Surprised? These Signals Foretold Dow Explosion

  • May 16, 2001
  • Marc Dupee

As pundits throughout the media commented that the
reaction to yesterday’s Fed rate cut was “subdued,” “muted,”
or “weak,” TradingMarket.com’s signals from the Futures Indicators pages
were practically screaming about the potential for an explosive day in stock
index futures. 

The most obvious signal came from Dow futures’
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posting on the Momentum-5
List. The second directional indication was the Dow futures’ registration on
the Pullback From Highs
List. Both of these indicators triggered entry opportunities in the 10,950
area. Using an the Off The Blocks
strategy (which works well for Momentum-5 and Implosion-5 markets), an entry
signal would have been been generated at the high of the last-hour’s trading
from the previous day, at 10,950. This area was also the high from the previous
day, which would have been your Pullback From High setup entry trigger. 

While direction was most clearly indicated by the blue-chip futures contract, all three stock index futures gave signals that they
could explode. Dow,
Nasdaq 100
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registered on the 6/100 Low Volatility
and the Multiple Days Low
Volatility
 lists. Volatility compression has been evident by the narrowing ranges
which formed a handle in a cup-and-handle pattern on the Dow futures, an upside
pattern indicator. Volatility is mean reverting, meaning that low volatility
situations are often followed by higher-than-normal movement as volatility
overcompensates and returns to normal, resulting in range
explosions.

Dow futures closed 333.0 higher at 11,252.0, Nasdaq
futures rallied 79.50 to 1897.00, and the S&Ps gained 30.90 to 1288.40.

June gold
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combining signals from TradingMarkets.com Futures Indicators Pages. Also
registering on the Momentum-5
and Pullback From Highs
lists, gold shot up to a two-month high, rallying as traders bet that lower
interest rates will stimulate physical demand for the metal (this setup was
pointed out in yesterday’s Futures Market Recap and in Dave Landry’s Futures
Trading Outlook last night). Gold closed 3.9 higher at 272.4. 

Lower interest rates also made European debt instruments
relatively more attractive. Despite the European Central Bank’s surprise .25%
rate cut last week, the ECB is not expected to cut rates again soon. This means
traders sold dollars to buy relatively higher-yielding Euroland debt
instruments, and bought euros, Swiss francs and British pounds in the process. June dollar index futures
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are down .56 at 116.24,
euro FX futures
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Swiss francs
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British pound
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Yesterday’s American
Petroleum Institute (API) report showed inventories of gasoline increased during
the past week to just 1% below levels from the previous year. The market is
viewing the news as bearish, despite cleaner-burning reformulated unleaded
gasoline inventories falling from last week. This is the fourth consecutive
down day and fills the April 9 gap. Perhaps more importantly, gasoline failed to
rally on some potentially very bad news.

Fire was
reported at the western hemisphere’s largest refinery on St. Croix, in the U.S.
Virgin Islands. A more skittish market would likely have taken this news as very
bullish since this refinery accounts for nearly 40% of gasoline imports to the
east coast.
June
unleaded gasoline
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yesterday by registering on the New 10-Day Lows List, fell .0156 to .9880,
recouping over half of its losses upon tagging its 50-day moving average (the
low was .9550). 

The average from inventory reports from the Department of
Energy and the API indicated that stocks of crude oil increased 2.2 million
barrels last week as imports surged (higher supply equals lower prices). Crude oil
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closed .10 lower at 28.88 and triggered its Turtle Soup Plus One
Sell down to an intraday low of 28.43. 

Heating oil
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as the API said inventories of distillates went the other way and fell.
However, the DOE figures showed a much smaller drop in inventories and may cause
confusion until next week’s data provides clarification. This contract closed at
a one-month high and despite some recent toppy bars, appears poised to launch
out of its handle. Heating oil added .0107 to .7770. 

Natural gas
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injections (inventories) rose. Nat gas formed a Slim Jim at its Pullback From Lows
trigger (yesterday’s low) and plunged out of that formation mid-session on the
release of the APA. Nat gas closed .358 lower at 4.295.