May 2, 2013

Logical Market Update: Mirror, Mirror… – Russell 2000 Gains 1.7%, DJIA and S&P 500 Gain 0.9%, Treasuries Still Embrace Zero % as Gold and U.S. Dollar Rally

Mirror, Mirror… – Russell 2000 Gains 1.7%, DJIA and S&P 500 Gain 0.9%, Treasuries Still Embrace Zero % as Gold & U.S. Dollar Rally


“I’ll Marry You Tomorrow, But Let’s Honeymoon Tonight.” by Marvin H. Lane © 2007 


Thursday was the mirror image of Wednesday almost to a “T.”  No surprises, other than how far the pushing went.  The S&P 500 hit another new high; with the DJIA still lagging and the Russell 2000 appearing to be the little index that wishes it could.  Volumes remain light, which keeps alive the “choppy” action until either the bulls or the bears make some type of commitment. 


Thursday’s rally doesn’t remove the necessity or the probability that the market will correct.  The pattern in progress is still adhering to a clean Elliott wave structure.  I was surprised yesterday, that the volumes did not increase, that the selling was done on very thin volume so I suspected that Thursday’s move would happen on low volume, which speaks loudly in terms of buyers not moving back in a full out across the board style.  Leaving one to ponder that much of the move is happening because of “traders” be it HFT, algorithmic or manipulation.  It still is a rally and being held higher for negative reasons.


Observations from Thursday and Expectations for Friday

The ECB cut interest rates before the U.S. open on Thursday, which initially set things into motion.  Once Thursday’s U.S. economic data was released it was more evident that the dollar and precious metals rallies were not going to suppress the urge for higher levels in equities.  


The Russell 2000 albeit the percentage gained leader remains the weakest link amongst the broader indexes.  To answer one of yesterday’s questions:  it sure felt like another set up as markets surged higher in search of volume.   It is still prudent to remain open to the DJIA reaching a new high before any sustained pull back begins.  The one-day drop did not relieve the mounting pressure for a correction.  The momentum oscillators (near-term) shot back to extreme overbought levels with the mid to longer-term oscillators remaining overbought. 


DJIA Daily Chart w/Channel Lines

DJIA_ Channell_2013-05-02-TOS_CHARTS

Click chart to enlarge

S&P 500 Daily Chart w/Channel Lines 


Click chart to enlarge


LinkedIn (LNKD) reported after the close on Thursday after hitting a new 52-week high at $202.91.  The company while reporting stellar earnings disappointed the Street with lowered 2nd quarter revenue estimates and guidance.  In after hours trade the stock dropped to a low of 177 before settling into a range between 179 and 183. 


I am beginning to notice a discernable rotation one that may catch fire as money is pulled from the biotech sector and back into the technology sector.  It would seem that all is forgiven with technology stocks again gaining strong favor from the investing public and money managers.  MSFT, AAPL, and INTC to name a few of the titans will become very attractive if and when the broader markets pull back. 


Friday’s trade action may be a coin toss at this point, but expect a reaction to the release of April’s Employment report to decide direction.  Resistance levels remain in place for the broader indexes and as discussed previously new highs may not produce the desired momentum many appear to be “banking” on. 


Restated Support levels for a Larger Correction are still valid.

DJIA – support at 14550 while tested recently remains in place for now.  The next zone is at the 14500 to 14450 area, but eventually downside momentum will prevail with stronger support coming in at 14400 to 13750.


S&P 500  – Resistance remains at 1598 to 1600.  Support is at 1573, 1566, 1559, and 1550, with stronger support below between 1525 and 1475.


Russell 2000 – Support should be found at 920, 916, 912, and 906.  Ultimately, it remains highly likely that it could get very ugly for the Russell 2000 with stronger support seemingly far below at the 850 to 820 area. 


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 and GS. 


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)
  • S&P-500 future (e-mini available
  • US$/Euro futures (e-mini available)
  • GS (Goldman Sachs)
  • AAPL (Apple Computer)
  • GOOG (Google)
  • LNKD (LinkedIn)
  • NFLX (Netflix)
  • 30-yr Treasury Bond future
  • 10-yr Treasury Note future
  • TLT (Treasury Bond Long ETF)
  • TBT (Treasury Bond Short ETF)


From previous blogs –


Day Trading vs. Position Trading


Recent discussions have revolved around the necessity to toss out most if not all of your old trading ideas and join the ranks of algorithmic trading.


I advocate the use of overbought/oversold indicators and momentum oscillators to indicate where money is flowing, where an imbalance of buyers or sellers occurs and a  “bull trap” or ”bear trap” forms.   


I believe that it only gets more confusing going forward as the market ignores “the writing on the wall” and continues higher with a false sense of security built on negative input.  Price volatility has increased with the broader averages easily moving 2 to 3 percent and as high as 10 percent intraday.  Many stocks have seen daily trading ranges average between 10 and 15 points, with one day being 15 points higher and the next being 10 points lower. 


This type of action is the primary motivation behind my advocating switching strategies if necessary and focusing on day trading and less on position trading.  I do believe there are discernable longer-term positions investors should consider and implement, but the near to mid-term market gyrations have produced far more profitable day trading opportunities without overnight risk. 


I continue to recommend 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.