Post by Savant on Jul 26, 2004 2:32:41 GMT -5
Approaching Major Stock Market Support Levels - Published 03:32 EDT July 26 2004
We had a lot to learn from the week just past. A week ago we laid out the scenario as follows which played out remarkably well as the week unfolded, but were handed a somewhat unexpected secondary surprise as the week wore on with wide ranging overall impact.
Here's how we heralded the week that was:
The potential for us to find a bottom at any time cannot be totally ruled out, because the elastic band is being somewhat stretched in a number of areas and with Bonds having rallied as dramatically as they have since rates were raised, with many thousands of bond traders apparently agreeing with our fervent views that the Fed may have acted too soon, the potential for Bonds to break could foment a sudden snap back or turnaround in the Stock Market.
In addition, the dollar weakened significantly and against a background of Dollar weakness for the most part of 2003 and early 2004 have been fairly supportive of most stock prices, as the rise in US Treasury Bonds has also been the forerunner or catalyst for several Stock Market rallies.
Following an early break to new monthly lows, the stock market stabilized Monday afternoon and once again we nailed the 2 PM EDT bottom as a powerful rally began to unfold, co-incidentally aided by a corresponding peak in Bond prices that led to an early break and as we suggested, paved the way for that sudden stock market rally to unfold. Following an early evening pullback through to the early hours of Tuesday on the back of a last gasp rally in US Treasury Bond prices, Bonds suddenly broke extremely sharply early Tuesday morning and this led to an increasingly strong stock market throughout the day that was ultimately capped off by unexpected releases from Microsoft announcing the mother of all one time dividend payouts of all time of $3 per share and an increase in dividend to 8c per share along with the greatest share buyback initiative in history that could be as high as $32 Billion. Had we maxed out on available contracts to capture these moves, we probably could have racked up about $25,000 in gains for just over a day's work, but that is only half the story...
And that's where the lesson comes in, because ordinarily on such gigantic news as was announced by Microsoft, it might have been safe to assume that this was the start of something big and that continuation of what had been fairly powerful upside action might be the order of the day on Wednesday, when instead, with our indicators flashing the exact opposite, the market went into a sickening plunge to new monthly lows, wholly justifying our caution that the earlier month negative action had ominous implications.
What we learnt was, had we reversed our positions, not only could we have doubled our one day's potential gains and then some for just two days work, but the resulting fallout actually caused a chain reaction that had major negative ramifications for the currencies, base metals and precious metals markets as they too, went into a tailspin, thereby creating additional profitable trading opportunities.
What went wrong? Well, maybe the canny traders on Wall Street were not about to be fooled as to why Microsoft would choose to announce its so called good news two days ahead of less than expected earnings later in the week. Maybe they smelt a rat and that caused them to be on the defensive and frankly, the somewhat anemic reaction of Microsoft's failure to break through the $30 major resistance level also may have increased anxiety levels on Wall St. But, it really all seemed to go wrong when our Mr Greenspan was challenged Wednesday morning by an African American congressman who complained bitterly about the fact that his constituents were being left behind in the employment statistics and why did the Chairman see fit to raise rates, without due regard for the fact that weak spots remain in the economy and raising rates could only hurt further and potentially compromise a very hard fought for recovery,
Exactly our sentiments as we have been reporting here for weeks and it seems that this smacked of the Fed's indifference to such situations at ground level and that they were out of touch with reality and this hit home hard with traders and from that point the selling avalanche began. Instead, as we have been saying for months, the Fed Chairman should have been pounding the table and overruled the many zealots who called for this pre-emptive action. The markets have responded badly, contrary to expectations of previous rate hike reactions, because they no longer see the backdrop as the continued and much needed stimulative measures that have been in place long enough for us to get three quarters of the way towards sustainable recovery, but lacking that remaining quarter that can get us back to full employment that includes all, not to mention our already expressed sentiments as to the dire employment situation in Europe, that is years away from being resolved and with capacity utilization at multi-decade lows, the threat of disinflation remains...
So: Where to from here? Well, once again, we find ourselves probing for a bottom at sharply lower levels and below Dow 10,000, so now it becomes somewhat imperative this decline is nipped in the bud in short order or a different outlook altogether could become the theme for the remainder of 2004. Since we've now trundled lower into the Democratic convention week, it's not beyond the realms of possibilities that we might actually find a low of significance this very week and a secondary low of some consequence in August.
Trading Ideas and Updates
We said we were looking for a buying opportunity to develop in the Grain Complex last week and we had two rally attempts, one at the beginning of the week and one at the end. We feel the case for a significant low to be established in grains could genuinely eventuate any time in the coming few weeks as we reach extreme support levels that could precipitate a rally or series of rallies of consequence.
Coffee remains a make or break type situation. Whilst we actually had good gains from our position entered a few weeks back, we're sitting this one out as seasonally the Coffee market has a tendency to snap back violently in late July early August as frost fears tend to bite and already there are reports of extreme cold conditions in mountainous areas of Peru causing major problems for farmers. Gamblers can take a shot at buying a September 70 Call at the market and additional calls on strength at 71 upwards should it occur.
The Energy Sector remains vulnerable to a sudden breakdown or pullback although it has been firm so far, it is still exhibiting signs of a possible interim top of significance in the making and if Crude Oil breaks below $40, it could be especially helpful to stock prices.
Orange Juice, Cocoa and Fluid Milk continued to soar in line with our comments, though we would look to sell short Cocoa this week.
Meats reversed strongly from the previous week's selloff and gained in strength towards the end of the week closing at their highs.
Precious Metals and Currencies remain trapped in a range, bearing out our sentiments we were unconvinced by earlier rally attempts.
