The markets continued their volatility for another week as it endured questionable economics, Bernanspeak, $67 oil, global power plays and a trickle of earnings warnings. Overall the volatility came on low volume and support levels held. End of quarter window dressing may not have been able to push the indexes back to their highs but more importantly it may have kept us from breaking support.
Dow Chart - 90 min
Nasdaq Chart - Daily
We saw mixed economics again take center stage Friday morning with a very strong PMI leading the list. The headline on the PMI jumped to 61.7 for March compared to 47.9 in February. This was far better than the expectations for a modest rise to 49.0. The production component jumped from 51.2 to 64.9 and order backlogs rose to 54.0 from 44.3. The biggest jump came in new orders to 72.2 from 48.7. Prices paid fell and inventories decreased. It was a strong report and completely reversed last months drop to 47.9 and the lowest level since October 2002. The rebound sent the index back to levels not seen since early 2006. As you can see in the chart below the downtrend was completely reversed. The size of the rebound suggests a problem with the data that will likely produce a sizeable revision over the coming months. The responses that make up the index are not weighted by company size and this data could be impacted by some minor players. For instance 3M could have said no change but ACME Mfg and ACE Products, both fictional companies with 20 employees each, could have seen a surge in orders. That surge in orders could have been in dozens of units rather than tens of thousands of units at a larger company like 3M. Those small companies would have reported a strong month but in reality it was barely a drop in the proverbial bucket. These types of data points produce volatility in the index, which is eventually smoothed away.
Chicago Purchasing Managers Index Chart
Monday's ISM Index should give us a better picture of the manufacturing economy. If the components on the ISM reflect the same robust data as the PMI then we can expect the Fed to be hiking rates again very soon. A true rebound of that magnitude would put the Fed on heightened inflation alert even more than they are now. Last month the ISM came in at 52.3 after posting numbers in contraction territory below 50 for 2 of the prior 3 months. It is conceivable we have seen the bottom but we need confirmation with several positive months before making that call.
The NAPM-NY report on Friday dropped slightly by only a fractional amount but it was the first decline since Oct-2005. Given the fractional .3-drop I don't deem the change relative and the New York area continues to be one of the strongest economies in the nation. However, the current conditions component fell the sharpest from 57.6 to contraction territory at 49.3. This component spiked to 82.5 back in November but fell back to the mid 50s the following 3 months. This drop out of the mid 50s could be a cause for concern but with an economic region this strong it will take more than a couple months of declines to convince analysts it is for real. It has not been under 50 since the depression after Hurricane Katrina.
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Personal Income for February rose +0.6%, double consensus expectations and the second fastest rate since Jan-06. Even worse for inflation watchers was the jump in the core PCE deflator of +0.3%. This was the fastest increase since the +0.4% rise in Aug-06. This pushed the 12-month inflation rate to +2.4% and well over the Fed's target rate of 1-2%. This was not a Fed friendly report. However, the Bureau of Economic Analysis (BEA), which produces this data, said they were adding $50 billion (annualized) to each month in the first quarter to account for unusually large bonuses and the exercise of stock options. You got your share, right? Despite this surplus of personal income the savings rate remains negative at -1.2% and real spending grew by only +0.2% and the slowest growth in the last six months. This suggests workers are making more money but enjoying it less and I am sure most of us can relate to that. The final revision to Consumer Sentiment fell to 88.4 from the initial reading of 88.8 and February's reading of 91.3. This is the lowest sentiment reading since Sept-06. Higher gas prices were blamed along with the subprime implosion.
Next week has two critical economic reports. The ISM for March will be released on Monday with expectations for a slightly positive reading just over 50. The second is the Non-Farm Payrolls on Friday. Analysts expect the report to show a gain of 140,000 jobs in March. In February the economy only produced 97,000 jobs and that was the weakest one-month gain in more than two years. We have seen nearly every month revised higher for the last year so the odds are good that 97K will eventually be revised to something in the 120K range. The setup for Friday could be more bearish depending on your view. A second month of sub 100K gains would cast real doubt on the economic rebound, especially if the number was down in the 50K range. This would be Fed friendly but probably not market friendly. The Goldilocks number would be something just over 100K. Just strong enough to suggest the economy is continuing its recovery but not strong enough to put pressure on the Fed to raise rates.
