Tuesday, November 3, 2009

03/11: Risk aversion & bullish sentiment fight to a draw

World markets noted an exciting November 3rd. Exchanges across Asia and Europe witnessed a sharply negative day, many down two percent, albeit with the notable exception of the Nikkei, as Tokyo celebrated a public holiday. Futures signaled a lower open in the U.S. too, but the morning States-side was saved by news of M&A in railroads. And not just any acquisition; the esteemed Warren Buffet is buying Burlington Northern Santa Fe (BNI) in a cash-and-stock deal that values the railroad at a nearly 33% premium over its close of Monday, November 2nd. And BNI is no guppie; its market cap is 33B (although I'm uncertain whether that is based on Monday's close or today's 27% higher one). The S&P500 would end today's session up nearly 3 points, or about a quarter percent, to 1045.

Obviously, the M&A news gave bulls fresh life. Yet the Buffet announcement was far from the only source of fireworks during today's trade. Critically, gold shot higher to close at a fresh record of over $1080 an ounce, on a strengthening dollar no less. Front-month oil futures also advanced nearly $1 to just over $79 a barrel. It's important to note that the strong correlation of late between rising equities, a falling dollar, and rising gold did not hold today. Of course, trade this week can be expected to be somewhat abnormal, with critical news due tomorrow from the Federal Reserve Open Market Committee (FOMC) on interest rates (less important; no rise is forecast) and outlook (far more important; will the policy statement be dovish or hawkish?) and Friday bringing the all-important U.S. unemployment figure (a number in the neighborhood of negative 100-150k is expected).

What's in store for the rest of the trading week? From a technical perspective, upside moves remain a strong possibility, especially for those leading stocks that declined only moderately in the last fortnight and that have built bullish bases over the last few sessions. I've picked up calls in one such stock, the Houston-based, oil services firm Schlumberger (SLB). A 10-day chart follows, and the reader should note the following bullish features: A) an inverse head-and-shoulders pattern, with the left shoulder (first dip) at the close of trade on Wednesday, 10/28 and on high volume; the head (second dip) at midday on Friday, 10/30, likewise on high volume; and the right shoulder (third dip) at midday on Monday, 11/2, and critically on lesser volume; B) a cross of the 50-period (i.e. 50 hour) simple moving average (SMA) today, from below; and C) a break upward from the downward price channel of the past 10 sessions.

I've also purchased calls in Motorola (MOT). This firm is being buoyed by the forthcoming launch of the Droid smartphone, a supposed 'iPhone killer', and as such, the stock is one of few today (after several sessions of overall market correction) that has a hands-down, strongly bullish chart pattern. Note the explosive volume of the last four sessions, the decisive break above the 50-period SMA, and the bullish trending of the last four sessions:

Finally, I include a 10-day of the S&P500. Several items of interest. First, the S&P500 has been rather markedly outperforming the NASDAQ 500 (not pictured) during the correction of the last two weeks. This is partly expected, as the NAZ has a higher beta and, as such, would tend to decline in a more pronounced manner; yet technology has been a market leader during much of the last months' rally, and as such, its relative performance (vis-a-vis the overall market) might be expected to persist into the correction, not reverse. Does this loss of leadership also portend the end of the overall rally? Aside from this (over-fleshed-out) point, note also that the S&P500 seems to have consolidated over the last few sessions around the 1030-1045 area; could this be a durable support level? Yet all this analysis is ultimately for naught; the FOMC and unemployment data are the 500-pound gorilla in the room, and these will ultimately move the market during the remainder of this trading week -- and perhaps set a course that shall be sustained throughout the rest of this month.

Happy trading!

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