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The Significance of Tuesday's Outside Day
This week began with an early morning surge in the futures market. The S&P futures were up as much as 21 points in overnight trading due to the large drop in crude oil. The precipitous decline in oil was induced by the lack of damage to the rigs in the Gulf by Hurricane Gustav, allaying fears of supply disruptions.
As has been the case for several months now, falling oil prices have been perceived as a positive for stocks, in that lower fuel cost will act as a sort of stimulus to consumer spending. This notion is beginning to change however. Investors are starting to come to the realization that global demand is slowing, and that this shift in the supply/demand equation is perhaps more of a negative than was previously thought. My sense is that the market's huge reversal on Tuesday – despite the large sell-off in crude - was the sea change in that perception. Equally important, the commodity futures, as well as its equity counterparts, and the tech sector - which is heavily dependent on overseas business - traded lower on the aforementioned date. This furthers the argument of global recession.
In technical terms, Tuesday's price reversal printed what technicians refer to as an "outside day". An outside day happens when one day's high is higher than the prior day's high, and its low is lower than the prior day's low. This can also be interpreted as an "engulfing" candlestick formation. We can see it highlighted in the S&P chart below.
Figure 1: S&P500
In and of itself this pattern has some significance; however, of bigger importance is whether the 1262 support level will hold in the next few days. I would put more stock in this pattern if it had come after a parabolic move - as a sign that the trend is exhausted. Since this really doesn't qualify as such, the predictive value in the short-term is no better than average, in my humble opinion.
The time for change is finally upon us. As some of you already know, the E-Mini Russell 2000 is migrating to the Intercontinental Exchange (ICE). The September contract, which expires on the 19th, will cease to exist on the Chicago Mercantile Exchange, and the new contract-symbol (TF) will commence trading in earnest on rollover day (Thursday, September 11). All the specifications will remain the same: $100 X Russell 2000 Index with a minimum tick of .10 Index points, or $10 per contract. From what I've observed, the ICE has done a very good job of maintaining a tight bid/ask spread – even in the September contract. They're also offering incentives to traders, in an effort to have them come over and trade the new contract on this exchange. One such incentive is free real-time quotes. Check with your vendor and make sure you ask for "the mini Russell on ICE", or go directly to the ICE website if you wish to track this new contract. The Russell is certainly not for everyone, but for pros such as myself, there is no better product, and barring any unforeseen circumstances (low volume, wide spreads), I will be trading the mini Russell on ICE.
Part of the reason I love trading the Russell is the large intraday moves it tends to exhibit. In this week's technical review, we can see on the chart below, that the intraday range for Tuesday's reversal was over 25 points, or $2500 per contract. By comparison, the E-Mini S&P's range was $1600 per contract or 32 points.
Figure 2: ER2 5-minute
On the daily chart of ER2 below, note the lower high that was put in on Tuesday. From a technical perspective, this pattern tends to have negative implications.
Figure 3: ER2 DailyIn order to sustain an uptrend, prior highs must be breached. In this case, the ER2 failed to do that; therefore, one must take a cautious stance in aggressively pursuing long positions for anything other than day trading.
In summary: In last week's newsletter, I made mention of the dismal track record the market has had in the month of September. The first day of trading for the month certainly lived up to those expectations. On the technical side, the market still finds itself in a short-term uptrend (barely). From a fundamental viewpoint, the same problems we're all familiar with still persist. Add the prospects of a global slowdown, and you have more uncertainty. The market-moving report this week is the Jobs number due to be released early Friday. As we know from last week's surprisingly good GDP number and ensuing powerful rally, the market is looking for any piece of good news to hang its hat on. That rally was short-lived as subsequent economic reports quelled the enthusiasm and muddied the economic waters even further. Markets go up when they have clarity, not opaqueness, and presently we have the latter. We are still in a bear market, plain and simple. When will it be over? I haven't a clue. In the meantime, I will focus on executing my trading plan daily, and I encourage all of you to do the same.
Until next time, I hope everyone has a profitable week.
If you have questions, comments or you'd like a specific topic covered, please email me at gvelazquez@tradingacademy.com
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Gabe Velazquez is a professional
trader with 14 years of experience. His focus is intra-day and swing trading the
ER2 (Russell 2000 E-Mini) using technical analysis as his primary tool. Gabe has
managed both stocks and futures accounts as well as conducted educational seminars
on technical analysis for the past ten years. He is a frequent guest on Biz radio,
where he shares his market knowledge and utilization of technical indicators.
Gabe also teaches the