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Market Wrap

The Short of It

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[Image 1] Monday Briefing

Today was another low volume high volatility session in the broader markets. The range was about 30 points on the S&P 500 (SPX), 45 points on the NASDAQ 100 NDX), and 230 one the Dow Jones Industrial Average (DJX). A quick recap of the open had the markets opening flat to slightly down due to earnings from Walgreens (see below), a loss warning from Toyota Motors (TM) and a possible downside revision to the International Monetary Fund’s economic forecast. In fact, the markets declined steadily into the last hour of trading on rumors of a credit watch or downgrade on Dow Jones component Alcoa (AA). However, program buying might have recognized the discounted market and bought into the close. At 3:30 PM. The S&P Futures were down almost 30 points. Suddenly, a catalyst was revealed and the futures closed down only 9.50 points. However, even with the bounce the end of the day had all 10 economic sectors down. Some of the bell weathers include stocks like McDonalds, United Technologies, and Merck. It appears as though stocks with dividends and strong balance sheets have been able to maintain their relative strength. Being a holiday filled week, there won’t be a lot of news other than what the media makes as such.

The market internals had decliners at a 3 to 1 advantage today. On the NYSE and NASDAQ Composite, four stocks posted new 52-Week Highs while 44 and 115 stocks achieved new 52-Week Lows on the NYSE and NASDAQ Comp, respectively. TRIN on both exchanges broke and closed above the 1.50 level that often provides exhaustive indications and a possible long trade at the close. These trades are supposed to be closed out at the open or at a stop equivalent to an average price range. Volume on both the NYSE and NASDAQ Comp were well below the average. That means that technicians might dismiss the downward move today as just end of year tax loss selling. However, the end of the day rally looked like window dressing. But I can’t imagine what stocks or assets Mutual Fund companies want to display as their top ten holdings in the fourth quarter reports.

Earnings News

Walgreens (WAG) reported that its profit fell 10 percent in its fiscal 1st quarter. WAG reports that its earnings fell short of the analyst’s expectation because of the 200 new store openings. The company earned $408 million or $0.41 per share versus the consensus estimate of $0.46. Tomorrow morning, American Greetings Corp (AM) reports earnings while after tomorrow’s close, FSI International and Micron Technology (MU) report. There are no earnings being released on December 24th and none of any substance on December 26th. As I mentioned in the Option Writer post today, I will be holding onto some cash this expiration cycle so we can trade some of the Earnings Volatility trade setups.

Economic News [Image 8]

As you can see from the graphic above, there were no economic releases today. But tomorrow is full of market moving data. I don’t believe that the third quarter GDP-Final matters, but the Existing and New Home Sales has had a lot of influence on market sentiment. I have a lot of friends in real estate. There have been reports that the true values of homes are the foreclosure price. After speaking to some of the more active agents, it has become my opinion that the foreclosure price can’t be the value since it is almost impossible to get a bank to release the home as a short sale. It is a lot like the pricing discrepancies of mortgaged backed securities and their derivatives. If there isn’t a lot of liquidity, rather than using a mark to market methodology you have to price it according to a pricing model similar to option pricing methodologies. In addition to the market sentiment gathered from the home sales report, the Michigan Sentiment for December is expected to be revised downward to 58.8 from 59.1. Finally, on Wednesday we get November Personal Income and Spending. The reaction from any reports on Wednesday should receive a thin response as many traders are away from their post.

S&P 500 (SPX)

On a daily basis, the SPX is consolidating after bouncing nearly 20% from the November 21st lows. However, on a Weekly chart it is still evident that the SPX remains in a sustained down trend. In the chart below, the black curve is the 200 week moving average. It began to curl down ward in October. On a longer term basis, I wouldn’t call an uptrend until the SPX broke above the 50% retracement level and held. The SPX has yet to break above the 23.6% retracement level. From past experience, it would be of no surprise to me if the SPX declined once more in the coming month before trying to break above the 23.6% and 38.2% retracement levels. The Weekly ADX is reaching oversold levels and has slowed its ascent. The Money Flow Index did breach the 20 last time the SPX was oversold. That is an indication of capitulation. I think we have seen the low; just not the end of the volatility.

