Tame Trading an easier way to trade

Hear is the Deal:

Right now the only thing that matter is the yield on the 10-year note. The Dow moved lower as the TYX moved higher. At about 1:10 PM the two reversed sharply in unison sending the Dow soaring higher. And just after 2 PM both reversed again, with authority. And with the bond market closed at 3:00 PM there was nothing to stop the selling which ran on into the close.

Tuesday we were again expecting some backing and filling. While the early low was a bit lower than expected, the mid-day rise was right on target with our expectations. It was the final two hours of trading when the market collapsed that took us by surprise. In hindsight, the mid-day rally was clearly much narrower than it should have been.
The Dow is right on main support at 13,300. We really didn’t want to see this level violated as pulling back this much suggests we will see new lows even if prices snap back over the balance of the week.

A break of 13,250 targets much lower prices.

With all the focus on interest rates, the economic data points over the next three days are sure to have an impact. The Beige book comes out Wednesday at 2:00 PM. Then the PPI and CPI reports come out Thursday and Friday.

Here’s why:

Wow! The Dow fell about 100 points to an early low of 13,320. It then rallied about 130 points to a high of 13,449.50 when it was up 24 points. Then all hell broke lose and it fell another 154.89 points to a lower low. It closed at 13,295.01 down 129.95 points, at the low of the day. It is uncommon to see three major price swings in one day.

The BIX took another shot at the 400 – 402 resistance level, but with the market gyrating all over the place it was unable to hold its gains. Like most indices, the BIX made a lower afternoon low. In fact, the BIX traced out a bearish outside down day.

Interest rates continued higher on Tuesday. The TNX closed at 52.48, in line with its 2006 high, which was reached in June, about the same time the market was building an important intermediate-term low. In June 2006, with the market weak, the housing bubble in full burst mode, and signals from the FOMC they were done raising rates, the 10-year quickly fell remaining well below the Fed Funds rate which has been at 5.25% for well over a year now.

On a near-term basis, there are Fibonacci upside extension lines at 52.17 and 52.62. Tuesday the TNX closed just off the top of that zone. After being inverted for more than a year, the yield curve may be returning to its normal state where shorter rates are lower than longer rates. With Fed Funds at 5.25% that suggests a floor of 52.50 for rates. However, on a near-term basis, bonds may have one more bad day in them, but the move is remarkably extended at this time. 

As destabilizing as the adjustment is, we probably shouldn’t lose track of the fact that for most of history, the yield curve has not been inverted. And, during those times, markets and economies did just fine. It is getting through the adjustment phase that is complicated. Once this period is behind us the stock market should regain its footing.

The S&P 500 pulled back a bit more than desired: I was thinking / looking for a quick dip, ideally just below 1500 to “scare” the market a bit. That happened with the morning action with the SPX bottoming right on a Fibonacci line at 1498 and set the stage for the afternoon rally. Well, the afternoon rally really got going at about 1:30 PM. Here again, the day was developing in line with expectations, including the fact the surge higher was quite similar relative to recent low / recovery efforts.
Then just after 2:00 PM, suddenly everyone wanted to sell the stock they had just bought, and then some. The secondary round of very sharp selling, especially given the morning action, was not expected, but it does do a couple of things for us.

From a pattern stand point, last week’s decline is one wave lower. Since Friday’s low we have a five wave up followed by a large messy three wave down to Tuesday’s close. Monday’s high is considered an A wave high and Tuesday’s low, or a slightly lower low on Wednesday should be a B wave low, which should be followed by a C wave rally, likely to better Monday’s highs possibly reaching the 62% retracement at 1520. This is the primary expectation as it remains in alignment with the very short-term cycles and the expectations for the weekly trends.

The alternate is prices crack last week’s lows and we are quickly on our way to 1461, the February high, or 1475, the 38% retracement level of the spring rally. In light of a second “Rare Buy” signal given today, in immediate major breakdown appears less likely.

The Russell took the brunt of the damage: Seeing the Russell fall to a new low is not a welcome sight. It still has some room down to the 815 level which is even more important. The Russell needs to stage a recovery now. The fact the opening move carried down to last week’s low was the first warning signal.
832, 820 and 815 are the critical levels to watch.

The NASD is wedging between a rock and a hard place. 2530 support is there, but it suddenly looks very fragile, especially with the way the NASD has bounced off the down trend line over the past two days. We can lower resistance down to about 2565 followed by 2580. The complexion of the action could change dramatically once we see some economic numbers over the balance of the week.

