Tuesday, July 31, 2012

What My Trading System Says About Gold Right Now

Gold appears to be breaking out of a narrow trading range and could finally be ready to deliver gains to traders again. At least that’s what the chart and my 26-week rate of change (ROC) system are telling me right now.

Last week was the SPDR Gold Trust's (NYSE: GLD) narrowest weekly trading range in more than 18 months. The trading range is defined as the difference between the highest and lowest price seen in the week. Eventually, low volatility gives way to high volatility, and that happened this week when gold broke toward the upper limit of a three-month consolidation pattern.

GLD has traded mostly between about $148 and $158 a share for the past three months. The chart below shows that GLD should be expected to break out of this trading range and move higher.

GLD Chart

In the middle of the chart, a flag pattern has been highlighted in blue. This pattern appears on many charts during large price moves, usually at the halfway point. The measured move based on this pattern pointed to a low of about $150, close to the actual bottom of the trading range. Because GLD has met its downside price objective, I believe the decline in gold has reached an end.

After breaking out of the trading range, the price target for the move is equal to the size of the trading range. In this case, a $10 price move is expected to follow, and that would bring the price of GLD to $168. That price is also the apex of the triangle pattern, which would be a price level expected to offer resistance.

In addition to price patterns offering a number of reasons to look for at least a small gain in GLD, relative strength (RS) analysis offers another argument for a bullishmove.

At the bottom of the chart, GLD’s performance relative to iShares Barclays 1-3 Year Treasury Bond (NYSE: SHY) is shown. This ratio shows whether gold or short-term Treasury notes are preferred by investors. Since GLD reached an all-time high last year, investors have generally preferred SHY to GLD. As GLD touched the lower edge of the trading range, the RS ratio formed a slight bullish divergence, and it has now broken the downtrend line. Previous trendline breaks have been associated with at least short-term gains in GLD.

It seems appropriate to use SHY as a benchmark for a RS analysis of gold. The metal is considered by many to be an alternative to cash, while SHY is a virtually risk-free alternative to cash. If SHY is outperforming GLD, traders should sell GLD and accept the risk-free rate of return from short-term Treasuries. When traders’ appetite for risk increases, or global uncertainty points to an increased demand for gold, the RS of GLD turns higher.

By following the RS analysis, we don’t need to know which factor is pushing traders to GLD. We just need to know we will own it as long as it’s going up, and we’ll sell when it stops going up.

That’s the essence of my 26-week ROC strategy. We want to be in the strongest ETFs in each asset class.

Carter's, Inc. (NYSE: CRI)

Carter's, Inc., together with its subsidiaries, designs, sources, and markets branded children's wear. The company provides products under the Carter's, Child of Mine, Just One You, Precious Firsts, OshKosh, and related brand names. Its Carter's brand baby products include bodysuits, pants, undershirts, towels, washcloths, receiving blankets, layette gowns, bibs, caps, booties, playclothes products, sleepwear products, bedding, outerwear, swimwear, shoes, socks, diaper bags, gift sets, toys, and hair accessories. The company sells its products in department stores, national chains, and specialty retailers, as well as through its Carter's and OshKosh retail stores; and online at carters.com and oshkoshbgosh.com. As of June 30, 2012, it operated 385 Carter's and 166 OshKosh outlet and brand retail stores in the United States; and 73 retail stores in Canada. The company was founded in 1865 and is headquartered in Atlanta, Georgia.

To review Carter's stock, please take a look at the 1-year chart of CRI (Carter's, Inc.) below with my added notations:

CRI embarked on a nice rally from August of last year until this April. Since then though, the stock has settled down into a Rectangle pattern over the last (3) months. A Rectangle pattern forms when a stock gets stuck bouncing between a horizontal support and resistance. For CRI, the Rectangle pattern has formed a $55 resistance (brown) and a $50 support (navy). You will notice that CRI's $50 support was also a resistance earlier this year.

The Tale of the Tape: CRI has formed a common Rectangle pattern. The possible long positions on CRI would be either on a pullback to $50, or on a break above $55. The ideal short opportunity would be on a break below $50.

The One Simple Rule Used By Every Successful Trader

If you learn one simple rule, you can easily eliminate crippling losses and begin booking consistent trading gains.

You can use this rule to separate yourself from the ranks of the unsuccessful traders and join the select few that are able to grow their accounts year after year.

But first, you need to find out what’s keeping you from making money in the stock market…

You probably think there are only two types of traders: those who make money and those who don’t. Traders who have a set of personal trading rules–and those who just throw money at random stocks in the hopes of hitting a big winner.

