Todays holiday shortened trading session was right on track with the rest of the weeks trading activity. We started the session today with a nice gap up followed by a quick sell off which pulled the Nasdaq 100 into its 1802 gap from April 16th. While we are on the subject of the Nasdaq the volume was obviously less that yesterdays action because the market only traded until 1:00 PM EST. Tuesday had strongest volume of the week at 2600 million shares traded. The 50 day moving average of the Nasdaqs volume is 2090 million shares per day. Since Tuesday gapped down from week European economic results and proceeded to close up near the days high the higher than average volume posted an accumulation day. However, on Wednesday the Nasdaq 100 dropped back to Tuesdays low on lower volume than that of Tuesdays. All the daily volume differences indicate is that yesterday wasnt a distribution day. It just wasnt fun if you were long. As for today the advance decline was negative with 1167 advancers versus 1674 decliners. Another read on the volume from yesterday is that traders left early for the holiday weekend. Dont they know that we all live for the action of trading and cant go a whole evening let alone three and a half days without trading our precious options?
The New York Stock Exchange (NYSE) internals posted at 2 to 1 decliners versus advancers ratio. The actual numbers are 1089 advancers versus 2020 decliners. The volume on the NYSE resembled the Nasdaqs weekly trendmost likely due to the shortened week. For instance, Tuesday had 2009 million shares traded versus the 50 day moving average 1610 million shares on an up day.
Out of four trading days three were up. However, the week ended down 16 points and 39 points on the S&P 500 and Nasdaq 100, respectively. Every day this week was volatile intraday due to the amount of news and economic reports from the US and ECB. This morning was no different.
The above chart is of the S&P futures contract shown on a 5 minute chart. Prior to the Unemployment Rate, Initial Claims and Nonfarm Payrolls the futures were relatively flat on the S&P and down on the Nasdaq. Then the index futures began to advance ahead of the release. As the chart shows after 8:30 am the futures initially ran to up 10 +/- prior to the open. At 404,000 Initial Claims versus the 385,000 estimate there were quite a bit more unemployed than expected. At this point in the economy we would like to see more people working and paying taxes into the system and spending money rather than deriving income from unemployment and the other government programs. In my opinion the U.S. needs the dollar to strengthen versus the Yen, Sterling and Euro in order to help reduce our costs of importing goods and therefore increasing actual inflation. The good news for those people working is that the amount earned increased 0.3%, in line with the markets and Briefings expectations. However, the length of the work week stayed constant from last month. The actual results came in at 33.7 average hours per week instead of the anticipated 33.8 average hours Briefing expected. One commentator on the news mentioned that while the employment results werent good the market has become desensitized as of late and found some good news in that the results werent as bad as they could have been. It is amazing that we are in this place againwhere bad news that wasnt all that bad is good news and good news just isnt anywhere to be found. Then the really bad news came out at 10:00 am. The ISM Services Index for June came in at 48.2 which came in 3.5 less than Mays 51.7. Junes results are far less than the 52 that Briefing expected or 51 the market that was polled expected.
General Motors (symbol: GM) continued its slide this week on a downgrade and amid rumors the company could actually go bankrupt. A Merrill Lynch analyst said bankruptcy is not impossible if the U.S. auto market further deteriorates and GM fails to raise substantial capital. The analyst believes GM needs another $15 billion to curb its failing company. Hondas small vehicle lineup is growing while the US automakers struggle to make more cars. GM responded to the bankruptcy comments by stating that it has sufficient liquidity for the remainder of 2008, but the company is already between a rock and hard place. The two largest Detroit automakers have already had their credit ratings placed on negative watch by Standard & Poor's.
