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TRADE Focus
11/13/2008
The market analysis section of this edition of Trade Focus was prepared and written during the course of the day on Thursday November 13. The charts were prepared and added the morning of Friday November 14. The discussion which follows was written Friday morning as well.
Markets hate uncertainty. We heard and saw a great deal of that during the course of the week. The auto sector and the imminent fate of GM was front and center. It has become a big political issue with many of our representatives and also our president-elect advocating for the industry. Treasury Secretary Paulson said, though, that TARP money should not go to the auto industry. The loss of jobs associated with the industry will have an impactful effect on the economy and congress may demand action. We feel that sooner or later, and this may seem cynical, that the underlying problems in the auto industry need to be addressed and that is the job of each company. They may need federal help, including dealing with, dare we mention, the unions and the compensation packages that have added to their financial distress. Certainly there is more to it than just that, but it is up to these companies to be responsible for themselves in providing more competitive products. If they can not it is their own fault.
Treasury Secretary Paulson threw another surprise at the market with his change of direction on TARP funds buying back toxic mortgage paper. Where this had been the answer to the problem before, it was no longer. It appears shoring up the balance sheets of the banks will do the trick. What will it be next? There's bound to be more shoes to drop and other fall-out along the way. Perhaps the "brain trust" calling the shots on the crisis see bank liquidity as the panacea rather than cutting out and removing the cancerous tissue. More will be coming our way on this we would imagine.
Other economic uncertainties included rotten retail sales data. They were expected to be bad but were even worse than those expectations. This is on the heels of poor employment data released last Friday, both key indicators of economic health. These are often considered lagging indicators, however we feel that in this case it is more likely that we are in the middle rather than the end of this poor economic cycle and that these are indicators of what to expect. Here in Chicago , for example, the mayor let it be known that CEO 's have told him to expect that more massive layoffs are coming.
So, here we are. There's this tremendous uncertainty regarding our economic health. There is great uncertainty of what it will take to fix this predicament. Yet, on Thursday, the markets stage incredible reversals to the upside. The S&P 500 cash displayed a sweeping key reversal, making a new low and closing not only higher but above the high of the previous session. This is the third low in the same area for the S&P. The Dow Jones Industrials did not make a new low but finished 550 points or so higher after being more than 300 points lower than its previous session. What does this all mean? Granted, Friday morning's action is not providing follow through. The retail sales data may be the cause. Certainly we agree that the malaise is not over. We believe there is more bad news to come. But market performance like that of Thursday is a reality of its own and can not be ignored. Some profess that the market is the best leading indicator. It is after all, the price where a buyer and seller agree at any given point in time. We would not disagree with that.
The purpose of this commentary was not to make predictions. It is discussion, nothing more. Markets have a way of taking care of themselves. We try to determine and find some understanding of what they may suggest.
Note: We are archiving the Traders Focus from here on so that those interested can follow more easily.
Silver - Economic news has yet to provide solid reasoning for longs to become excited in the silver market. It appears capable of retesting the low at 840 basis the December contract. A new low would activate targets of approximately 810 and 685.
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Gold -  Gold is trying to hang on perhaps through the benefit of "fear factor" buying. After making its low on October 24 there has been a period of consolidation which appears to have been a pennant formation. The price has emerged to the downside out of the pennant and provides an objective in the area of 665 basis the December contract. A new closing low below the previous low of 681 would activate targets of approximately 625 and 590. On the upside the retracement resistance levels remain approx 778; 808; 838.5.
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Euro Currency -  The consolidation in the euro currency over the past few weeks appears as what is likely another continuation pattern. The euro has emerged from this to the downside. The measured objective from this is approximately 12075 for the December contract. We believe that is using a more conservative measuring technique. Last week we mentioned extension targets of 12380, which has been hit today, and 12188. The 12188 is still in play as a near term target along with the stated measured objective of approx 12075 and the major retracement supports below the market of approx 12165 and 11265. Retracement resistance numbers are approx 12716; 12823; 12930. The reversal action of October 28 remains a factor and may be helping the euro find some buying support on weakness. A new low, particularly on a closing basis, not only changes this but likely will be cause to quickly find the lower level targets and supports. The euro has also been quite stock market sensitive therefore momentum moves in stocks likely will take the euro with.
