July 18, 2013

Logical Market Update: Friday is Futures & Options Expiration – Equity Update

Friday is Futures & Options Expiration – Equity Update – GOOG & MSFT Disappoint & Slide 5%

Media headlines are becoming more humorous as reporter’s grapple to find a reason for the markets continued rise.   One very popular financial site ran a banner “Breaking News” headline: Detroit Has Filed for Chapter 9 Bankruptcy Protection right above Dow, S&P 500 hit record highs on earnings and Bernanke.  If nothing else this hits home my point of how the markets will move to new all time highs on negative input.  From my perspective today’s new highs had little to do with earnings and Mr. Bernanke as much as it had to do with position squaring in preparation for expiration. 

What a difference a day makes, actually 6 hours.  The equity markets roared out of the gate this morning pushing to new all time highs for the DJIA, S&P and Russell 2000, and new recovery highs for the NDX.  The bond market turned in retreat; the US Dollar perked up and started to rally as gold and silver held higher levels. 

Google, Microsoft both reported earnings after the close and just didn’t make the cut.  These titans were quickly beaten back with GOOG loosing over $50 and MSFT down close to $2 – both shedding over 5%.  The NDX has been the weak link coming into today as traders began to anticipate this afternoon’s outcome.  The Russell the outright favorite to win the best performance award found support in holding gains after Chipotle rose over 5% topping $400.  All this against the backdrop of AMZN, NFLX, and TSLA getting clocked on rally attempts.  

On an Elliott Wave basis, the broader indexes have likely completed the 2nd sub-division and started down to begin a little bit larger 4th wave declines.  Ultimately the patterns will consist of 2 declines separated by an intervening rally.  More to the point here are the potential downside targets for the DJIA, S&P, Russell 2000, and NDX. The bears should begin to smile a bit as I’m sure the rhetoric will turn in their favor building the case for the world coming to an end.  Rest assured though, this is highly unlikely at this point in time.  Check back in the not so distant future for that message. 


DJIA Weekly (click chart to enlarge)

Not discounting the strong potential for a final gap up opening tomorrow morning (SPX options will settle at the opening price) the DJIA is likely headed lower before the uptrend picks up again.  The potential for wave 4 is the neighborhood of a 5.5% to 7% drop off of 15589.  In points that would be an 845 to 1090 point decline.  In the near term a sweet little trading opportunity and in the long term a drop in the bucket.  So it depends on your style or objectives with trading.  Day traders will be glorious – position traders that are bearish will reveal in the downside, as position traders that are bullish will scramble somewhat to protect positions. 


The current patterns in progress across the board are pointing to this type of “perfect storm” type of days ahead.  Where one sector follows another as the broader indexes drop in unison.  I wouldn’t suspect that the end is upon us just yet.  I continue to view downside as corrective within an ongoing uptrend.  However, having said that the downside will begin to expand its range as the degree of the 4th wave declines increases to finish the series of sub-divisions previously discussed.

The opportunities for day trading should continue.   Don’t forget about position sizing.  The use of this remains critical in maintaining a positive P/L.    

SPX Weekly (click chart to enlarge)

The SPX carries the same potential as the other broader indexes in that a drop of 105 to 136 points is picking up in probability.  That represents a decline of between 6.2% and 8%.  If Friday’s opening exceeds 1693.12 minor adjustments would be needed to these numbers.  Again, while there will likely be points of strong downdrafts I fully anticipate additional new highs in the SPX for the mid-long term. 


Russell 2000 Weekly (click chart to enlarge)

The Russell 2000 at several points during the expected 4th wave correction will lead the way lower.  In percentage terms the RUT carries the potential for a 7.5% to 10% drop in prices, which equates to a move to the 975 to 941 area. 



NASDAQ 100 Monthly (click chart to enlarge)

The NDX also is in a position to put in a 4th wave correction of a higher degree than the DJIA, S&P and RUT.  The potential decline likely sits within the 7% to 18% range.  I would anticipate, initially, somewhere in the middle to top of the range.  Point wise suggests a 200 to 535 point decline – or 2891 to 2556. 


Friday’s trade is looking more opportunistic with the release of GOOG, MSFT and CMG earnings.  The weakness in NFLX, TSLA, and AMZN would I believe continue.  Trading opportunities will be plentiful and staying alert and continuing to adhere to your preset trading parameters and objectives should produce a near term period of strong gains. 


My intention remains not to sound like a broken record but the importance of accepting that the status quo is changing and carries much of the burden of price volatility seen recently so again I will say please don’t be fooled in to complacency.  Now is the time to keep alert as the trading opportunities will be numerous and present themselves in both directions. 


However, it remains a time when things can seem to change quickly coming as “surprises” to the markets when in fact the larger moves have been in the making for several years.  


It is a time when the underlying reasons for the advances – the huge influx of money into the system by the global Central Banks – will eventually come full circle via the credit/debt – interest rate bubble bursting with such force that the markets will not be able to lean on the Central Banks good faith and credit to fix the problems.  It is a matter of when not if. 


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.  Continue to bear in mind that there are days when trading opportunities are not as plentiful.  These are days when not trading is likely more profitable than attempting to “force” a trade”:


  • 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