Friday, July 11, 2008
This is huge!
While the Dollar today is collapsing:
The price of crude oil has set more and more new records, surpassing $147/barrel for the first time:
And the stock markets have plunged. It is a miracle the Dow isn't down 300-400 points:
Rumors are even circulating this morning that the Bush Administration is considering taking Fannie and Freddie into receivership because they are so deeply in over their heads.
Here is an excellent article, well researched and factual, on Congress' role in this energy crisis, and why they are trying to shift the blame. It also discusses what will be the consequences for America. Excellent article by Walter E. Williams. Enjoy!
Thursday, July 10, 2008
The price of crude oil has risen more than $6 today, crushing another attempt at a stock market rally. Crude oil at $142/barrel is incompatible with strong equity markets.
The Iranian leadership has learned that they can manipulate the price of crude oil with a single sentence. By simply threatening to destroy Israel, they have learned that they can add $2-5 to the price of a barrel of oil within an hour. This adds billions of Dollars to their treasuries within a week or two.
With an economy in shambles and high unemployment, the leaders of Iran have realized that they can increase revenues easily and quickly by bellicose talk. If you were desperate to retain power and suppress your people, wouldn't you do the same?
Remember the taking of British soldiers as hostages, the buzzing of U.S. warships in International waters, the constant threats to Israel, the threats to shut down the Straight of Hormuz, and the recent missile test firings? All of these events have driven the price of oil substantially higher within minutes of these event reaching the news wires.
Here we go again!
The Dow rally (see chart) has been cut almost in half! Note that the selling in this chart is more robust than the rally in the last one! Also, now that the testimony of Paulson and Bernanke are complete, the attention of Wall Street appears to have shifted.
Stock futures have also now begun to stage a rally -- up 100 points on the Dow. This is somewhat surprising, given that the price of crude oil has risen $2 today. Apparently, stock traders like what they are hearing in the Congressional hearings from Sec. Paulson and Fed Chairman Bernanke. Sec. Paulson has reassured the markets that Fannie Mae and Freddie Mac are adequately capitalized and are not insolvent, as the rumors suggested yesterday.
This rally, however, looks somewhat weak to me. It probably has its legs on relief that maybe the rumors regarding the financials are not as bad as we thought over the past few days. The Lehman Bros. rumors persist, however. If oil continues to rise, it's hard to imagine how it can continue. It looks like more of a relief rally to me. Probably temporary, as the underlying problems aren't going away.
The longer-term daily charts are showing early signs of a possible consolidation pattern setting in, with more rallies one day and collapses happening the next day.
Even still, on the bearish side, I notice that the latest highs for crude oil occurred within the Bollinger Bands, a sign of diminishing upward momentum, and the Klinger Volume indicator has just turned red for the first time in months, although it is stillwell above its moving average as well. The stochastic indicator has been overbought for many weeks, and the MACD is also overbought. Only time will tell.
Crude oil is $1/barrel higher during overnight trading.
Wednesday, July 9, 2008
The stock market bears are back in charge today. The stock market rally yesterday has fizzled, and it appears that the bear market will continue, at least for the time being. Here is today's intra-day charts:
And here is the daily chart that looked like it might be forming a bottom over the past few days. Note today's reversal:
This is an interesting phenomenon today, that both crude oil and stock index prices are lower. I have no explanation, but the correlation between the price of crude oil and stock index futures appears to have been broken, at least for now.
One of the reasons for this is that despite heavy buying or selling by one very large fund, the effect of that buying or selling is very short-term in its consequences, lasting just a few moments. No matter what the size of a fund's order, it still only counts for just ONE order to buy or sell crude oil. As soon as that fund stops buying or selling, the effect dissipates almost immediately.
Thus, even a very large fund buying crude oil in massive volumes can be easily offset by just a few small traders selling smaller volumes at the same time. In the example above, the effect of the 500,000 notes that were selling crude oil were quickly nullified by the few thousand (2700 in this last candle) that were buying crude oil. This must be very frustrating for large funds to know that small investors and traders can have almost as much impact on the market as they can, offsetting all that buying and selling of the big funds with much smaller trades that have just as much impact.
Congress should wake up and learn the lesson the market is trying to send them. It's is a very silly argument (suggesting that speculators drive prices higher) once the facts are known! Congress needs to acknowledge that it is -- at least in part -- bad policy that is affecting the supply and demand for crude oil worldwide, and the blame needs to begin where that policy starts -- in Congress' own house -- right at home. Until that changes, the fundamental reasons for high fuel prices will stay the same, and prices will likely remain elevated.
Over the next few days, I will be writing about day trading ETFs (and ETNs) in my other blog. I will also indicate which ETFs I day trade. There are only a handful with sufficient liquidity to do so. Did you know you can day trade crude oil through ETFs without any leverage?
This is a rare event, when most of the futures markets are under an umbrella of low volatility and are trading mostly sideways. Sometimes it happens prior to a major news event, when traders are unwilling to commit to any action, so the market trades sideways, with low volume, or in an erratic fashion. This sometimes occurs prior to a major Fed decision or in anticipation of the NFP or a crop report.
