The Insights of Swing Trading
by Scott Hoffman, Senior Broker & CTA
The past week was one of transition, as traders ratcheted down their estimates of Katrina's impact on the markets and started looking toward the future. For financial markets, this meant looking toward the September 20th FOMC meeting, which may be the most important meeting of the year. The Fed has to decide whether the economic risks from Katrina outweigh the monetary effect of government relief spending, and the perceived "housing bubble" they seem intent on popping. Traders are torn on the idea of a pause in Fed rate hikes. There have been conflicting statements from FOMC members on the subject and differing ideas as to the impact that Katrina will have on the economy. Energy prices and the amount of spending on Katrina relief are also front burner topics for the traders. Monetary policy has turned into an important issue, as the massive spending by Washington offsets some of the effect of Fed rate hikes.
S&P
Fueled by the retreat in energy prices below pre-Katrina levels and continued hope that Fed rate hikes would be put on hold, the S&Ps had a strong week. Last Thursday (labeled A) gave a great buy day set up, as momentum dropped below zero and prices came back to test the 40 day moving average. Friday's rally pushed S&Ps up to resistance at 1250 and left prices within striking distance of yearly highs at 1254. Tuesday set up as a breakout day, as traders awaited earnings from Best Buy and the August PPI report. Wednesday saw a downside breakout as Best Buy disappointed, although the market recovered well from the early selloff. For the balance of the week, look for Wednesday's Retail Sales report and Thursday's CPI to be attention grabbers, with energy prices and triple witching to be the other market drivers. I expect S&Ps to run into tough resistance at 1255, and 1235 should be solid support.
Bonds
Treasuries had a tough week last week, as the "tax" of higher energy prices was withdrawn from the economy, and the prospect of ballooning budget deficits weighed on prices. Crude oil is below pre-Katrina levels, and stocks have roared past pre-Katrina highs, so there's not much for Treasury bulls to hang their hats on. Tuesday did see a test of support at the 40 day moving average (11520), but expect 11700 to be solid resistance.
Yen
Remains range bound as traders ponder the significance of Koizmi's win on Sunday. The Yen remains bound by 9250 on the upside and 9050 to 900 on the downside. MACD is hinting at a bearish crossover, but hasn't confirmed yet.
EuroFX
The failure of Dutch pension reform and poor polling of German opposition leader Merkel dimmed the outlook for reform in the Euro zone. The Euro is on the verge of breaking an uptrend line of the past months; a breach would target 122 to 121.
British Pound
The Pound broke out of last week's wedge formation to the downside, and looks to be on the verge of a bigger breakdown; the market is holding a 50 percent retracement area at 18123. A break would target the old breakout area of 180.
Gold
The bull market for gold remains intact, as long as prices hold critical support at $445. With a double top at $454, the midrange around $449 is a natural pivot area. A breakout of either side of the channel should see follow-through. We've bought gold twice and made money, but for now, I'll wait to be a buyer until it breaks into new highs.
Silver
The recent rally faded, as Dec Silver was unable to clear tough resistance at $7.11. Tuesday's break could represent a buying opportunity if silver can muster a close over $7.00. A close over the $7.11 resistance area could propel prices toward longer term resistance at $7.40.
Sugar
One of the more compelling bull stories, sugar is reaching five year highs as traders believe that Brazil will up its production of ethanol from sugar, a move that would help take more supply off the market. Since clearing resistance at the ten cent area, October Sugar had an upside breakout of a wedge pattern and will be poised for more upside on a move over Monday's high at 1045. We're long and would advocate buying dips, with 1020 as support. The next target is 11 cents.
Cotton
Pressured the past few days as a result of the bearish crop estimate that the USDA came out with on Monday. The supply deficit the bulls had hoped for earlier this year seems a distant hope, as biotech cotton and improved production prospects in the US and India are offsetting robust demand. Momentum showed a good short sell signal last Thursday that coincided with a test of resistance at August highs around 53 cents. Tuesday's trade saw a low in momentum in conjunction with a test of support at 50 cents, but a clear move under 50 cents will target the August low around 48 cents.
Crude Oil
As funds continue to liquidate long positions, crude oil has dropped nearly $7 a barrel since the post-Katrina highs. Crude has sold off in spite of the uncertainty regarding damage from Katrina; the psychological high of $70 was reached amid stories of the end of Gulf oil production and 1970's gas lines. I believe that as prices retreat toward the lower $60s, crude will again be a buy, as the amount of damage done both to Gulf oil production and US refining capacity remains uncertain. Tuesday's trade had the market waiting for inventory reports on Wednesday; a bullish number could make Monday's low at $62 a bottom for the selloff. First upside target for a rally will be $66.
Soybeans
The soybean market was hammered on Friday, dropping under the psychologically important $6 area ahead of Monday's USDA production numbers, which showed a slight uptick in production and carryover from the August report. Commodity index funds continue to carry large positions in soybeans as an inflation investment vehicle, and I think Monday's low at $5.75 in the Nov may mark an intermediate term low. I expect to see a fall rally in soybeans, as the damage done by this summer's drought remains an unknown until the crop is actually harvested. In addition, the rapid rebuilding of loading and shipping facilities in the Port of New Orleans takes a big burden off Midwest producers, because it will allow for restoration of the major export channel for US grains. Resistance in November beans is $6.00 and then $6.25. The key to the rally is holding Monday's low at $5.75.
Wheat
I've been encouraged by wheat's performance in the face of the meltdown in corn. I continue to like the long side of wheat, as the USDA stocks report and exports are friendly. In addition, drought in France is estimated to have reduced French production by about 10 percent. We're long Dec Wheat from the low $3.20s, and a move over resistance at $3.29 to $3.31 should foster a rally toward July highs around $3.50.
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.
PLEASE NOTE THAT THERE IS AN INHERENT RISK OF LOSS ASSOCIATED WITH OPTION CONTRACTS. OPTIONS TRADING IS NOT SUITABLE FOR ALL INVESTORS. OPTIONS CAN AND DO EXPIRE WORTHLESS. IF YOU PURCHASE A COMMODITY OPTION, YOU MAY SUSTAIN A TOTAL LOSS OF THE PREMIMUM AND OF ALL TRANSACTION COSTS.
