Bill Cara

Bill Cara’s Blog for Feb 26, 2013

CTA Trading Desk Morning Report

[7:00am ET] Good morning, Geoff here.

The weak US Dollar that I mentioned prior to yesterday’s open ended up reversing, moving strongly to the upside. That strength pressured equities south but gold managed to rally along with bonds.

Last week I showed you the following chart:

ggimage05_022213.png

Here is that chart updated to yesterday’s close:

ggimage03_022613.png

As you can see, the shift has begun to take shape, how long it lasts is anyone’s guess.

I want to be clear, I’m not boasting about this call – I want to point out something that’s actually important. Please note what I wrote in the chart last week:

“However, as stocks have been making new highs, talking heads have been really pushing the “Great Rotation” story about selling bonds and buying stocks – which is the opposite of what I am saying to do now. Often, at turning points, financial TV pushes the exact opposite of what people should do…”

I wrote that because I have seen it happen so many times that it is almost money in the bank. When the Four Pillars analysis says to do one thing and Financial TV is saying to do the opposite, Four Pillars is correct 9 out of 10 times (exaggeration, it is probably better odds than that 😉 ). This new “reporting” could be a conspiracy or it could simply be recency bias – it doesn’t matter to me, I just know that it works. Has anyone ever made any money listening to CNBC? It is more profitable to fade CNBC.

You may be getting tired of seeing the following chart but it is important to understand how a typical distribution process works in case equities are indeed topping.

Wyckoff Distribution

ggimage04_022613.png

This occurred last fall. Please note how when price fails to make new highs, it tries again. In this case, the internals were deteriorating as attempts at new highs failed. The basic features of; distribution, lower peak, weakening internals, breakdown, throwback and markdown occur often and should be studied if you are new to trading.

I did not include “distribution day” volume in the above chart, but in the last week that has occurred. That meant that the market was possibly going to decline, which it did.

The current decline should be supported by the massive liquidity that global central banks are going to provide so I doubt that we witness a crash. It could occur, but in my opinion, it is more likely that equities either move to new highs or consolidate at these levels over the next few months in a pattern like above. That is why I only gave 2 scenarios in my weekend report; 1470 support or new highs – those are the levels that I like to start to buy back stocks.

Gold:

The gold bull has been marked by periods of unsustainable price rallies followed by consolidation periods before rallying once again. I have shown this in the following chart:

ggimage01_022613.png

Noting that gold fundamentals are extremely strong, the question is; is gold starting on rally #6?

Here is a close up:

ggimage02_022613.png

That chart, combined with everything that I have been writing about the last week, says that there is a good chance that it is starting on rally #6. I would like to see price get through the next 2 days of Bernanke testimony and the Italian election issue unscathed, but it definitely looked good for a long trade, albeit a risky one.

Here is the CEF trade updated:

ggimage05_022613.png

So far so good but please note that this is a high risk trade.

I have said that the mining shares have been trading like they are going to “zero”. I also said that as a sector, the opposite will occur with prices making new highs after it shakes off all the weak hands. I was reminded of this when I was looking through some mining data last night.

The following charts are not meant as trading recommendations. I merely want to show you why I think the odds of these companies going to “zero” are slim and sometimes pictures are better than words. These charts are only estimates, but do these Cara 200 companies look like they are going out of business?

AGI

ggimage06_022613.png

MUX

ggimage07_022613.png

NGD

ggimage08_022613.png

RGLD

ggimage09_022613.png

SLW

ggimage10_022613.png

Various inputs including the price of gold and other metals will affect those charts. But, if I am right and we are about to witness another rally, the charts will improve.

(Disclosure: CTA is long CEF, AGI, MUX, NGD, RGLD, SLW)

Have a great trading day!


Here are the 7:00am ET snapshots of the latest equity market trading results for Europe, and futures prices plus 5-minute charts of the futures for S&P 500, 30-year US Treasury Bond, US Dollar index, Gold and Crude Oil.