However, I usually keep some good trading books near my desk, including all the ones I've listed in the right column of this blog. Phantom of the Pits recommends keeping a good book nearby to read on a day when trading goes poorly. This helps to prevent negative thinking and a poor attitude from becoming entrenched. I use this same tactic on days when the financial markets show relatively stagnant activity. I like to use the time productively, even when the financial markets are difficult to trade.
Rarely do I read for an entire day, however. There is too much going on in the world's financial markets for them to remain stagnant for more than an hour or so. There is the temptation to walk away from my desk and do something else, even if for a few minutes. However, it seems that there is a gremlin that seems to know when I am away from my desk, because inevitably when I am away from my desk, something will happen that will cause the markets to take off, and that little gremlin makes sure that always happens when I am away from my desk.
The market gremlin always knows! Darn his hide!
Tuesday, July 8, 2008
This chart for today's activity in stocks shows a nice rally after nearly two weeks of sideways to slightly downward trading. Very nice rally over the past two hours!
Note also that on the daily chart (below), the stock indexes have been building what appears to be a possible bottom. A confirmed buy signal for me includes the following:
- Prices close above the 8-period Exponential Moving Average. In this chart, prices still haven't closed above the EMA, so we will have to wait until tomorrow's close to determine whether this buy signal will be completed. However, this chart is very close. The EMA changes to green (it hasn't yet) when prices cross above it and remain there until the close of the day.
- The Klinger Volume indicator is higher (green) and above its moving average (yellow)
- Prices move higher the day after the combination of the above two signals
Where's the bull?
This principle is also taught by Chick Goslin in his book "Trading Day By Day", and also applies to the financial markets. Financial trends in motion also tend to stay in motion -- unless some other powerful countervailing force intervenes. Prices that have declined substantially can decline still further. In fact, stocks can go to zero. (Commodities don't. They always eventually find a bottom and retain value. I guess that means I'm biased.) The larger the market, the longer the trend tends to remain in motion. It takes a great deal of energy to change or shift momentum toward the opposing direction.
Monday, July 7, 2008
Amazing the difference 5 minutes makes. Look at these charts versus the ones from my last post. Wow! These are the kinds of movements that traders love.
The Connection to Crude and Relationships Between Futures
Lest anyone make the mistake of assuming that these relationships are permanent, I would warn others against making that assumption. These relationships between futures markets are as fluid and changing as the markets themselves. Still, the striking relationships between these three futures (stocks, treasuries, oil) are hard to miss (see the three charts below). These movements not only occurred inversely to each other, but they also occurred simultaneously.
Fortunately, although tropical storm Bertha has now strengthened into a full Hurricane, its storm path indicates that it will not make landfall in the United States, so there is no risk of impact on the price of crude oil. This, along with the stronger Dollar, are the primary reasons for the falling price of crude oil today. However, with four more months in the hurricane season, what will happen to the price of crude oil -- and thus, stock prices -- if/when a hurricane develops that does threaten oil supplies in the Gulf of Mexico? We should all shudder at the thought!
One reason why treasuries tend to move in such smooth waves is that this is perhaps the most liquid futures market in the world. You can't turn an aircraft carrier as fast as you can turn a dinghy, so the treasury futures tend to change direction much more gradually -- like a sine wave -- rather than in erratic, jerky paroxysms of irrational spams.
Crude Oil -- 1 hr chart
Dow -- Day session open
Some one else will always have better fundamentals-related information, either because they have more information (ie., an additional source of information that I don't have), or because they have more current (up-to-the-moment) information. Even then, this information doesn't tell them what to do with that information. How they choose to trade that information matters much more.
The fact that I attributed the reason to something suggests that I am falling into that same psychological trap as most other traders. It's not enough to simply observe that prices fell. Like the rest of the market sheep, I feel better knowing why it fell. I deceive myself into thinking that somehow knowing the reasons after-the-fact somehow gives me an edge in future trading. It doesn't.
I check various web sites for fundamentals-related information before the futures markets open for the day session each day, but I have to admit that this information has never provided me with information that gave me an edge -- or profits -- in trading. Technical analysis, on the other hand, does provide me with an edge every day. The chart reveals to me real-time what market sentiment is, and even more importantly, what the market is doing. Knowing why corn prices fell overnight tells me nothing about price activity tomorrow. This is why knowing fundamentals-related information can be a psychological trap -- and usually is for most traders, myself included.
Sunday, July 6, 2008
From The Hindu, India's national online newspaper:
The full article can be found here:
Oil prices are likely to rise further largely due to a weak dollar and geopolitics, Chakib Khelil, president of the Organisation of the Petroleum Exporting Countries (OPEC), said on Sunday.“The price of oil will rise again in the coming weeks. We have to follow the evolution of the dollar, because a one per cent fall in the dollar means four dollars more on the price of oil,” Mr. Khelil said in an interview to Algeria-News.
“I believe that 60 per cent of the rise is due to the fall in the exchange rate of the dollar and to geopolitical problems, and 40 per cent to the intrusion of bioethanol on the market,” he said.
OPEC President Predicts Further Rise in Oil Prices