Lather, Rinse, Repeat
"I just made $13 like it was nothing!" We used to laugh at that commercial depicting a stereotypical, unshaven daytrader in his underwear. It is not so funny anymore since the humor became truth. Notice that commercial is no longer on the air?
Such is the nature of a rangebound market with no volume. Conviction is missing as even the leftover participants (those not on vacation or frustrated in general with the market) are finding it tough to get profitable market moves, let alone the chart setups that used to be more reliable. Anymore, chart failure and lack of followthrough are the most common result of the ideal chart setup. Without market range, oscillators are less effective. That is something to keep in mind as we slog through the remains of summer. It is the same old, same old just like the directions on a bottle of shampoo.
Still, do not believe for a minute that once summer ends, markets will come roaring (or even whimpering) back. All that new found volume we expect to see then may very well be in the negative direction. The market could just as easily sell off, which would be no surprise given the economic conditions. I noted carefully that Citigroup (C) and Tyco (TYC) are planning to cut a cumulative 16,000 workers, many of them oversees. Think that international funds are the place to be? Think again. Layoffs are happening because the demand is not there to keep them productive, nor does management believe demand will return in the short run. - here and all over the world.
I am sure nearly everyone reading this is as frustrated with the market (and the economy) as I am, and secretly hopes that the bulls will be back in charge within 45 days. It is just human nature. But folks, some personal friends of mine who have thrived through good and bad times over the last 20 years have told me to batten down the hatches - conserve my cash. What we are seeing now will go deeper and last longer than anyone expects, and it will be painful. I am listening.
I hope they are wrong, but I cannot ignore the couple of dissenting natives that have turned against the collective tribe facing the hopeful distant hoof beat that they suppose will stampede the village by year-end. Personally, I believe that the notion of "we think we will be profitable again in Q4" is another one of the great lies along with "check is in the mail". (Did I mention that AMAT says it will be profitable in Q4? Show me the money.)
Those two dissenting natives have my attention precisely because nobody believes their warning is plausible. In the jungle, the noise toward which the native's noses are pointed is already handled. It is then that the threat of danger to their backside is greatest, just as the dissenters have warned.
Now, having said all that, should we be gloomy, unhappy, even depressed forever about the current market state? Not on your life! While the next few weeks do not look so hot from a rangebound trading standpoint, we should be happy that the market is likely to soon choose a directional bias, which might likely be down to new lows! That is not a guaranty. But as a trader, I would welcome a down market just as much as, if not more than an up market. Down markets move down faster than up markets move up! All we need is movement. It matters not which way!
Oh, and in all the excitement today, I almost forgot to mention the Retail Sales figures! Ready? They did not increase a bit! However, the notion that they did not fall the anticipated -0.2% was great news! And if we do not count car sales (pesky distraction to the economy that they are), they actually rose 0.2% besting the 0.1% anticipated rise! Bulls were dancing in the streets at the open, and accordingly sent the Dow up 60 points and the NASDAQ-100 up 20 points in the first 30 minutes. Wahoo! Party on, Wayne! Party on, Garth!
Excuse me while I remove my tongue from my cheek to point out that June numbers were revised downward from plus 0.2% growth to flat at 0.0% - no gain after all. Suppose July will be any different? The bureau of Labor and statistics dirty little secret is that numbers are revised all the time and initial publications are not to be trusted, but that is another matter. While it all eventually comes out in the wash, the spot figures we hear today are frequently revised, and even then, not always accurate by the Bureau's own admission.
More to the point, while dead even shows that consumers are not dead, it also says they are not spending us out of a flagging economy either. I might add that Wal-Mart sales did manage to come in right on target at $0.37. Unfortunately, they guided H2 earnings downward from current estimates of "double-digit" growth to "single-digit" citing higher labor, insurance, utility, and health care costs. In other words, expenses are rising. While they did rack up an impressive 14.5% gain over last year, it came from increasing market share (good for WMT), not an expansion of consumer demand, which does not speak well for the overall economy.
OK, enough fundamental stuff. Let us get to the charts for clues to direction. Honestly, this is like rearranging the same tealeaves hoping for a different flavor, but here goes.
