Tame Trading an easier way to trade

Here is the Deal:

3.5% GDP vs. expectations for 3.0% growth…Yawn, flat open. At 10:30 AM Crude Oil Inventories register a build of 2.6 million barrels vs. consensus of 1.5 million barrel triggers an almost instant 40 point Dow rally. Such is the nature of a slow market awaiting comments from the FOMC. The key to the day is that popped the Dow above the 12,540 resistance barrier that had contained the action all week and set a positive tone going into the FOMC meeting and it held above 12,540 for the rest of the day.

Before the FOMC announcement, Bob Pastani said everyone was positioned for a negative reaction to the FOMC statement. With that it seemed obvious the reaction would be positive and it was. The Dow rocketed higher after the FOMC, but being the last day of the month we saw some very late day profit taking.

Support was challenged, bent, but never broke. Unless or until support breaks, any weakness is considered a pullback. The Dow reached a new all time high about 25 points higher than the last all time high. The bulk of the day’s gains were in reaction to the FOMC. The tick index reached +1453 on the move suggesting heavy program buying activity. Despite my earlier line of thinking, the higher target range of 12,665 to 12,700 is back in play.

If the Dow fails to hold a significant portion of Wednesday’s big gain it won’t look good. After a 200 point rise in just a couple of days we should expect a consolidation, but sliding below 12,600 will look weak. One other thing to watch for, it is not uncommon for a FOMC related move to be reversed within a few days as often the initial FOMC reaction is the wrong reaction. The upside target range is just above Wednesday’s high.

The parade of economic data continues on Thursday February 1 with personal income and spending and then at 10 the ISM index comes out. With the huge Q4 GDP number I anticipate strong readings across the board.

Here’s why:

The Dow was down 18 points early in the day falling to 12,505. It then rallied a total of 152 points to its high of 12,657. That is just shy of our Fibonacci target zone. The Dow closed at 12,621.69 up 98.38 points. That is 35 points off the new all time high set on Wednesday.  

Hurray for the January Indicator! The saying is: As January goes, so goes the year. For January the Dow advanced 1.27%, the SPX advanced 1.41% and the NASD advanced 2.01%. So, as per the saying, 2007 should be a positive year. Of course we still have another eleven months and a lot can and will happen over rest of the year. For now, the bulls can rest easy knowing they are off to a solid start.

Economically I have maintained we have a very strong economy. The only real weakness is in housing and that isn’t really that weak in terms of activity. Pricing stinks, but activity remains somewhat firm. The US Auto industry is in trouble but the US car market is fine. Just ask Toyota. Their sales are growing like crazy and they are taking market share. Non-Detroit based auto companies are building new plants while Ford and GM are closing plants. We can’t call that an economic problem, it is an isolated domestic industry problem. The point is the economy is very strong. And, the recent drop in energy prices should supercharge the consumer even further. Going forward, the US economy is likely to get stronger despite conservative earnings guidance from a number of US companies.

The S&P 500 bounced back to record a token new high above 1440 then we saw selling into the close at the very end of the month. Technically Wednesday’s move should clear the air for a move up to the 1450 area. After bending support we have another push to new highs. I changed the accompanying chart back to the NASD to show the divergence that exists between the two sides of the market.

The NASD rallied back to last week’s high as did the other indices. The difference is for the listed indices last week’s high was an all time high. The NASD remains well below its 2007 high. Seeing the NASD slide below Wednesday’s low will look very negative for the Bulls.

This persistent divergence may quickly disappear, but as long as it is here we can not ignore it. If not erased, it will likely prove to be an important one. I have continued to point out similarities between the current market action and the high reached last April and May. The NASD reached its peak on April 20, then about 14 trading days later, the Dow and S&P 500 reached their highs on about May 10, 2006.

The NASD reached its high on the January 16. That is 12 trading days ago, almost the exact same time spread between the NASD April 2006 high and the S&P 500 May 2006 high. Seeing a measurable downside break over the next few days will make the situation even more remarkable.

