The Insights of Swing Trading
by Scott Hoffman, Senior Broker & CTA
The past week saw the financial markets buffeted by weak fourth quarter stock earnings in the US. We also saw a sharp jump in energy prices reflecting unrest in Nigeria and concerns over Iran’s nuclear program. In addition, there are worries that the Iranians may be moving assets out of Europe as they fear that they may have overseas assets frozen if the UN imposes sanctions on them. This week will see consumer confidence on Tuesday, preliminary fourth quarter GDP numbers on Friday, and traders will start to look toward the next FOMC meeting on January 31st. The earnings reports continue this week; the poor start to earnings ended the Santa Claus rally, although traditionally January isn’t especially bullish for stocks.
S&P
Was Friday the signal for more to come in the stock indices? Last Wednesday’s break held at the 50% retracement level of this year’s rally, Friday’s plunge through it may set the stage for the test of the end of 2005 low at 1251.50. Only a move back over 1278 (a 50 percent retracement of the recent selloff) takes the pressure off the Spoos.
NASDAQ
The attempted recovery on Wednesday and Thursday came to a thudding halt on Friday, as higher energy prices and weak earnings slammed stocks on Friday. Although we may see a bounce next week, only regaining 1700 negates the bearish in the NASDAQ. Tech stocks are seeing weak earnings at a time after a big run up; this is a formula for lower prices. My downside target is 1646 - right where we started the year.
Dow
After breaking under its low from December last Friday, the Dow is the weakest of the stock indices. Look for more downside although a move back over the December low at 10730 may take some heat off.
Bonds
The big reversal last Wednesday may spell trouble for the bond rally, as the market was unable to maintain trade over the old high at 115. This level remains the key resistance for the bond market. 11408 is a 50% retracement of the last rally and is important support. Bonds have found a comfort zone around 114-16; look for the FOMC meeting to start a new trend.
Dollar Index
The Dollar has a well defined channel this year, with 8950 on the upside and 8850 on the downside. Monday’s break out of this channel projects to 8750, which was nearly reached on Monday. The Dollar is being hurt by interest rate prospects - the US is near of the tightening cycle, and comments from the ECB indicate they’re considering raising interest rates.
Yen
Monday saw the Yen break out to the upside out of a recent pennant formation (see chart). This rally pushed the Yen up to January’s value area around 8800, but they were unable to hold up there. I like the long side of the Yen, but the congestion area around 8800 is going to be hard to clear.
EuroFX
Thursday saw an attempted downside breakout of the recent triangle, only to see a strong recovery on Friday. Monday saw a sharp rally out of the triangle. The length of time the market was in congestion indicated that there would be a strong move out of it, as market participants often rush to buy into a breakout (or cover losing positions), which accelerates the move. Look for further upside in the Euro.
Gold
Gold is advancing in a choppy pattern following a channel higher. Last Friday’s intraday rally and selloff should have been troubling for the bulls in the short run. Monday saw a narrow range/inside day setup, which could lead to a breakout and directional move this week. A move under $550 could lead to a retest of support in the low 540 area, which would represent a good buying opportunity.
Silver
Last Friday’s wild ride in silver covered most of the week’s range, as silver was unable to move over the double top in the upper 9.20’s. Silver appears to have found a comfort zone around 9.00 with good resistance between 9.25 and 9.30, and support at 8.90 then 8.80. For the time being I would look to “fade” a move to either extreme while waiting for a catalyst to move out of the channel.
Copper
Copper is in a channel between 213 and 208; Monday’s rally left copper in a position to break out to the upside on Tuesday. Copper prices are being supported by high domestic copper prices in China, possibly related to buying ahead of the Chinese New Year. I like the setup here and would look to buy a breakout over 213.
Sugar
After a slow start to the week last week, sugar exploded higher, rallying 145 points on Thursday and Friday. Sugar is seeing panic buying over fears of tight supplies, especially as Brazil continues to expand its ethanol production for fuel. Brazil estimates it will use approximately 50% of their sugar crop for ethanol production. Sugar’s chart is a very informative one to study for how to enter a trending market, as the January 13th rally out of the flag correction led to a strong rally in a strongly trending market. Monday’s upside gap remained open, but the late session selloff hinted at more downside. I don’t think this run is over, however, and I am looking to re-buy this market.
Crude
Geo-political problems in Nigeria and Iran are pushing crude oil higher, as are tight supplies in the US. Last week the Department of Energy had to release oil from the Strategic Petroleum Reserve to refineries in Texas, a troubling sign. Last week’s trade was a breakout above the sideways congestion of the previous weeks, with the post-Katrina highs of 70.70 as the next target.
Live Cattle
Last Friday was a prime example of the old adage “sell the rumor, buy the fact”. The Japanese government imposed a ban on US beef imports after some tainted beef was found, but the lack of follow-through selling brought in panicked short covering. Cattle continue to trade within the range established on January 11th, and Friday’s Cattle on Feed report did little to resolve the indecision in this market; although I am bullish on cattle longer term.
Lean Hogs
Last Tuesday saw a sharp selloff in April Hogs as they broke out of a narrow range setup, which pushed prices to a three month low. Monday saw Hogs test down toward the 6280 low, which held and led to short covering back into the recent small triangle. Look to sell a move under 6280 in this down trending market; while a move over last Friday’s high might lead to more short covering.
Soybeans
Soybeans have been contained by gap resistance at 5.78 and support in the low 560s. The gap from 5.78 to 5.83 is a tempting upside target, with a rally back to 5.90 basis March not out of the question. Longer term, however, I think it will be difficult to rally too far barring a weather problem in South America, and I am looking for a break before the US planting season targeting 5.50. Memories of rallies in 2004 and 2005 may provide support, but a good South American crop will mean ample supply and lower prices.
Wheat
Last Tuesday saw a big break out of the inside/narrow range setup on January 17th, but the inability to break under 321 led to short covering last Thursday and Friday. Monday saw a failed attempt to push above the 2006 down trendline. A break under the year’s low at 321.50 should lead to a move toward the lower 300 area.
About the Author
Scott Hoffman is a Senior Broker and CTA with Daniels Trading. After graduating from the University of Chicago in 1986 with a degree in Economics, Scott worked on the floor of the Chicago Mercantile Exchange. Following his time at the CME, Scott went to work off the floor, serving as the personal broker to a former chairman of the Chicago Board of Trade. Here Scott learned the trading and brokering business, a process that he continues to expand and refine.
Scott is the publisher of Swing Trader’s Insight, a comprehensive swing trading advisory service covering all of the major futures markets. In addition to a nightly newsletter, Swing Trader’s Insight provides in-depth client education complete with specific trade recommendations and market analysis, including an S&P Morning Insight commentary, Midday Updates and Trade Management Updates. Although Scott specializes in swing trading, he has years of brokerage experience that is available to all of his clients, regardless of their individual trading styles.
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