Dow Industrial index chart (INDU):
I am really focusing in on the daily chart tonight, but before that, note the weekly chart is forming a neutral triangle. It could break either way and the stochastic is beginning to stall without ever reaching overbought. The daily stochastic though is on the rise, but the candles are not keeping pace. We see two dojis, or days of indecision below the 20-dma, but holding at 10,400. If the stochastic is rising strongly, but price action is failing to follow, we are witnessing the makings of divergence. More on that in a minute. The 60/30 charts are just floating out there with no direction, but the 30-min is just beginning to show signs of life. Trying to base a trade off that though is dangerous in this market. For those keeping score, the Dow as off three points to 10,412 on 962 mln shares. Breadth was deceptively good at better than three winners for every two losers.
NASDAQ-100 index chart (NDX):
As for the NASDAQ-100, anybody see a problem with the weekly chart? Yep, it the Mercedes 240 Diesel of market indexes, which cannot accelerate its way out of a wet paper bag. We see rising stochastic trend (but currently rolling down) as the candles fall. No big picture strength in this at all. While the daily chart shows a bullish stochastic trend emerging from oversold, the candle cannot easily clear 1665, and fell back hard from the 20- dma and point of resistance. Another divergence setting up. More in a minute. All is not lost though, at least for the daytrader. 60/30 chart patterns are approaching a bottom of a stochastic cycle. With a bit more downward pricing pressure, they could easily cycle back up for anther stab at resistance that would also keep the daily stochastic pointing up, weak as it is. The fact remains this index remains a follower, not a leader and will not for a long time, if ever, regain its former bubblized composure. Scorekeepers note that advancers were about even with decliners as the NASDAQ-100 fell 23 points to 1629 on 1.23 bln shares (very light volume).
S&P 500 Index chart (SPX):
Uh oh. Do not look now, but while the weekly chart holds at support over 1180, the stochastic has crossed fast over slow in a bearish reversal. The daily looks weak too as former support of 1200 provided resistance today. Meanwhile the daily stochastic continues to rise. Again, divergence setting up. . .again, more on that in a minute. Perhaps the daily candle will catch a temporary break though as the 60/30 chart stochastic nears its cycle down to overbought, which could pave the way for another quick cycle back up. 1185 is providing some short-term trading support. Nonetheless, the bigger trend is showing signs of weakness and I would leery of taking any call plays on this market leader unless you possess finely-honed daytrading skills.
The VIX too is starting to look scary falling today to 23.01. No so much because of the low number, but because the VIX trend is slowly falling, but so are equity prices. A falling VIX is a sign of boldness on part of the bulls as call buying gets more popular in relation to puts. If investors are buying calls when the market is trading flat to , what will happen to those candles when investors move to the bear's camp and raise the VIX. Kind of like the old saying, "with friends like that, who needs enemies?" Bulls are active, but getting no traction while Yogi and Boo Boo sharpen their claws for the mother of all pic-a-nic baskets.
This dovetails into what I noted earlier about the bearish divergence on all three indexes setting up (not there yet) that could create the mother of all put-buying opportunities. Here is the scenario that will have me buying puts with both hands and feet. The oscillators are moving up while the candles stumble at current levels. Should the oscillators reach overbought and the candles complete a lower high, coupling that with a sinking VIX, say around 20-21, and a weekly stochastic already reversed to the downside would be as close to perfection as we could ask. Not only would that likely make for a nice short-term downside play, it could last a while if investors come to realize that Q4 WILL NOT be profitable for many companies that are now saying the worst is over (remember TYC, C, WMT).
It has not happened yet, but could that set-up possibly coincide with the market's belief (wish) that Alphonso The Great will cut rates by 50 basis points next week instead of the originally believed 25 bp? Maybe, but imagine that a 50-bp cut happened today. Reflexive rally yes, but likely just a put-buying opportunity when coupled with the notion that even a 50 bp rate cut will not derail the current economic trend of even the international economy. The contrarian in me says this is a very likely outcome precisely because very few people if anybody believe this will happen. Just like nobody believed in April 2000 that the bottom would fall out when the NASDAQ hit 5200. I cannot wait! But for now it is merely wishful thinking, and I must remind myself that the market will do as it wishes without consulting me for my opinion beforehand.
So what of tomorrow? AMAT and BEAS could provide support in the early going. Or the oscillators could continue downward to overbought and perhaps break mild levels of support. In short, it promises to remain choppy through this expiration week and one of the biggest games of chance I can remember given the lack of conviction. As there are only one or two good entries per week, we will be looking to capitalize on any break but would still caution against using the whole account and stick only to small amounts of risk capital with any trade.
I have gone on way too long tonight. The end.