Day Trading & Forex Forum

Hamzei_Analytics

All those sell signals and warning signs that I have talked about in the last update, have finally produced a sell off on Thursday and Friday. There was no escape, just about everything went down. Small Caps led the way lower, while NASDAQ tried to resist the selling due to Microsoft’s heroics. Meanwhile we took nice profits on a couple of bearish positions, which we established just prior to the decline. The question right now is whether this is the beginning of a down trend or just a normal correction, which is almost over. In my opinion, the answer is neither one. The market had a good rally to important resistance levels, where it got to a point where there is simply no more reasons to buy. At the same time the economic and technical conditions are not scary enough yet to bring back severe declines. My expectation for next week is for wide swings (especially after the FED meeting) with downside bias. 1225 represents support on September S&P futures. 1598 is a support level for September NASDAQ 100 futures. A daily close below these levels will look bearish on the charts and may bring more selling. It is important to watch NASDAQ’s relative strength, because it is difficult for the market to go down without NASDAQ.



The chart above illustrates that NASDAQ composite has run into problems at the appropriate resistance level, and the strategy should be to sell strength until this trend line is broken or the market gets oversold. I will be watching the enthusiasm of a rebound to assess whether and how we need to be aggressive on the short side.

On a short-term basis it will be interesting to see if bears can close the market below the support level outlined on the SPX chart below. A continued weakness in the Bond market can be a catalyst for further selling in stocks



Good trading to all,

Dennis Leontyev
Options Strategist & Editor,
Hamzei Analytics

Hamzei_Analytics

Equity markets have been in a slow choppy decline for over three weeks. Volume is running below average and internals are in line with a typical summer correction action. So far stocks has been acting like a usual correction in a bull market, but this is about to change starting Monday morning. Katrina will probably have a dramatic short-term effect on several asset classes. Usually an event like this creates a panic-type situation, which is a necessary ingredient for a bottom (even if it is a very short-term bottom). Since a lot will depend on this event, I would like to concentrate on event driven trading in this update.

This time the event is a hurricane called Katrina, which can potentially kill a lot of people, damage one of the US cities and ruin 1/4 of energy business and a major port. So, what action makes financial sense? The obvious, of course:

1. Unleaded gas will go up because some of the refineries are damaged
2. Crude oil will go up because the port is damaged and infrastructure is damaged
3. Equities should go down because this has a negative impact on the economy.
4. Bonds will go up because they will represent safety.
5. US Dollar will go down, because New Orleans is located in the US.

That is it. A trader does not need to know anything else. This is Finance 101 at work. So, all a trader needs to do is the following: Buy Oil and Bonds, Sell Stocks and US Dollar.

Now, 24 hours later the event is over (lets assume that was a bad event).

A trader is long oil and bonds and short stocks and US Dollar. What to do now?
And now everything is returning to normal and the event is over. So a trader needs to justify his holding by something other than the event. If he can't do it, he gets rid of them, and by doing so, he returns those markets to levels where they were right before the event. They always come back to pre-event levels.

Does anybody actually think that intelligent and successful traders in the institutional world do what I just described? Of course not. These event-driven moves are done by two forces:

1. FEAR because if you are on the other side of this so-called basic logic, you have to cover your position or

2. All a trader took in college is Finance 101 and a trader doesn't know any better, and actually believes that Katrina will move the market according to logic on a long-term basis.

These moves are made by short-term traders. Some of them will capitalize on the event and some will not. But these events never have lasting effects of more then a few hours (maybe a couple of days). On Monday or Tuesday an I-Bank portfolio manager will call a meeting and ask his VPs who manage $50Billion whether we need to change our allocations to asset classes like Bonds, Equities, Currencies and Energy based on Katrina. What do you think they will decide to do? Nothing. They will not change anything, and therefore the market will proceed to do what it intended to do before the event. And before the event the stock market was searching for a short-term bottom and a bounce. So this is exactly what I am expecting, but this time it is going to occur in a dramatic fashion.

Dennis Leontyev

Robertral

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Hamzei_Analytics

What I posted is the opening commentary.......the details that follow are for paid customers only

good trading, fari

Hamzei_Analytics

200-year history of the stock market has shown us that only one development works every time, and I repeat – every time! Death, blood, catastrophe, devastation and wars are always buying opportunities. Always! This is a terrible thing to say, but this has never failed, and some studies show that the more horrifying the event is – the more stocks rally after that. The psychology behind is rather simple. Markets always look forward, and as soon the bad event occurs, the probability of it happening in a near future diminishes substantially, and therefore the thinking is – we have less bad events to anticipate. Another reason is liquidity, which is immediately provided by the government. More money means more economic activity, which in terms provides support for stocks. The longer-term effects are usually discounted during stressful times, and traders concentrate on immediate healing effects. That’s what we are seeing right now. The question becomes: what is the longer-term picture? This question, however, requires a lot more thinking than achieving a positive end-of-the-month result. And if you are a portfolio manager, you are going to get paid at the end of the quarter, and not in a year or two when the true economic effects of current activities will become evident. So the current environment for portfolio managers requires substituting longer-term thinking with buying now and asking questions later in order not to underperform the benchmark. That is how NYSE composite index arrived to the new all-time high, which, if you believe that the stock market is a leading economic indicator, means that things have never been better in the United States from the economic stand-point. Strange, isn’t it? NASDAQ on the other hand needs to rally 250% in order to confirm this economic paradise. Talk about a divergence.





