A different approach - what could earnings season bring us? PART 2

Market reaction to Alcoa earnings today is different to the overnight trading and broader market continues to rally into earnings season. Alcoa gapped as high as 11.34 on the open following yesterdays earnings release. But the market was quick enough to fall towards 11 again and is trading on the lows of the day. on two other occasions this resulted in new low for the year:

Dow is up 1.5% and most of its components are trading higher. Tonight it is Intel's turn. While the market managed to push through downward channel, there is still 50d moving average at 21.05 acting as resistance now. Everyone is fond of tech stocks, but technically this market has little potential to rally under 50d moving average. I will change my view if we break it though. Here is the chart:

Looks like there is lots of uncertainty for the risk assets, but looking at most of the charts, any advances still should be treated as correction rather then the upward trend.

A different approach - what could earnings season bring us?

This time, without looking at macro picture, I will have a look inside major variable that has been driving equities and commodities markets or risk assets recently - earnings. It is difficult to analyse every company in S&P, so I will focus on Dow Jones instead. First company to report in DJ Industrial average is Alcoa:

Honestly I have no idea what the fundamentals of this company are. I only know that price of aluminium at LME was under pressure since the beginning of this year. and obviously the revenues of this company very hit. Is it a sell ahead of earnings? I am afraid so. Recovery off  $10 psychological support, despite beeing a decent one in % terms, occurred on low volume. That means it was more of a short covering rally rather then new longs being established. Moreover the rally was not strong enough to push the share above the gap (10.75-11) and we reversed off it. So the market is not putting strong conviction on earnings of this company. Under $11 it is a sell, but only when momentum confirms this or we turn lower after consolidation.

I will go ahead a little bit and look at the next company - Intel. Everyone says they like tech companies:

Well, everyone, but not the market... a series of lower highs this year confirms the down trend. This equity probably would need something very big to break past $21 (channel resistance, 50d and 200d moving averages). Volume off the lows is not encouraging either. As for Alcoa, if momentum turns bearish under $21 its a sell.


Situation looks different for JPMorgan however:

despite lower volume the market managed to break the channel and is now testing 50d moving average. IF broken, next target is 41.5 - convergence of 100 and 200d moving averages.

so for the remainder of the week the strategy is the following: sell ahead of and tech and buy ahead of financials... happy trading everyone!

And let the rally continue!

No, no, not the rally in equities/oil/metals. Any advance for these markets is likely to be choppy with deep pull-backs while we stay under key moving averages. I warned yesterday about possible rally in risk assets, which started with FX last week and today moved onto equities and risk correlated commodities.

I am talking about  NYMEX gas this time. Here is what I am looking at:

We have a failed head and shoulders set up currently developing as price did not have a meaningful follow up through the neckline and recovered above it. Momentum is turning up and rally through 4.85 opens up $5.20 then $6 then $8 upside target. Crazy, right? Well, look what's happening currently in Europe...(this is Dutch TTF front month contract):

Not bad for oversupplied market...

Safe heaven positions unwind, but no evidence of full risk on rally

It looks more and more convincing to me that markets will go through a period of safe-heaven position unwind.  I would not argue yet that we will have "risk - on" rally. It will probably look more like choppy advance of risk assets within greater bear trend. And at the moment there is no evidence of recovery in equities and commodities. FX markets look different however... 

Chart 1: EURUSD posted head and shoulders pattern targeting 1.30 at least if neckline support holds

Chart 2: Safe heaven of them all JPY has bounced off long term channel support.

Chart 3: CHF is holding onto 200 days moving average:

Whether commodities and equities are to follow remains to be seen. Downtrend for these assets remains in place while major moving averages hold. We had a nice one way move in these markets, so time to take a breath and consolidate before we move down.

Dead cat bounce or change of sentiment?

Yesterday's price action in risk assets was unusual if not confusing to most people. What started as a bounce in Euro and Pound on some 'not so bad' news on Spanish debt issuance and PMI's developed into full blown capitulation of dollar bulls. For once we traded on fundamentals with disappointing data from the other side of Atlantic sending commodities, equities as well dollar lower.

At the moment I do not buy sentiment shift towards dollar and I continue to believe dollar will have negative correlation to other risk assets. And yesterday's move was a bull trap or dead cat bounce in Euro and Pound. However... there always has to be however...two other scenarios are possible with very dramatic impact on economies:

1.Stagflation: everyone will dump dollar on bad news and buy commodities and equities (correlations of risk assets remain in place)
2. Deflation: people will dump dollar and commodities along with equities as happened on yesterday, July 1st (total breakdown of risk correlations)

Today's trading session will give more information on  which way we are going to trade into second half.
It is also important to check how market will react to good news but there were no any recently.

In view of the above and possible sentiment shift towards risk assets correlation I remove conviction sell equities and commodities vs  long dollar  on uncertainty. Until now this strategy played out well and remember trend is your friend until it ends.

In the afternoon, after US data comes out, I will publish further analysis and long term charts...

A problem of relativity

I mentioned earlier that market was the best leading indicator. Since we have reached a top in April this year I made a suggestion that economic data was going to get worse. And it did earlier then I thought... disappointing employment, housing data in the US , fears of double-dip in Europe and slowdown in Asia dominate the news. No wonder risk assets performed bad.

I never was able to understand someone saying that "valuations look attractive for stock markets" or "this is a good buying opportunity given the drop we have seen". Based on what are you people make these calls?! This is the problem of relativity to my mind. I think that using relativity to call change in the trend is dangerous. Technical analysis relies on historical patterns and it uses relativity in extrapolating future price movements as trend continuation tool and not a trend change tool. A bad period of someone using relativity to determine trend change would look like this:

Technicals are everyrthing

Market of any particular asset is like a tube with a ball inside. Collectives of Bulls and Bears are two people blowing into this tube from both sides simultaneously. The stronger one moves the ball away from him. if there are more bulls then bears, market rallies and vice versa. The problem is if you blow too hard the ball ends up in the mouth of another person and you have to start again. And you definitely need at least two people for this...

The more people follow the same technical indicator the better it will work. Obviously if there are two many people then you know what happens. Why am I mulling about this?

Yesterday I made wrong conclusion in the market analysis of copper charts. Absence of strong resistance levels determined by moving averages in this case should not have resulted in conviction to sell even if correlations held. In other words there was not enough selling power. Technicals are indeed everything!