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Dec 08, 2005

The Insights of Swing Trading

by Scott Hoffman, Senior Broker & CTA

It’s a slow news week this week.  We had the ISM non-manufacturing index on Monday, and there’s a crop production and grain supply/demand report on Friday.  The dominant “theme” of the week appears to be a renewed concern about inflation, as metals continue to rally and crude oil flirts with regaining the $60 area.

S&Ps

Tuesday was a telling day for stocks, as a strong opening drove the S&Ps into new contract highs, clearing last week’s high at 1272.70.  They proved unable to hold on to the gains, and ended up closing only slightly higher.  I think the psychology in stocks is changing to selling rallies, as heightened inflation concerns weigh on the market.  MACD is verging on a bearish crossover, Wednesday’s move under 1258 basis December will aid the selloff.  The next downside target is last week’s low around 1250, and a move over 1275 would reignite the bulls.

NASDAQ

The Naz also appears to be turning lower; Wednesday’s trade took out the shallower down trendline.  The first downside target is last weeks low at 1673.50 basis December.

Bonds

Strong overseas buying led to Tuesday’s rally, which pushed the yield on the 10 year T Note under 4.50%.  Wednesday saw consolidative trade as the market worked through Wednesday’s auction of 10 year T Notes.  The picture on bonds is mixed; they are constrained by a Fibonacci retracement level at 112-09 and the 40 day moving average at 112-01.  In time, I expect to see a selloff inflation as fears reemerge.  The downside target is the November low around 110.

EuroFX

Wednesday was a fun day in the Euro.  Tuesday’s narrow range/inside day pattern gave a breakout setup for Wednesday, and the market performed as expected, staging a good selloff after breaking under Tuesday’s low at 11763.  The downside target for the selloff is the contract lows around 11660, but the impending bearish MACD crossover indicates those lows may not hold.  Only a close back over 118.05 negates the bearish trend.

British Pound

The Pound has had a good rally, nearing resistance at the 40 day MA on Tuesday (174.62).  Wednesday’s trade saw the Pound break under the recent up trend line, the first downside target for the break is 172.50, a 50% retracement of the last rally.

Gold

The gold market is making 25 year highs, gaining strength from Yen weakness and strengthening crude oil prices.  Look for the gold rally to continue as speculative players continue to pile in.  The chart doesn’t indicate to me that the current up move is yet overdone.  A drop back below the steeper trend line (currently around $512.00) would slow the rally, but only a drop back under $500 would argue for a larger correction.  Look for buying opportunities in this market. 

Silver

The silver market had an impressive day on Tuesday, as the lower opening led to a strong reversal and rally by the end of the day.  Silver looks to continue higher, with $9.00 as a psychological target.  A drop under the old high at $8.75 would slow the rally.

Cocoa

A great rally for cocoa on Wednesday, as the momentum indicator (bottom panel of the chart) gave a clear buy signal.  In addition, the narrow range day on Tuesday had the market primed for a directional move on Wednesday.  This was a good low-risk buying opportunity, as the 40 day moving average (1408) gave a good stop point.  The first upside objective for this trade was Monday’s high at 1460.

Sugar

The sugar market continues to storm higher.  We’ve been long the sugar off and on for the past month, and I continue to think there’s more upside for this market.  Tuesday saw a narrow range/inside day breakout pattern, which gave a good buy setup for Wednesday.  The market continues to push higher amid a back ground of expected deficit in world raw sugar supplies for first-quarter 2006.  The next major upside target is 1400, while a drop under 1290 could derail the rally.

Cotton

The cotton market has turned more positive amid thoughts that the Chinese will soon become interested in US cotton.  Prices have started to challenge the month long down trendline, and MACD is hinting at an impending bullish crossover.  I’m looking to buy cotton on a break above the trend line, looking for a rally toward the 40 day moving average at 54.40.  I’d be cautious here, though, ahead of Friday’s supply/demand report.

Crude Oil

Wednesday’s weekly inventory reports showed larger than expected builds in inventories of crude and heating oil, which really took the wind out of the bull’s sails.  The continued inability of Jan Crude to clear resistance at the $60 mark is also proving disappointing.  Support is at $59, then $58.40 (a 50% retracement level).  A close over $60 should be bought.

Live Cattle

Monday’s inside/narrow range day led to a downside breakout on Tuesday, and the market followed through down on Wednesday, as the MACD is threatening a bearish crossover.  The next downside target for Feb Cattle is trend line support at 94.50.

Lean Hogs

Last week’s double top and collapse in Feb hogs led to further downside this week, pushing them under the 40 day moving average (65.75) on Wednesday.  A bearish crossover (albeit at lower levels) corroborates the selloff; although I have a modest downside target at 64.50 (November’s low).

Soybeans

The recent rally in the beans came to a screeching halt on Tuesday, as good growing weather in South America and an expectation of an increase in carryover stocks are weighing on beans.  Wednesday saw a break below 50% retracement support at 5.60 basis the January soybeans with a retest of longer term support around 5.50 likely.  Keep an open mind going into Friday’s production and supply/demand reports from the USDA.

Wheat

We came into this week long wheat, expecting to see some further upside off the bullish MACD crossover.  Spillover selling from beans and corn weighed on wheat on Tuesday and Wednesday, pushing prices back toward contract lows at 3.10 basis March.  Wheat bulls might prefer to be in the Kansas City (Hard Red Winter) Wheat, as the world’s hard wheat stocks remain tight, and there continues to be fears of damage to Plains wheat crops from this week’s cold snap.

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.