Sunday Night Coffee – 11/8/2009

Last week I titled my Sunday post “What Will The Weekly Price Bar Look Like?” I chose that title for the purpose of pointing out not to get caught up in the daily gyrations. Last week was a whipsaw fest for those that traded directionally. One week later we can see that the market closed higher but that the price action remained completely within the prior week’s range. It felt as if there was a lot of movement, but not a lot happened.

U.S. DOLLAR

I was hoping that we might get some clarification on the direction of the Dollar. Clarification would be defined as a breakout of UUP over its 50-day SMA or a breakdown of UDN under its 50-day SMA. That did not happen.

Going forward, I will not be using UUP or UDN charts anymore. Due to technical issues with the UUP ETF, there was a big spike up on Thursday not related to the movement of the Dollar against other currencies.

UUP is pegged to the $USDUPX index and I’ll use the index rather than the trading vehicle when I discuss currency. This should eliminate the possibility of having the chart distorted due to technical matters related to the ETF.

Before we look at the Dollar, keep in mind that I am operating under the assumption that the existing relationship of a weak dollar will correlate with market strength and a strong dollar will correlate with market weakness. Further, I’m assuming that the fall of the Dollar is part of the fuel behind the market moving higher. I believe that the nominal value of all assets denominated in dollars are being inflated to a higher value. I therefore expect the market to go down if this fuel is removed.

My reading of the $USDUPX chart is that the index is going to $54. There is horizontal support at $54 from 2008 and it is so close to support that I would expect it to be attracted to this level.  Once the index hits $54, I don’t see it just plowing through this support level. I therefore would expect a sideways consolidation giving time for the 200 and 300 day SMAs to catch up with the big drop. If I turn out to be right, it means more upside for the market in the immediate future as the index drops from $55.35 to $54 followed by a pullback. Keep in mind the consolidation phase could include a decent bounce causing a selloff in the market. Based on the Fed seeming to telegraph that it is not raising interest rates anytime soon, I would be a little surprised to see a hard bounce off of $54.

I think this reading of the Dollar ties in with the price action we’re seeing the stock market.

If you look at the monthly SPY chart, October put in a slightly higher high than September but it was the first month with a lower close since June. November is in jeopardy of making a lower high but it is still early yet. Nevertheless, the move higher off the March lows seems to be at least entering into a consolidation phase if not a topping pattern. Note that on a volume basis, the rising wedge scenario seems to be playing out. We have declining volume every month until the wedge breaks in October on higher volume.

This is just a hypothesis but it is my script for the coming weeks. I’m open to changing direction if this script turns out to be wrong, but it is the most logical scenario that I see.

TRENDS

If a trend has changed from the prior week, I’ve noted this by capitalizing UP or DOWN. All of the major indexes continue to trade around their 50-day SMA. SPX, QQQQ and FXI all moved back over their 50-day SMA. Other changes included SLV moving back over its 50-day SMA and JJN (Nickel) moving below its 50-day SMA. I’ve also replaced UUP with $USDUPX.

EARNINGS AND ECONOMIC DATA

We’re on the back side of earnings. Below is a list of some of the names I’ll be following. If you want a full list, click on the earnings in the right hand navigation pane. Thursday is the biggest day in terms of earnings and economic data. We’ll get another data point from the jobless claims number as well as earnings from Walmart and Disney.

INDEXES

The Russell 2000 (IWM) is a pretty bearish looking chart. First, let’s look at the monthly chart.

IWM put in a slightly lower monthly high in October and closed just below the open of September. This is the first down month on IWM since February and volume is the highest since April. Keep in mind, the amount of value traded in October is higher than in March. It is true the volume was higher in March, but the average price of IWM was in the $30s. Now the price is in the $55-58 range.

The daily chart is showing a double top with increasing volume on down days. Not surprisingly, we’re getting a retest of the 50-day SMA.

On the 5-year chart, IWM is meeting up with horizontal resistance at $58.21. This is not a huge double top on IWM. It really calls for a pullback rather than a plunge.  I would say it is worth $4-5 points which would bring IWM down to support at the 200 & 300 day SMA. There is also horizontal support in the $52 area. Darker scenarios such as a complex head and shoulders pattern can be dreamed up but I think the most honest reading right now is to see this pullback to its 200/300 day SMA. Everything doesn’t need to be figured out today.

SPECIFIC STOCKS

Here are a few trading ideas.

I’m already short AZO but AAP also looks like a pretty good short on a breakdown below $36. I think it can trade down to $32 pretty quickly. Earnings on the 11th.

AAPL, BIDU, GOLD, IBM and BLK are all in the process of making all-time highs. Since I’m expecting a pullback in the market, I definitely want to wait for a new high and see volume on the breakout. But if that happens, these could be good ones to ride. If the market does breakdown, these stocks could be vulnerable and could turn into good short candidates.

AAPL tested the all time high, pulled back a bit to horizontal resistance and the 50-day SMA and might now be in a position to take out the high.

BIDU is similar to AAPL. It breached the prior all time high but then fell back after disappointing earnings. But the stock is making another run.

GOLD is tricky. There have been 3 touches of the all time high at $75 and the stock finally broke through resistance on volume. I like it right here using the 50-day as a stop area.

IBM is moving back toward its all time high at $126.

BLK is looking to breakout after failing a couple of weeks back. Will the volume show up?

FIRE has been on fire for a while. It recently retested horizontal support successfully and is moving above its 50 day again. The stock has been up huge since May on high volume and perhaps there might be another leg up.

GIVN is another momentum stock that might have another leg higher. Nice volume has been coming into the stock and it recently bounced off its 50 day and is looking to breakout over horizontal resistance.

PZZA is a short from last week. I’m waiting on the breakdown from this triangle.

I’m interested in UNG on the support bounce at $9 if it falls hard to that level. I’m only willing to buy it there if RSI is below 30.

WFT short on a breakdown below $16.50.