Battle Of Retests

• March 4, 2005
• Mark Boucher

A number of important markets
are retesting important resistance and support zones this week, and we suspect
the direction of the next multi-week move in the markets will be dependant upon
how these retests iron out.   

First we have the oil markets. 
WTI is getting close to its highs of last October.  So is Heating Oil.  Oil
Service stocks are also testing the highs of 2001.  This is an important
retest.  If all of these oils can close strongly on good volume above these
respective resistance levels, it will become very difficult for global equities
to continue their recent upmove — and moves above these levels in oils will
begin quickly to weigh increasingly upon equities. 

Next we have bonds.  Ten Year
notes are testing the lows of a downward sloping trend channel that has been in
place since September of 2004.  A sharp break below this downtrend channel
support will be very bearish for bonds, and put pressure on stock prices
quickly.  Similarly, a move in the nearby 30-year bond futures below 110 would
be quite negative for equities. 

The dollar is also flirting
with critical levels.  The EUR is making a potential head and shoulder bottom,
and a strong move above 1.33 in the EUR will set off a retest of the dollars
lows and give even more strength to commodities.  A lower dollar would likely be
neutral to the stock market, though more positive for foreign equities, unless
it happens TOO QUICKLY.  Conversely a move by the EUR below 1.30 would mean that
higher US short yields are likely to exhibit more currency strength in the
dollar and a trading range environment for some time.  Gold, the free market
currency has similar levels at 440 and 430 which could be used to confirm the
action in the Euro.  Stay tuned! 

Finally the US indexes
themselves are testing last year’s highs in many cases.  The DIA Dow diamonds
are testing 108-110 resistance, SPY spiders are testing 122-3 resistance,  and
many other broad-based indexes (not the Naz!) are testing their highs.  Strong
closes above these levels by a plurality of indexes would signal a new leg
higher — whereas non confirmations of new highs or failures here along with
trouble in bonds or oil would mean a broader trader range likely in the US
markets for some time to come.  Trouble in the US stock indexes would likely
begin to influence global equities as well. 

We suggest investors watch
carefully and go with CLEAR decisions by the verdict of the markets for their
short-term trading endeavors. 

In US and global equity
markets, value/growth appears to be working and logical whether the market moves
up in a late phase rally, makes a volatile top over months to years, or even
moves down as the softness takes hold later on.  Select European and EM’s over
the US seem likely to continue unless a true global recession takes hold as
well.  Energy outright seems a good speculation to treat gingerly (watch
resistance suggested above here carefully), while energy over the market and
over soft sectors seems more reliable with much of the upside intact.  More
neutral long/short strategies that buy the strongest sectors like energy,
managed care, soft drinks, foods, staples, rails, base metals and short weaker
sectors like financials, brewers, US autos, airlines, and parts of the
technology sector — also seems a good profit generator, albeit with some
volatility, in this new era.  Selected EM’s outright and against the US seem
good speculations with caution, such as Korea, central Europe, Indonesia, South
Africa, Chile, and China.  Investors should adopt a much more equity defensive
and negative market stance if US bonds breakdown through the lows since last
August (above 4.5% for 10-year Treasury) — or if oil prices move sharply to new
highs without corresponding new lows in bond yields to cushion the blow from
oil. 

Our model portfolio followed in TradingMarkets.com with specific entry/exit/ops
levels from 1999 through May of 2003 was up 41% in 1999, 82% in 2000, 16.5% in
2001, 7.58% in 2002, and we stopped specific recommendations up around 5% in May
2003 (strict following of our US only methodologies should have had portfolios
up 17% for the year 2003) — all on worst drawdown of under 7%.   This did not
include our foreign stock recommendations that had spectacular performance in
2003. 

This week in our Top RS/EPS New Highs list published on TradingMarkets.com, we
had readings of 95, 172, 157, 77, and 91 with 32 breakouts of 4+ week ranges, no
valid trades and  one close call in TXI.  This week, our bottom RS/EPS New Lows
recorded readings of 15, 10, 17, 7, and 16 with 8 breakdowns of a 4+ week
ranges, no valid trades and one close call in KG.  Valid signals remain in place
in MLI, BHP, USAP, LCAV, and JBLU.    The balance of longs and shorts and
breadth in top RS NH’s versus bottom RS NL’s is slightly positive but drifting
lower this week.

For those not familiar with our long/short strategies, we suggest you review my
book

The Hedge Fund Edge, my course “The
Science of Trading,”

my video seminar, where I discuss many
new techniques, and my latest educational product, the

interactive training  module.
Basically, we have rigorous criteria for potential long stocks that we call
“up-fuel,” as well as rigorous criteria for potential short stocks that we call
“down-fuel.” Each day we review the list of new highs on our “Top RS and EPS New
High List” published on TradingMarkets.com for breakouts of four-week or longer
flags, or of valid cup-and-handles of more than four weeks. Buy trades are taken
only on valid breakouts of stocks that also meet our up-fuel criteria. Shorts
are similarly taken only in stocks meeting our down-fuel criteria that have
valid breakdowns of four-plus-week flags or cup and handles on the downside. In
the U.S. market, continue to only buy or short stocks in leading or lagging
industries according to our group and sub-group new high and low lists. We
continue to buy new long signals and sell short new short signals until our
portfolio is 100% long and 100% short (less aggressive investors stop at 50%
long and 50% short). In early March of 2000, we took half-profits on nearly all
positions and lightened up considerably as a sea of change in the
new-economy/old-economy theme appeared to be upon us. We’ve been effectively
defensive ever since, and did not get to a fully allocated long exposure even
during the 2003 rally.

Mark Boucher