And what about short-term picture? It is mixed. More bad news from Katrina will obviously bring more buying for the reasons described above. Options expiration week should also provide more support for stocks. I am expecting S&P to get to new recovery highs this week and then to begin to run into problems, because buying at 5 year highs requires long-term thinking. And that is a big problem.

Dennis Leontyev

Hamzei_Analytics

Hurricane Katrina is viewed by Wall Street as the best event for the US economy, therefore it brought NYSE composite to all time highs. Not only this is the only index trading at new highs, the number of new 52-week lows on NYSE is the highest in 5 months and McClellan oscillator is in negative territory. As I mentioned in my last report, buying at all time highs requires long-term thinking and this is a problem. The bond market is falling and Gold is going up like crazy. September is the best month for Gold, but this September is fueled by inflationary forces. The government will probably print $200 Billion dollars to help rebuilding efforts. The bullish view is that it will help the economy, and the bearish view is that half of it will be wasted and the other half will find its way to Halliburton. I am still looking for leadership in this market and having hard time finding any other than oil stocks. Even the housing index, which was one of the steadiest leaders throughout this bull market, is falling. Fed Funds Futures project a 94% chance of another rate hike this Tuesday. I believe, however, that the FED is not cynical enough to raise rates this time without saying something positive like “we are close to the end of this cycle”. This could be welcomed by the street and become an excuse to finally get to 1260 or thereabout on S&P. My opinion is that if your time horizon in trading is longer than three days, it does not matter where you establish your protected bearish strategies – here or two percent higher. My cumulative tick remains on a solid sell signal since the end of July. This indicator has a time horizon of longer than three days. Last week our firm issued a recommendation to our long-term portfolio clients to drastically reduce their US equity holdings.



Dennis Leontyev,
Chief Options Strategist and Editor
HamzeiAnalytics Options Trading Service (HOTS)

Hamzei_Analytics

To all HOTS Subscribers:

Despite the majority of our indicators being on the bearish side and the market decline last week, bears are still unable to take control of the market. It was surprising to see that such negative news and economic uncertainty couldn’t even drive S&P 500 down to test 1200 level, which is the August low and 200-day moving average. This spells resiliency. S&P futures are trying to rally in the Globex session on the news that hurricane Rita didn’t wipe out Houston and caused only a minor damage. This is an important point: regardless of my opinion on economics and position of technical indicators, Wall Street turns every news positive and looking for an excuse to buy. Maybe this is just temporary, but until the sell side is capable of breaking and closing S&P 500 index below 1200, I view bears as just capable of talking and no action.

Bond market has completely lost its identity and decided to follow Crude Oil almost tick for tick. This actually proves the fact that just about every financial asset class has become a hostage of the Oil industry. This is disturbing not only from a trading stand-point, but also from a long-term effect on the economy. While Greenspan is on a mission to “kill a conundrum”, or to put it in English, to make long-term interest rates to rise, the Government continues to spend uncontrollably, which is partially being financed by foreign buying of the US long-term bond and note obligations. That is why we see obvious signs of inflation – just take a look at Gold – but we don’t see the Bond market going down. All this confusion will eventually be resolved, and although it is difficult to predict the exact economic outcome of this disconnect between the FED and the Government, it has extremely dangerous long-term implications for the economy and therefore for all asset classes. But right now, the street is wearing rose glasses, and I will join the bears only if and as soon as those glasses are broken.



Dennis Leontyev
Chief Options Strategist and Editor
HamzeiAnalytics Options Trading Service (HOTS)

Hamzei_Analytics

Last week’s market action could be summed up in one phrase: Bulls won!


There were many opportunities for the sell side from technical, news, fundamental and any other perspective, but instead of selling, bears have chosen to voice their opinion in media and sentiment surveys. There is not much more to say at this point. Every pull back should now be bought. Bears will obtain control only below 1200 on S&P 500. We are long S&P puts, which we will sell sometime next week depending on the internals. The current situation is very similar to 1998 – 1999 trading environment when indexes kept going up while market internals kept deteriorating. Don’t argue with this picture. This is typical for a late bull market stage where the more you diversify – the more you underperform, because the strength is based on a very selective group of stocks. The obvious bearish divergences should be ignored at this point, and although I don’t think we will experience more hurricanes to provide market support, a couple of terrorist attacks like in London or Bali should be enough to push S&P to a new recovery high above 1250.


Most importantly we are entering a seasonally strong period for paper assets during the year, which ends in 5. Yesterday I have tried to explain what it means to a friend of mine who is not in finance, and he looked at me like I am crazy and asked me if the biggest portfolio managers in the world make their decisions based on that. The scary thought is that I am afraid the answer is yes. I also think that only a catastrophic terrorist attack can put this paper seasonality during a year, which ends in 5 into jeopardy. Keep it simple: buy now, ask questions later.