The odds are good that after Monday's ISM the market will be more focused on the coming Q1 earnings than economics. Since earnings expectations have fallen from double digits in December to +8.2% in February and then to +5.1% today there is a slight concern that they could go negative. If it were not for the energy sector it would almost be a certainty. That 5.1% growth estimate comes from S&P. Thomson Financial is expecting 3.8% in Q1, 4.0% Q2, 6.8% Q3 and then 12.5% in Q4. Thomson is estimating only +6.7% earnings growth for all of 2007. That has come down from estimates of 9.3% back in January. The earnings warnings have been scattered and fewer than normal. Unfortunately positive guidance has dried up completely and a cloudy haze is settling over earnings expectations. Many analysts are expecting a massive write down by the financial sector as mortgage loan losses mount. Most feel the banks are severely under reserved because loan losses in real estate have been nonexistent for years. As foreclosures rise those banks will have to increase reserves at the expense of profits. Financials account for 21% of the earnings in the S&P so plenty of room for problems.
The 4th quarter is still teetering on the brink of double-digit earnings at +10.05% growth and only a few stragglers left to report. According to S&P that would be the 19th consecutive quarter of double-digit earnings growth but in all likelihood the last for some time. Over those 19 quarters the S&P has rallied +90% off the 2002 lows of 768. The S&P has risen in 13 of the last 15 months and a feat not duplicated in the last 52 years. While 5% earnings growth may not be spectacular it is growth and the market has posted gains through many periods of low growth. Since 1950 there have been 12 periods of earnings growth deceleration. 11 of those 12 periods ended with a profit recession but stocks themselves gained ground in 9 of those periods. On average stocks gained +9.2% during the periods of earnings deceleration.
S&P-500 Chart - Weekly
Just because earnings growth is falling into the low single digits does not mean the market will crater. Investors normally look ahead to the future and try to buy 6-9 months before earnings growth returns. Currently earnings are expected to be single digits in Q1, Q2 and Q3 but return to double digits in Q4 or maybe Q1-07. That suggests true investors would be planning on buying any Q2 dip in prices in hopes of an end of year rebound. That all sounds good on paper but it still sets up the potential for a sell the news event if Q1 earnings beginning on April-9th disappoint. With Q2/Q3 expected to be tough quarters that suggests guidance with Q1 earnings could also be rough. That could produce the market dip needed to give those investors a buying opportunity later this summer. With 90% long term gains on the S&P the odds are good that more than a few funds will be looking to shuffle positions and build up cash for a new entry later this year.
Friday's market started off positive on the heels of the PMI report but geopolitical news tripped it up right out of the gate. Commerce Secretary Carlos Gutierrez announced Friday morning the beginning of trade sanctions against China. American paper producers had sued to block cheap imports of paper from China. For more than two decades the Commerce Dept position had been that China was a "non-market economy" and that prevented them from being sanctioned. Gutierrez said on Friday China has evolved to the point where the U.S. can now use additional tools to protect American producers. The administration announced import tariffs of 11-20% on certain paper products produced in China. Chinese producers sell a roll of a particular paper in the U.S. for $800 while it costs U.S. producers over $1000 to produce the same product. Chinese producers can do this because of subsidies from the government and no/low interest loans from government controlled banks that are frequently forgiven. China needs to subsidize industry to create employment for the two million workers moving from the farmland to the cities each month. The alternative of rising double-digit unemployment is not acceptable because of the increasing crime rate and poverty it produces. Other sectors we can expect to be targeted in the future include steel, chemicals and furniture. These are sectors that China targeted in its five-year plan several years ago to expand into global exports. The problem with this form of protectionism is the potential for dollar dumping. China has more than $1 trillion in currency reserves with the majority of that in U.S. treasuries. If China decided to fight back they could shift some of their dollar denominated investments into Euros and drive the dollar lower. That would raise our interest rates and make imported goods more expensive. It would also make their goods more expensive for the US so there is serious doubt they would take this action. There are mixed ideas about the ramifications of this change in policy but the markets did not wait to see who is right. The Dow dropped -174 points from its high to a -106 loss intraday when the announcement was made. The Dow struggled back to positive territory but only barely.
