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Oil and Financials: A Drag on the Market
If it's not oil surging, then it's the incessant decline in financials, which are the proverbial albatross around the market's neck. These two countervailing forces continue to stymie any further advance, and are a major contributing factor in the choppy trading we've experienced lately.
On more days than not, the market is being held hostage by crude oil prices. These days you have to look at oil as a leading indicator, as every gyration affects stocks. If you go back six months, the weekly release of the Energy Information Administration's crude oil inventory report was no big deal. Now, however, it's a potential market mover. This is a normal (and quite frequent) occurrence in the markets, as cycles and perceptions are in a constant state of flux. For this reason, traders must stay abreast of these dynamic trends in perception. If they don't, they will encounter bigger challenges than are already present in the daily routine of a day trader.
The continuing meltdown of the financial sector was further exacerbated on Tuesday. Goldman Sachs (one of the most respected firms on the street) captured the spotlight, and essentially was the catalyst for the day. First, they were ascribed with sending the market higher in early trading by reporting better-than-expected earnings (this rally overshadowed bad inflation numbers). Then, they followed that by being credited with sending the market lower when their bank analyst downgraded, as well as lowered his forecast, for a whole host of bank stocks. Incidentally, for those of you looking for a bottom in these stocks, the bottom will be found when everyone stops looking for it.
I've been alluding to these problems for the last two months now, and despite these negatives, I've been generally positive on the market since the middle of March. Why is this? Well, the primary reason is because the market has been trending higher; hence being long has been the path of least resistance. The only way to have maintained a long position - amid all the seemingly bad economic data - is by looking at the market through an OBJECTIVE eye. In other words, only trade on what the market is telling you, not what you think it SHOULD do.
Maintaining objectivity is something I stress when I teach both the Professional Trader class and the E-Mini Futures course for Online Trading Academy. Remaining objective when we're out of the market is not as difficult as when we enter the fray. Once in, the mind starts working to rationalize and justify our position, ignoring what doesn't suit us and focusing on what does. A good trader stays objective regardless of whether he's long, short, or flat (out of the market). Objectivity enables a trader to exit losing trades quickly when they're not working, rather than holding on in hopes that the market will come back. Objectivity also prevents traders from overstaying in profitable trades. If the market is signaling the move's over, then it's time to take profits. An aphorism I like to use that speaks to this issue is "now that you own it, it owns you". Whenever I get into a slump, I always ask myself if am I losing my objectivity. If the answer is yes, I have to work to regain it since my trading survival depends on it.
On the technical front, the market sold off further after last week's oil inventory numbers surprised with lower inventories, giving Crude an impetus for higher prices. We can see in the hourly chart below, the ER2 (Russell 2000 E-Mini) bounced from the highlighted strong support level and has retraced more than half of this month's peak-to-trough move.
On a longer-term basis, the Russell's uptrend is little disturbed. It traded below its 50 Day EMA briefly, but has broken above it once again after the recent rally (view chart below). The relative strength of the Russell versus the S&P (highlighted in last week's newsletter) continues. Until the financial sector turns up, this divergence will probably persist.
The Bottom line: This Friday is options expiry, which always makes for an interesting week. In recent months, these days have been either extremely volatile or extremely quiet (nothing in between). Since oil is such a dominant theme now, Wednesday's Inventories report will be watched very carefully. As I write (early Wednesday), Morgan Stanley released poor earnings results, sending the futures market down sharply. It looks as though the financials will dominate the tape again. In my view, the market will remain in a range for the short-term as the battle of negatives versus positives plays out.
Until next time, I hope all of you have a profitable week.
If you have questions, comments or you'd like a specific topic covered, please email me at gvelazquez@tradingacademy.com
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Gabe Velazquez is a professional
trader with 14 years of experience. His focus is intra-day and swing trading the
ER2 (Russell 2000 e-mini) using technical analysis as his primary tool. Gabe has
managed both stocks and futures accounts as well as conducted educational seminars
on technical analysis for the past ten years. He is a frequent guest on Biz radio,
where he shares his market knowledge and utilization of technical indicators.
Gabe also teaches the