Commentaries on the market
Comments as of close Fri, 4/16/10
Trading Day by Day, copyright 2010
Comments as of close Fri, 4/16/10
Decent chance action on Friday may turn out to signal new directional moves in many markets. While moves were at least partly news caused (Goldman fraud charges) believe most of the spikes will turn out to be continuation spikes, beginning of new good sized moves, and so, for time being at least, will treat them as such.
There is no question that over time the SMR lines and prices move together. Naturally since lines are by definition lagging indicators (lines move on what prices have done, not what they will do) it is not enough to just be positioned with what the lines say at moment; the key is to end up being positioned with where the lines end up a few days ahead. I believe that it is extremely difficult, if not impossible, to consistently “guess” where prices will be; however, I strongly believe it is possible, in fact quite possible, to “guess” where the lines will be. So what I am always working at doing in trading is positioning myself where I feel the lines will be in few days.
To do this I start with where the lines are now, and then anticipate where they will be by comparing where I guess the prices (i.e., numbers on moving averages) will be in few days to what numbers we will be taking off of the three moving averages. I go into detail in books on how to do this anticipating so will not do so again here.
In Thursday’s letter mentioned several times that something just did not “feel” right about the price action of the financial markets (stocks, bonds, currencies, precious metals, crude) starting Wednesday night and going into early Thursday evening. When I look at the daily price action (movement) I am always looking to see whether the action reflects what the lines (and to much lesser extent the charts) indicate it “should” be. By this I mean if lines clearly positive then the action also “should” be positive. If it is then all is well and positions can be held comfortably; however, if action deviates from what lines say it should be then it is a matter of concern and the longer and more significantly this deviation lasts the greater the concern. The action of the financial markets starting deviating from what they should have been doing Weds night and this continued into Thursday evening, and this deviation was significant. This is what made me so concerned and this is why I felt it best to change what previously had been view that long side was comfortably the right side of most/all financial markets (as well as opposite the previously fairly comfortable short side of yen, interest rate markets and US dollar).
It is like throwing a ball against a wall. If the ball comes right back to you and at a slightly lower speed than all is well; however, if the ball comes back at a different angle or faster or slower than it should, well this tells you something significant about both the wall and the ball. Same thing with prices, how they act in relation to what the trend/momentum lines say they should act is always significant and this is what you should be looking at every day. First look at the lines and the rules and what they say prices should do, then look at what prices actually do to see what you can learn of significance. Of course, then you have to act on what you see. Sometimes your action will be incorrect, when it is just have to correct. Fortunately this time (Thursday’s letter) what I saw turned out to be significant and correct and this saved and made considerable amount, which is our ultimate objective in trading. Sadly since I am naturally lazy, as many of us are, we have to do this every day, day by day. Never any rest in trading, always have to be observing and acting on what we see, can never relax, always alert and ready to act, every day, day by day, just no other way.
June S & P - Status - Bullish (to Neutral)/mildly concurrent. Observations - On surface big down day Friday qualifies as a news related, against trend spike and as such “should” be fairly quickly regained. Don’t like to go against my rules again but I believe this down spike could signal start of at least decent down move and possibly even mark a significant top. Had a weekly downside reversal in S & P since made new long term highs then closed slightly lower for week. Have seen numerous times in past where this has marked significant tops/bottoms in this market. Fact only happened in S & P and not in other stock indexes lessens odds of this being meaningful, although do consider S & P to be the most important stock index. Lines are still positive but only slightly so now and unless up decently Monday should go to Neutral/crosscurrent in day or so. Feel there is decent chance this volcano in Iceland and it’s ash cloud may turn out to be a significant market event also. As mentioned Thursday and sentiment indicators are quite bearish for stocks (too much optimism about upside potential and too much complacency about downside risk). So prefer not to be long despite slightly positive lines, and see nothing too wrong with some against trend shorts if want to be aggressive (using stops somewhere in 1200.00 to 1204.00 area, especially if see this much after midday Monday). Bottom line - LInes say can be long, prefer sidelines or even some light against trend shorts (but this very aggressive).
June Bonds/Notes - Status - Bullish/Neutral. Observations - Ten Year Notes now officially Bullish/concurrent to upside and Bonds on verge of being so. Fact prices on both now back to price just before downside spike day three weeks ago that looked like beginning of sustained down move is a definite bullish sign (leaves all who shorted past three weeks as losers and this can signal significant bottom). ML’s now on solid up cycle which should be sustained for at least couple weeks. Only “negatives” at moment are trends not quite clearly up yet and with both prices and SL’s on good rallies are a little short term over bought; however, see enough positives to justify being/going at least lightly long here with idea of adding on next two, three days of slight down or sideways. Need to keep in mind COT data is and has been for long time very bullish and now with lines turning positive as well have best combination for good sized, sustained up moves. What stocks do will probably dictate near term action, but regardless odds now favor upside. Bottom line- Can be/go long with stops probably OK for now in area of Thursday’s closes (116.00/bonds and 116.32/notes, preferably not entered until after midday Monday).
