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Yesterday is History and Tomorrow's a Mystery
All the major indices mounted a fierce rally this Tuesday. Stocks refuse to cave-in despite an abundance of perceived negatives. All-time high prices for crude oil, the greenback making new lows almost daily, and subprime, which seems to be metastasizing throughout the financial system, are apparently not enough reasons for investors to sell. I expect this is because they‘ve not yet given up on the idea that the Fed will step-in to provide liquidity as needed. In addition, the global growth story is still not fully played out, as the rest of the world is still enjoying unprecedented prosperity. Just when it looks as though the market is going to drop off the cliff, buyers come in and a new rally ensues. This has the bears tearing their hair out with frustration.
We start the last quarter of 2007 with stocks putting together some very healthy gains for the year, thus far. The Nasdaq 100, (which I've been writing about for two months now) has racked up a nearly 20% YTD return. With all the turmoil that's gone on, the market has been extraordinarily resilient. Moreover, we are entering a historically favorable period for stocks. According to the Stock Traders Almanac, since 1950 the market has had some of its best gains during the November/December period. The reasoning has to do with the fact that at year-end, most individuals and companies have to fund their pensions and retirement plans. By doing so, they're injecting tons of cash into the marketplace, which in turn has to be invested. What's more, from a sentiment standpoint, people are generally more cheerful during the Holidays and thus less likely to be in a "selling mood". We even have a term for this late-year phenomenon: "the Santa Claus rally".
Is jolly ole St. Nick going to fill traders' stockings with goodies, or a big lump of coal this year? As the title of the piece implies, no one knows for sure what tomorrow will bring. This holds true, not just in life, but also in trading.
It's very important for traders to start every day with an objective view of the market, especially in periods like the present, where we have big down days followed by big up days. Being free of any preconceived notions prior to the opening bell will make it easier for traders to be more in sync with price action. When traders bring strong opinions about what the market should or shouldn't do, and it doesn't follow their script, they set themselves up for a battle against the market. And let me tell you… in my fifteen years of trading experience, I have seen an inordinate amount of traders who are wrong and stay wrong, but never the market!
Let's change gears and look at this week's charts. First, we'll focus our attention on the daily chart of the ER2 (Russell 2000 e-mini) below.
In looking at this chart, we see that the ER2 has been somewhat erratic for the last month or so. Since the last peak in early October, it has had a sharp pullback with a retracement. Then it has come down and successfully retested the prior lows. This corresponds to a 61.8 retracement of the summer trough to the aforementioned October peak. This keeps the ER2 still –technically – in an uptrend for the longer-term time frame.
In contrast, the hourly chart below tells a different story. Tuesday's late-day rally only served to retrace 38% of the steep decline, which started in early November. Equally important, the down gap from earlier this month will prove to be stiff resistance on any subsequent rallies.
In our last chart of the ER2, we'll see Tuesday's intraday price movement on a 5 min chart with a 15-period Exponential moving average. This is a glaring example of how useful just one EMA can be at keeping you on the right side of the market.
In Summary: this week is light on the economic calendar but Bernanke will be in the spotlight on Thursday, as he testifies before the Congressional Joint Economic Committee. Market participants will be looking for hints as to monetary policy going forward. The FOMC after cutting rates last week gave the perception that they would be done for now (reducing rates that is). The initial reaction was positive, but after giving it more thought, the market sold-off. So where does it put us now? The fact that we're in a somewhat favorable time of the year for stocks, coupled with the Fed being on hold puts me in the neutral camp. I believe the market will stay range bound –with plenty of volatility-for the balance of this year, but there are many storm clouds hovering in the New Year.
So until next time, I hope everyone has a profitable week.
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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