The Dow and S&P 500 both triggered new weekly buy signals while the NASD barely managed to turn its weekly trend up and the NDX continues to lag. There is still plenty of time for the NASD to catch up to the rest of the market but the continued lagging nature is not something to ignore. The S&P 500 should turn its 3-day trend back up on Thursday.

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

Total breadth was +1505, which is really low for such a powerful rally day. The indices were flat to up before the FOMC so breadth didn’t have to recover from a weak condition. The lacking area was on the NASD side of the market. The internal action works to confirm the negative price divergences.

On the NYSE we had a second consecutive day of NYSE breadth over +1100. Typically after two very strong NYSE breadth readings, the market will consolidate for a day or two. In addition, we have four consecutive days of positive internals. The current market is not known for sustaining trends for prolonged periods of time. This argues for something of a pullback near-term.

Wednesday’s Total volume of 2.76 billion shares seems a bit light considering the events of the day. It was solid to the upside with healthy buying pressure for the first time in several days. While buying pressure did show improvement, I need to point out that 8-day relative selling pressure has fallen to a low level and is due to cycle higher.

The Dow’s weekly trend count improved from 13 to 15. That is normal enough, but the 15 reading is noticeably low considering the Dow reached a new high. The low reading suggests the Dow is being lead higher by a smaller number of issues. Additional positive action will improve the situation, but for now it is a noticeable detraction from the move higher.

Other internal divergences remain, but also can be reversed with additional positive action.

The Very short-term cycles on the SPX call for a high in this time frame, meaning now give or take a half a day. The chart below is a 10-minute chart of the SPX showing the recent cycle pattern. Note, had today been a down day, the envelope would have turned lower leaving a well timed high in place.

The Dow’s new high feels good but I can’t help noticing the remarkable similarities to the top reached last April and May. One of the most uncomfortable situations is calling for a market high and being early because every time the market refuses to break down it just feels bad. Then, once the top is in place, I am left looking like the proverbial stopped clock. That said, high or no high, the very short-term cycles are calling for at least a minor high over the next day or so. Once we see the character of the following pullback, we will know more.

Jim Patterson

Most Obvious chart resistance levels:
Dow 12540, 12660- 12,700, 12,750
SPX 1435, 1452, 1480-1489
NASD 2465, 2501, 2536 (minor Fib) 2570
NDX 1790, 1810, 1844-1850, 1877 (minor Fib), 1910 (Major Fib Level)
NYSE 9260, 9300-9320

Most obvious Chart Support levels:
Dow  12540, 12450, 12350, 12,260, 12,200, 12,080, 11,890, 11653, 11,470,
SPX 1430, 1418, 1403, 1390, 1378, 1362, 1354, 1345
NASD 2450, 2422, 2400, 2360, 2290, 2225, 2000,
NDX 1790, 1772, 1745, 1700, 1650, 1465
NYSE  9110, 9060-9080, 8960, 8800, 8690, 8610, 8575, 8500

Here’s where we are now:

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

Despite the positive emotion of the day, the NDX struggled during the day and remains well below 1810 resistance. A break of 1780 will look very negative. In short, the negative divergences remain in place.

S&P 500 (SPX) Trading

01-28-07: This is a longer-term recommendation, meaning I expect holding this position for several weeks to several months: Buy the SDS (ProShares UltraShort S&P 500 ETF) which closed at 58.24. The SDS should move 2x the S&P 500 on an inverse basis. If the S&P 500 rallies to 1450 then we will move to a 200% long the SDS position.

I view Wednesday’s rally as an opportunity to get short at a higher level. Resistance remains in the 1450 area.  

Current Positions

ATML is slated to report Feb 1 after the market closes.
DELL reports on Feb 22.

After the close, DELL announced they will miss their earnings estimates this quarter. That is the bad news and the stock had been reacting to that. The good news is Michael Dell is taking over as CEO effective immediately. The stock reacted positively in after hours trading and is trading about 90 cents higher at about 25.10.

