 months ago. It’s such a strong uptrend that, prior to May this year, the Aroon UP (green line in lower pane) only touched the bottom twice (yellow highlights). It didn’t even touch the bottom on the 2 recent declines that fell below 30 (blue circles). Throughout this uptrend, the Aroon UP spent most of the time staying above 70.
There's something different this time. This was the first time Aroon UP had not only fallen below 30, but had been staying at 0 since the beginning of May (black circle). It all began with the crossover (red circle) of Aroon UP & Aroon DOWN in the beginning of April (see dotted black vertical line). It's technically significant because the crossover occurred at about the same time the Average broke below the blue trendline and the -D (Negative Directional Indicator - red line) crossed above the thick black ADX (Average Directional Index) line. That was only the third time (pink circles), the –D moved above ADX while the +D (Positive Directional Indicator – green line) stayed below ADX. Each time resulted in a decline of the Transports Average.
Now, the Transports seems to be at an important juncture with –D looking to cross above ADX. This could mean the resumption of the down trend after the brief pause in May. Let’s zoom it in and see if we could get a better view on the daily chart.
This daily Transports chart below shows that the –D had already crossed above both the ADX and the +D. The ADX had also leveled off and shown a small uptick. This means the momentum of the recent downtrend had started to pick up the steam. Meanwhile, the 50-day and the 200-day moving averages had just run into each other while the Transports had dropped below both moving averages (yellow highlight). If the 50-day MA crossed below the 200-day MA, that could mean further deterioration of the Trannies.
Another sign of further deterioration is for the Aroon UP to cross below 50 while Aroon DOWN stays above 70. As of Friday, Aroon UP did fall below 70 (blue circle); it stood at 66.67. Aroon UP also had previously spent almost 1.5 months under 30 in March and April when the Trannies declined more than 8%. So, it's not unprecedented for the Aroon UP to fall below 30 and stay down there for a while. Anyway you look at it, the Transportation Average just doesn't look too healthy at this time. But, I'd like to check one more thing for confirmation.
Federal Express (FDX) is the current number 1 weighted component of the Transports Average. This daily chart of FDX with the overlay of the Transports indicates exactly that leadership - as the FedEx goes, so goes the Transports. Recently, the FedEx had fallen faster than the rest of the Trannies on extreme volume. In addition, the RSI had just broken the uptrend trendline and fallen below 50. MACD histogram had just turn negative while MACD crossed below the faster “trigger” line or the red line.
The only positive that I can see from this deteriorating technical picture is that the extreme selloff volume (more than 3 times the 21-day average) on Thursday could also signal the bottoming of its decline. That could be the final blowoff. We should take note of that technical possibility.
In any regard, based on the above technical view of the long-term, short-term, and the intra-market comparative analysis, the Dow Transport Average appears to be in trouble. If the Transports failed to rally from here, it should be self-evident that our economy is headed for a slowdown. And, a global economic slowdown should then ensue, that is, if it’s not already taking place.
Here’s one sign of a possible global economic slowdown. The Baltic Dry Index (see right column in the table below) is a measure of freight rates for bulk cargo of raw materials that are shipped to industrial users. It’s fallen more than 37% this year, to 2.889.
And, finally, for those of you who inquired, here’s the follow-up on last Sunday’s Fibonacci Arc analysis of the NASDAQ.
As I mentioned last week, on its way down, the inner layers become the supports. This past week, Nasdaq had fallen through both layers of supports and finally stopped at a tad above the 23.60% Fibonacci Retracement. The gap-up occurred on 5/25 had been filled, and is now served as the final support. We’ll revisit Nasdaq later. That's it for now.
OBSERVATORY 018: White Mountains Insurance (WTM)
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After the Bell: 6/9/05
This is one of the reasons that I advised in the Sunday Chartmentary not to "go overboard shorting the market".
This simple yet effective 200-day Exponential Moving Average of the Wilshire 5000 index provides a pretty good idea of the market directions. It faithfully signals a change of market direction whenever the trendline (thin red line) was broken. Incidentally, Wilshire 5000 index consists of over 6000 publicly traded companies headquartered in the U.S.