SymbolNameLast TradeChangeRelated Info
^ATXATX2,398.85 6:45AM ESTDown 45.29 (1.85%)Components, Chart, More
^BFXBEL-202,581.30 Feb 25Up 36.30 (1.43%)Components, Chart, More
^FCHICAC 403,633.29 6:59AM ESTDown 88.04 (2.37%)Components, Chart, More
^GDAXIDAX7,629.81 6:45AM ESTDown 143.38 (1.84%)Components, Chart, More
AEX.ASAEX General335.75 6:44AM ESTDown 4.51 (1.33%)Components, Chart, More
^OSEAXOSE All Share518.95 6:45AM ESTDown 3.57 (0.68%)Components, Chart, More
^OMXSPIStockholm General369.91 6:43AM ESTDown 4.72 (1.26%)Components, Chart, More
^SSMISwiss Market7,457.48 6:44AM ESTDown 136.87 (1.80%)Components, Chart, More
^FTSEFTSE 1006,271.42 6:45AM ESTDown 83.95 (1.32%)Components, Chart, More
FPXAA.PRPX Index994.98 6:59AM ESTDown 18.77 (1.85%)Chart, More
MICEXINDEXCF.MEMICEX Index1,503.66 7:45AM EST 0.00 (0.00%)Chart, More
GD.ATAthex Composite Share Price Index989.28 6:44AM ESTDown 6.09 (0.61%)Chart, More

http://finviz.com/futures.ashx

http://finviz.com/fut_chart.ashx?p=m5&t=ES

http://finviz.com/fut_chart.ashx?p=m5&t=ZB

http://finviz.com/fut_chart.ashx?p=m5&t=DX

http://finviz.com/fut_chart.ashx?p=m5&t=GC

http://finviz.com/fut_chart.ashx?p=m5&t=SI

http://finviz.com/fut_chart.ashx?p=m5&t=CL

The team will check in during the day, reporting in the Discourse when there is a new entry.

Enjoy your day.


Cara 100 Company research notes from Seeking Alpha

Apple (AAPL)

Feb25: 12:52 PM Apple’s (AAPL -0.2%) newfound success in India could provide a template for attacking emerging markets where the iPhone’s high unsubsidized prices have limited sales. Payment plans – one promotion involves a $93 up-front payment for an $840 iPhone 5 – have grown Apple’s addressable market, a splashy ad campaign has increased brand awareness, and new distributor deals have expanded reach. Canalys estimates Dec. quarter Indian iPhone sales nearly tripled Q/Q to 250K, though Apple’s 5% local smartphone share is still well behind Samsung’s 40%.


Chevron (CVX)

Feb25: 3:58 PM Chevron (CVX -1.9%) says it may consider expanding its proposed liquefied natural gas export terminal off Canada’s Pacific coast because of its “vast amounts” of gas reserves in the Liard and Horn River formations in British Columbia. Meanwhile, Canada’s government gives final approval to an export license for Shell’s (RDS.A) planned LNG plant on the coast, only the third such approval.


Cummins Inc (CMI)

Feb25: 2:06 PM Cummins (CMI +0.5%) bucks a weak tape after Goldman Sachs ups the shares to Conviction Buy with a price target of $144. The price target represents a 30% upside from current levels, as Goldman says it’s expecting a strong new product cycle in machinery, with contract awards in the coming months that could exceed $1B. The firm adds that CMI’s core global truck markets are also in the early stages of recovery as production rises off trough 1Q levels.


Home Depot (HD)

Feb26: 6:47 AM More on Home Depot’s (HD) Q4: The retailer grew sales faster than operating expenses rose as a a continued recovery in the housing market along with a benefit from repair sales tied to Hurricane Sandy contributed. Comparable store sales were up a brisk 7% for the period. For 2013, the company sees total sales growth of 2% and EPS of $3.37. Capital spending of $1.5B is forecast. 6:21 AM The Home Depot, Inc. (HD) declares $0.39/share quarterly dividend, 34% increase from prior dividend of $0.29. Forward yield 2.44%. For shareholders of record Mar. 14. Payable Mar. 28. Ex-div date Mar. 12. The board authorized share repurchase program of $17.0B cancelling the previous authorization.


Intel (INTC)

Feb25: 12:17 PM As was the case at CES, Intel (INTC +0.3%) is unfurling a PR blitz at the Mobile World Congress. The company has officially announced its Clover Trail+ smartphone CPUs (previous). There are 3 dual-core chips in the family, with speeds ranging from 1.2GHz.-2GHz. Also unveiled is the XMM 7160 (.pdf), Intel’s first LTE baseband modem with 2G/3G support. Intel says the chip, meant to challenge Qualcomm’s 4G dominance, will ship in 1H, but Paul Otellini previously stated the first phones with an Intel LTE modem won’t arrive until early 2014.