The British hostage problem with Iran escalated to a higher level with the EU demanding an immediate release. The female, who was to have been released on Thursday, was not released and Iran said the group might have to stand trial for crimes against Iran. This prompted the U.S. to make solidarity comments in the press and for Britain to ratchet up demands for their release. Iran raised its bet on oil prices by saying they will no longer sell oil for dollars and all payments must be in Euros. That is about $210 million dollars per day that will need to be converted to Euros to pay for Iranian oil.
Everyone on the western side of the Iran hostage problem keeps asking why Iran would make such a play in full view of the coalition forces in the Persian Gulf. I think the answer is simple. Oil prices were $57 a barrel a little over a week ago and now they are $66 and have traded as high as $68. With just a little effort militarily and almost no risk they have produced nearly a $10 spike in the price of oil. Iran produces 3.5 mbpd so that spike produced an extra $35 million dollars in revenue every day it continues. Since oil accounts for about 50% of the Iranian government budget this is a significant boost to revenues. Secondly the current Iranian administration had been sliding in the polls with civilian unrest rising. By punching Britain in the nose and grabbing 15 hostages this saber rattling has produced a small lift in popularity for Iranian President Mahmoud Ahmadinejad. Don't forget this is a country that has a government sponsored anti U.S. demonstration every weekend. This is a way to save face in the Iranian press instead of focusing on the new UN sanctions and the massive build up of warships in the Gulf. It is not helping our markets because most Americans don't understand the problem and the reasons behind it. Late this week Debka, an Israeli military intelligence website, said Americans in Bahrain had been advised to leave by the US Army on security concerns expected next week. Debka cited "intelligence sources in Moscow as predicting a US strike against Iranian nuclear installations codenamed Operation Bite on April 6th." Debka has reported rumors as truth in the past but this one seems to be gaining traction. It was also reported that Patriot missile batteries have been setup in Bahrain along with new alarm networks and defense systems upgraded to handle chemical, biological and radioactive attacks. The carrier USS Nimitz and its battle group will be leaving San Diego on Monday to join the John C Stennis and Dwight D Eisenhower carrier groups in the Persian Gulf.
In another article in Time there is a story about an attempt to take a squad of US soldiers hostage on the Iraqi side of the Iran/Iraq border. Soldiers from the 5th Squadron, 73rd Cavalry, 82 Airborne were on a routine joint patrol with Iraqi forces when they came upon an Iranian officer standing in the middle of the road in Iraqi territory. When US and Iraqi soldiers approached and began speaking to him a platoon of Iranian soldiers appeared and took up positions on the high ground surrounding the Americans. The Iranian officer said if they tried to leave they would be fired on. Fearing abduction by the Iranians the Americans scattered and began taking fire. A press release by the US said there were no American casualties but sources at the scene said there were Iranian and Iraqi casualties. You can bet the Iranians would like nothing more than to capture an American patrol and claim they were in Iran illegally.
In stock news Dell dropped sharply at the open on Friday after saying that an internal probe had uncovered accounting errors and evidence of misconduct, which may cause them to restate years of results. Dell said an audit committee "has identified a number of accounting errors, evidence of misconduct and deficiencies in the financial control environment." Dell is under fire from all sides with SEC probes, class action lawsuits, insider trading charges and a suit over a $1 billion kickback scheme with Intel. They have lost the CEO and CFO and Michael Dell has had to return to the CEO position to fight the fires. The accounting period covered was during Dell's initial tenure as CEO so he may yet come under fire for inappropriate activities. Dell recovered to close down only slightly but their problems are far from over.