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Oil continued to move upward to a high of $145.875 today. This move is making T. Boone Pickens right about his predictions on the high. The Money Flow is near 80 where we find it to be usually overbought. The Slow Stochastic closed today at 93, which is well above the 80 overbought level. A tick down both may confirm that oil is short term overbought. A week ago oil looked as though it was beginning to turn over from slowing volume but the whole picture wasnt revealed. Even now the Money Flow isnt quite overbought and the Chaikin Oscillator (not shown) is still up trending. The interesting part of the price expansion is that many of the oil driller and service stocks have began to move off their highs ahead of the commodity they covet. Stocks like Ultra Petroleum and Schlumberger have declined sharply over the last few days which have moved contrary to the commodity.
Gold advanced sharply from the 200 day moving average at 875 on June 25th to an intra day high of 949.40 today. Gold closed down 10 points to 934 an ounce after the dollar began to strengthen. Long gold and long crude has been a good pair of commodities to own. Gold helps to hedge the inherent inflationary pressures caused by the rise in oil prices. Both the RSI and Slow Stochastic have turned over therefore confirming that the commodity is short term oversold. The 89 day moving average (grey line) is the next level of support. Should gold hold that level then the 949.4 price established today will become the resistance to break out from.
The S&P 500 (SPX)
As mentioned earlier the SPX was very volatile this week and declined about 16 points from Fridays close. The SPX broke the March low today before closing up 1.37.
I mentioned a few weeks ago (at the magenta arrow) that the 89 day moving average (grey line) was the next level of support should the market sell off. Followed by that the April lows were next and did come into play as short term support in early June. However the market has sold off into a downtrend and broken all support levels. While it isnt shown above this is the third time in 2008 that the SPX has come down to these levels. Double bottoms tend to provide better odds of continued bounces while the third time isnt always the charm. However, the Slow Stochastic is oversold and has re-emerged above oversold territory to 21.08. Below, the Bollinger band chart includes the RSI indicator which closed up slightly at 18.68 but below 30, the re-emergence level.
By trading below 1256.98 the market completed the full Fibonacci retracement today. Often times when a stock, index or commodity retraces fully it tends to extend further to the 127.20% extension level. Since the SPX remains in a confirmed downtrend the next level of support, after todays low, is at 1207.13. We may see a short term bounce from these extended oversold levels to the 78.4% or 61.8% levels before possibly selling off to new lows.
The above chart shows the SPX 60 minute chart since June 17th. The 50 bar moving average has become the resistance level to test and turn over from. A break and close above the 50 bar MA should become a confirmation of a new upside move. However, a test and failure to close above would provide a good short entry opportunity. The SPX traded within a 25 point range on Tuesday, a 31 point range on Wednesday and 20 point range today.
I keep mentioning Tuesday because it provided interesting action in which the market gapped down 13 points to 1267 and then moved up to 1282.74 at 11:15 AM to be slightly. By 12:30 the SPX had dropped to 1260 and found a short term bottom from consolidating. By the close the SPX closed up over 4 points after trading down 20 at the lows. All while this was occurring, Financial Advisors that I manage portfolio models for were asking me to go to cash or at least slowing step into the positions within the various portfolio models. Also, one of them said that they decided to hedge against their long positions with the SDS just before lunch. At times the contrarian indicators reference the average mentality of the investor. From my experience, concerned for their retirement savings, the average investor calls their Financial Advisor usually at the early onset of a market decline only to be reassured that their portfolio is allocated a certain way that utilizes a balanced approach, asset allocation and diversification or modern portfolio theory. The interesting point is that the initial fear of the client is often very timely. The Financial Advisor doesnt usually want to rebalance or sell off positions because they believe they are right and that their client is overly cautious. By the time the Financial Advisor finally reaches the point that they join in their clients concern the market has already made the majority of its move. The Financial Advisor is usually the last to switch gears. Similarly, the Investors Intelligence Polls actually poll investment newsletter writers rather than actual investors for the same reason Financial Advisors provide a reliable signal.
The Nasdaq 100 (NDX)
In the above chart todays low filled in the April low of 1802. The next level of support as measured by the gaps is at 1751.99. 1776, coincidently the year of independence, it the next price support from April. Resistance is at yesterdays high and then at 1886 (the 89 day moving average). After that resistance level is broken the gap down from last Wednesday is at 1910.21. The Slow Stochastic has broken above its moving average and re-emerged out of oversold territory. The NDX made it into positive zone by the end of trading today by a huge 0.20 points.
