Morning Thoughts 2/4/11

Good morning traders,

Short term traders can sometimes lose sight of the big picture, so it is useful to have a reminder. The daily chart of the S&P Cash index shows a market that 1) is in a pretty clear and obvious uptrend, 2) is not quite as overbought as many of the internet kibitzers would have you believe and 3) has a fairly significant trend channel line about 25 handles ( = 2.50 in SPY) overhead. Also, consider that when the market does roll over into a pullback, it will very likely be in context of this bigger picture uptrend. There will certainly be money to be made on the short side, but managing shorts in a bull market is very different than shorting in late 2008. We will cross this bridge when we come to it.
Note that interest rate futures may have significant downside (in terms of prices which move inversely to rates). Longer term, ETF products like TBT and TLT are very, very poor proxies, so you must do analysis on the 10 or 30 Year futures. This is important even for short-term traders, because clearly trending bond prices (and rates) have improtant implications for Equity market psychology.
We are still not seeing any convincing buying pressure in the precious metals. Gold can’t really lift off of support while Platinum and Palladium press through resistance. If you are holding swing longs, consider how you would manage the downside if the complex melts.
This morning we find fairly lackluster sessions in global equities. Japan is up a percent (and made a new 52 week high overnight) and India down 2% (which is not a big move relative to the volatility in that market.) Europe is as flat as I remember seeing it in recent months (standouts are Ireland +1.2% and Belgium (??) down 0.5%). S&P futures ticked to a new 52 week high in the overnight session as well.
Some moves in forex deserve out attention: Looney is strong (see CADCHF, GBPCAD, etc), and the Auzzie continues its recent rally. (AUDJPY may have some more extended upside potential.) Probably no direct impact on commodities in the short term, but something to keep an eye on. Net impact on the US Dollar index is slightly positive in early trading.
From my morning Waverly Advisors report on precious metals:

Platinum is pressing to multi year highs while Gold and Silver have yet to pick up the strength. (Gold’s move yesterday was fairly large as a standard deviation, but, in terms of market structure, it cannot lift far off of support.) Gold futures have significant downside potential below 1,315 (basis April futures); this has implications that must be considered for stop placement. Dropping 1,315 (not a clean level) probably targets 1,250 fairly quickly, so stops located between 1,250 – 1,300 are most likely targets. Plan accordingly.

Also, keep an eye on grains which may be staging a significant move. Rice and Wheat, in particular, should be on your radar.
As far as short-term trading goes today, nothing is really changed from my comments on recent days. 1306 is the line in the sand on the futures; holding above this line could finally get us a good breakout and a more directional move. Failing back below, my baseline expectation would be flat and consolidation (remember, every dip has been bought), but also consider the possibility of a Friday dogpile out of a market that fails at the highs. Even though this is unlikely, it could be dramatic so it’s worth your time to consider how you would aggressively press shorts if this scenario is in play. Do not anticipate or fish for this scenario, but wait for the clear momentum to show you it is in play. (A Waverly client asked me midweek how we would know the short scenario is in play. After outlining a few specific momentum cues to watch for, I ended with, “it’s like porn. You’ll know it when you see it.” This seemed to sum it up pretty well for him!)
Don’t forget there are also a number of earnings stocks that should be in play. Keep healthcare stocks (HUM UNH WLP) on your screen today for some possible followthrough.