News Reversal

  • September 14, 2000
  • Marc Dupee

Bonds staged a classic News Reversal in response to
Thursday’s friendly Producer Price Index (PPI) numbers and solid but subdued retail sales. The News
Reversal approach, made public in Larry Connors’ Investment
Secrets of a Hedge Fund Manager, exploits investors’ herd mentality by
taking a contrary position on major news events. In Thursday’s market, T-bonds
initially rallied–as they should on a report that showed lower-than-forecast
wholesale inflation with the indication of steady economic growth (higher retail
sales). But after the initial uptick, T-bond futures
(
USZ0 |
Quote |
Chart |
News |
PowerRating) collapsed,
subtracting a full point before ending 26/32 lower at 99 4/32. The strategy goes short
on a pop-up opening, one tick below the high of the previous day. 

Somebody seems to have let the cat out of the bag about
Thursday’s slightly higher retail sales numbers and slightly lower-than-expected PPI figures. Interestingly, the biotech sector and
selected bio-celeb stocks surged in the
final half-hour of trading Wednesday to close on their highs (stocks such as Millennium
and Protein Design Labs). Nasdaq 100 futures
(
NDZ0 |
Quote |
Chart |
News |
PowerRating) gapped open and
traded through their opening range in follow-through buying but were unable to
ford the next pivot at 3900, pulled back to opening levels, and then consolidated on the session’s lows before filling the gap and cascading to
Wednesday’s close for a 8.50 finish at 3796.50.

Dow futures
(
DJZ0 |
Quote |
Chart |
News |
PowerRating) were pressured the entire session by corporate warnings
on foreign exchange losses, closing down 103.0, and S&P futures
(
SPZ0 |
Quote |
Chart |
News |
PowerRating)
closed 4.70 lower at 1502.80.

The European Central Bank said it would step into
international currency markets to stem the fall of the fledgling euro, the first
time the body has intervened to contain the slide of the Europe’s single
currency.
Euro FX
(
ECZ0 |
Quote |
Chart |
News |
PowerRating) futures gapped (lapped) open on the news to .86890 but found
their high mark just two ticks above that level and have traded to the downside
throughout the session. The ECZ0, as well as Swiss francs
(
SFZ0 |
Quote |
Chart |
News |
PowerRating)
British pounds
(
BPZ0 |
Quote |
Chart |
News |
PowerRating)— both negative on the session–are all on the Implosion-5 List. 

There is a debate as to whether intervention actually
works in the international currency arena. Soros was said to have “broken the
Bank of England” in his speculative attack on the pound and lira back in
the early 1990s. And Japan is reported to have spent in excess of $80 billion
trying to prop its currency in the past decade since the bubble popped on the
Japanese economy. Hence, it is interesting that the ECB should both broadcast
their move in advance of actually taking action (traders would usually not
speculate against a currency due to the surprise factor) and issue a glib
statement on the move: “Whether you call it intervention or not,
intervening was not the intention,” said ECB President Wim Duisenberg.

Hot, cold and swirling
winds set the stage for natural gas
(
NGV0 |
Quote |
Chart |
News |
PowerRating) to make good on its Momentum-5
List and rally to new all-time records. A cold mass of air is expected to
heighten demand for gas for heating in the Midwest and northeast, while
100-degree temperatures in California keep demand for the fuel high for cooling
purposes. The threat of a hurricane in the Gulf of Mexico also helped to send
the October contract up .140 to 5.195.

December wheat
(
WZ0 |
Quote |
Chart |
News |
PowerRating) faltered on weak export demand, closing down 2 3/4
at 254 1/4. Corn
(
CZ0 |
Quote |
Chart |
News |
PowerRating) and 

November soybeans
(
SX0 |
Quote |
Chart |
News |
PowerRating) also fell. The decline in wheat and corn represent
downside follow-through after these futures hit new New 10-Day Lows. 

Cocoa
(
CCZ0 |
Quote |
Chart |
News |
PowerRating) reversed off a six-week high to make
good on a Turtle Soup Plus One
Sell setup for a loss of 23 to 815. The 828 sell trigger (the previous
20-day high) served as resistance after the initial plunge through that level on
the open. The mid-season harvest begins later in the month and will add to
record global supplies. 

Coffee
(
KCZ0 |
Quote |
Chart |
News |
PowerRating) also made good on its Turtle Soup Plus One
Sell setup, breaking a six-day. The December contract’s
Multiple Days Low
Volatility List reading left an indication that coffee could make a
larger-than-expected move (as volatility reverts to its mean), presaging the
3.13%, or 2.65-point loss to 82.10.