JSL's Strategy Lair

J

JSL_Capital

I kind of got hooked on posting my charts (previously here: http://www.elitetrader.com/vb/showthread.php?s=&threadid=83194&perpage=6&pagenumber=12 ) so I thought I might as well create a thread of my own and keep on doing it. Mostly daily stuff, though I trade intraday mostly. I might also muse about market fundamentals time to time such as 'PE expansion', which has become a mantra among fund managers and analysts these days.

Dow daily chart updated:
 

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This Week's Market Analysis
Borrowing the CNBC anchors' preferred term throughout Monday morning, this week saw the Dow started the year on a tear but the euphoria quickly disappeared just as soon as it came and the market is now sitting at crossroads, with a decision to make that would affect its direction for the next few weeks to months. Some observant traders have called Monday's gap up opening of almost 1 percent a manipulation, but I believe a better term to describe it (lest I be accused of being a conspiracy theorist) would be price gouging. The case in point - the market getting propped up on a thin volume (even by the low afterhours trading standard) during outside of regular trading hours (it took 1/50th of the normal daily trading volume on S&P futures for it to go up 10 points) only to be met with heavy sell offs in the next 3 days. Is this legal? Yes, the game was played within the strict rules of the regulatory bodies. But is this ethical? I'd say no, because the idea is to create false sense of optimism and euphoria to support selling on volume, though those being drawn in at this point of the rally is also guilty of greed. This week's action is a case study on how a small number of market participants can distort the market action in short term, though I belive the market is quite efficient on a long term basis.

Two weeks ago, I commented (on my blog but not on Elite Trader) that there was a sign of flight to quality, as well as there being signs of long-short strategy being implemented by market participants, whereby growth stocks are shorted and cyclicals are bought. After weeks of widening spread, this week saw the NDX rallying back strongly on Thursday while the Dow waited for the NDX to calm down to finally break its intermediate (6 month) trendline on Friday morning and eventually closed below the line, despite several attempts to move back above it. Even though the trendline is broken, it could still be a sign of deceleration to find a lower support rather than a bona fide start to a corrective phase. Because almost all weaknesses on a Friday has been met by a strong rally the following Monday (usually in the first 10 minutes of Monday morning with institutions buying in rounds and locals getting caught and hurting badly on the floor; it's mildly humorous if you listen to Ben Lichtenstein's squawk box) in this up turn, one ought to be cautious playing the downside. For instance, even though I am short the Dow futures, I would be market neutral by buying S&P futures (in equal market value) if the market shows strength Monday morning. Another method for traders playing the short side to think about is to buy call options to limit their losses. On the other hand, another downturn on Monday will be a strong confirmation that the market has already reached the intermediate top. According to Stock Trader's Almanac 2007 (p. 100 if you have the book), such instances are statistically significant in signalling the market direction in intermediate term, most probably because "the market has the chance to reflect any weekend news, plus what traders think after digesting the previous week's action and the many Monday morning research and strategy comments".

Perhaps I'll use my Ensign intra day charts in the future but the yahoo chart more than fulfills its job in showing intraday market action (I like checking it out several times a day while trading to see the market action without any bells and whistles I put on my Ensign charts):

The S&P being dragged along by the Dow and the NDX:
http://img157.imageshack.us/img157/8691/spxoh1.png

The Dow showing weakness this week after weeks of being the fittest:
http://img160.imageshack.us/img160/5117/dowlk5.png

The NDX attemping a come back, but vertical upward action is more bearish than bullish (it shows bulls are too eager and weak bears are panicking):
http://img157.imageshack.us/img157/8574/ndxwl9.png

The volatility is coming back, slowly but surely; have a nice trading next week!
 
re: "Some observant traders have called Monday's gap up opening of almost 1 percent a manipulation ..."

Before the US futures went up pre-market, asia and europe had gone up signifigantly during regular hours. It was the start of a new year, with the accompanying party attitude. Also, it was a time when the press was full of articles about how much the markets had gone up in '06, so a lot of people may have resolved to be in the market in '07.
 
Quote from doli:
Before the US futures went up pre-market, asia and europe had gone up signifigantly during regular hours. It was the start of a new year, with the accompanying party attitude. Also, it was a time when the press was full of articles about how much the markets had gone up in '06, so a lot of people may have resolved to be in the market in '07.
More...

