Rebel Traders – Analysis Without The Hype

All eyes will be on the bond market this coming trading week. There are numerous charts that are showing a significant ‘event’ is in the works. Whether it be corporate bonds or US Treasuries, all have some form of a major resistance or support level that is going to be challenged this coming week.

(click on charts for large view)

Let’s start with one of the mostly followed charts, the 10 year treasury note yield ($TNX). Remember that yield is inverted to price. So when money pours into treasuries (for safety) the price goes up and the yield goes down.

In this chart ($TNX) we are looking at yields. A technical analysis of this chart reveals a rising channel from the beginning of the year. The dotted line is a trend line beginning in mid March. From these two simple analysis tools we see that the 10 year yield last Friday fell below the trend line. Also observe the RSI, which has fallen well below its trend from the start of the year. What can we take away from this? It would appear to us ‘chart readers’ that the probabilities of the yield falling further over the coming weeks is high. The drop should be at least to the lower channel line which would act as support.

If the 10 year yield does begin to drop then we would also see bond prices rise. That brings us to the next chart which is the TLT (iShares 20+), this fund generally tracks the long end of the price curve. On this chart observe that the price is currently right at a down trend resistance line. The two dotted lines represent long term resistance levels. The TLT chart presents us with a very interesting situation right here and now. Should the $TNX (10 year yield) drop this coming week that would correlate to rising bond prices and the TLT will break above the trend line. But a break above the trend line would quickly run into longer term resistance levels (dotted lines).

If the down sloping trend line on the TLT holds, then we can expect to see falling prices and rising yields. Actually either outcome is a bad signal for the broader equity markets because a drastic drop in yields may signal a rapid movement of funds back into the perceived ’safety trade’, and out of the equity market. Should yields continue to rise, then the economy is faced with a very difficult situation where the rising yields is a hindrance to the housing market and all other types of ‘credit’. A situation that stifles growth.

On the other side of TLT is TBT, this is the ultra short of the Barclays Capital 20+ Year U.S. Treasury Index (TLT works just as well here for comparison). TBT rises when TLT drops, and vice verse.

Just as on the TLT chart, we can see that TBT is also at a critical spot. At this time TBT is resting on the up-sloping trend line beginning in December of 2008. Moreover, it is also sitting at a significant Fibonacci retracement level. Now here is the situation, If the 10 year yield (remember the 10 year yield is the most widely watched) falls this will mean that bond prices are rising. This will send the TLT upwards and the TBT will drop below its trend line shown here. Should that happen we may expect to see a drastic reaction in the equities market with a violent down ward move.

And what happens if the 10 year yield rises further? Then the TLT will fall and TBT will rise. The reaction in the equities market may be an initial upward rise, however one must remember that the financial market are starving for credit and rising yields would dampen efforts to unfreeze credit markets and Ben Bernanke will be forced to pull liquidity, essentially draining the equity markets of much needed liquidity and sending stock prices back down.

Given where the volatility index ($VIX) is currently sitting it says that this coming week will indeed be very active.

What about corporate debt? The next two charts reveal similar ‘on the cusp’ of a significant event. The first is that of the JP Morgan Emerging Markets Debt fund (EMB). Observe on the EMB chart that it is currently very near a significant resistance level.

And the final chart is that of the iShares Investment Grade Corporate Bond fund. This too is currently at a very significant resistance level. Should these resistance levels hold, then it will signal that credit conditions are deteriorating once again.

I anticipate a fairly significant trading week ahead. My forecast for the equity markets remains bearish.

The existing home sales numbers showed more houses waiting to be sold and prices going lower.  Merrill Lynch is having some major problems with the “sub-prime” issue.  They are writing down billions, and during the conference call they were not willing to discuss how much worse it could get.  This caused the stock to drop even further.  There is no clear picture on how bad these losses will be for any financial institution.  This problem is far from being “contained”.  Not a great start to the day.

The Dow had another up/down time today that can give one whiplash!  13400-13500 is the area to watch on the Dow, not wanting to see it below.  The S&P closed over 1500, but under the weekly trendline. 1490 is a critical support short term.  The yen is holding it’s strength, adding to worries of carry trade unwinding.  The Nasdaq composite is trading in a rising wedge on the daily (Chuck will put charts up tomorrow, he may disagree, but I see the wedge).  The semiconductor sector (what I deem “tech”) is sickly.  The SMH and $SOX lost a good bit of ground today.  The QQQQ seems to have a mind of it’s own, but weakness in the Nasdaq 100 may finally have an effect on it’s upward trajectory. The financials, homebuilders and retail sectors are still down.  And the flight to safety in bonds continues.