Johnson & Johnson (JNJ)

Feb26: 3:19 AM A jury is due to start hearing arguments today about the punitive damages that Johnson & Johnson (JNJ) should pay for damage caused to a South Dakota patient by the company’s Gynecare Prolift vaginal mesh. The jury yesterday ordered J&J to pay Linda Gross $3.35M. J&J faces 4,000 lawsuits over the product in the U.S., although Morningstar analyst Damien Conover reckons J&J should be able to withstand any further penalties.


MasterCard (MA)

Feb25: 11:30 AM MasterCard (MA -0.5%) reveals more details of its new mobile payments initiative, saying a virtual wallet will allow customers to scan items as they meander through stores and show a proof of payment via their phone as the exit. Though a retail system without checkout lines still seems like it’s a ways off, the company’s virtual wallet presents an attractive online payment solution right off the bat.


Vad’s Catch of the Day


Kaimu’s Sound Money


Deron’s Daily ETF Analysis

In this February 22 post on our trading blog, which was published immediately following two days of heavy selling on February 20 and 21, we said, “If and when the S&P attempts to bounce from its current level, the subsequent price and volume action that immediately follows any recovery attempt will be extremely important at determining whether stocks are merely take a breather, or if the rally is dead…If the S&P 500 generates another distribution day that follows just a feeble, light volume bounce off the current lows, that could be the nail in the coffin for the current rally.

The scenario highlighted in bold text above is exactly what has happened over the past two days. After just a one-day lighter volume bounce last Friday, stocks again got slammed on higher volume yesterday (February 25). Since the S&P 500 Index has now logged three distribution days within the past four sessions, and individual leadership stocks have begun to falter, we are now selectively targeting new stocks and ETFs for potential short sale entry.

Even though we have been trading exclusively on the long side of the market since the new buy signal was received at the start of 2013, we are objective, emotionless trend traders who simply follow and trade in the same direction as the dominant market trend (which now favors the downside, at least in the near-term).

The PowerShares Nasdaq 100 ETF ($QQQ) closed below support of its 50-day MA yesterday, with an ugly, wide-ranged reversal candle (all the major indices formed bearish engulfing candlestick patterns yesterday). Although support of the 200-day moving average of $QQQ is not far below its current price, prices can slice through important moving averages like a hot knife through butter whenever the market is in distribution mode. Moving averages work really well in a bull market, but not so much when conditions turn sour. The ugly pattern in $QQQ is shown on the daily chart below:

$QQQ UGLY REVERSAL CANDLE

The recent relative weakness of $QQQ really becomes clear when comparing its price action throughout last rally with the S&P 500 SPDR ($SPY): On the chart below, notice that the S&P easily cleared its prior highs, but $QQQ struggled with its initial swing high from December 19 (attributed in no small part to the sharp correction in Apple ($AAPL) recently):

$QQQ UGLY REVERSAL CANDLE

Operating with the idea that the 200-day moving average of $QQQ will not provide significant support, we now expect $QQQ to fall to test its prior swing low (around the $63 to $64 area) over the next two weeks. As such, we are now targeting this trade as an “official” momentum swing trade setup on today’s watchlist.

Rather than selling short $QQQ, we plan to buy the inversely correlated and leveraged ProShares UltraShort QQQ ($QID) instead. This enables our subscribers with non-marginable cash accounts (such as IRAs) to still take advantage of newfound bearish momentum in the market, without technically selling short. As always, our exact entry, stop, and target prices for the $QID trade setup should be noted in the ETF Watchlist section of today’s report above.

As you can see on the daily chart of the benchmark S&P 500 Index below, it’s always a bad technical signal when distribution days cluster over a very short period of time:

$SPX DISTRIBUTION

Numerous times in the past, a cluster of distribution days after an extended rally, combined with the suddenly poor performance of individual leadership stocks, has been enough to prompt us to exit long positions within just a few percent of a market top (here is one such actual example from mid-2012). This has once again been the case, as we have exited all long stock positions (mostly substantial winners), and nearly all of our ETF positions (a handful of small losers) over the past few days.

Overall, we had a positive, profitable run from the rally of the past two months (exact statistics to be reported soon), and now are focused on preserving those gains through the combination of sitting patiently in cash, combined with selective short selling of stocks and ETFs with relative weakness.

The above commentary is a shortened version of the February 26 issue of The Wagner Daily, our nightly ETF and stock picking newsletter with a 10-year track record of performance. More information and risk-free 30-day trial subscription available at http://www.morpheustrading.com.


Point and Figure on Canada


OptionOracle


Harp’s Roadmap


Cara on the Metalminers


Cara on the International Markets


CTA Trading Desk Mid-Day Report


CTA Trading Desk Post-Close Report