Drug maker Dendreon Corp more than doubled in price on Friday with a +148% gain after the FDA endorsed its prostrate cancer vaccine, Provenge. The committee voted 13-4 to approve saying there is substantial evidence that it works in treating advanced prostrate cancer. The drug extended survival of cancer patients by an average of 4.5 months without any negative side effects. The only side effect mentioned was the expected $45,000 price tag for one month of treatment. How much is 4.5 months of additional life worth to your family and their finances after you are gone? Because of the need for additional trials the drug is not expected to be officially approved until 2009 and that makes the +148% jump in the stock a little questionable for me. It actually traded $5 higher than that at +230% but could not hold the gains. There was a high short interest ahead of the announcement from general skepticism about the drugs approval. Those shorts were killed on the announcement leading to volume of 92 million shares on Friday. DNDN was the 3rd highest volume stock on Friday compared to average daily volume of only five million shares. Nuvelo (NUVO) surged on nine times its daily volume earlier in the week when the FDA granted its colon cancer drug fast track status as both a first and second line treatment.
More information came public regarding the charges against Beazer Homes. Apparently the company came under investigation after the Charlotte Observer noticed an extremely high rate of foreclosures in Beazer developments. There are allegations that Beazer seduced home shoppers using gimmick loan programs to get unqualified buyers into homes in order to move Beazer inventory. The allegations claim no documentation loans were made with exaggerated income and assets and information negative to the borrower was removed from the applications. Now all those unqualified borrowers are being foreclosed and Beazer is under fire from regulators. A grand jury subpoenaed Beazer's loan records and Beazer said it would comply. BZH volume hit 20 million shares on Wednesday compared to an average of 1.6 million. If even a small bit of what they claim is true it could mean the end of Beazer Homes. I am thinking the Jan-2008 $25 put could be a bargain.
Semiconductor stocks were top performers on Friday after Stifel Nicolaus upgraded the sector to overweight from neutral. Stifel said booking patterns have steadily improved over the last 3 months and the upcoming earnings season may be the first time since early 2006 that companies won't lower guidance. Broadcom (BRCM) and Intersil (ISIL) were their two best picks saying Broadcom was one of the best positioned and Intersil was doing the best job in the analog industry. Nvidia was upgraded to a hold on worries about new competition. PMCS also rose after it narrowed its guidance to the upper end of the prior range and said it was closing two facilities to save $22 million annually. LSI Logic received shareholder approval to acquire Agere Systems for $4 billion.
Corn futures limited down on Friday after the USDA released a report saying corn plantings would jump +15% to 90.5 million acres in 2007. The push to profit from the ethanol move has prompted farmers to press marginal fields into service and to cut back on other crops. Soybean plantings for 2007 are expected to drop by -11%. The sharp increase in the expected corn crop sent futures down by -20 cents and the daily limit. Corn prices had risen sharply in 2006 due to the demand for ethanol. Traders are unsure if that demand can consume the new corn capacity. This is the largest corn planting since 1944. High corn prices have sent food prices higher across the board since corn is also used as feed for nearly all livestock at some point in the lifecycle. Technically they could double the amount of corn planted and not produce enough ethanol but the problem today is insufficient capacity at the ethanol plants. There are 40+ plants under construction but most will not be completed in time to process this crop. Ethanol producers ADM and BG were flat on the day but CAT and DE rose on the prospects for higher tractor sales. The sudden acceleration of income from corn has got a lot of farmers thinking about a new rig. In the city you keep up with your neighbor by purchasing a new Mercedes or BMW. In the farming community your status is measured by the size of your tractor. The USDA says net profits per acre of corn in 2006 were $334 compared to $190 for soybeans.
For a market outlook for next week I am perfectly neutral. The Dow held over support at 12300, Nasdaq did the same at 2400 and the Russell ended the week exactly at my sentiment pivot point of 800. Try as I might I can't develop a compelling bias this weekend. I could see it going either way although there is less reasoning for a continued move higher than a drift lower now that the quarter is over. We have a full two weeks of the earnings warning cycle ahead before actual earnings begin in earnest. The ISM on Monday is a wild card but I believe any impact will be very short lived. I think the earnings picture will be the key and that could take another three weeks to develop completely.