You can see the change of directions in the market (upper pane) and the MACD (lower pane) at every break of the trendline. The thin red line rose almost parallel along side the 200-day EMA until the beginning of March. That signaled that uptrend was coming to an end. And, that's exactly what happened. Wilshire 5000 dropped from over 12,000 to below 11,200.
The recent rise from around May 16 was almost at a 45 degree angle. And as of today, I've not seen a slight hint of a change of direction anytime soon. And, that's amazing considering the lack of volume while the MACD has been turning downward.
Unless the volume picks up, this recent uptrend that lasts almost 4 weeks now should merely be a reaction to the preceding period (March-April) of selloff. In addition, my previous analysis pointed out that, as much as Wilshire 5000 had dropped approx. 7.5% during the March-April selloff, the market had not shown technical sign of oversold. Therefore, a market uptrend that's not supported by volume and was not a result of an oversold condition will not last. And, it's certainly not a rally.
Whether you hold short or long position, a market without volume is a market without full participation. And, a market without participation could turn on a dime at any moment. Set your stops and Be careful!
Trade Journal: Apple Computer (AAPL) w/Full Tech Note
I don’t want to get into the full debate about Apple and Microsoft PC. I’m merely offering a little fundamental understanding as I did with most of my trades.
According to WSJ online survey chart below, majority (46%) of voters thought the reason Apple has had a small share of the PC market was due to buyer’s reluctance to change system. This isn’t anything new. It’s the same reason since the 80’s, and, unless something drastically changed, it’s going to be the same reason going forward.
Steve Jobs didn’t believe market shares matter at all. Last year and the year before, Apple computer accounted for just about 2% of the global PC sales. It’s not the computer sales that led Apple’s financial comeback, it’s the iPod. iPod now brings in 1/3 of Apple’s revenue. So, the question is whether the market is in favor of this business model moving forward.
From this chart below, market didn’t seem optimistic about Apple’s outlook. There’s the usual on this chart. The ADX (thick black line) was trending down while the –D (red) had just crossed above both the +D (green) and the ADX. MACD had also just turned negative with the histogram in the negative (below 0) territory.
And, it’s never a good sign that while MACD starts to trend down, PVO (Percentage Volume Oscillator) begins to pick up. PVO, while still under 0, just broke above the recent downtrend last week (red trendline).
The most noteworthy technical development is probably the formation of the “ISLAND” reversal pattern. It started with a gap up (there were actually 2 gaps) in mid February (blue boxes), and it completed the formation with a gap down in mid April (red box marked No. 1). Island formation is a critical market top indicator.
The first down gap (#1) happened around the time the 20-day moving average crossed below the 50-day MA, and the down gap 2 broke down right after the same 20-day MA crossed below the 100-day MA. The down gap 1 was accompanied by huge volume, which indicates huge selling pressure. The second gap down (2) was also accompanied by huge selling volume.
Both gap 1 & 2 were then filled when the up gap 3 occurred in mid May with largest positive volume since April 18. This tells me that $34-$35 support is a tough one to crack. I don’t expect it to drop below $34 without putting up a good fight. That’s why I went with the $35 call and not anything lower.
The $40 level where the down gap # 1 occurred also appeared to be a strong overhead resistance. The price gapped down from there (see # 4 gap) just last week with largest selling volume since May 12. And, this gap #4 still didn’t get filled yet. It would seem unlikely to have this gap #4 filled any time soon because this gap took the price down below all moving averages, except for the 200-day. 200-day MA is nearing $32.50 area.
My entry point is to make sure that the price didn’t shoot back up to fill gap #4 right away. This also means for the price to stay below $37.50, which happens to be below all 3 of the moving averages.
And, that’s what this 4-day, 10-min intraday chart told me today. It dropped below the 23.60% Fibonacci Retracement, which was at around $37, and stayed there for the rest of the session.
I bought Jan 2006 $35 PUT @ $3.60 as per my first Trade Journal post. I deleted that post just to remove the redundancy.
So, now we’ve got the play in place, and we’ll sit back and enjoy the game.
Incidentally, if you're wondering why the term "Island", here's why...
