Change text size

• Email This Article
• Print This Article
• Digg This
• Delicious
• Subscribe

“May you live in interesting times”
               ~Ancient Chinese Curse

Darn Chinese. They really got us good with that one. For about the only thing that you can say for sure these days is that we definitely do live in “interesting” times. That’s interesting, as in perplexing, maddening, irritating, frustrating, exasperating, etc. The global economy is in great turmoil as crude oil – the engine that drives the global economy, whether we like it or not – continues to get more and more expensive. This in turn has caused great turmoil in the global financial markets. In some ways the financial markets have never been more, ahem, interesting. Let’s take a look at a few of the more significant developments.  

Reversal Point or Armageddon?

Last week I wrote about the fact that the financial markets may soon get really wild. To which some replied “what do you mean get really wild?” And they make a good point, because there have been a number of big moves in prices among stocks, bonds and commodities of late. However, most of those moves have been in a particular direction. In other words, the commodities markets have mostly advanced in price and the stock market has mostly declined in price. So while the movements have been relatively large, ultimately if you were able to bring yourself to latch onto a trend you should not have had too much trouble being on the right side of things. And my point was that things may get less “easy” in the days ahead. For it is quite common for the markets to trade in large trading ranges once a major advance (or decline) has run its course.

So have a number of major advances (and declines) run their course? A quick perusal of the major futures markets reveals a fairly amazingly large number of markets that have touched or come within a hair of touching a meaningful support or resistance level in the most recent fortnight. In fact, I personally cannot recall ever seeing so many different markets reach their respective “inflection” points at the same time. So do some of the reversals of Tuesday 7/15 signal a meaningful new trend or just a temporary pullback?  Well, my crystal ball shattered a long time ago, but it is not a stretch of the imagination to expect some meaningful corrections in the days ahead. At the same time, despite a $6+ decline in the price of crude oil, the stock market still can’t seem to find a bottom. Interesting.

The following futures markets have very recently flirted with or tested a significant resistance level:

British Pound
Euro
Soybean Oil
Cocoa
Crude Oil
Unleaded Gas
Heating Oil
Copper
Orange Juice
Sugar
Soybean Meal

The following futures markets have very recently flirted with or tested a significant support level:

Russell 2000
Canadian Dollar
Cotton
US Dollar
Live Hogs

In the current emotionally charged investment climate, many traders are of the mind that the majority of these markets will move easily through their respective support or resistance levels and continue to march to higher (or lower) ground. And that may in fact turn out to be the case. Nevertheless, it is useful to step back once in a while and remember that even the strongest trends experience pullbacks from time to time.

Not So Energetic Energies

For some time now, the number one topic of conversation has been the price of gas. The typical conversation is not something that I can repeat here since this is a “PG” rated column, but the gist is that gasoline prices are soaring higher day in and day out. And while that may or may not be true based on where you are located, what I have found to be quite interesting has been the action of the Unleaded Gas market. In this case we can ask that age old question “is it possible for a market to be perceived as rallying like crazy without actually going anywhere?”  Consider the action of UGA, the exchange-traded fund that tracks the price of unleaded gas futures as displayed in Chart 1.

Chart 1 – Unleaded Gas, going nowhere "loudly"

UGA hit a high of 66.27 6/6/08. Since that time it has passed from below to above that price level repeatedly without ever breaking solidly to new high ground. This is the type of price action that one typically sees before a stock or futures market runs out of steam and heads lower. Sure enough, on 7/15 UGA plunged -4.9%. So are happy days here again?  Are gas prices destined to plunge further from here?  I hope so, but only time will tell. Nevertheless, let this serve as a reminder to look beyond the headlines and heavy rhetoric to see what the markets are really doing.

I have mentioned a few times in recent weeks that in the face of all of the bad news that seems to inundate us on a daily basis, the stock market needs a catalyst in order to launch any kind of a meaningful rally. A sizeable drop in the price of crude oil and gasoline would certainly fill the bill.     

Another Case of “Ignore the Headlines”

Much has been made of Exxon’s (take your pick below):

a) Record profits
b) Obscene profits

Still, while the average person thinks of Exxon as an unstoppable monolith, it is interesting to note that today Exxon stock stands unchanged from its level of May 2007. In other words, in the past 14 months the stock has gained no ground whatsoever, as you can see in Chart 2.

Chart 2 – Exxon moves sideways for 14 months – testing support? 

So what does this teach us? 

-Record/obscene profits do not guarantee stock price performance
-Always look beyond the headlines 
-Never ever listen to politicians when they are blowing hot air (which is code for “never listen to politicians, period”).

What to Do Now

Since I cannot predict with any certainty what will take place in the stock, bond and commodity markets at this critical juncture, let’s instead talk in terms of doing some contingency planning. Any trader who has recently been riding a strong long or short trend might want to consider taking some profits in the near term. This is especially true of the indicators for the security you are trading – for example, the MACD or the 3-day RSI Index – are experiencing divergences from price. In other words, if the security is making a new high and the indicators have topped out or made a series of lowers highs, this is often a warning sign that profit-taking might be a good idea. Remember that you can always get back in if the relevant support or resistance level fails to hold.    

Experienced traders – i.e., those who have taken some hits in the past and lived to talk about it, might consider trading off of some of the recent support and resistance levels established by a number of futures, indexes and stocks. For the rest of the population, this is probably not the time to be a “hero." While it is tempting to try to pick a top or bottom, in the long run it is far better to trade with the major trend.

The stock market – along with a lot of other markets, as I have just discussed – is at a very critical juncture. Typically when the stock market gets very oversold, it bounces. At this point every overbought/oversold indicator that I follow is long past the point of being oversold. This suggests one of two scenarios: either a bounce is coming soon or something really bad is about to happen. So now is not the time to stick your head in the sand. Just remember to pay attention to the action of the market and not to what the pundits have to say about the market.

Interesting times indeed.

To search for previous articles written by Jay Kaeppel, please click here.

Jay Kaeppel
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site

• Email This Article
• Print This Article
• Digg This
• Delicious
• Subscribe

Recent Articles by Jay Kaeppel, Optionetics.com

• October 15, 2008
  Kaeppel’s Corner: The Number One Biggest Mistake in All of Trading
• October 1, 2008
  Kaeppel’s Corner: This Is Why We Trade
• September 24, 2008
  Kaeppel's Corner: Now What?
• September 18, 2008
  Kaeppel’s (Bonus) Corner: What an Ugly Bottom Looks Like
• September 17, 2008
  Kaeppel's (Bonus) Corner: What a Double Bottom Looks Like (Maybe?)