The Insights of Swing Trading
by Scott Hoffman, Senior Broker & CTA
Market Background
Last week's two rallies toward $63 in crude oil proved to be a flash in the pan, and the subsequent selloff has cushioned the stock market. For the second time in three months, housing starts came in weaker than expected, stalling the S&Ps breakout over double top resistance at 1296. On Tuesday, a weak Chicago PMI and a low Feb Consumer Confidence number extended the late Monday selloff in stocks. Today, we'll see the national PMI number, with the ISM non-Manufacturing index due Friday.
S&P
The week long rally in stocks culminated in Monday's failed breakout over 1296, along with the inability to clear 1300. This led to Tuesday's break under support at 1292, which paved the way for further weakness. While traders should be cautious about reading too much into Tuesday's numbers, continued trade under 1285 could lead to more downside, with a downside Fib retracement objective at 1278. A move back over 1290 gives the bulls a new lease on life.
Dow
Last week's rounding top pattern came to fruition on Tuesday, as the break from a bearish hammer candle and narrow range day on Monday led to a big selloff on Tuesday, which took out last week's low at 11023. I expect more downside, with congestion around 10950 as an objective.
Bonds
The specter of tighter Fed policy weighed on bonds last week, which fell hard on Monday in spite of a weak housing starts number. Look for bonds to be led by macroeconomics this week; weaker economic numbers could revive the Treasury market. A close over 11300 should revitalize the bulls, with 11316 as the next objective.
Dollar
The two-week channel in the Dollar Index is breaking out to the downside; a break under last week's low at 9000 could lead to a bigger leg down. Charts of the European currencies are bottoming, and an established uptrend in the Europeans could be the last nail in the coffin for the Dollar.
EuroFX
The Euro appears to be in a bottoming pattern. Clearing trendline resistance around 11970 and then last week's high at 11990 would confirm the upturn, with 122 as an intermediate objective.
British Pound
A three-day bull flag pattern in the Pound led to a sharp rally on Tuesday, which is now knocking on the door of resistance at 17557. Clearing that resistance could take the Pound toward the February highs around 178.
Canadian Dollar
The Canadian Dollar is riding the wave of the recent commodity boom. Monday's rally over resistance at 8737 is pushing the Canadian to test the contract high at 8803, which we hit today; I expect this resistance to be taken out, with Fib extension targets at 8811 and then 8860.
Gold
I bought Gold on Tuesday off a breakout signal, as the recent wedge pattern is resolving itself to the upside. Holding 560 keeps the bulls happy, with 570 and then 580 as targets. Gold should be supported by a weakening Dollar and the downturn in equities.
Silver
Silver's breakout isn't yet as clear cut as Gold's, but Tuesday's action was positive, and I bought Silver off a breakout signal. The first objective is Friday's high at 990, clearing that could lead to a retest of the contract high at $10.
Coffee
May Coffee appears to be bottoming around 110, with the rally over 113 giving more evidence of a bigger upturn. A move over last week's high at 11475 would confirm a bigger move, with 120 as the first upside objective. A close under 110 puts the bulls on hold for the time being.
Sugar
Sugar got slammed Monday ahead of the last trading day for March, falling over 100 points. This selloff was also tipped off by the narrow range day on Friday. The combination of a fundamental factor (the need for speculators to clear out of a contract going into delivery) and a chart setup gave a good synergy of indicators for a selloff. Tuesday's recovery back over 1700 could bring a further rally; follow-through would take sugar to 1800.
Crude Oil
Friday's rally off geopolitical factors gave way to the burden of ample supplies, and pushed April Crude back toward support around $60. We're starting to move to a seasonally bullish period for petroleum as refiners gear up for the summer driving season. I think the relative weakness in crude oil has been aided by an abnormally warm winter, and as we move to Spring, expect the problems of tight refining capacity and clean air standards to lead to a strong rally, with a retest of $70 likely. Apparently, the lesson of last summer's gasoline prices has been lost on the US consumer.
Lean Hogs
High slaughter levels, heavy weights, and competition from poultry are weighing on hog prices. April's bear wedge formation has support around 6100, with a breach likely leading to a retest of the 2006 low at 5960 and probably lower, as big supplies continue to weigh on prices. A move above the down trendline could rally hogs to the recent high at 6375.
Soybeans
Recent rains were very timely for the South American crop, weighing on bean prices last week. Nonetheless, May beans are showing resilience at 580 support, as the index trade continues to show a big appetite for grains. I'm waiting for a break toward $6 basis November to buy; although shorter term traders may find opportunities fading the extremes until we get closer to the North American planting season.
Wheat
Continued dry weather in the Plains and decent demand are helping the wheat market. It will be interesting to see if commercial selling intensifies as the July contract approaches the psychological $4 mark, but for now, the bulls look to retain control.
Corn
Index funds appear to have an insatiable demand for corn, which is also being aided by the biofuel and ethanol mania. In addition, a tight stocks to usage ratio keeps the trade nervous about pressing the downside. I'm long Corn and will look to remain so as long as May holds 230. The massive fund positions in the grains may set up this summer for substantial volatility as we move to spring and summer.
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.