DELL rec Long 10/02 @ 22.80, stop 24.00 close, Target >35, closed at 24.22
ATML rec Long 01/04 @ 6.17 stop 5.63 close, Target >8.50, closed at 5.98
ICLR rec Long 01/24 @ 39.53 stop 34 close, Target >46, closed at 37.30

Strong stocks that shows signs of life on Wednesday

NUAN looks good above 11.55
GRMN looks good above 50.36
CTCI looks good above 24.43
NOVN looks good above 24.42
 

Jim Patterson
Editor
Tactical Trading Outlook

Here is the Deal:

After three days of Positive internal readings, the S&P is up only 4 points and the Dow has managed a not so impressive 22 points. The market is positive, but overall it doesn’t look very positive for a three day rally. The setup going into the FOMC meeting is either really good or really negative. The point being, we should see a measurable move from here. We have a market that tested and slightly violated important near-term support, and for at least a couple of days, has held support with the help of a positive internal backdrop. The action this week leading up to the FOMC has been heavily influenced by the program buys and sells while the bulks of traders are jockeying anxiously ahead of the heavy news over the balance of the week.

Tuesday was another back and forth day for the Dow with another test of the 12,540 resistance level. Early weakness attributable to a 4 points drop in Dow heavyweight MMM was quickly offset by strength is CAT, XOM, and UTX. As quickly as one Dow component fades, the others quickly make up the difference. Tuesday proved to be the consolidation type day that was more or less expected.

Warning, FOMC announcement ahead! Between 12,440 and 12,540 it is anybody’s game. Above 12,540 the Bulls have it while a sustained move below 12,480 should drive a break of 12,440 and then it is a quick step to 12,340.

Any rally is not expected to go very far or last very long, meaning more than a couple hundred points at most as resistance is heavy at 12,650 to 12,700. A break to the downside has the potential to unravel very quickly as the overall backdrop is remarkably similar to that seen just before the major breakdown in May 2006. Unless or until it breaks, you can’t fault anyone for buying support, but once it breaks it should really break.

Q4 GDP, the GDP deflator, and the Employment Cost Index come out before the open. An unexpectedly high ECI could set the tone for the whole day. At 9:45 the Chicago PM comes out and at ten Construction Spending for December. Finally, at about 2:15 PM the FOMC policy statement comes out. With the heavy dose of economic reality in the morning I am thinking the market will have discounted the statement to a certain degree.

As for the Fed, I expect them to be a bit Hawkish while remaining data dependent. The Market’s reaction will vary depending on how much hawkishness has already been discounted.

Here’s why:

The Dow was down 31.32 points on the open thanks to MMM. It then rallies 79 points to 12,538.45 (below Monday’s high of 12,542) before settling to close at 12,523.31 up 32.53 points. Considering the positive internal backdrop, that isn’t much of an advance. Then again; MMM sliced over 34 points off the Dow. This kind of pattern, strong breadth with a very small advance, doesn’t happen very often. Recently when it has happened the irregularity has not been a good sign for the Bulls.

Tuesday’s rally on the S&P 500 looks good but does not alter the mini 3-peaks and a domed house pattern. After three down days in a row the S&P 500 was due for a positive day, especially considering the fact the SPX closed lower despite positive internals for two days in a row. For three days of positive internals the S&P has managed only a five point gain. That isn’t what I would call bullish action.

Unless or until support breaks, support continues to hold. We didn’t expect much over the first two days of the week. With all the economic data and the FOMC on Wednesday, it is time for something to happen.
Note: relative to the Head and Shoulders pattern shown last night. As of today, the right shoulder is higher than the left shoulder, a common occurrence. In addition, volume on Tuesday was light and that is consistent with a head and shoulders pattern, reduced volume on the right shoulder.

From a straight up pattern stand point, the rallies up from Friday’s lows do not have an impulsive looks to them. The NASD and NDX look the most like corrective rises within unfinished down trends. That said, over the past few years, scraggly rallies off bent support levels didn’t amount to much as most of the time prices rallied.