The upper Bollinger band on the above chart is hanging onto the upside range established at the June highs. However, the lower Bollinger band has been rapidly trending lower to 1779.60. The 8 bar exponential moving average (magenta line) provided the resistance the market opened at yesterday. At just above 1850 the NDX needs to close strongly above the 8 bar EMA in order to get out of the down ward slide the tech heavy index is currently on. The RSI, at 26.12, hasnt provided any confirmation to go long either.
The CBOE Volatility Index (VIX)
As the VIXs chart shows the Stochastics has begun to roll over from todays decline. In the contrarian newsletter I write I have pointed out that the 10 and 20 day moving averages of the CBOE VIX have returned to a confirmed uptrend. The confirmation was returned because the 10 day moving average broke above the previous high established the week before. The dotted black line above represents the 200 day moving average. The long term moving average established a base line to work from and sets a target for the index to regress to. The VIX isnt really at an overbought extreme until retesting the previous highs (26.77) not seen since March. If the 26.77 price level is broken, then a test of the extreme highs over 34 that we saw in March will be the next target. I prefer to use the 10 day moving average closing below the 20 day moving average as confirmation for a long signal.
Next Tuesday begins the economic reporting with Pending Home sales and Wholesale inventories. While home related readings should be intuitive, as we saw this week, the Michigan Sentiment and Initial Claims should be more crucial to the market movement. Alcoa is the big earnings news the market is awaiting next Tuesday.
The Press Box
From up above the field we can see the big picture of the various would markets. One aspect of this view is the open interest of Index Options. While we can start looking at the Dow and Russell indices at some point, I tend to follow the S&P 500 and Nasdaq 100.
The yellow highlighter shows the next levels of resistance as shown by peak levels of open interest while the pink highlighter shows the highest level of open interest of the indexs front month options. There is peak resistance at 1400 with 177,000 options open at that strike price. However, 1400 is a long way to go in two weeks. The target I am looking at is 1300 where there are 37,000 contracts open. 1250 is the next major support level as represented by the peak open interest of 111,000 contracts. The low today was at 1252 which confirms the 1250 support.
The July open interest levels on the NDX peak at 1950 which is also a long way from 1816 in two weeks. The support at 1750 correlates with the gap from March I wrote about in the above commentary. 1825 is higher than the close today and really doesnt provide support anymore. However a break back above 1825 would put that strike as the next support level.
The Ten Year Treasury Yield (TNX)
After peaking at 4.3% the 10 year treasury yield has declined to 3.973% where it has found some support at the 200 day moving average.
The Stochastics is indicating that the yield will be advancing from the current levels. The TNX trades options but they arent very liquid. However, for those of you that trade futures you can take the short on the TY (ten year treasury futures contract) if you believe that the yield will decline. Take the long trade if you think that the Fed isnt done (which I dontthey never do what is right in a timely manner) lowering rates and believe the 10 year yield will decline to the 89 day moving average at 3.78%.
Have a happy Fourth of July.
After recent market action, I was anxious to follow up on an article from last month discussing the TED spread. This article will discuss a little of this and a little of that related to the TED spread.
The June 19 article found at this link discussed the TED spread, a measure of default risk followed by some market pundits. In brief, equity markets don't like rising default risk or even perceived rising default risk, whether that risk is actually rising. That article provides the background information for the TED spread, including its previous and current method of calculation.
That article ended with the following concern. The TED spread had had been moving in a wide descending channel since last August's explosion above its typical 0.10-0.50 range (10 to 50 basis points). Just previous to the article's publication, the TED spread had dipped toward channel support and begun rising, although it hadn't yet risen into the danger zone I had identified as my personal Yikes! point.