Trade Journal: Korn Ferry International (KFY) Update
I don’t know how to stress the significance of this trade on both the technical and the fundamental fronts other than the fact that I could’ve closed my short position yesterday for a nice 4% gain, but I didn’t ($17.57/$16.88=104.09%). Money is not the issue although I was tempted to take the profit yesterday. The issue is to get first hand experience on this experiment.
In any case, so, the earning was announced this morning. KFY earned $0.27/share, which was $0.02 better than the analysts estimate of $0.25. The “Surprise%” was then 8%. This was the chart I posted yesterday that shows the declining “Surprise%” (red bars).
As I mentioned that the analysts seem to have caught up with KFY’s earnings. This 8% “surprise” for the recent quarter was making another lower low. It’s lower than the 9.5% in the pervious quarter.
I also mentioned that I would give KFY the benefit of the doubt of having a better than estimated earnings due to its concentration on recruiting executives and managerial positions. However, I believe that this “better than” estimated earnings had already been factored in the price when it recently moved above the centerline of the Bollinger Band.
I firmly believe that anything known at any point in time has already been factored into the price action. The market’s always forward looking. It does not look back. It doesn’t even look at the present. As a side note, this is why trading or investing is so hard for us. Humans tend to live in the past. And the older we get, the more time we spend living in the past.
Notwithstanding, the only way to verify this theory once again is to keep this short position open until KFY price moves back to the equilibrium point. The point where it belongs should be right at $16. This was where the market had already given it the benefit of having a better than estimated earnings.
So, we shall see...
OBSERVATORY 017: Coffee (September)
OBSERVATORY 016: Motorola (MOT)
12.37% Dividend Yield. CNT (Carbon Nano Tube) Technology.
Korn Ferry International (KFY) Trade Journal II
I’m always reluctant to post short sales in the public, but this one is different. This one is an intriguing experiment; an experiment of the paradox. It’s paradoxical because of all the contradictions.
I’ve been posting Conference Board’s Help Wanted Advertising Volume Index, which shows a slowdown in hiring across the nation. Job growth in the temporary help sector also slowed to 6.3 percent from the 8 percent average over the last year. This is in addition to the now widely known Labor Department’s latest data about the lower than expected number of the non-farm payroll job creation in April. Yet, KFY experienced a double-digit intraday gain just a day prior to its earnings call. The earnings call is scheduled for tomorrow morning at 10:00am.
And these are the reasons for the experiments.
REASON # 1
2 analysts upgrades today, just prior to the earnings call.
--- Upgraded to Buy from Neutral by UBS
--- Upgraded to Outperform from Neutral by Robert Baird
Note:This is one of the most widely held stocks by institutionals and mutual funds.
REASON # 2
The red bars are the last 4 quarters’ earnings surprise %. It was a big surprise last April when the actual earnings were 61.50% higher than analysts’ estimates. But, then the “surprises” factor started to dwindle in every subsequent quarter. In addition, the differential between the heights of the aqua bars (Estimated Earnings) and the green bars (Actual Earnings) were shrinking.
Both indicate analysts’ estimates had pretty much caught up with the actual earnings. Unless there is a BIG surprise waiting in the wings tomorrow morning, a big surge of price movement like today would be illogical. But then, how could it be possible for staffing agencies to have a big earnings surprise under the current slowing economic environment? What a paradox!
What if KFY did better than other staffing agencies due to its concentration on executive and managerial positions? Fine. Then, I believe the better than expected earnings had already been factored in the price. Its share price had recently moved above the centerline of the Bollinger Band - see yellow highlighted area.
In order for that big surge to happen today, there had to be a bigger than just the better earnings announcement tomorrow morning. But, no one in the public should’ve known that till tomorrow, right? Maybe not. Who knows?
REASON # 3
Gary Burnison, chief financial and operating officer of executive recruiter Korn/Ferry International, called the payroll numbers "a blessing in disguise," as higher interest rates could be worse news for recruiters if it inspired companies to pull back on capital spending. Burnison said "To the extent that companies are growing and interest rates are favorable, companies are going to continue to invest in their businesses and they're going to need people".
Should I use the four-letter word to describe this type of bull?