All the daily trends turned back down on Tuesday, but since none of the major indices have fallen to new lows we don’t have any daily sell signals. None of the 3-day trends can turn up until Friday at the earliest.  

Detailed Trend Report on Web & CLX Count and Weekly Signal Counts & NYSE & NASD 5-day up and down volume charts

Total breadth was a disaster at -3912 as the herd mentality reigned supreme. Everyone was selling everything. But, with volume at 2.6 Billion shares, it wasn’t extremely heavy selling (consolidation prize for the bulls.)

With breadth bad direction volume was polarized. In fact, it was so extreme that we got another “Rare Buy” signal. The first one was Thursday the 7^th and was followed by an immediate 18 point rebound. The first signal remains in effect until the 18^th. Tuesday’s signal runs through the 21^st. Note: The second signal was given with a lower readings on the buy side and on the sell side. NYSE selling pressure was 65.8% last Thursday and it is 63.7% today. The point being that the selling is a little less intense at this time. With two “Rare Buy” signals, while we may see slightly lower prices over the next one to three days, we should see prices quickly rebound over the next week.

With the negative internals, the market has finally nearing a significant oversold level on a 5, 6, 7, and 10-day basis. The NYSE 6-day AD line fell very low and is in line with recent major lows on 3/23/05, 10/12/05, 5/18/06, and below the low levels reached on 6/12/06 and 3/5/07. Most of those dates are at or very close to important lows, but the 10-day line remains above the levels seen at the listed dates. With a very large positive set to fall out of the 10-day metrics, the stage is set for a near-term low to evolve.

Finally, note the CQI index is back down to a very low 0.82. While all this selling is going on, the 5-day RSI metrics are all just above the oversold 30 mark.

Tuesday started out in line with expectations, but it didn’t play out that way. However, with a second Rare Buy signal and a very low CQI reading I am sticking with my expectations from the weekend where I was looking for a rebound early in the week with a secondary low due on or around Tuesday. And with the plethora of economic data over the second half of the week in conjunction with options expiration we should see strength into the end of the week. And, provided the indices can manage to finish the week near their highs the stage will be set for the weekly trends to turn higher as previously mentioned. Watch for the Beige book reaction at 2.

Jim Patterson

Most Obvious chart resistance levels: ()
Dow  13,465, 13,550, 13,600, 13690, 13,750 – 13,800, 14,350
SPX 1512-1514, 1522, 1528, 1532, 1542, 1551 (ATH) 1562
NASD 2565, 2580, 2595, 2620, 2645-55, 2710-2730
NDX 1890, 1900, 1912, 1925, 1937, 1957, 1972
NYSE 9860, 9960, 10,000, 10,024, 10,160
RUT-2K 826, 832, 838, 846, 854, 867

Most obvious Chart Support levels:
Dow 13,620, 13,540, 13,450, 13,380, 13,280, 13,220, 13,131, 13,050
SPX 1528, 1522, 1512, 1502, 1498, 1491, 1475, 1436, 1397, 1373, 1362, 1340
NASD 2606, 2595, 2575, 2558, 2548, 2525, 2480, 2455, 2425, 2400, 2385, 2335, 2316
NDX 1925, 1918, 1908, 1895, 1875, 1855, 1840, 1822, 1808, 1795, 1775  
NYSE 10,020, 9960, 9920, 9800, 9760, 9690, 9620, 9510, 9400, 9350, 9280
RUT-2K 850, 844-846, 838, 830, 825, 820, 808- 810, 803, 790, 760

Here’s where we are now:

NASD 100 Index (NDX) Trading System, trade the QQQQ:

The NDX is now in a wide loose range between 1885 and 1915. Per the general market buy signals, look for the NDX to work higher, but fading below 1885 sets the stage for lower prices near-term. The pattern on the NDX is still one of the more constructively bullish of the major indices.

S&P 500 (SPX) Trading

With a second “Rare Buy” signal and the CQI having fallen below 1 again, I am recommending a long position in the SSO, ProShares Trust Ultra S&P 500. Of if you prefer a less aggressive trade, a long in the SPY.

Obviously, if Wednesday starts out weak then hold off on entering the position. The goal is to get long at the best price, but with the PPI report coming on Thursday, plus expiration related matters, if Wednesday is straight down then we will go long on the close. The SSO closed at 93.30.  

