February 24, 2013

Logical Market Update: Trading Opportunties Plentiful As Another Down Leg Still Expected

The Correction Remains On Course – Traders Are Skeptical – Another Down Leg Still to Come

The speed at which the rebound rally took over on Friday was as if the “All Clear” signal had been sounded. Initially I credit short covering and day traders positioning themselves for the bounce. But as it appeared some of the “arrogance” had resurfaced things began to heat up pushing the broader indexes towards top-side resistance for this move. Is it a classic “head-fake”? Monday’s trade should reveal the answer.

Observations from Friday’s Trade:

Funny thing about Friday’s rally was that not all component stocks were jumping as high as their broader index. The DJIA, S&P , and Russell 2000 all zipped straight up into resistance zones that are expected to contain and complete the bounce off of Thursday’s lows. The DJIA (basis the futures) retraced over 75% of last weeks drop before dropping off slightly into the close. The S&P 500 (basis the cash) closed just above a 50% retracement and well into the resistance zone marked by 1510 to 1518. The Russell 2000 closed at 915 (basis the futures) which also is right into the resistance zone at 911-916, which is expected to contain the buying and kick off the next leg down.

Thursday’s commentary bears some repeating as it remains valid as to what is expected:

The type of correction that is unfolding in the broader markets indexes is comprised of 3 somewhat larger legs – 2 declines separated by a rally. Thus far, Thursday’s lows look to have completed the initial down leg of the correction with the recovery bounces on Friday being all or most of the intervening rallies. What is not evident just yet is whether the intervening rally phases will sub-divide taking several days to complete before the next leg down kicks in.

If this is the case, trade may be choppy on Monday. However, if all holds true to form the markets may see follow through upside continue tomorrow. (Check the numbers below for resistance levels) Once the “bounce” is complete though expectations would be for an additional down leg of the same magnitude as we saw last Wednesday and Thursday.

As for trading opportunities, the important factor will be to follow the trend and not your emotions. Trading opportunities should remain plentiful. Equities, treasuries, and precious metals have sprung back to life.
Here again is a brief list of the markets I have found DTS to very profitable:

• US$/Euro
• Japanese Yen against the US $ or the Eu
• GS (Goldman Sachs)
• AAPL (Apple Computer)
• E-mini S&P 500
• GLD (Gold ETF)
• SLV (Silver ETF)
• TLT (Treasury Bond Long ETF)
• TBT (Treasury Bond Short ETF)
• LNKD
• FB

Expectations for Monday (2/25/2013)

Resistance areas that should contain the upside and kick off the next leg down – As mentioned above it may take another day or two to finish the intervening rallies and set the stage for the 2nd down leg to begin. Should this be the case look for choppy trade to be dominant as the market searches for direction:

DJIA (basis the March Dow future): exceeded upper resistance at 13,950 on Friday leaving a choppy pattern in the process. While additional upside attempts at getting back above 14,000 can’t be ruled out, and should it occur it would not necessarily change the outlook for an additional down leg taking place. What would change is the support levels expected to hold. If Friday’s highs hold I would continue to expect support at 13,800 to be broken. Ultimately the decline should drop to the 13.650 to 13,600 area.

SPX (basis the cash): the S&P 500 finished Friday just above the resistance zone at 1510 to 1514. The 1518 area continues to be topside resistance. The hourly oscillators quickly ran from oversold to overbought on Friday which supports the next leg down beginning. The next leg down should be another Elliott 5 wave structure that will likely mirror what we saw on Wednesday and Thursday. Support for that move comes in at 1465.

Russell 2000 (basis the future): rallied on Friday ending the day in the resistance zone at 911 to 916. Topside resistance at 920 remains in play even though I continue to expect the zone to contain this move will be 911 to 916. Support for the next leg down (remember the drop itself should resemble what we just saw happen on Wednesday and Thursday) comes in at 885; so don’t be fooled if momentum takes a breath at the 895 to 900 area.

Treasuries:

30yr –the pattern in progress is not all that bullish, which continues to suggest interest rates are going higher. Basis the future intraday support is at 143’12 to 143 and resistance at144’12 to 144’20.

10yr – same pattern as in the 30-year bond – the 10-year note is not that bullish. Basis the future support is at 131’17 to 131’04 and resistance at 132 and then 132’11

TLT – support at 116.70 to 116.35, and then 115.50 to 115.38 Resistance at 117.15 to 117.25 and then 117.85

TBT – support at 66.85, and 66.60 Resistance at 68, 68.50 and then 69.20.

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