The very thought that our fearless (?) Fed may do anything other than slash rates .50-basis points on Tuesday has sent bulls running for the chutes. After all we're in an easing cycle, aren't we? Can't the markets expect to have "Easy Al" drop rates all the way to zero from here? A .50-basis cut every six weeks would have banks paying us interest to borrow money for Xmas this year.
Nice thought, but don't wait until then to hammer up your credit cards and expect cheaper money at that time. Interest rates may very well be on the way back up when Santa arrives for retail in October.
Carl Quintanilla of CNBC fame may be one of the 50 most beautiful people this year but he ranks far lower than that on the macro- economic scale of comprehension. Our young friend just stated that one wouldn't know we are in a recession based on the conference calls taking place with positive guidance going forward. Who Carl, who? CIEN? JDSU? IBM? CSCO? GE?
Nope. Natural gas companies. Power & energy. Uh, Carl... hate to break this to you off-camera, but energy stocks do not rally during times of economic boom. They prosper from higher energy costs which last time we checked did not bode well for consumer spending. Defensive plays during trying times.
Most of you know how I feel about fundamental factors. They are imperative for investors but of little value to traders. Market outlook for Q3 will matter to us then, not now. The old adage that markets look forward several months may very well be outdated. I think that happened back when trading 100-share lots or one option contract cost $100 - $150 per side. Yes, you read that correctly. Commissions weren't always just $8 per trade.
The past two years have seen an unprecedented shift in market volatility due to short-term, hyper-momentum trading. The days of people buying & holding many months before good news arrives may not be with us now or ever more for that matter.
Secondly, many are not convinced our "economy" will make a full & speedy recovery for the big bull to resume after this brief pause. I know one thing: we have unprecedented levels of overhead supply on many of the big-cap techs that must be bled off before new highs can be reached. That means a lot of selling must take place in between all this buying as well.
The two main pressures to our economy have been the dot.com implosion and fallout through technology's food chain and energy. From where I sit, tech sectors may clear inventory by the end of this year but will that justify higher stock prices from current levels today?
I don't know about where you live but gas stations around here have replaced lettered signs on their pumps with whiteboards. Easier to send the cashier out to raise prices three times a day on his or her break. Maybe for the first time in memory gas prices will go down between the Memorial and Labor Day season.
New market lows? Not on my horizon but anything is possible. I expect brief pullbacks and summer rallies to move us up and down into next September when it's anyone's guess what happens next. As for me, I'll follow chart patterns and oscillator signals wherever they choose to take me.
(Daily Chart: Dow)
This is not a bullish chart. The Dow could rally from here but that's not how I would bet 'em. My guess? We break that wedge to the downside on a close below 10,800 and sail down to the 10,400 area this week. Could easily do it on Wednesday if things really got out of hand, but great gyrations are more likely instead. I wouldn't be at all surprised if prices pop to the upside first, fail one last time near 11,000 and plummet from there.
I highly, highly doubt we will see the 9,100 lows anytime soon but 10,200 area is not out of the question.
(Daily Chart: NDX/QQQ)
The NDX is hurting. Closed below its wedge and daily stochastic values are heading straight down. Filling the gap near 42.50 seems plausible by week's end or much sooner. If those price highs from April 18th are valid the pattern calls for a target near the 38 level for QQQs but I find it very dubious from here indeed.
Then again, I didn't buy that bull-confirmed wedge (purple) on the breakout in early April, nor did I buy the bull flag (green) in mid April because we just can't trust those lying charts when they predict market action exactly opposite the herd's current sentiment. Or can we?
(Daily Chart: OEX)
The OEX has worked real hard to form a classic Bear Flag pattern (purple) that would confirm on a break AND CLOSE below the Fibanocci 50% retracement line (blue). Next stop; 623 area on its way down to 602 as an ultimate bearish objective. (Daily Chart: SPX)
And "big brother" SPX shows the mirror image. Close below 1238? A cinch to test considerably lower from there. Personally, I'll buy the break of each index a few ticks below these marks and take my chances as daily stochastic values have just begun to turn south.
Post FOMC Blues
Here's an apt analogy sent to Buzz & I last week from a long-time IS member that eloquently describes the Fed's inept handling of this economy and state of panic they are truly now in:
Buzz and Austin,
If he's controlling pitch, you can watch the airplane start to pitch pretty violently up and down as the pilot is trying to "catch" it. I saw this a lot when pilots would try to do air refueling. Navy pilots have to stick their probe into the fuel drogue (whereas the Air Force guys just hold straight and level and the tanker guy maneuvers the drogue to the airplane probe).
The pilot would get out of synch with his airplane and you could see the airplane bouncing up and down as the pilot struggled to find the sweet zone (made especially difficult when flying in the turbulence behind the tanker).
Which reminds me of Greenspan. If ever a guy was out of synch with the economy and causing PIO with our money supply, Greenspan is it. After panicking and pumping up the money supply for Y2K/Asian Flue and then panicking in early 2000 to get the money out, he's now panicking to get the money back in. Guess what's going to follow soon? My guess is he'll reduce interest rates another .50 now and .25 (maybe) in June because recession is the bigger problem right now.
Soon after he'll have to start raising interest rates and reducing money supply because of the inflation fears. It seems the corrections are getting bigger and closer together than anything that's happened historically, hence the Greenspan PIO. Obviously his instruments aren't helping him fly a little steadier. Thought you'd enjoy. Keene Little
[Buzz replies] Great observation and perfect metaphor, Keene! Your point is well made. I only hope turbulence at the intake does not cause economic flameout and put us in flat spin! Nice to hear from you - thanks for writing. Buzz
Well, I don't understand all that pilot jargon but the visual is clear in my mind's eye. We are on a Fed-induced roller coaster that has not reached a crest or trough before this long ride is over.
Conservative traders should hedge the big move and buy straddles or strangles on their favorite major indexes no later than 2:00pm EST Tuesday, which I consider the ideal time. Option prices should be lower near there as we drift sideways into the session. That also offers maximum odds of catching a significant move in either direction from resting pivot points. Spread Trade model will list all those details tomorrow.
More aggressive traders should play the highest-odds direction on a break of firm resistance or support. Position Trade model will list June contracts to hold for awhile as chart signals cycle through while Swing Trade model will play the May contracts for fast & solid potential gains. Neither model will be in a big hurry to unload any plays taken as holding into Wednesday or beyond could be the big move for the week.
Those who trade expiration week know one fact sure as the sun will rise tomorrow: Somewhere between us and Friday's closing bell lies a trade or two for +200% - +1,000+ gains on May contracts. Can't speak for you, but I sure want my shot at a chunk of those this time around!
Best Trading Wishes,