Tactical Stock Trading Powered by Patterson Relative Strength

PDA rec Long 5/14 @ 33.12, stop 32, target 38, closed at 34.03
UNCA rec Long 5/22 @ 16.98, stop 14, target 20, closed at 17.23
DK rec long 5/31 @ 23.85, stop 22.25, closed at 23.31
BBD rec long 5/31 @ 25.39, stop 23, closed at 24.01

We bought AAPL July 110 Puts @ $6.60 as of 5/16

** PRS Open Actives making noise:
SIMO is making a nice counter-trend move with its close above 23.50, and it traded healthy volume.

Jim Patterson
Editor
Tactical Trading Outlook

Here is the Deal:

After Friday’s big run we saw some minor backing and filling Monday morning but the early weakness was milder than expected. When viewed relative to the end of day action it appears the early weakness was of lesser degree and the afternoon rally completed a five wave rally up from last week’s lows. At the end of Monday the overall situation is roughly the same as it was Monday morning. The important issue for the bulls is there were no heavy waves of selling as the very young recovery gets under way. With a heavy focus on interest rates all eyes will be on the PPI and CPI reports on Thursday and Expiration Friday.

Monday’s strength carried the Dow up to the 50% retracement line. With each higher level we can target the next higher level, which is now the 62% retracement at 13,527. Monday’s weakness established 13,380 – 13,400 as the important near-term support level. 13,460 to 13,480 has been a prominent pivot level over the past few weeks. A close above it should be a big confidence booster.

We expected some backing and filling on Monday. Even though prices worked higher, that is more or less what we have. As we move through the balance of expiration week, watch the 13,400 level and 13,520. Breaking 13,420 will target Monday’s low of 13,380 but if the bulls are still in control, and I think they are, Monday’s lows should not be materially broken while we wait for market moving news later in the week.

This is quadruple expiration week and all the economic data is in the second half of the week. Stock related events should carry the day on Tuesday while on Wednesday retail sales in the morning and the Beige book in the afternoon will provide a catalyst for movement. We are at something of a hurry up and wait for something to happen point and the market wants to see something happen that will suggest the Fed will at least be on hold for the time being.

Here’s why:

The Dow was down 42 at its low of 13,381.64 and rallied 96 points to the day’s high of 13,478.11 when it was up 52. The back and forth action was healthy but afternoon weakness pulled prices back to neutral with the Dow closing at 13,424.96 up just 0.57 points. Overall it is a consolidation day. Despite slightly negative breadth and weakness into the close, I am going to say the say had a slight positive bias.

The Dow finished even on the day, but the BIX (banking index) gained over 0.75% and challenged key overhead resistance. Seeing the BIX rebound as strongly as it is, considering the sell off is interest rate worry driven, is a healthy sign for the market. The BIX needs to get above 402 to establish a more constructive near-term pattern. Failure to regain 402 over the balance of the week will reflect poorly looking out several weeks.

The S&P 500 also reached the 50% retracement level: The morning test held well above 1500, but at least we saw some morning weakness, in line with expectations. Like the Dow, we now have a more complete looking 5-wave pattern up from last week’s low. The obvious support line is Monday’s low of 1503.35. I still think a quick dip below 1500 would trigger some healthy alarm. Of course prices would need to recovery quickly from such a dip. A move below 1495 will be outside expectations and very bad for the bulls.
Very short-term cycles call for a secondary low, which should be well above last week’s low, over the first half of the week. Ideally it will trace out early Tuesday and set the stage for prices to move higher in line with the very short-term cycles that call for a high near the end of the week.

The Russell staged an impressive rebound too: It didn’t make it all the way back to the 838 – 840 level, but it wasn’t for a lack of trying. Like the others, it reached the 38% retracement level while tracing out a 5-wave rally from the lows. Minor support is 832. To keep the bulls in control on a very short-term basis, any pullback ideally needs to hold above 830. Watch for a dip to 832, but as long as it holds above 830 the stage is set for additionally higher prices. Getting above 848 signals a likely move to new highs is under way, but it has to get through resistance at 843 first.

Monday’s move finished off the rally that began on Friday. That pushes our expectations for a mild corrective pullback ahead one day. That means we are looking for a little corrective pullback near-term and it shouldn’t last long. We may have to wait until some economic data is released later this week to see prices really jump higher again. For now resistance is 2580 with support at 2565.

All the daily trends turned up Monday. This confirms a minor low is in place. Ideally we will see the daily trends turn down on Tuesday and then turn up and give daily buy signals over the next few days. Overall the trends are pointing higher.