SPX Weekly Chart [Image 2]

Moving onto the daily chart, as previously stated in past weeks, the 50 day moving average has become the newest resistance level to keep the SPX down. The daily ADX is declining from the lower high peak established on November 21st. The higher low on the trend indicator along with a lower low in the market is actually a positive divergence. The Money Flow Index hasn’t provided much help in determining whether or not the SPX is oversold or overbought. You can’t have every indicator work consistently and coincidentally. But if you have a few of them indicating the same, the probability of the move increases. As mentioned earlier, the 50 day moving average, currently at 897.54, has become heavy resistance for the SPX to break. Aside from the 50 day SMA, there is also price resistance at 916. Over and above that, the SPX has resistance from the November 4th high of 1007 and coincidentally the 89 day SMA (magenta line). The SPX has support at 851 and then at 818. If the 851 support is broken, another leg down to the November lows might be next. But today’s low (857) held the support. Depending on tomorrow’s reports and the attendance of traders, the market could retest those lows. The market tends to advance the day before a major holiday.

S&P Daily Chart with Moving Averages [Image 3]

The SPX is definitely consolidating over the last three weeks. Until today, we have seen higher lows but not higher highs. This was forming a positive flag formation on the daily chart. But today’s decline fell below the uptrend line and has therefore disregarded the positive bias. In addition, the RSI and the Slow Stochastics have broken below recent support. This indicated that further weakness can be expected. The RSI still has plenty of room to decline before becoming oversold. However, the Stochastics, at 27, is quickly approaching oversold territory. The Bollinger bands are squeezing together and indicating that market volatility is subsiding. The current reading of the Bollinger bands suggests that the market should trade within a 95 point range of the 21 day Exponential Moving Average (EMA). The 21 and 8 day EMAs continue to crisscross one another. Since the SPX can’t seem to remain above the 21 day EMA, I can’t confirm that the SPX is in a short term uptrend. As with the other charts, I think that we will see the market lower before breaking out above the 916 resistance.

S&P 500 Daily Chart with Oscillators [Image 4] Commodity Corner

Within the last two weeks, the Eurodollar Futures has broken out to the upside. The first resistance level was the 50 day SMA. Once that was breached, the Euro rallied straight through the 89 day SMA and up to test the 200 day SMA last Thursday. The contract closed at 1.39 and has support at the 89 day SMA, or 1.358. I don’t think the Euro is a buy until testing this support and I wouldn’t sell it until it ran up to the 200 day SMA again. Basically, the market feels that the value of the US economy is weakening versus other currency counterparts. I have been stating that the dollar will eventually devalue from the constant print of money and issuance of debt. The strange thing is that Light Crude Oil didn’t rally along with the Euro. I guess the two aren’t as pegged as I once thought. The US generally prospered with a weaker dollar. As the new safe haven, Japan’s strong currency might provide some problems for the countries trade export. We might see a long dollar short Yen as a good currency trade. How do we do this? I spoke of a trade last week with the Short FXY Calls. Another way to trade this is to sell short the actual ETF. But that doesn’t go along with the theme of this newsletter. The recent high of FXY is 114.61. The January 114 Calls are 1.10 – 1.35. There isn’t a lot of premium for a security that can move so much. When volatility (VEGA) is low, the better trade is to buy the option.

Eurodollar March Futures Contract [Image 5]

Crude continues to decline as the world economy slows. At some point, the demand will increase from here. One thing that is interesting is the weakness in the commodity while the DJ Oil and Gas Index (IEO or DIG) has maintained some price relative strength. If crude continues to decline, another trade idea is to pair off the USO and IEO by selling USO Calls and IEO Puts. Light Crude Oil is showing oversold tendencies, but is in a definite downtrend as indicated by the 8 day EMA well below the 21 day EMA. The RSI and Slow Stochastics are also indicating that there is room for further weakness before becoming oversold.

Light Crude January Contract [Image 6]

Finally, the other commodity I follow closely is Gold. Gold declined from its open but still maintained to gain about 3 points today. As the chart below shows, the commodity has found resistance at its daily 200 SMA. After such a strong and sudden move, I expect to see a little more profit taking down to the 89 day SMA. However, a break and close above the 200 day SMA might spur a buy signal which would allow for a run up to the all time highs near 1000. The recent low near 830 held the previous resistance from 11/24. That means that to go lower, gold must break the price support established from the high (old resistance becomes new support) and then travel down to the 89 or 50 day SMA at 789. I might short a break below the recent support at 830 from Friday with a price target at the 89 day SMA and a stop at a close back above 830 or today’s low of 840. Have a safe and happy holiday.

Gold January Contract [Image 7]

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