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| Canadian Dollar -  We have been looking at the Canadian dollar as providing opportunity from the long side since it reached and exceeded a major retracement level of support from which it reversed to the upside. There was a move to the upside of some significance where the high basis the December contract was 8724 on November 5 after hitting its low of 7686 on October 28. That high represented a .500 retracement from a major leg down that started at 9723. We mentioned last week that the retracement levels of support were now 8330; 8205; 8085. With today's low of 8044 (at the time we are writing this) we consider this retracement as satisfied and believe new long positions are reasonable. Make sure to utilize protection and we might suggest that a close below 8000 for the December would negate this approach at least for now. Penetrating the 7686 low would give strong reasoning we believe, to establishing short positions. |
Chicago Wheat -  Last week we said "wheat remains bearish." That still applies but there appears to be a temporary respite developing. It was not able to penetrate the 496.5 low in the December contract and although it has not caught on fire it has held for now and some momentum indicators have turned slightly positive. Also of interest to us was how the wheat versus corn spread chart was beginning to take shape and with its underlying technicals seeming to favor wheat over corn at this time. We suggest that if interested you contact us for further discussion on the wheat/corn spread potential. For now the retracement resistance levels in the December wheat remain the same: approx 597; 628; 659. Finally we feel it necessary that even though we have spoke here of a possible respite to the downward trend, that the bigger picture has not yet changed and we feel we will at some time in the not too distant future see a 2 in front of the Chicago wheat contracts. Possibly a 1. |
S&P 500 -  The recent lows are being assaulted as we are writing this. In fact the cash has made a new low below its low of October 10 while the emini low is holding. But barely. New low closes will activate a new set of downside targets and would force us to join in by recommending short positions be established. The December emini low was 825 on October 10 and it is just now being penetrated. The extension targets now become approx 720 and 658 unless a reversal from these new lows occur. We would suggest allowance for some form of confirmation to this new development be given prior to entering new short positions such as a close below 820 for example. Make sure protective orders are instituted accordingly. And be mindful of a reversal. If a reversal should occur there is a reasonable enough likelihood for a follow-through rally warranting attempts at bottom fishing. Just make sure that protection is taken at whatever the day's low is. New shorts could be added via stop-and-reverse orders if those lows penetrated. We will have to wait for the new retracement resistance levels to be determined. |
Soybeans - Last week we said " new lows would also signal another leg in the direction of the current trend and short positions could be entered on that basis." That has yet to occur but while the stock indices are penetrating their recent lows as we write, the soybeans are nearing theirs. A close below 850 in the March Soybean contract we believe activates targets of approx: 750 and 698. Currently retracement resistance levels are approx: 1000; 1043.5; 1089.5. |
Bonds / Notes - Last week we mentioned, " A close above the 50day moving average would be a good signal to exit short positions..." This has happened and warrants taking a wait and see attitude toward entering anew from the short side. The 120-00.0 level basis the December T-Bond contract we believe remains key. A close above that will cause us to reconsider our intermediate term view of bonds and notes. Such an occurrence may spark a continuation to the 130-00.0 area. Currently the 50 day moving average we show as 117-16.0. The retracement resistance levels of interest are approx 118-06.0 (hit) and 119-17.0. If interested from the short side we believe attempts near this 119-17.0 level can be used to initiate and with protection above 120-00.0. Give strong consideration to stop and reverse if close above 120-00.0. There are extension targets of approx 118-16.0 (hit) and 119-06.5 in play. Retracement levels of support are approx: 116-11.5; 115-20.75; 114-29.75.
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Coffee -  Last week we alluded again to an important long term retracement level having been reached in coffee. We said there was no rush to jump in to this market as it needed further development. We are now more comfortable in suggesting the long side be approached. We also suggest using the March contract which is currently trading at approximately 11500. Using this price as a bench mark, protection needed beneath 11000 as we show 11010 as the low posted October 27. In this case too, consideration can be given to stop-and-reverse to short, particularly on a close below. We will be able to update retracement levels and possible extension targets next week. |
| Crude Oil - We added crude oil to our coverage last week as it had reached a significant retracement level given all our available data. We suggested that before entering from the long side to allow for a buy signal of your choosing to be completed. One example we gave was a daily reversal. This past Monday there was such an event. The market however did not hold and proceeded to new lows. As we are writing this, there is yet another reversal taking place. Today's low basis the December contract has been 5467 and it is now 5925. This may or may not follow through but it is an event worth noting if not acting upon. As always enact protection ahead of time. If this low holds, the first series of retracement resistance levels are approx: 6105; 6310; 6515. Using a larger portion of the wave provides us with approx: 6620; 6985; 7350. This is probably no surprise, but crude oil and many other commodity markets trade with an eye to the stock market. Today's action there has been quite an impressive reversal of its own. |
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