 The volume today was higher than normal, decliners outpacing advancers, more new lows than highs.  The pattern continues with higher volume on the down days.  The rally at the end of the day was interesting.  Apparently, there was talk of the Fed’s instituting an emergency rate cut of 50 basis points.  Why an emergency cut would be necessary before the meeting next week is beyond me.  Confirmation did not come and the market pulled back a bit from it’s upward frenzy.  What this shows, however, is the extreme emotions at work here.  It could be a preview of what will happen when the Fed’s do cut rates next week.  Of course, I have no idea if they will cut or by how much.  But, if I were a betting woman, I’d say they are cutting rates.  This volatility will be at work in the market for some time.  Don’t forget that the popular momentum stocks can go down even more quickly than they go up, so understand you are playing against big funds when it comes to these stocks.

 The primary trend of the market is still upward.  That doesn’t mean that the short-term trend is up, or even the intermediate term trend!  That’s why we are watching more than just the major indices to tell us the health of any move in the market.  Then we make our trading plan.  That keeps us from jumping into or out of stocks based on an emotion-driven, rumor-laden move. 

These wild swings in the market can drive a trader crazy.  It will bring out emotions you don’t want others to see in public, especially if your stock is dropping.  Even if your stock is rapidly going up, your heart races, your palms get sweaty, you get knots in your stomach.  It’s a bit like meeting a blind date.  Your friend said he has a great personality and he sounds intelligent on the phone. You’re nervous about seeing him for the first time. Then, you meet and he’s incredibly handsome to boot, and now you’re really nervous! (Anyone who’s ever been in this situation knows what I’m talking about).  But, the thing that keeps you from stuttering, sputtering, and acting silly, is if you have a plan for the date.  Dinner, movie, drinks, and dancing.  It’s the same with trading.  To keep us from acting silly we have a plan with entry/exit, support/resistance, broad market outlook. We have to keep things in perspective.

See you in the morning!

We started the day with MTRX issuing a guidance warning statement before the market open. Here is the story:

http://biz.yahoo.com/prnews/070620/law053.html?.v=101

This news is what caused other short term investors, and long term to take their chips off the table. They knew there would be short term volatility due to this and traders want to keep the money moving.. “dead money makes no money”. The long term prospects for MTRX are still good in my opinion. But what happens here is that investors, hedge funds, big money, retail money, etc.. do not want to wait around for the stock to recover. So they sell out quickly and move their money into another play. So we have to do the same thing. Remember that the most important aspect of stock trading (short term swing trades or long term buy and hold) is to protect your capital and control your loses. And that is what we had to do. The stock took a dive soon after the market opened and there was nothing to do except to get out as quick as possible. Which is what happened because I had a stop loss already in place which sold my shares automatically when it dropped. I took a 6.2% loss on the MTRX trade.

Later in the day I sold 1/2 of the ARD position for a 16% gain. And then I set a sell stop at $56.50 on the remaining 1/2. The idea here was that I would give some room to ARD to keep going but with the broad market sell off later in the day the stock price began to fall. The sell stop sold my shares automatically at $56.50 and protected my gains. So the remaining 1/2 provided a 15% gain. And after I sold my shares the price kept dropping. But I was already out with my profits.

The remainder of the FP80 portfolio holdings are all still ‘in play’. All are still green with the exception of HGRD which is now about 2% below the buy point. This is not a reason to sell yet. The pain is not so severe with HGRD that it requires it to be sold. Tomorrow we may see the broad market recover some and them HGRD would also rebound some. So we still have a play in HGRD and we will watch it closely (as we would do with any stock that is near a stop out point). The other holdings are still nice and green and we will keep watching them. The FP80 portfolio is still in a nice profit after only 3 weeks of starting the new portfolio for the board here. If the broad market sell off today continues and brings down all sectors even more then we will sell some of the other holdings and lock in the profit.

As the DOW chart has been indicating on my public charts list we need to see the DOW move above resistance in order for us to resume our bull market rally. Right now we’re in a gray area.. somewhere between bull and bear. That is why I have the yellow flag up.

But in all types of markets there are plays out there. Just harder to find sometimes. But I’ll keep looking!

So why did investors and traders leave the table early today and take their chips with them? It started with those pesky bond yields again. The 10 year note yield went back up again today to 5.14%. Remember that when bond yields go up the stocks usually will go down. And then the financial sector was hit with news that Bear Sterns may be closing shop on some mortgage funds.. More spillover crap from that whole sub-prime lending debacle. So this news sent worries through the financial sector.

So there it is for another day.. More later

“May the Bulls be with you”

FP80