Is Anybody Else Noticing? Hype is on the Rise! – The Russell 2000 Makes New Highs – DJIA, S&P 500 Should Follow – Treasuries In A “Dead Cat Bounce”
I’m in a quandary as how to describe trading last Wednesday, Friday and also today. The broader index futures have now closed a second day “very rich” – (premium over cash) and while the pot odds were highly against this happening the fact is – it did. Something is spooking the shorts and forcing the futures to get “pumped” higher after the cash closes.
With the initial reaction to Alcoa’s Q2 earnings being positive it appears the markets are preparing for a successful Q2 earnings season. The fact that they are doing it into all time highs and against the spike higher in interest rates can only be akin to a spoiled child performing the “I dare you” challenge with a parent. The parent never really displays any threatening change until BAM – the hand that rocks the cradle comes swooping down.
The equity markets are challenging the FED to make good on Bernanke’s threats of reigning in “cheap money.” The treasury markets on the other hand have been posturing towards its inevitable and undeniable arrival.
No doubt, the financial lobby is working overtime up, down and all around the DC Belt Way giving pep talks on the improving economy in an attempt to force rates back into submission. Hoping in silence that the interest rate/ U.S. Dollar bubble was sufficiently deflated to withstand another blast of “hot air”.
The longer-term charts are signaling new highs for the broader indexes before another correction kicks in. The Russell 2000 pushed into that territory today and is seeing what is I loving call – the “TBTF long-term hooking” of the growing number of “yield seekers” aka retiring Baby Boomers. To continue the rally, the TBTF analysts must
- Be convincing in their recommendation to buy on the improving economy,
- Prevent Interest Rates from continuing to spike higher,
- In fact they need to spike back down to “jump start” the next avalanche of buy orders.
- Complacency levels must be restored as measured by implied volatility. The result would be the VIX moving back (well) below 15.
- Any notice of a change in the Status Quo must be squelched.
- Keep an eye on the Employment Numbers –
- If the rate declines moderately to strongly within the states of New Jersey, Michigan, Illinois, North Carolina, Georgia, Kentucky, Tennessee. Mississippi, or Nevada it could pull the national level closer to Bernanke’s trigger point.
- If California, Florida, Pennsylvania, and New York continue to improve same scenario.
- Full employment is (I’m sorry to say) not desirable since it usually ushers in higher inflation with it. Therefore it is important for the TBTF and others to keep the risk “off” of higher interest rates – to keep alive the “carry trade.”
- Lastly, take a look at the chart below (from www.zerohedge.com) and check out who would have motive to keep the rally going via holding interest rates lower!
DJIA (click on the charts to enlarge)
Elliott Wave Update –
The monthly chart (below) continues to make clear the strong potential for several additional new highs are still to come. The March 2009 low marked the completion of Supercycle Wave IV (or Grand Supercycle Wave IV) – more important is to understand that the ensuing advance will ultimately form five waves of Cycle degree to complete Supercycle Wave V which in turn completes a huge bull market covering more over a century of growth.
Previously I have discussed that within these larger moves (waves) the pattern will sub-divide and often within a third wave advance (or decline), the pattern will sub-divide several times. The ultimate outcome of this type of pattern is a stair step type action in the direction of the larger trend. In this case – up. Wave III has thus far sub-divided four times. The chart is labeled reflecting this. The result with is a series of new high followed by correction and a new high again (three times) as the pattern completes.
Conservatively, the market has strong potential to break above 16,000 and could go as high as 17490 before wave III is complete.
The technical picture while getting near term overbought does support a push to new highs before even a smaller pull back occurs. The stochastic oscillator is overbought on a monthly basis with the weekly chart clearly pointing higher from just below overbought.
Implied volatility should fall as the rally continues – so do expect pockets of increased price volatility and the velocity of the move(s) to increase.
Sector rotation is again in force with it appearing to continue to hit the mining stocks. The rotation into technology stocks could get a volatility boost from Q2 earnings and guidance causing slips, slides, and avalanches in both directions.
Tuesday and Wednesday’s blog will cover the S&P 500, Russell 2000, NASDAQ 100, the 30-yr Bond, 10-yr Note, and Precious Metals.
While some position trading will be highly profitable – I am continuing to find ample opportunities in day trading. Depending on your objectives a combination of day and position trading could prove very rewarding as the current patterns unfold.
Diversified Trading System
I continue to recommend as the best trading platform available to a broader range of traders from novice to expert. The Diversified Trading System offers a cost effective product that allows a trader to enter into the “chaos” and trade more effectively.
Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility. Automated stop-loss management and position sizing eliminates most of the problems most individual traders have. Day trading and position trading both require (actually demand) good risk management. Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades.
A newer member of the money management tools available from Indicator Warehouse is the Profit Finder – System Back Tester. When implemented it allows the user to:
- Immediately know the impact of parameter changes.
- Automatically reads all of your DTS entries and exits
- Calculates the profit/loss of each trade
- Performs a wide number of essential intelligence boosting calculations instantly
- Provides solid details about the effectiveness of your trading strategy/ methodology/ indicators
The last two points above are valuable tools to use. It will show you where some “tweaking” is needed to improve results through the back testing feature.
My point on money rotation and sector rotation is similar to that on parabolic moves that they happen with frequency within many time frames. As traders these types of moves can be a bonus for day trading or position trading so again don’t get caught up in the “what’s the catch.” Realizing a rotation is occurring within a stock you trade or a sector is a great source of stocks to plug into the Diversified Trading System. Allowing DTS to cleanly and beautifully capture the moves though any or all three DTS trading platforms. Our goal remains to assist traders to make greater profits during all types of markets. Sector and money rotation is another tool.
The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD, GS, and Tesla Motors (TSLA).
Here is an updated list of the markets where I have found that DTS (all three birds) are producing numerous signals:
- DJIA future (e-mini available) – Highly recommended
- S&P-500 future (e-mini available) – highly recommended
- Russell 2000 future (e-mini available) – highly recommended
- NASDAQ 100 future (e-mini available) very highly recommended
- US$/Euro futures (e-mini available) – very highly recommended
- GS (Goldman Sachs) – good two way volume –
- AAPL (Apple Computer) – highly recommended
- GOOG (Google) – highly recommended
- LNKD (LinkedIn) – solid intraday range
- NFLX (Netflix) – solid intraday range
- TSLA (Tesla Motors) – highly recommended
- 30-yr Treasury Bond future – highly recommended
- 10-yr Treasury Note future – solid two way trade
- TLT (Treasury Bond Long ETF) – very active
- TBT (Treasury Bond Short ETF) – very active (moves inversely to TLT)
- Gold (futures and ETF – GLD) very active – not suitable for all traders
- Silver (futures and ETF – SLV) – very active – not suitable for all traders