Detailed Trend Report on Web & CLX Count and Weekly Signal Counts & NYSE & NASD 5-day up and down volume charts

Total breadth spent about half the day below zero and half above but it was ultimately flat at -249 for the day. Total volume contracted substantially, which is about normal for a Monday. Don’t read anything into the volume trends just yet. Directionally what little volume there was was evenly balanced.

Internally the market remains oversold on a near-term 5 to 7 day basis and on a 10-day basis it doesn’t look much better. The CQI index rebounded back above 1, in keeping with somewhat typical behavior after late week’s extreme spike.

Our “Rare Buy” signal remains in effect for the S&P 500 through Tuesday of next week.

Not a great day but not a bad day either. Monday’s action remain consistent with our expectations for a minor secondary low over the first half of the week, which should be followed by higher prices. The trouble points for the week are the Beige book Wednesday afternoon (though that typically isn’t a big market mover) and the PPI and CPI reports on Thursday and Friday morning. If the Government can find a way to say inflation is better than expectations then we should see some relief flow through the market regarding near-term anxiety on short-term interest rates.

Jim Patterson

Most Obvious chart resistance levels: ()
Dow  13,465, 13,550, 13,600, 13690, 13,750 – 13,800, 14,350
SPX 1512-1514, 1522, 1528, 1532, 1542, 1551 (ATH) 1562
NASD 2565, 2580, 2595, 2620, 2645-55, 2710-2730
NDX 1890, 1900, 1912, 1925, 1937, 1957, 1972
NYSE 9880, 9960, 10,000, 10,024, 10,160
RUT-2K 838, 846, 854, 867

Most obvious Chart Support levels:
Dow 13,620, 13,540, 13,450, 13,380, 13,280, 13,220, 13,131, 13,050
SPX 1528, 1522, 1512, 1502, 1498, 1491, 1475, 1436, 1397, 1373, 1362, 1340
NASD 2606, 2595, 2575, 2558, 2548, 2520, 2480, 2455, 2425, 2400, 2385, 2335, 2316
NDX 1925, 1918, 1908, 1895, 1875, 1855, 1840, 1822, 1808, 1795, 1775  
NYSE 10,020, 9960, 9920, 9800, 9760, 9690, 9620, 9510, 9400, 9350, 9280
RUT-2K 850, 844-846, 838, 830, 825, 820, 808- 810, 803, 790, 760

Here’s where we are now:

NASD 100 Index (NDX) Trading System, trade the QQQQ:

The NDX pushed above 1910 which is good. The problem is there remains some supply above 1910 and the NDX couldn’t hold the advance. 1900 is still holding the minor pullbacks, but if AAPL has another bad day, that could hurt the NDX on a near-term basis.
1895 remains the key level for the bulls. The NDX looks like it is ready to turn higher sooner than the other indices.

S&P 500 (SPX) Trading

The Rare Buy signal on Thursday has led to about a 18 point advance. While the expectation is for some choppy action on Tuesday, we should see higher prices later in the week. Monday’s move higher cleaned out some of the supply above 1510 so the next time up it should be an easier move.  

Tactical Stock Trading Powered by Patterson Relative Strength

PDA rec Long 5/14 @ 33.12, stop 32, target 38, closed at 35.70
UNCA rec Long 5/22 @ 16.98, stop 14, target 20, closed at 17.37
DK rec long 5/31 @ 23.85, stop 22.25, closed at 23.87
BBD rec long 5/31 @ 25.39, stop 23, closed at 24.52

We bought WMT June 45 Puts @ $0.25 as of 5/16
We bought AAPL July 110 Puts @ $6.60 as of 5/16

I was way too early with the AAPL put and with expiration this week, the WMT option is a crash rather than a checkered flag. However, after the AAPL developers conference on Monday the stock did not respond well on an otherwise healthy day, and we have plenty of time left. And, Monday we saw a measure of skepticism creeping in on AAPL and the iPhone. Really cool cell phones come out all the time. When I see one that looks really great, I think to myself….I will get one of those in a year, after they work the bugs out and it only costs $50 or less with 2-year contract. The question is whether or not the price of the iPhone will ever come down or not, and if it does, what will happen to AAPL’s margins.

** PRS Open Actives making noise:
ASIA made an aggressive move higher on Monday pushing back near its all time high of 9.15. It traded as high as 9.10 and closed at 8.99. ASIA is a very strong stock that held up very well last week.

Jim Patterson
Editor
Tactical Trading Outlook