June Euro - Status - Neutral/crosscurrent. Observations - Very mixed picture here since trend now very indecisive (essentially sideways), ML on solid up cycle and SL making higher low/highs but just turned down from recent high. Really not down that much on Friday and had good reasons to sell off much more and so see action as little positive (despite being down decently). While big trend still down would not take much to turn it up. Current momentum line pattern really not one would like to short and one where if can turn SL up next few days (would have to hold and/or move up some) would turn quite positive (if can turn SL up for a third higher low). COT data remains very bullish and should trend actually turn up would create best combination for sustained up move. Swiss now actually bullish/concurrent to upside and with price on two day dip basis rules can fully justify being/going long that one here. COT only slightly bullish on Swiss, but so bullish on Euro and Pound good enough. Fact Swiss pattern positive another indicator Euro down move may be limited and next good move there will be to upside. Effects of volcano on these markets an unknown and may change things so have to keep an eye on that. Bottom line - Can be/go long Swiss with stops OK in 93.75 area (although probably best not to enter until at least hour or so after european markets open). Euro and Pound say sidelines and agree, but sideways next day or so much more positive than negative.
June Yen - Status - Neutral/crosscurrent. Observations - Very mixed picture here since trend solidly down but ML just as solidly up. Momentum line pattern fairly positive, action quite positive. Too mixed to make case for either direction, but despite high price/SL in down trend (which rarely good time to be/go long) still see at least short term odds as favoring upside). COT data now very bullish here, but rule is can/should ignore this when trend down. Bottom line - LInes say sidelines and agree.
June Aus and Ca$ - Status - Neutral/Bullish (very marginally concurrent but will go crosscurrent after Monday). Observations - Very big down day and this especially negative since lines were quite positive. Down day may have been triggered by big down in crude, but regardless “should not” have been down that much basis lines and this clear downside warning. Clearly an against trend down spike, but at least for moment tend to doubt will turn out to be aberration spike. Should keep in mind that both these markets have had, and continue to have, extremely bearish COT situations and while can ignore this when trend up, when get this type of negative action have to give it more weight. See sidelines as best in both these for time being, but if had to go in here would have to be short, not long. May have made significant tops in both these markets and if had to guess believe have. Bottom line - LInes in between longs and sidelines, prefer sidelines.
June Gold/May Silver - Status - Bullish (to Neutral)/mildly concurrent. Observations - Big down day in both and fact had this when patterns were so positive makes it more bearish than otherwise would be. Rare to see this much weakness when patterns so positive, but markets follow their own rhythm and sometimes go against good line patterns. Supposedly selling sparked by fears Paulson hedge funds (heavily long precious metals) may have to sell some due to Goldman fraud case so does qualify as news related, against trend down spikes and rule is these tend to be quickly regained. Normally will get couple of fairly quiet, sideways type days when this case and then turn back up so next couple of days may tell tale (whether bull market over or this just a temporary dip). Commercials added another 25K (about) shorts in gold this week and this makes over 50K new shorts past two weeks and have seen this (couple weeks of big new commercial shorts) kill up moves in past. While was definitely concerned about negative action coming into Friday, really did not expect to see this much on downside, too much in my view. Bottom line - Lines still say can be long and this may turn out to be OK,but prefer sidelines for time being.
June Crude - Status - Bullish/Neutral (marginally concurrent but will not be after Monday). Observations - Very big down day and more than any news justified. As with other precious metals and Au and Ca$ size of down moves Friday while lines were clearly positive is an extra negative. COT here is and has been extremely negative and so when get some surprisingly negative action need to give it little more weight, despite still being in good up trend. While ML still in up cycle this will end in few days unless rally sharply. Have now put in good bearish divergence between price and SL and this at least short term negative. Another down Friday and find this strange but that’s the pattern until it changes and have to respect this. Bottom line - Lines in between longs and sidelines but headed for solidly neutral and so prefer sidelines.