Thanks to MMM the Dow turned its daily trend down while the S&P finally turned its daily trend up. The NYSE, which remains the healthiest looking index, can turn its 3-day trend up on Wednesday provided it goes above Tuesday’s high and holds Tuesday’s low. The NYSE is the only index that did not turn its weekly trend down over the past few days. If we do not see a negative reaction to the events on Wednesday then look for the NYSE to turn its 3-day trend up, which should be constructive.

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

Total breadth was solid at +1984. Most of it was on the NYSE while the NASD is languishing. The catch is despite very strong breadth numbers, the indices didn’t move proportionally higher with the Dow the major underperformer. In addition, total volume contracted from Monday’s already slow pace on what should be a bigger up day. Folks bought very little but they were buying as the wait for the onslaught of data over the balance of the week. Tuesday was the calm before the storm.

Going into the end of the month and the FOMC meeting the internals are suddenly balanced and neutral. We have seen three internally positive days that worked off a mild oversold condition. The lack of price improvement against the positive internal backdrop is somewhat remarkable and does not favor the bulls.

From a calendar stand point, in October, November, and to a certain extent December, we saw near-term corrections begin late in the month. In September, August, and July, correction began within the first week of the month.

In view of the strong earnings reports coming out we should expect a better than expected Q4 GDP figure. The question as always is whether or not the market has discounted better than expected numbers. From a pattern stand point the market is positioned to break support and begin an overdue measurable pullback. However, as was the case last spring, the bulls managed to keep it from breaking a lot longer than they should. The longer it takes to break the bigger the break will be. But until it breaks, it is just a pullback.

Jim Patterson

Most Obvious chart resistance levels:
Dow 12540, 12660- 12,700, 12,750
SPX 1435, 1452, 1480-1489
NASD 2465, 2501, 2536 (minor Fib) 2570
NDX 1790, 1810, 1844-1850, 1877 (minor Fib), 1910 (Major Fib Level)
NYSE 9260, 9300-9320

Most obvious Chart Support levels:
Dow  12550, 12450, 12350, 12,260, 12,200, 12,080, 11,890, 11653, 11,470,
SPX 1434, 1418, 1403, 1390, 1378, 1362, 1354, 1345
NASD 2422, 2400, 2360, 2290, 2225, 2000,
NDX 1790, 1772, 1745, 1700, 1650, 1465
NYSE  9110, 9060-9080, 8960, 8800, 8690, 8610, 8575, 8500

Here’s where we are now:

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

The NDX never rallied much on Tuesday. Aggressive traders can go short now with a tight stop. Going above 1790 should clear the way up to 1810, but the NDX is struggling to rally despite a positive internal backdrop. This is not a positive signal for the bulls.

S&P 500 (SPX) Trading

01-28-07: This is a longer-term recommendation, meaning I expect holding this position for several weeks to several months: Buy the SDS (ProShares UltraShort S&P 500 ETF) which closed at 58.24. The SDS should move 2x the S&P 500 on an inverse basis. If the S&P 500 rallies to 1450 then we will move to a 200% long the SDS position.

Repeat from the weekend the action on Monday and Tuesday doesn’t change things much: If you are short, stick with it even though the SPX will probably try to rally early in the week (and it has) At a minimum we should see the SPX reach 1400 by the first full week of February.

Current Positions

ATML is slated to report Feb 1.
DELL reports on Feb 22.

OCN Missed on their earnings report and got slammed, end of story. No one knew they were going to miss, in fact quite the opposite. The stock had broken out, which tell me folks expected good numbers. It didn’t happen and we cut our losses early in the day for less than a point loss @ $14.79.

DELL rec Long 10/02 @ 22.80, stop 24.00 close, Target >35, closed at 24.29
ATML rec Long 01/04 @ 6.17 stop 5.63 close, Target >8.50, closed at 5.97
ICLR rec Long 01/24 @ 39.53 stop 34 close, Target >46, closed at 37.50

While we may see prices push higher one more time, I prefer to stand back and wait for the correction we all know is coming. Then, as prices come in we will add new positions and will be able to rack up solid returns.

Jim Patterson
Editor
Tactical Trading Outlook