July 10, 2013

Logical Market Update: Near Term Outlook for Russell 2000 – Rallies Pick Up AfterHours – Dollar Crumbles

Near Term Outlook for Russell 2000 – Afterhours Madness – Broader Indexes, Bonds, Precious Metals Soar – Dollar Crumbles – The Power of the FED?

The broader indexes took off with a vengeance after hours on Wednesday.  As I sit down to write this blog the DJIA future is up 113, the S&P 500 future +14.50, the NASDAQ 100 +24.50, the Russell 2000 +8.40, the 30-yr bond +1’04, the 10-yr note  +0’265, Gold +32.80, Silver +0.66.  The Euro jumped to 1.32 and was up 1.50% at 1.3076. 

The reason for an across the board rally might be somewhat questionable, but Asian markets took heart from Bernanke’s remarks that the FED was in “no hurry” to raise interest rates, even though the FED is expected to begin tapering its QE policies; China’s growth slowdown was featured in a South Korea Central Bank statement as posing downside risk.  The Bank of Japan left policy unchanged and cut their inflation forecast adding a boost.  The dollar was sold heavily as dealers now believe the FED won’t run the risk of raising rates anytime soon.  The treasury markets followed suit and quickly rose, as did the precious metals. 

Nonetheless, the moves themselves remain in line with current expectations regardless of the basis or velocity.  I continue to expect new highs for the DJIA, S&P 500, and Russell 2000 before the next larger correction takes over. 


Russell 2000


Elliott Wave Update (click chart to enlarge)

As in the DJIA and S&P 500 the Russell 2000 carries the same wave count.  A fifth wave of cycle degree began in March 2009.  Thus far Cycle waves 1 and 2 are complete.  Cycle wave 3 began in August 2010 and has thus far, subdivided 3 times.  The resolution of which will consist of a series of 4th wave corrections (down) and 5th wave advances.   

Near term the rally has pushed to first resistance at 1029 (basis the September future – afterhours trading 7/10/2013) and a solid push through this level should clear the path for the rally to advance to next resistance at 1082.60.  A full out blast higher can’t be ruled out with a jump to topside near term resistance at 1169.  The Russell 2000 is often the laggard and on those occurrences has found renewed life in catching up and taking the lead as has been the case over the last week or so.   This being the case I would expect this index to top first and begin to show weakness as the next correction begins. 

Again, the longer-term picture remains bullish as the pattern in progress  moves to completion.  Corrections may be short in duration with the rally jumping into action quickly.  Also, as I have discussed previously I fully expect the markets to reach new all time highs beyond most expectations on negative input.  The status quo is changing please don’t be fooled in to complacency.  The trading opportunities will be numerous and present themselves in both directions.  But it remains a time when things can seem to change quickly coming as “surprises” to the markets when in fact the finishing advance has been in the “making” for over four years.   It is a fascinating time to trade, a time that will rival the action at the end of 1999 to 2000.  It is a time when understanding 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 equity 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 this I am certain of.



Russell 2000 Monthly Chart (10 years) (courtesy of Prophet Charts)



From Monday’s blog and still valid:

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!





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