May Corn - Status - Neutral/crosscurrent. Observations - Unchanged day Friday but closed on highs and see lack of down here when both price and SL on recent highs positive action. Trend just marginally down now and only need little more up to start to turn trend up. ML now on solid up cycle and SL making higher lows/highs so momentum line pattern clearly positive with only “negative” fact a little short term over bought. Despite slight down trend and high price/SL still see at least light anticipation longs here as justified. Even if should dip next few days doubt will go far or last long and would view it as good buying opportunity. COT remains very bullish and if/when trend turns up, which could/should soon will then have best combination for good sized, sustained up move. Still see this one as least attractive of three in “grains” for longs, but good enough for some light longs anyway. Bottom line - Lines say sidelines, continue to prefer anticipation longs. Should not need stops since would want to buy small dip, but can use 3.50 area if feel need (might want to go with July for any new longs).
May Beans - Status - Bullish/concurrent. Observations - Unchanged type day on late sell off, but see sideways here as more positive than negative. When pattern clearly positive any one to two and half day dips tend to be very good buying opportunities and now on at least half day dip. 9.70 - 75 area should now provide good support since it was long standing resistance so don’t see much in downside risk from current levels. COT a little less bullish this week but this normal when trend finally turns up and not in any way a negative. Both products also bullish/concurrent so longs fully justified there as well. Still see Oil pattern as little more solid than Meal, but action in Meal much more positive. Bottom line - Can be/go long any/all three in this complex with Beans best. Should not need stops but can use 9.65 - 70, 270.00 - 74.00 and 39.25 - 40 areas if feel need, although would not enter until at least little after open Monday and preferbly not until midday or so.
May Wheat - Status - Bullish/Neutral (almost concurrent). Observations - Solid up day on Friday and closed on highs of day and past month. Very close to trend being legitimately up and within margin of error to consider it up. Have had extremely bullish COT situation here for many months and so with trend turning up now have best combination for a good sized, sustained up move. Volcano may have big bullish impact on this market and should have at least psychological bullish effect. Wheat an unusual market in that it tends to be what economists call inelastic market since takes big price moves to impact demand (people tend to buy their bread and pasta irrespective of price fluctuations) so on those rare occasions when get either prospect of shortage, and especially when get actual shortage, tend to see surprisingly big and sustained up moves. See good chance may be headed to this type of situation. If volcano becomes a factor would have potentially very explosive situation here since commercials loaded on long side (for whatever reasons) and so specs would be stuck short (meaning they would have to both cover shorts and go long and that’s a lot of buying). As rule do not want to be buying when price and SL on recent highs and trend down or sideways, but exceptions tend to be when trend turns and this may be case here. ML up cycle very strong now and this market tends to follow clear ML cycles. For moment see this one as possibly best bet of group and will be if volcano becomes a supporting factor. So continue to see being long this market as fully justified despite trend not being quite up yet, and if should start to push higher in earnest could have situation where one day’s close turns out to be next days good price to buy. Bottom line - Lines now in between long and sidelines, continue to prefer longs and see no need for stops.
July Cotton - Status - Neutral (to Bullish). Observations - Still very mixed picture here so continue to prefer sidelines; however, with trend so solidly up and price hovering around up trending ten week moving average also continue to believe just a matter of time before see sustained upside pressure again. Prefer to stick to sidelines for at least another day, but would view sideways as much more positive than negative next day or two. COT neutral and so not a factor. Bottom line - Lines say sidelines and agree for another day.
Conclusion - On technical basis the big question on the markets that had big spike type moves on Friday is whether those spikes were aberrations (will quickly be made back) or continuations. Since they all came against clear trends and were at least partially news related the spike rule says they were most likely aberrations. I tend to get this rule wrong most of time and may be doing so again here, but for moment at least they look more like continuation type spikes to me than aberrations, but will watch action of next two, three days to get better idea.
See this volcano situation as potential big wild card in almost all these markets. This is type of surprise event that can lead to major changes in markets and especially since it has come up at just the point where many of these markets may have been ready to change direction anyway. Doubt volcano had much, or any, impact on any market other than wheat on Friday, but if situation continues to be bad early next week (meaning still no flights, volcano activity continuing, etc) would expect it to start to have impact, and possibly significant one. Have to see this as potentially very negative for european economies with distinct possibility spreading to negative impact around world (both due to ash cloud potential to spread around world and the interconnectedness of world economy these days).
So tricky times for all the financial markets and should keep open mind about what’s going to happen. In grain group though see lots of positives and much more upside potential so want to continue to give those markets every benefit of doubt on long side. See decent chance will see 5 to 10K (or more) a contract upside moves over next few months in corn, beans and wheat and this type of potential worth giving a chance.
Chick Goslin