Have a great week
Trade Well
Savant
We had a lot to learn from the week just past. A week ago we laid out the scenario as follows which played out remarkably well as the week unfolded, but were handed a somewhat unexpected secondary surprise as the week wore on with wide ranging overall impact.
Here's how we heralded the week that was:
The potential for us to find a bottom at any time cannot be totally ruled out, because the elastic band is being somewhat stretched in a number of areas and with Bonds having rallied as dramatically as they have since rates were raised, with many thousands of bond traders apparently agreeing with our fervent views that the Fed may have acted too soon, the potential for Bonds to break could foment a sudden snap back or turnaround in the Stock Market.
In addition, the dollar weakened significantly and against a background of Dollar weakness for the most part of 2003 and early 2004 have been fairly supportive of most stock prices, as the rise in US Treasury Bonds has also been the forerunner or catalyst for several Stock Market rallies.
Following an early break to new monthly lows, the stock market stabilized Monday afternoon and once again we nailed the 2 PM EDT bottom as a powerful rally began to unfold, co-incidentally aided by a corresponding peak in Bond prices that led to an early break and as we suggested, paved the way for that sudden stock market rally to unfold. Following an early evening pullback through to the early hours of Tuesday on the back of a last gasp rally in US Treasury Bond prices, Bonds suddenly broke extremely sharply early Tuesday morning and this led to an increasingly strong stock market throughout the day that was ultimately capped off by unexpected releases from Microsoft announcing the mother of all one time dividend payouts of all time of $3 per share and an increase in dividend to 8c per share along with the greatest share buyback initiative in history that could be as high as $32 Billion. Had we maxed out on available contracts to capture these moves, we probably could have racked up about $25,000 in gains for just over a day's work, but that is only half the story...
And that's where the lesson comes in, because ordinarily on such gigantic news as was announced by Microsoft, it might have been safe to assume that this was the start of something big and that continuation of what had been fairly powerful upside action might be the order of the day on Wednesday, when instead, with our indicators flashing the exact opposite, the market went into a sickening plunge to new monthly lows, wholly justifying our caution that the earlier month negative action had ominous implications.
What we learnt was, had we reversed our positions, not only could we have doubled our one day's potential gains and then some for just two days work, but the resulting fallout actually caused a chain reaction that had major negative ramifications for the currencies, base metals and precious metals markets as they too, went into a tailspin, thereby creating additional profitable trading opportunities.
What went wrong? Well, maybe the canny traders on Wall Street were not about to be fooled as to why Microsoft would choose to announce its so called good news two days ahead of less than expected earnings later in the week. Maybe they smelt a rat and that caused them to be on the defensive and frankly, the somewhat anemic reaction of Microsoft's failure to break through the $30 major resistance level also may have increased anxiety levels on Wall St. But, it really all seemed to go wrong when our Mr Greenspan was challenged Wednesday morning by an African American congressman who complained bitterly about the fact that his constituents were being left behind in the employment statistics and why did the Chairman see fit to raise rates, without due regard for the fact that weak spots remain in the economy and raising rates could only hurt further and potentially compromise a very hard fought for recovery,
Exactly our sentiments as we have been reporting here for weeks and it seems that this smacked of the Fed's indifference to such situations at ground level and that they were out of touch with reality and this hit home hard with traders and from that point the selling avalanche began. Instead, as we have been saying for months, the Fed Chairman should have been pounding the table and overruled the many zealots who called for this pre-emptive action. The markets have responded badly, contrary to expectations of previous rate hike reactions, because they no longer see the backdrop as the continued and much needed stimulative measures that have been in place long enough for us to get three quarters of the way towards sustainable recovery, but lacking that remaining quarter that can get us back to full employment that includes all, not to mention our already expressed sentiments as to the dire employment situation in Europe, that is years away from being resolved and with capacity utilization at multi-decade lows, the threat of disinflation remains...
So: Where to from here? Well, once again, we find ourselves probing for a bottom at sharply lower levels and below Dow 10,000, so now it becomes somewhat imperative this decline is nipped in the bud in short order or a different outlook altogether could become the theme for the remainder of 2004. Since we've now trundled lower into the Democratic convention week, it's not beyond the realms of possibilities that we might actually find a low of significance this very week and a secondary low of some consequence in August.
Trading Ideas and Updates
We said we were looking for a buying opportunity to develop in the Grain Complex last week and we had two rally attempts, one at the beginning of the week and one at the end. We feel the case for a significant low to be established in grains could genuinely eventuate any time in the coming few weeks as we reach extreme support levels that could precipitate a rally or series of rallies of consequence.
Coffee remains a make or break type situation. Whilst we actually had good gains from our position entered a few weeks back, we're sitting this one out as seasonally the Coffee market has a tendency to snap back violently in late July early August as frost fears tend to bite and already there are reports of extreme cold conditions in mountainous areas of Peru causing major problems for farmers. Gamblers can take a shot at buying a September 70 Call at the market and additional calls on strength at 71 upwards should it occur.
The Energy Sector remains vulnerable to a sudden breakdown or pullback although it has been firm so far, it is still exhibiting signs of a possible interim top of significance in the making and if Crude Oil breaks below $40, it could be especially helpful to stock prices.
Orange Juice, Cocoa and Fluid Milk continued to soar in line with our comments, though we would look to sell short Cocoa this week.
Meats reversed strongly from the previous week's selloff and gained in strength towards the end of the week closing at their highs.
Precious Metals and Currencies remain trapped in a range, bearing out our sentiments we were unconvinced by earlier rally attempts.
Have a great week
Trade Well
Savant