DDow Chart - 30 min
S&P-500 Chart - Daily
Russell-2000 Chart - Daily
With the quarter over fund managers are free to shuffle positions and take
profits ahead of earnings. With earnings expectations dwindling so rapidly there
is actually the chance for an upside surprise and that could further confuse the
directional issue. I think for next week we should continue to key on Dow 12300
and Russell 800. A drop below either or both could signal the beginning of a new
move that could last several days. Conversely a
rebound above those levels would
be bullish but only if it happened on decent volume. Volume over the last week
has been only average and the last two days it has been split almost exactly
50:50 with advancing volume only slightly ahead of declining. New 52-week highs
are still averaging around 300 per day and that is slightly bullish but it was
an end of quarter week and we should have seen more new highs. Next week is a
holiday shortened week with the markets closed on Friday. That
volume as the week progresses. Bottom line, watch Dow 12300 and Russell 800 and
F5 Networks - FFIV - cls: 66.68 chg: -2.56 stop: 71.01
We Like It:
BUY PUT MAY 70.00 FLK-QN open interest=776 current ask $6.10
Picked on April 01 at $ 66.68
MDC Holdings - MDC - cls: 48.07 chg: -0.49 stop: 50.05
Why We Like It:
PUT MAY 50.00 MDC-QJ open interest=523 current ask $3.40
Picked on April xx at $ xx.xx <-- see TRIGGER
Apple Inc. - AAPL - cls: 92.91 chg: -0.84 stop: 88.85
We were expecting more of an end-of-quarter window-dressing rally to push AAPL higher. Instead the stock trended down and the weekly chart's latest candlestick looks like a bearish reversal. We would expect a continued dip toward $92.00 and probably toward the $91.00-90.00 range. A bounce above $90 could be used as a new entry point. Our target is the $97.50-100.00 range.
Picked on March 19 at $ 91.01
Allegheny Tech. - ATI - cls: 106.69 chg: -1.00 stop: 105.75
The intraday bounce near $106 has struggled two days in a row. Aggressive traders might want to consider new bullish positions with the stock above $105 (if you do you'll need to adjust your stop loss). We are sticking to our plan and waiting for a bullish breakout over resistance near $110. We're suggesting a trigger to buy calls at $110.26. If triggered our target is the $117.00-120.00 range. FYI: The P&F chart points to a $123 target. We do not want to hold over the late April earnings report.
BUY CALL MAY 105 ATI-EA open interest=412 current ask $7.30
Picked on March xx at $ xx.xx <-- see TRIGGER
Bunge Ltd. - BG - cls: 82.22 chg: -0.02 stop: 77.95
There has been a positive current under the agriculture plays. BG has definitely been showing relative strength. The stock hit a new four-week high on Friday at $83.75 before succumbing to profit taking. If BG dips back toward $80 we'd watch for a bounce as a new entry point. More conservative traders may want to tighten their stop loss. Our target is the $85.00-85.50 range. We do not want to hold over the late April earnings report.
Picked on March 26 at $ 80.75
Chaparral Steel - CHAP - cls: 58.17 chg: -0.42 stop: 54.95
CHAP made another rally attempt on Friday morning but failed to make it past the $59.25 level. Shares still look poised to move higher and odds look decent that CHAP will hit our target in the $59.50-60.00 range soon. This close to our target we're not suggesting new positions. The P&F chart has a triple-top breakout buy signal with a $72 target.
Picked on March 25 at $ 55.73
Celgene - CELG - close: 52.46 chg: -0.24 stop: 49.95
CELG under performed its biotech peers on Friday. The BTK index broke out above technical resistance at the 100-dma and broke out from a weeklong consolidation pattern. Meanwhile shares of CELG continued to slip toward what should be support near $52.00. Shares hit an intraday low of $51.72 before bouncing back. We would suggest waiting for a new rally past $53.00 (or maybe the 50-dma near $53.55) before initiating new call positions. Our target is the $57.50-60.00 range. We do not want to hold over the late April earnings report.
Picked on March 19 at $ 52.65
ConocoPhillips - COP - cls: 68.35 chg: -0.82 stop: 64.85
This past week was disappointing for the oil stocks. Crude oil surged higher on the Iran-Britain-US conflict yet shares of COP failed to make it past resistance near $70.00. The trading action in COP actually looks bearish. However, as much as we would hope for a peaceful solution to the 15 British servicemen held hostage, we don't see it happening. Iran will do anything to keep from losing face in front of its Arabic and Muslim neighbors. As the conflict gets worse oil will continue to rise and oil stocks will eventually move with it. We would wait and watch for a bounce in COP before considering new positions. We're aiming for the $74.00-75.00 range. We do not want to hold over the late April earnings report.
