A Brief Look Back

The following are economic news or events that moved the markets last week. The numbers refer to the close-to-close move in the Dow industrials.

Monday: Up 1 point. Consumer credit was down less than expected, but it didn't effect the market. Tuesday: Down 104 points. Moody's warned that the US needed to cut its budget deficit to maintain its credit rating. Wednesday: Up 51 points. Wholesale inventories climbed more than expected, but crude inventories dropped. Thursday: Up 69. Initial jobless claims were more than expected, continuing claims dropped, trade deficit sank less than expected, and the treasury budget dropped less, too. Friday: Up 66 points. Export climbed but imports held steady. Retail sales were up along with business inventories.

Economic Reports

The following information is derived from yahoo!finance and times are local to the east coast. The Dow Moved column is the close-to-close price change of the Dow industrials on the release day from the prior trading day, the last time the report came out.

ReportTimeA-F
Rating
Dow
Moved
Description
Producer price index8:30 TB-+30Measures wholesale goods cost. An indication of future inflation.
Capacity utilization9:15 TB-+30Gauges economic activity, hints of inflation.
Industrial production9:15 TB-+30Production of utilities, mines, and manufacturers.
Building permits8:30 WB--11Measures building permits for new construction.
Housing starts8:30 WB--11Number of homes beginning construction.
Consumer price index8:30 WB+-11Inflation report. Measures cost of goods and services.
Crude inventories10:30 W?+51My guess: Measures oil inventory.
FOMC interest rate2:15 WBig?The FED announces any changes in interest rate policy.
Initial jobless claims8:30 ThC++69Counts people filing for state unemployment benefits.
Leading indicators10:00 ThD--94Summary of already known reports.

The Federal Reserved reports on Wednesday, so that could set the tone for the rest of the week.

Options Expiration

The following is courtesy of yahoo!finance and they stole it from The Options Industry Council.

OptionDate
SPL converts to SPXTuesday
VIX, VXN, RVX expireWednesday
A.M. settled index options cease trading.Thursday
Expiring equity, P.M. settled index options and treasury/interest rate options classes cease trading. Expiring cash-settled currency options cease trading at 12:00 P.M. EST.Friday
Equity, index, cash-settled currency and treasury/interest rate options expireSaturday

Many options expire this week, so traders will be looking to close out their positions ahead of that, and that suggests increased volatility (large daily price swings).

CPI: Chart Pattern Indicator

On Friday, 12/11/2009, the CPI had:

7 bearish patterns, 57 bullish patterns, 420 patterns waiting for breakout. The CPI signal is 89.1%, which is bullish (>= 65%).

The chart pattern indicator is bullish with one of three half triangles showing (/). Additional triangles are a measure of strength with solid triangles meaning a more reliable signal.

Other

Earnings season is over but Best Buy reports earnings on Tuesday, Oracle and RIMM on Thursday.

I found only 4 pipe bottoms last week with no pipe tops appearing. This is mildly bullish. Large numbers of pipes often signal the start of a short to intermediate-term trend change.

The following industries, of 52 that I follow, were the best performing.

  1. Internet (best again this week)
  2. Air transport (new, replacing Shoes)
  3. Apparel (was 3)
  4. Medical Supplies (new, replacing Coal)
  5. Long ETFs (new, replacing Computers and Peripherals)

Here are the worst performing.

  1. Trucking/Transportation Leasing (new, replacing Cement and Aggregates)
  2. Oilfield Svcs/Equipment (new, replacing Homebuilding)
  3. Petroleum (Integrated) (was 50)
  4. Alternate Energy (was 51)
  5. Short ETFs (worst) (was 52)

Notice that the bottom three remain the bottom three. In other words, the dogs remain dogs. Stick to industries that outperform and avoid those that don't show good relative strength.

My Prediction

Picture

The chart shows the Dow utility average on the daily scale. I think the rest of the market will follow this index higher, so I have changed all of my targets going into the new year. See Tom's Targets at the top of this page.

The Federal Reserve meets on Tuesday, I think, and reports their decision on Wednesday. I don't think they will do anything except celebrate the coming holidays. Happy Hanukkah, by the way.

For the coming week, I show what I expect will happen by the red lines. This is geared toward the utility index, so I expect the up trend to continue for a few day then begin to pause and retrace a portion of its gains. Options expire this week, so that could add to the volatility on Friday. A check of the Dow industrials for last month showed that the industrials dropped 14 points the last time options expired. So maybe Friday won't be a large-move day after all.

Returning to the chart, I show a broadening pattern called a right-angled and ascending broadening formation, highlighted in blue. The pattern broke out downward and then reversed course. When it closed above the top of the pattern it busted it. Busted patterns tend to show strong moves in the direction of the new breakout -- higher, in this case.

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