My research was anecdotal and derived from a time period in which the TED spread's actions were already aberrant, but I had concluded that it might be dangerous for equities if the TED spread then began moving into and above the 0.90-1.00 range (90 to 100 basis points). I warned traders to be careful with equity positions if that should happen, although offering the caveat that my inability to get a feed through my charting service did not allow me to do more than a cursory presentation or study.
What's happened since that article was written that made me so anxious to do a follow-up article? From 6/18-6/23, the TED spread broke above a 0.86 resistance level and charged above 0.90. It retested on 6/23 and then surged higher, reaching a new recent high of 1.132 on 6/27.
A Bloomberg.com One-Month Chart of the TED Spread, with a One-Month Chart of the
SPX Immediately Below:
Unfortunately, since the Bloomberg charts don't allow me to add trendlines or annotations, I can't mark the salient points directly on the chart. Still, even a cursory study makes it clear that as the TED spread began breaking above its consolidation-range resistance on 6/18 and moved into and through the 0.90-1.00 zone, markets did indeed flounder.
As the TED spread was rising into what I felt was a danger zone, my research was confused by a new concern. Could the approaching June FOMC meeting be distorting the movements in the TED spread? I located articles and commentaries that suggested that it could indeed be impacted by the interest-rate environment. In addition, as I noted in a 6/25 post on the Market Monitor, the live portion of our site, one response to an article written by Paul Krugman in the NEW YORK TIMES offered another interpretation. A response by "Nick" noted that "Interpreting Interbank spreads (TED, BOR/OIS, etc.) over bank earnings season requires considerable finesse. It is comparable to interpreting the implications of high overnight equity option implied volatility the day before corporations put out earnings."
We are of course approaching earnings season for financials. Earnings season kicks off next week with Alcoa's (AA) report, but some financials will be following shortly with their reports the week of July 14-18. Financials reporting that week include US Bancorp, State Street, Wells Fargo, Merrill Lynch, JPMorgan Chase, and Citigroup, among others.
If the approaching reporting season can confuse the interpretation of the TED
spread or if professionals have switched to another type of spread such as the
BOR/OIS referenced in some articles, what do we conclude? I don't know about
you, but as I represent those of you who are self-taught in trading and economic
matters, I'm going to conclude that I can't be dogmatic about my
interpretations. Having had my conclusions confirmed by market action over the
last month, however, I know
this: for the sakes of my mother-in-law trying to
live on her investments, and all us baby boomers who will soon be doing the
same, I want the TED spread to go back down.
Play Editor's Note: I'm starting to feel like a broken record here. Our market bias is bearish but stocks remain oversold and are way overdue for a bounce. Yet trying to buy calls as stocks bounce from support has been a losing game this past week. We are going to add some neutral strangle strategies. This way it won't matter what direction the market goes. However, nimble traders should be ready for the bounce. Some of the short-term signals I watch are suggesting a rebound soon. Of course we'll try and use any multi-day rally as a new entry point for shorts.
FYI: A few more stocks that I'm watching are: PCP, SYK and XHB. Shares of PCP have pulled back to their March lows. A bounce from here might be a bullish entry point or you could try a neutral strategy. SYK is consolidating sideways but odds are decent that the stock will either be north of $65 or south of $60 by August expiration. Could be a strangle candidate. The XHB homebuilder ETF is trying to bounce from its January lows. You could speculate with some calls or consider another strangle. Use August options.
Amazon.com - AMZN - close: 72.00 chg: +0.56 stop: 73.85
Why We Like It:
BUY PUT AUG 72.50 ZQN-TD open interest=1212 current ask $6.00
Picked on July xx at $ xx.xx <-- see TRIGGER
iShares Brazil - EWZ - cls: 83.06 chg: -0.90 stop: n/a
Why We Like It:
We are suggesting the August options. Our estimated cost is $3.95 We want to sell if either option hits $5.90.
