Tuesday, March 28, 2006

Fifteen Steps and a Stumble

The Fed announced their fifteenth consecutive rate hike today (I'm really glad I have a fixed rate on my house.....) and stocks - finally! - did the right thing and tanked. It's about time.

One blog reader wrote to ask me about the Fed Funds rate. You can get this from Prophet with symbol FF9413 (use a line graph, since it's one data point per day). Just for fun, I charted all our history on this versus the S&P. The correlation is bizarre. For a while they were inversely correlated. Then they seemed to be random. And recently it seems positively correlated! (Today notwithstanding). Anyway, draw your own conclusions (blue is S&P 500; black is the interest rate):

The breakout of the Dow I mentioned recently is now moot. Prices have fallen below the resistance line, so there is no breakout. In fact, this line is getting to be just noise at this point, so I'll probably chuck it soon.

Likewise the potential breakout on the Major Market Index ($XMI) I mentioned last Saturday didn't materialize (thank God) so, again, this is a bullish move that simply isn't going to happen.

What is happening, and what I did predict quite some time ago, is the Utilities are starting to fall to pieces. The best options I've found on these is on the UTH, but the bid/ask is big enough to drive a truck through. I've drawn two necklines for this head and shoulders pattern. It hasn't quite broken through the lower neckline yet, but if it does, you can see the target I've drawn here is a nice fat distance away.

What we're looking for, people, is directional change. Nothing beats a stock that has been going up for years (and has the corresponding high price) which fundamentally changes direction. Below is CLF. You can see where it broke its upward trendline. And I've drawn a downward-sloping channel. There are not that many price points to support this channel yet, but it's not bad, and it illustrates the ship changing course from up to down. That's the kind of issue in which we want to buy puts.

One developing H&S I've had my eye on is iShares Latin America (ILF), but it's relatively thinly traded, and the options on it are terrible (super thinly traded, huge bid/ask spread). Plus the pattern isn't complete.

However, a major component of this security is symbol UBB, which has completed breaking an H&S pattern (strictly speaking, the right shoulder is higher than the left, which isn't textbook perfect - - but I'll take it). I'd look to buy puts on this on any pullback to the neckline. It's a lovely chart.

I'll close with APC - - the OIH has been pushing higher lately, but I think it's going to soften very soon, and APC behaves very well. What I mean is that when OIH is weak, APC is especially weak, and when OIH is strong, APC isn't quite as strong. I like the puts on this, which are fairly heavily traded.

Continued good luck, everyone.....nice to see some sense returning to the markets.


Kapil Khanna said...

Looks like we have an intermittent top like i had eluded earlier. Still not a direction change technically, dow below 10900 will be it for me.
Coming days will help us guage where the markets are headed. Google went against the market, that seems a bit strange to me. Looks like Google is done its correction and may begin moving upwards.

costas1966 said...

Thanks for the fed fund rate symbol. Also thanks for the nodoodas info as well.

walter said...

tim, do you have any opinion on drawing trendlines, etc on charts with log scales vs non-log scales? for example, a parabolic or exponential rise on a regular scale chart will look straigth/linear on a log scale. i find in my own charting that trendlines for the same stock can differ widely depending on the type of price scale used.


Tim Knight said...

Walter, my answer is: log scale, log scale, log scale! There is never a need (EVER!) to use an arithmetic scale for anything except for writing a newspaper article and wanting a chart to look scary and dramatic.

Arithmetic scales have no place in technical analysis.

Stephen said...

just wanted to point out that google has a new finance section which is pretty well done. You could type in a stock symbol as a google search and it will bring it up using their finance section (previously they were using yahoo). Some neat features that I thought is worth mentioning here.

Rich Remick said...

Tim, why do say only use log charts. IMO they seem to distort price movement. Unless its a parabolic move I dont see the reason to use them.

PB said...

Can someone explain what is going on with these markets? We gapped up right from the open. What gives, where the heck are the supposed bears???

Super Bull said...

You guys are truly congenital bears. The market simply corrects a tiny bit and you bears are all having a euphoric spasm thinking that the big bear market is upon us. The reason that Ben raised the short term interest rate is that the economy is doing very well. Get this into your heads: Good Economy == Good Stock Market.

walter said...

tim, thanks for response about log vs arithmetic scales... i too have same question as rich though - they turn parabolic/exponential curves into straightlines - that works for mapping uptrend line, but for exmample look at 6 month chart of SNDK on arithmetic scale... yesterday's candle was under the downtrend line... interesting...

NO DooDahs said...

For stocks that don't have incredible moves, i.e. doubling or tripling in a few months, and for shorter time frames like 1-3 year index charts, there's virtually no difference between arithmetic and "log" - even though what they use often isn't a true log scale.

Here's an example of a long-term chart that would look just silly in arithmetic scale. It's a chart of natural log of the S&P 500, adjusted for reinvested dividends, from 1950 to present.