Monday, April 16, 2007

Earnings Week and Some Things to Watch...Oil Trading Scan Continued

This is the start of earnings season, and for the next two weeks chances are your favorite companies will be announcing earnings. There is a lot to follow and the only thing that can be guaranteed is there will be surprises and disappointments. Below are a few charts of the NYSE Composite, Nasdaq Composite and, the S&P 500 Index.

(Click Charts To Enlarge)

The indexes have recovered pretty well from the 24hour Chinese flu that went around the end of February. The moves have been nice on a percentage basis, but the volume on up days has been less than the volume on down days; this can be troubling. The NYSE has made a new high while the S&P 500 and the Nasdaq Composite are still trying to get there. If the rally is going to continue, a new channel is going to have to be formed above the triangle in the S&P 500. This new channel will have to require an up day with volume greater than what we have seen as of late. If this area turns into a stalling point, it will serve as a throw-over pattern and a quick drop should be in the cards.

A couple other charts to watch to confirm this new channel forming above this triangle are below. The first chart is of the Dow Jones Transportation Index. This chart is forming a nice triangle, and with the support of the Warren Buffett news in taking positions in the railroads, there could be support upon any weakness.

The next area to watch is the bond market and the rate of the US Dollar. Below are two charts that track each. If there is any increase in downside momentum, this will carry over into the stock market. This might be masked during earnings season, but after its over and traders begin to look around at what to focus on next, this will be a factor.

The April 4th post went over a spread trade between two coal companies. There again has been a jump in the spread between Arch Coal(ACI) and Massey Energy(MEE). It might be worth looking at.

With dollar weakness, it is worth following commodities and the companies that deal in oil, metal, or other basic materials. If demand in the United States slows, it does not mean that demand around the globe will slow down. Below is a chart of the XLB which is forming a triangle. Look for volume to confirm a new high price, and follow metal companies in New Zealand and Australia;both currencies are doing pretty well. New Zealand bonds pay 7.5% and their currency is appreciating against the US Dollar;not a bad investment.

In an earlier post, canary in a coal mine, it was mentioned that watching the major brokerage stocks is helpful in gaining some insight into the health the market. Below are charts of Goldman Sachs and Morgan Stanley. On Friday Morgan Stanley opened up nicely, but finished the day on the low. The Goldman Sachs chart has been very quite also. These,along with Lehman Brothers, are worth keeping an eye on this week. They might give clues to what is ahead.


In the previous post from last week, a scan was created to find stocks in the oil sector that performed well. The scan was this:

1.Close > (High+Low+Close)/3
2.Volume >AvgxV20
3.(High+Low+Close)/3 > (High1+Low1+Close1)/3

We ran this scan on our universe of 76 oil companies, and 11 fit the criteria that day. They performed pretty well on Thursday and Friday.

Below is what would happen in we took our list of 76 stocks, and ran this scan every day and bought the ones that met our requirements. In selling these stocks, a simple system was employed.

1.5% risk from our initial buy price.
2.30% target price.

Below are the results:(Click To Enlarge)

This exit strategy is an example of how important money management can be in any system. This system could have used a great custom made indicator or a combination of many widely known indicators to build the better mouse trap. Some of them might have made the system better, but seeing the results of just using a 5% stop loss and a 30% profit target, shows clearly the roll of money management in any system. The results are from only 2 years of data, but if any one wants to see the results over a longer time frame, just click the contact button at the top of the blog and explain what time period you are looking for information on.

More on systems in a future post. Have a great trading week!

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