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So, we shall find out tomorrow morning. I’m willing to take a loss on this trade just for all the intrigue, mystery, and paradox.
Korn Ferry International (KFY) Trade Journal
Shorted KFY, one of the top 3 percentage gainers on NYSE @ $17.57... Trade details to follow.
David's Weekly Market Chartmentary June 5, 2005
My analysis last week showed that the market was in the process of topping out. Nonetheless, Friday's broad market decline didn't mean that the market had finally topped out. Let’s get technical and see how far along we are in this process.
This is the NASDAQ Composite intraday 10-minute chart that covers the past 8 trading days - 5/24 through 6/3/2005. Let's walk through the action of these 8 sessions first.
This Fibonacci Arc was constructed by drawing a Trendline (red diagonal line) connecting the highest and the lowest price points (small black circles) on this chart. The lowest point (2,041.95) occurred on 5/25 and the highest point (2,097.80) on 6/2/2005. The percentages on the left are the Fibonacci Retracement. A 50% retracement from the high of 2,097.80 is at approx. 2,070 (see aqua color horizontal line).
On 5/26, after a gap-up advance, NASDAQ hit the 2070 overhead resistance, which happened to be the first outer layer (blue circle) of the Fibonacci Arc. In an uptrend, these outer layers serve as critical resistances. And, on this day, NASDAQ got stopped cold right outside of the Arc.
On 5/27, it finally broke through both the 50% retracement and the first layer of the Arc. However, it then bumped into the second layer resistance (blue circle), which coincidentally was at the 61.80% Fibonacci Retracement. This resistance turned out to be a tough one to crack. As a result, NASDAQ dropped below both the Trendline and the 50% retracement level on the first trading day after the long Memorial Day weekend.
Except for June 1, the subsequent market action pretty much took place below the Trendline. NASDAQ did manage to cross above the Trendline on 6/1, but it fell right back below the Trendline at closing. Moving below the Fibonacci Arc Trendline seemed to indicate the weakening of the current trend.
On Friday, June 3, it took just one day to undo all the effort that the market took 4-5 days to put together. Now, on the decline, the inner layers of the Arc become the supports. On this day, it set right above that 2070 level, which happened to be the critical 50% Fibonacci Retracement. This 2070 is now as tough a support as it was a resistance just three trading days ago. In addition, we must keep in mind this is only the first line of defense. There are two more layers of defense approximately at Fibonacci Retracement of 38.2% and 23.6%.
The market didn't fall apart on Friday by any measure. It actually sit quite comfortably 2 layers above the breakdown. Let's seek further confirmation.
This is the chart that I posted on my Trade Journal on Wednesday. As you may see that the bottoming of the NASDAQ option Volatility Index (VXN) usually indicates that the top is near. Let's check out the updated chart.
Just when I thought VXN volatility couldn't' go any lower, this updated chart below shows that it did drop lower - see red arrow. The Aroon UP (green line) had actually formed another lower high to make it 4 in a row. Aroon UP eventually would have to move up, and that's when VXN would also begin to rise. Meanwhile, Aroon DOWN (red) just broke below the previous lows for the first time since May 11 - see red horizontal line. When Aroon DOWN crosses below 70, that's when the downward momentum picks up. By the way, Aroon is a great direction indicator. Aroon means "Dawn's Early Light" in Sanskrit.
This updated chart shows us that it's getting another step closer to the top, but it's not there yet. It refused to go down without a fight. And it may take a little more time than we thought.
Next, let's check the Fed's money stock supply. In my previous analysis I pointed out the inverse correlation between the market and the M2 minus M1. For new visitors, backing out M1 leaves M2 with just the savings accounts, time deposits of under $100,000, and balances in retail money market mutual funds.
M2-exM1 is currently on a downtrend. This means that money's going back into the equity market again. The only concern is that the Fed's money stock report has almost 2-week lag time. But, going by the latest data available to us (for the week ended 5/23/2005), the market didn't seem ready to go down just yet.
Looking at how Friday's decline was stopped right at that inner layer of the Fibonacci Arc and the 50% Fibonacci Retracement, I would not be surprised to see the market rally back up early next week. It takes time for the topping process to complete. I wouldn't go too overboard shorting the market, yet.