I do watch world markets and am aware of their correlations but my opinion is that setting up the US market just because the Shanghai or Bombay went up (or down) 2-3 percent overnight or the press is bullish or there is perceived pent-up demand to buy stocks is really a poor excuse on the part of the commercials to unload inventories at higher prices than should otherwise be warranted(hence my usage of the term pricegouging). The current world-wide sell off actually started in South Korea on (their) Wednesday (before the US opened for the year after the president Ford's funeral) and it just took on some momentum, propagating into other Asian emerging markets as well as Europe. Overall though, I try not to dwell on the causes (media, analysts, locals, Goldman Sachs, you name it) but am more interested in effects (market actions).
 
Friday-Monday sell off reversal signal wasn't meant to be. The market sold off quickly in the morning without much panic and creeped way back from the low by the end of the day posting minor gains. It's not exactly clear whether this is a bullish reversal or a corrective wave before another impulsive move downward - tomorrow will be telling. The chart below illustrates some of the previous minor highs/lows that have now become supports on the Dow chart (today we found support near a minor low that was made in December. which was also a minor high in November. It's time to be very cautious.

http://img182.imageshack.us/img182/9273/ensignif6.png
 
A Look at Market Fundamentals on January 9, 2007

The Big Picture section of briefing.com (not to be confused with Ritholtz's blog) reports that the Wall St. is finally caving into the reality of slower earnings growth, cutting their expectations for the year 2007. Dick Green, the author of the article, believes that the market fundamentals have deteriorated in the past week due to decreased rate cut expectations (Green reports that while "few weeks ago it was conventional wisdom that the Federal Reserve would lower short-term interest rates in early 2007 - two rate cuts by mid-year, and perhaps four by the end of the year, now, the fed funds futures contracts assume one 1/4% rate cut on the current 5 1/4% fed funds rate target is more than 50% likely by July, but only fully assumes such a cut by September."). These two factors put together, the market does not seem to be fully pricing in the revised fundamentals, and the upside seems limited at best at this time, Green notes.

Source:
Briefing.com - The Big Picture
http://www.briefing.com/Investor/Private/Perspectives/TheBigPicture.htm
 
Someone asked me why the economic assessment in the previous post is relevant, so I will elaborate.

Fund managers, whose market orders most of us would agree define particular characteristics of a market (trend, volatility etc.), are not just buy and hold (and pray) individuals. Most fund companies have their own proprietary models with which money managers make decisions on whether to buy, hold or sell securities. The most prevalent among them is the cash flow discount model which is:

Fair Price of a security or index = CF/(k-g)

CF = cash flow (could be dividend, free cash flow etc.)
k = (risk free rate + market premium) = required rate of return
g = growth rate of a security or index (has multiple of factors as components)

Using the formula, one can see that in an environment where the risk free rate is expected to go down and the growth remains strong, the difference between k and g will narrow down and the perceived fair value of securities will go up and fund managers will be net buyers of securities. On the other hand, if it is the case that the risk free rate is expected to remain the same or even go up but the growth rate deteriorates, the perceived fair value of securities will go down and fund managers will be net sellers of securities that no longer seem so attractive. This is why the change in interest rate expectations and earnings growth rate can significantly impact the market (traders using purely technical analysis and investors purely using PE ratios notwithstanding).
 
The last 3 trading days look pretty much the same on the daily chart, hanging out right below the previous major trendline but none too sure about where to go. This is a sign of a resilient market, though in my opinion it will have to make some form of correction in one way or another (a prolonged sideways action or a more pronounced downward retest of supports; I'm biased toward the latter). Here is the ES H7 action in the last three days in 5 min interval with price histogram.


http://img246.imageshack.us/img246/2330/ensignau3.png
 
A look at the U.S. equity market on January 10, 2007

Here are some charts with my views.

NDX is now the strongest of the bunch:
http://img100.imageshack.us/img100/6125/ndxdailyod8.png

S&P and Dow still seem unconvinced about going higher yet:
http://img172.imageshack.us/img172/8468/spdailyao6.png
http://img100.imageshack.us/img100/2580/dowdailysx2.png

There are some gaps that are acting as support and resistance per this S&P 60-min chart:
http://img153.imageshack.us/img153/1772/es60minmf7.png
 
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