Picked on March 20 at $ 66.31
Holly Corp. - HOC - cls: 59.30 chg: -0.43 stop: 56.45
HOC is another oil stock that under performed this past week. Shares were streaking to new all-time highs two weeks ago. Last week the momentum ran out of gas. Shares have now broke short-term support at $60.00 and its 10-dma. We are expecting a dip near $58.00. Wait and watch for a bounce near $58.00 before considering new positions. Our target is the $62.00-62.50 range. FYI: The weekly candlestick chart might have produced a bearish "dark cloud cover" pattern.
Picked on March 14 at $ 57.87
Lockheed Martin - LMT - cls: 97.02 chg: -1.08 stop: 97.49
Aerospace and defense contractive LMT has seen it's upward momentum struggle, just like sector-mate Boeing (BA). The stock is inching lower and looks poised to dip toward what should be support near $95.00 and its 100-dma. Currently, we are still on the sidelines waiting for a breakout over resistance near $100. Our suggested trigger to buy calls is at $100.25. However, we're going to keep a close eye on the $95 level and if LMT produces a convincing bounce near $95 we might suggest aggressive positions there (obviously with an adjusted stop loss). Our target is the $104.85-105.00 range. More aggressive traders may want to aim higher since the P&F chart aims at a $128 target. We do not want to hold over the late April earnings report.
Picked on March xx at $ xx.xx <-- see TRIGGER
Millicom - MICC - cls: 78.36 chg: -0.10 stop: 73.49 *new*
MICC managed to trade to new highs for the month of March before paring its gains and slipping into the red on Friday. The stock turned in a strong week but might be poised for some profit taking soon. A dip (or bounce) near $76.00 could be used as a new entry point. We are adjusting our stop loss to $73.49, which is under technical support at the rising 50-dma. More conservative traders may want to use a tighter stop. Our target is the $80.00-81.00 range. The Point & Figure chart is bullish with an $88 target. We do not want to hold over the late April earnings report.
Picked on March 27 at $ 76.01
New Century - NEWC - close: 1.03 chg: +0.03 stop: n/a
We are not suggesting new plays in NEWC at this time. It was a speculative lottery-ticket style play and at this point it does not look like it's going to pan out. The company looks closer to filing for bankruptcy than having someone make an offer for it.
Picked on March 11 at $ 3.21
Sunoco - SUN - close: 70.44 chg: +0.13 stop: 65.65
SUN spiked higher on Friday morning and option volume soared as rumors surfaced that the company might be a takeover candidate. Unfortunately, the rally failed near resistance at the $72 level, which has held all week long. The trend is bullish but after multiple failed rallies at the $72 level we're starting to wonder if SUN is poised to pull back first. A bounce from $70 could be used as a new entry point but we suspect that shares could easily dip toward the $68 level, which should be short-term support. We remain bullish on the oil stocks given the conflict rising with Iran. Our target is the $74.00-75.00 range.
Picked on March 20 at $ 68.15
Boeing - BA - close: 88.91 chg: -0.85 stop: 88.95
BA continues to show relative weakness. The stock appears to be breaking down from a two-week consolidation pattern and volume is rising as the stock slips through support. Shares are testing technical support at the 100-dma and look poised to breakdown further. If it does BA's next level of support looks like the $85 zone. We were waiting on a breakout over resistance near $92.00 with a suggested trigger to buy calls at $92.15. We're dropping this play unopened.
Picked on March xx at $ xx.xx <-- see TRIGGER
CACI Intl - CAI - cls: 46.86 chg: -0.63 stop: 46.84
We have been stopped out of CAI. A week of mild declines culminated into a spike lower on Friday morning. Shares hit an intraday low of $46.55 and broke down under its 50-dma. Our stop loss was $46.84.
