July 2012 – Page 2 – Andrew Thrasher

The Important Levels for Equities

Posted on July 25, 2012 by Andrew Thrasher

Last night I looked at an indicator calling for some short-term relief in the market and small caps still showing signs of traders shedding beta.

This morning I think it’s important to recognize the important levels of support and resistance we face. Yesterday’s close stopped right at the 38.2% Fibonacci retracement level between the June low and the July high. We also touched the 50-day moving average at 1332 and the rising trendline (blue line) from the late June dip. On the upside, we have the falling trendline that we broke through but could not maintain just a few days ago (green dotted line).

It appears all of these levels of support were enough to hold us….for now. I’ll be keeping a close watch here to see if this support can hold future re-tests.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.

A Sign of Relief and A Sign of Weakness

Posted on July 24, 2012 by Andrew Thrasher

Things appear to have broken down pretty quick over the last few trading sessions. What took 6 days to build only took 3 to destroy in the S&P 500. Apple came out with weaker-than-expected numbers after the close today, as did Netflix. It doesn’t feel like we have experienced enough pain for a bottom. Although there is one chart that sticks out to me that indicates we might see some type of relief or consolidation.

Below is the percent of Nasdaq issues hitting record highs. I’ve put green dotted lines to show when the figure has broken past 10% and then come back up. As you can see this has typically happened at or near at least short-term bottoms. The most recent market action has taken us to touch the 10% threshold and back up, so it’s not as clean-cut as previous instances. Now a chart like this should be filed under ‘chart porn’, and not traded upon by itself but it’s success rate since 2010 is pretty interesting.

What is keeping me considered about equities and not fully convinced everything negative has been baked into this market is the fact small caps have been getting destroyed. We last looked at this chart of IWM back on July 19th, due to the negative divergence with large caps, right before this recent drop. As you can see, over the past two days, small caps have sold off a lot harder than large caps as traders are likely shedding their higher beta positions. We are seeing the same type action in 10-year Treasuries, with yields dropping to new all-time lows, closing out today at 1.40%.

Tomorrow Tim Geithner will testify before the House Financial Services Committee about the U.S. recovery, Europe, and the fiscal cliff, which could give traders some reasons to kick up volatility a notch. The market will also be looking to digest earnings data tomorrow from Boeing, Delta, Lilly, Pepsi, and Whole Foods. Be smart out there.

Confirmed Hindenburg Omen

Posted on July 23, 2012 by Andrew Thrasher

It appears we triggered the criteria for a Hindenburg Omen with today’s market action.

I don’t put a lot of weight in the omen and Barry Ritholtz put it well back in 2010 in the WSJ, “the Hindenburg Omen is a backward-looking indicator that doesn’t consider causation. He labels it “recession porn,” contending that investors are attracted to negative commentary and conspiracy theories during skittish markets.”

From Investopedia:

According to Robert McHugh, CEO of Main Line Investors, “The omen has appeared before all of the stock market crashes, or panic events, of the past 21 years,” speaking about 1985 to 2006.

Having a signal that can generate sharp market declines is appealing to all active traders, but this signal is not as common as most traders would hope. According to McHugh, the omen only created a signal on 160 separate days, or 3.2% of the approximate 5,000 days that he studied.

Here is a chart from McClellan showing past signals going back to 1980:

Below are the criteria to trigger the Hindenburg Omen based on an article by John McClellan:

The criteria that Miekka provided are different from the ones listed in Wikipedia, likely due to refinements that Miekka made:

Both NH and NL must exceed 2.8% of the sum of Advances plus Declines (unchanged issues ignored) on the same day.

The NYSE Comp (NYA) must be above its value of 50 trading days ago (a conversion from a weekly MA rule to a rule befitting daily data).

Once initiated, the signal is valid for 30 trading days, and any additional HO signals during those 30 TD should be ignored.

The signal is activated (i.e. go short) whenever the McClellan Oscillator is negative, and deactivated whenever the McClellan Oscillator is positive (within the 30 TD window).

The criteria varies depending on which source you use, whether it be the 4 points listed above or those found at Wikipedia. I’ve put the mix of criteria in the graph below, with everything (as far as I can tell) having triggered no matter which checklist you look at.

So there you have. Take it with a grain of salt but nonetheless it’s interesting.

An Updated to this post is here

Sources:

Be Aware Of The Hindenburg (Investopedia)

Hindenburg Omen Signaled, But Also Not (McClellan)

Anecdotal Agriculture

Posted on July 23, 2012 by Andrew Thrasher

I’d like to cover two related topics in today’s post…first a piece of anecdotal commentary from my grandmother who owns a farm in Illinois and second a couple COT charts.

I got an email from my grandmother over the weekend about her farm. There has been a piece of Illinois farm land in my family for I don’t know how many years, but the farmer who owns the land next to my grandmother’s farm is the one to tends to it. My grandmother just handles timing of when she sells her crop.

I’ve tried to keep up with my grandmother regarding the drought the Midwest has been experiencing the past few months and it’s impact on the land. At first it seemed Illinois farmland was holding up better than that of Indiana (the state I live in). However, In her latest email she said that farmers aren’t expecting to have any hay by September to feed the cattle. She said the entire state of IL is in worsening shape except the north-eastern portion (i.e. Chicago). Originally her crop was holding up fairly well, with the corn crop having deeper roots than previous years which allows it to endure the wind. Unfortunately, I’ve heard some farms in southern Indiana have already mowed down their crop for the year since there was little chance of saving it. It’s extremely sad what many farmers are going through this summer. Few people I’ve spoken to believe it’s too late for rain and that even if we got some it wouldn’t make a material difference on many of crops here.

Now this is just the opinions of a single person who owns a farm. It doesn’t mean this is the characteristics of other farms, but I thought you all would find it interesting as a different view than just USDA data.

Now onto the COT charts for this week….

With that being said about the worsening conditions for farmers, we are seeing historically high net long positions in feeder cattle. The highest through 2007.

We are seeing opposite action in the wheat market. With commercials extremely net short and large traders historically net long.

I look at COT data each week because I think it’s key data when evaluating various markets. It’s one of the few places you can get a glimpse of what traders are actually doing. However, the drought we in the Midwest are experiencing is considered by many a game changer. There is a chance the awful crop season is priced in to the affected futures markets but the summer isn’t over and the weather could shift the playing field at anytime.

An Interesting Setup in Oil

Posted on July 20, 2012 by Andrew Thrasher

A few days ago while driving to work I noticed the price of gas was $2.97/gallon and then while driving home the price had risen to $3.55/gallon. A 58 cent increase in under 12 hours. You have to love commodities!

The chart we are going to look at this morning is light crude oil. First lets look at the ultimate oscillator, which measures buying pressure based on three-weighted time periods. As you can see with the blue circles, since early 2010, whenever the ultimate osc. breaks above 70 we typically see crude either drop or consolidate. The price of crude oil is also back to the previous low set in December, which could act as resistance.

Oil has risen nearly 20% from its June low, but that doesn’t mean it couldn’t continue its trek back to $100/gallon. It’s often best to not try to front-run moves like this, allow price to confirm what we are seeing here. It’d be nice to see some short-term weakness before retesting its current price while allowing a negative divergence to be created with the ultimate osc. in order to confirm our thinking….time shall tell.