Tuesday, February 2, 2010

01/02: Markets begin February with a pop

Market action on Monday, February 1 was positive, with the S&P500 ahead by 1.4% to 1089.2 and the DJIA and NASDAQ as relative under-performers, with respective returns of +1.2% and +1.1%.

A major catalyst for Monday's advance was a favourable reading of the Institute for Supply Management (ISM) index, which registered as 58.4. Any value in excess of 50.0 indicates manufacturing expansion. Furthermore, the dollar pivoted from multi-month highs, notably in the EUR/USD market, where the dollar declined from an intra-day high on Sunday, January 31 of 1.3852; and in the USD trade-weighted index, where the dollar lost ground from an intra-day high of 79.55. Other risk-on trades also re-ignited, with crude oil futures advancing from an intra-day low of $72.43, recorded during Friday's (29/1) trade.

My own trade focused on identifying securities with heavily oversold 60- and 30-day price action. Pickings were abundant, and I further focused on a higher-probability situation whereby price first declines within an explicit downward-sloping price channel, and then violates that channel on high volume to plunge lower still, in accelerated fashion. My own in-house term for such a set-up is the "parabolic sell-off" (though such a phenomenon also occurs in the capitulation phase of bull markets), as the second derivative of price-vs-time takes and maintains the same sign as the first derivative, e.g. the second derivative would become negative in a sell-off, indicating accelerated selling. This is analogous to the behaviour of the second derivative in a simple parabolic equation (such as y=x^2), where it also takes a non-zero value with a sustained orientation in sign that is equal to the sign of the first derivative.

The above-described search yielded three securities of particular interest: YHOO, GOOG and BP. Yahoo and Google share the position of technology bellweathers, and as such, it is not surprising that their charts should share common technical characteristics. Plotting of price channels and support/resistance lines, along with consideration of key support/resistance areas on the 1-year chart of each security, all supported a bullish viewpoint of both stocks. (I expect to post charts of these with the market wrap-up for 2/2.) BP, likewise, featured an attractive entry towards the end of "parabolic sell-off" price action event, and the security also came with earnings risk, as the quarterly figures would be released during the morning hours, London time, of 2/2. The earnings risk was not altogether undesirable, as rival Exxon (XOM) itself issued an earnings report, in its case positive, on Monday that sent shares soaring.

Thanks for reading!

No comments:

Post a Comment