BUY CALL AUG 90.00 EWZ-HR open interest=2305 current ask $2.00
Picked on July 03 at $ 83.06
Internet Holders - HHH - cls: 50.25 change: +0.19 stop: n/a
Why We Like It:
We are suggesting the August options. Our estimated cost is $1.60 We want to sell if either option hits $2.45.
BUY CALL AUG 55.00 HHH-HK open interest= 695 current ask $0.70
Picked on July 03 at $ 50.25
MarketVectors Agribusiness- MOO - close: 57.25 chg: -0.40 stop: n/a
Why We Like It:
We are suggesting the August options. Our estimated cost is $2.10 We want to sell if either option hits $3.15.
BUY CALL AUG 62.00 MYV-HJ open interest= 80 current ask $1.10
Picked on July 03 at $ 57.25
CNOOC Ltd. - CEO - close: 170.99 chg: -3.92 stop: 164.95
Hopefully no one was surprised to see the weakness in CEO on Thursday. We warned readers not to be fooled by the stock's strength the previous session. As expected the stock dipped and retested the 200-dma. CEO's bounce from its lows is another bullish entry point to buy calls. More conservative traders may want to raise their stop loss toward Thursday's low at $167.18. Remember, trading CEO tends to be a higher-risk play. The stock is traded as an ADR on the NYSE and shares gap open, up or down, almost every morning as it adjusts to trading back home in China. This is also a higher risk play because the spreads on the options can be abnormally wide and that immediately puts us at a disadvantage. If you can handle the volatility this might be a play. We have multiple targets. Our first target is $179.50. Our second target is $184.50. Finally, our very aggressive target is $195.00. July options are available but we would prefer August calls.
Picked on July 01 at $171.36
CBOE Volatility Index - VIX - close: 24.80 chg: -1.12 stop:
The VIX pulled back on Thursday but the trend remains bullish. This is a very speculative play but the dip looks like another entry point. Essentially this play is a bet that the market will see a capitulation-selling event that will push the VIX to 30 or higher. There are only two weeks left for July options so we would suggest the August options. We were listing two targets. One target is $29.50 and a second one at $34.00.
BUY CALL AUG 22.50 VIX-HX open interest=15660 current ask $3.70
Picked on June 30 at $ 23.95
(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)
Alpha Nat. Res. - ANR - close: 85.87 chg: - 1.75 stop: n/a
It was another volatile session for ANR. The stock plunged to $80.40 before bouncing. Yet the rebound stalled under the $90.00 level and reversed lower again. We are not suggesting new strangle positions at this time. We only have two weeks left for July options. If you're thinking about backing out and trying to salvage some capital then this is probably the time to consider it. With just two weeks to go the time erosion in our options is going to get worse. You could probably exit now for 45% to 50% of our estimated cost. This is a higher-risk strangle play with the options so expensive. The options we suggested were the July $105 calls (ANR-GA) and the July $85 puts (ANR-SQ). Our estimated cost was $9.40. We want to sell if either option hits $14.50.
Picked on June 15 at $ 94.25
Chevron - CVX - close: 98.63 chg: +1.21 stop: n/a
CVX continues to bounce sideways. We would still consider new positions in the $99.00-101.00 zone. The options we suggested were the August $110 calls (CVX-HB) and the August $90 puts (CVX-TR). Our estimated cost is $2.20 (based on June 30th prices we needed 2 calls per 1 put). We want to sell if the puts $3.85 or if the calls hit $1.90. More aggressive traders may want to aim higher.
Picked on June 30 at $ 99.13
Garmin Ltd. - GRMN - close: 41.95 chg: -0.72 stop: n/a
GRMN is still trading sideways and we don't know what it's going to take to see a breakout from this range. We have two weeks left before July options expire. More conservative traders may want to exit early. We're not suggesting new positions at this time. The options we listed were the July $50 calls (GQR-GJ) and the July $40 puts (GQR-SH). Our estimated cost was $2.55. We want to sell if either option hits $ 4.75 or higher.
