Morning Market Thoughts
Good morning. We’re looking at a slightly higher open as new weekly unemployment claims rose more than expected (274,000 actual vs. 260,000 estimates). This rise makes it increasingly likely that the Fed will keep rates low for the foreseeable future. Last week, the Fed left rates unchanged, citing a slower economy and absence of inflation. Meanwhile, the Commodity Research Bureau Index ($CRY0 or $DBC) is up 15% since establishing a double bottom in January and February and is now pushing against the 200-day moving average.The CRB Index fell 60% since early 2011 before hitting that double bottom in mid-January and again in early February. Because rises in commodity prices ultimately lead to a rise in prices of finished goods (which is generally seen outside FOMC circles as the definition of inflation) we want to watch this dynamic. But don’t read too much into it because the entire market also bottomed in early February. So this rise in commodity prices might be signaling inflation…but it might just be in sync with the rest of the market.
So we watch, and we take note that oil is up nearly 70% since the February bottom, and gold is up a bit more than 20% since hitting bottom in December. That’s why we’ll be continuing to focus on energy and metals…and, of course, our aerospace/defense stocks.
Some thoughts about your trading decisions:
I was recently asked whether I use daily or weekly charts to find trends. I’ve discussed this quite a few times over the years, but I realized that I haven’t addressed this important aspect of trading in quite a while. I break down trading actions in two timeframes. I look for a trend on the weekly chart. That’s my “decision” time frame. If I make the decision to buy the stock, I will then zoom in and look at the daily chart. That’s my “action” time frame. And that “action” time frame might point me in the direction of buying now…or it might dictate that I do nothing. I.e., I’ve decided that I want to buy a stock, but I can’t take any action on that decision because the price activity is not favorable to buying right now.
This approach has typically worked for me, though it is not at all a perfect system. Rather, it just ensures that I am on the right side of a trend. And that’s the most important component of long-term success — staying in phase with the trend. And if there is no trend, the stock is not your friend.
One other thing: Tesla (TSLA) reported earnings that beat estimates, and the stock is up pre-market. So is this a signal to buy the stock? That leads me to another matter — how should a trader deal with positive/negative news on a stock? I think you’ve got to do two basic things. First, is the news positive or negative? Next (and more importantly), how did the stock trade in response to the news? The second question is the most important. Applying that to Tesla, watch the stock today. If the stock closes higher, then I take no action — the stock is broken and is going to be fighting a lot of overhead resistance from unhappy bulls who bought at higher levels. Buying the stock isn’t consistent with the trend. But if the stock closes lower despite the good news, I would consider shorting the stock. If a stock cannot hold a higher bid after reporting above-consensus earnings, then it is likely going lower for the simple reason that buying interest isn’t as aggressive as selling interest.
Go with the reaction to the news rather than the news itself.
OK, that’s it for this morning. See you in the trading forum.
Dan
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