Picked on March 21 at $ 48.36
Accredited Home Lenders - LEND - cls: 9.27 chg: +0.03 stop: n/a
We are suggesting an early exit in LEND. Our initial plan was to buy calls on the spike down and then exit on the gap higher when someone makes a bid to buy the company. Thus far there has been no buyout bid. Short-covering powered a rebound from $3.97 to $13.75 but after the initial bounce shares have struggled. If you believe that LEND will indeed be bought out then you may want to keep a small speculative position alive. Keep in mind that market chatter put any buyout bid in the $14-16 range. After two weeks we are jumping out before LEND implodes like shares of New Century.
Picked on March 14 at $ 6.04
Two weeks ago, I began a series of articles on nested Keltner channels. Keltner channels are not the most popular of indicators, and I have never understood why. Since I discovered them in an article by Jerry Wawrzeniak ("The Case for Keltner channels"), I can't imagine trading without them. Through the years of watching prices on nested Keltner channel charts, I've built on the information contained in that original article, using them in ways that I haven't seen described elsewhere, in addition to the ones Wawrzeniak detailed. The first of my series of articles set out some of the ways that I typically use these channels.
To review, Keltner channels can help traders determine when momentum might be creating a breakaway mode. That's certainly been a useful determination these last weeks, hasn't it? If prices are in breakaway mode, some oscillators such as RSI are rendered less useful than at other times, and it's helpful to know when that's occurring. Nesting Keltner channels can help traders decide where support or resistance might lie and determine which appears stronger.
In addition, nesting these channels can often help traders determine likely targets for price movements, even if prices are reaching into new territory where no prior support or resistance can be found. That's one of the most useful characteristics of nested Keltner channels.
Trader's Corner articles on March 10 and 17 skimmed these topics. Now it's time to wrap up the series and cover the last topic. Remember that we're often on surgery- or illness-watch here in my family due to my grandchildren's disability, so my articles are almost always prepared ahead of time, with charts that might have been annotated a week or two earlier. They don't show current values.
Annotated 15-Minute Chart of the OEX:
Since that Keltner support looked stronger than resistance at the close Friday, 3/16, one assumption might that the support would propel prices up to test resistance, either straight away Monday morning or after a retest of the support. However, the annotations on the bottom of the chart illustrate one way that nesting the channels can help traders set up some if/then situations to determine when their presumptions about the market are wrong. Such if/then situations can be used to determine entries or set stops, depending on bias and time frame.
As it turned out, those assumptions about the relative strength of support versus resistance turned out to be right. That next Monday morning on 3/19, the OEX headed up to test resistance without even needing a retest of support.
Annotated 15-Minute Chart of the OEX:
These if/then situations can be determined from studying daily charts, too, and can be utilized in many types of plays. For example, I often use nested Keltner charts to help me determine when to make exit plans for a credit spread I might have open.
Annotated Weekly Chart of the RUT:
This chart was annotated in mid-March, so the Keltner levels had changed from their late-February levels by then. However, studying this chart in late February, as the RUT was approaching and then testing converging blue- and black-channel resistance helped me determine a plan for my trade. I do not want to spend any unnecessary time worrying about plays, but I do want plenty of time to plan my exit strategy. Studying this chart as it existed in late February showed me that a weekly close above those converging lines would alert me that my sold strike was likely to be tested, if not violated. I would need to have exit plans in place if that happened.
Of course, we know that the RUT can travel pretty far in a week, so by the time that weekly close was produced, my sold strike could have long been violated. However, I could still use any intra-week break above that converging resistance as a sign that I needed to have my exit plans in place. Essentially, my plan was that if the RUT violated that weekly resistance, then I would start worrying and preparing my exact exit.
I could also have dialed down to a daily chart, watching resistance levels on that chart. Fortunately, none of that was needed, and I was spared unnecessary worrying. The weekly resistance held.
Other than the fact that black-channel resistance often does hold, I'd had other hints that it might. Keltner-style bearish divergence was beginning to show up on that chart. Next week's Trader's Corner article will concern divergences. While that article won't focus on Keltner channels specifically, I will touch on Keltner-style divergences, too.
I know that won't convince all traders that mess of spaghetti-like lines is a
useful way to chart prices, but it certainly has proven to be so for me. Enjoy!
Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda
Piazza, and all other plays and content by the Option Investor staff.
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