Picked on June 15 at $ 44.91
Holly Corp. - HOC - close: 33.50 chg: -1.15 stop: n/a
HOC continues to sink. Shares lost another 3.3% on Thursday. We only have two weeks left for July options. More conservative traders may want to exit early right now because any significant bounce will kill the put values. The July $35 puts were trading at $2.30bid/$2.45ask. We're not suggesting new positions at this time. The options we listed were the July $45 calls (HOC-GI) and the July $35 puts (HOC-SG). Our estimated cost was $2.00. We want to sell if either option hits $ 3.00 or higher.
Picked on June 15 at $ 41.25
KLA-Tencor - KLAC - close: 39.90 chg: -0.41 stop: n/a
KLAC has been a terrible performer for us. The stock has traded sideways for two weeks. The intraday trading on Thursday suggests that the stock wants to go lower but on a holiday-shortened, low-volume day I wouldn't trust it. We are not suggesting new positions at this time. We have two weeks left before July options expire. We listed two different strangles on KLAC.
KLAC Strangle #2) The options we listed were the July $45.00 calls (KCQ-GI) and the July $35.00 puts (KCQ-SG). Our estimated cost is $0.70. We want to sell if either option hits $1.50.
Picked on June 22 at $ 40.07
United States Oil - USO - cls: 116.82 chg: -0.02 stop: n/a
The rally in crude oil took a day off on Thursday but the trend remains a bullish one. We only have two weeks left before July options expire and we need to see a bigger move in oil and the USO if these strangles are going to pay off! We are not suggesting new positions at this time. We suggested two different strangles. The strangle with the wider strikes costs less but has higher risk.
USO Strangle #1) The options we listed were the July $115 calls (IYS-GK) and the July $105 puts (IYS-SA). Our estimated cost is $7.10 We want to sell if either option hits $9.75.
USO Strangle #2) The options we listed were the July $120 calls (QSO-GP) and the July $100 puts (IYS-SV). Our estimated cost is $4.10. We want to sell if either option hits $6.50.
Picked on June 22 at $109.14
Deere & Co. - DE - close: 68.45 change: -1.80 stop: 69.95
Wednesday's failed rally in DE turned into a bearish breakdown under support on Thursday. Shares quickly traded below $70.00 support and hit our stop loss at $69.95. This move is very bearish. The $70.00 level has been support since October and November 2007.
Picked on July 01 at $ 73.42 /stopped out $69.95
DIAMONDS - DIA - close: 113.05 change: +0.90 stop: 111.69
The DIA gapped open higher this morning but the initial strength failed and shares slipped to a new low of $111.48. That was enough to hit our stop loss at $111.69 and close the play. Markets don't move in a straight line for very long so look for a bounce eventually.
Picked on July 01 at $113.77 /stopped out 111.69
Murphy Oil - MUR - close: 94.76 chg: -0.37 stop: 93.95
Thursday proved to be another ugly day for MUR. The stock continued its sell-off from Wednesday and dipped to $91.73. This move hit our stop at $93.95. Traders did buy the dip near its rising 50-dma and the bottom of its bullish channel but the rebound was fading again into the closing bell. MUR had already exceeded our early target near $100.
Picked on June 29 at $ 96.26 /stopped out 93.95/1st target hit
S&P SPDRs - SPY - close: 126.31 chg: +0.13 stop: 125.85
Thursday's early morning market strength faded quickly and the SPY dipped to $124.99. The rebound was pretty anemic but stocks will bounce eventually. The SPY hit our stop loss at $125.85 closing the play.
Picked on July 01 at $128.28 /stopped out 125.85
Wynn Resorts - WYNN - close: 78.94 chg: -0.32 stop: 76.95
WYNN has continued to disappoint. We never argued about the longer-term implications of the economy and a struggling consumer would have on gambling stocks. Our plan was to try and capture an oversold bounce from support, which has failed to materialize. The stock hit our stop loss at $76.95.
Picked on June 30 at $ 82.10 /stopped out 76.95
Today's Newsletter Notes: Market Wrap by Robert Ogilvie, Trader's Corner by
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