Chart Talk: TRIPLE TOP - Goldman Sachs (GS)
Not a documented trade on my journal, but it's one of the triple top patterns that's rarely talked about nowadays. It's rare because it requires patience for this pattern to develop. With the short attention span of the mechanical trading, no one has the patience to track a stock for 3 months to make the trade. That's how much time it took for this GS triple top to develop - from Feb to May. Even the breakdown took almost 3 weeks.
A true chart connoisseur should be able to appreciate this.
NASDAQ Intraday Percentage Leaders 6/3/2005
There were 10 stocks with double-digit gains on NASDAQ today, and only half of them have at least 1 million shares traded. Again, none of them is a member of any market index. And their share prices range from $2.25 to $8.65, except for Blue Coat (BCSI), which has share price at $25.01.
I'm going to start keeping track of this data as much as I can here until we find some sort of a pattern.
ISSUE INDUST PRICE GAIN
Blue Coat Systems Inc (BCSI) Software $25.01 25.4%
SCM Microsystems Inc (SCMM) Computer Peripherals $ 3.40 18.5%
DDi Corp (DDIC) Computer Peripherals $ 2.48 14.3%
Chinadotcom Corp (CHINA) Software $ 3.45 13.1%
RITA Medical Systems (RITA) Medical Equipment $ 2.99 11.2%
Wet Seal Inc (WTSLA) Retail $ 5.39 10.0%
billkat- Glad you took advantage of Happy Hour to make your mark on my humble journal. I appreciate your thoughtfulness.
Here's something I just thought of... Yesterday I remember reading some paid "experts" comment about the market's expectation of today's payroll report. I couldn't remember who that was. According to him, if the payroll added any more than the expected 185,000 new jobs, it could hurt the market. However, if it added fewer than 185,000, the ease of inflation concern could spark a market rally.
Well, according to Labor Department report this monring, only 78,000 non-farm payrolls were added in May. That should really put the inflation concern at ease, but the market went down.
I'm sure these "experts" understood this is not about the inflation anymore. They just got to spin it anyway they could. This is about the economy slowing down, on a global scale. Well, call it "soft patch" if they had to. To me it's more like a NicoDerm CQ patch. We're so addicted to debts that we need some type of patch to help us fight this addiction. Of course, we could go cold turkey too.
In any case, the market action really had little to do with this report and that report. Anything known is no longer worth knowing. It has already been discounted. Today's market action is already discounting way into the future.
Today's not really a bad day. I'd say it's a mild down day at most. Low volume accompanied by QQQQ still hanging above 50 on the 5-day RSI. It's just a non eventful day. It looks more like a end of the week consolidation of a technically overbought condition.
happy hr-a chance to tell ya i really appreciate your posts-
thankyou for your work..bk
NASDAQ Biggest Intraday Percentage Gainers
Of the 25 double-digit percentage gainers, only the following 11 had more than 1 million shares traded, and all of them are non-index members. That makes all 25 of them non-index members. There's that eerie feeling about this.
How does this influence the overall market statistics? Does it skew the market strengths and weaknesses? Does it make the market seem much stronger than what it really is? If this keeps up long enough, does it convert investors into more bullish buying?
This is the type of market that requires the patience of 10 men, as Richard Russell would put it. It's going to be exciting. We'd just relax and enjoy the show.
Internet Initiative Japan(IIJI) Internet Tokyo 24.5%
Anadys Pharmaceuticals(ANDS) Biotech 23.8%
Sciclone Pharmaceuticals(SCLN) Drug 22.2%
Shopping.com Ltd(SHOP) Online Shop 19.1%
Amkor Technology Inc (AMKR) Packaging 18.7%
ViroPharma Inc (VPHM) Biotech 17.3%
Dobson Communications(DCEL) Telecom 16.7%
Wet Seal Inc (WTSLA) Retail 16.7%
SiRF TECHNOLOGY HOLDINGS(SIRF) GPS Manufac 11.7%
Evergreen Solar Inc (ESLR) Solar Power 11.4%
Ixia (XXIA) Semiconductor 10.4%
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