However, trading isn’t that cut-and-dry. In fact, there are plenty of smart, educated traders who can’t seem to make money in the markets.

A couple of weeks ago, I told you why you’re losing money in the stock market. I don’t mean the occasional losing streak, either. I’m talking about an issue many beginning traders face: the inability to consistently win and grow their trading account.

I told you that what you don’t know about the markets isn’t the problem. It’s not about a lack of knowledge or missing a market cue that could have saved you from your losses. And it’s not that you’re trading the wrong stocks. Or that you’re trading the right stocks at the wrong time (more)

Eurozone Retail Sales Sink 9th Month; 17th Month of Contraction in Italy; Margins Collapse in France; Germany Barely Above Contraction

globaleconomicanalysis.blogspot.com / By Mike “Mish” Shedlock / July 30, 2012

Eurozone retail sales continue to dive and not even Germany is immune. German manufacturing has been in contraction off-and-on, and retail sales are once again on the verge contraction as well.

Let’s take a look at some reports.

Italy Retail Sales Slump Extends to 17th Month

Markit reports Downturn in retail sales continues in July


Historic Drought Could Devastate This Stock by 37%

The Midwest is currently experiencing one of the worst droughts in over 50 years, and it could have a catastrophic effect on the food supply system. The U.S. Department of Agriculture expects food prices could rise 3% to 4% over the coming year. In particular, dairy products are estimated to go up as much as 4.5% from current levels. This is bad news for Dean Foods (NYSE: DF), the biggest dairy processor and distributor in the United States.

Dean Foods has already been affected by volatile commodity costs. During the past year and a half, the stock has see-sawed, between a low near $7 and a high above $17. Currently, shares are looking technically vulnerable, breaking an intermediate uptrend line and testing important support near $12.

DF hit a two-year high of $17.25 on July 3, and remained in an intermediate uptrend until the week of July 16, when that uptrend was broken on higher-than-average volume. The stock tumbled after investment firm Goldman Sachs (NYSE: GS) downgraded the company, citing how inclement weather could cause corn prices to rise, leading to inflated dairy prices because corn is a main source of cattle feed. Since then, shares have been on a steep, accelerated downtrend, falling over 15% in two weeks.

As I mentioned, shares are currently hovering near support at $12. The rising 50-week moving average, which represents additional support, intersects nearby at around $11.64. However, if that level is breached, the next meaningful support level is near $11. Once below $11, shares could easily drop to support in the $7 range, as we saw happen in December 2010 and August 2011.

RSI -- which is an overbought/oversold indicator -- is below the key 50 juncture. This is a bearish sign. In addition, the RSI intermediate uptrend line has broken, supporting the bearish interpretation of the underlying price chart.

MACD -- a buy/sell indicator -- is flashing a "sell" signal, as marked by the black line crossing below the red line on the chart above. The MACD histogram is in negative territory.

The bearish technical outlook is supported by weak fundamentals.

On Aug. 8, the company will report second-quarter results. Analysts project revenue for the quarter will decrease 2.4% to $3.2 billion, from $3.3 billion in the comparable year-ago period. For the full 2012 year, revenue is expected to drop 0.2% to $13 billion, from $13.06 billion a year earlier.

The earnings outlook is more optimistic. Due to an aggressive restructuring program in which the company is undertaking organizational changes to reduce operating costs and improve gross margins, net income is projected to rise. Analysts expect earnings per share will increase to 31 cents in the upcoming second quarter, from 18 cents in the year-ago period. For the full 2012 year, analysts expect earnings will be $1.16 versus 77 cents in 2011. However, by 2013, earnings growth is estimated to decelerate, rising only 13%.

Given my bearish outlook, I plan to short Dean Foods if it falls to $11.53. I will set my stop-loss at $13.96, just above current resistance, marked by the intersection of the falling 200-day moving average. My target is $7.23, near the two-year low hit in December 2010, for a potential profit of 37%. The risk/reward ratio is approximately 1.8:1.

Risks to consider: A sudden shift in weather conditions could alleviate the drought situation. In that case, corn prices could reverse and dairy input costs could fall.

Chart of the Day - Discover Financial Services (DFS)

The "Chart of the Day" is Discover Financial Services (DFS), which showed up on Friday's Barchart "All-Time High" list. Discover on Friday posted a new all-time high of $36.61 and closed up +2.48%. TrendSpotter has been long since June 29 at $34.58. In recent news on the stock, Discover on June 19 reported Q2 EPS of $1.00 that was in line with the analyst consensus. Discover Financial Services, with a market cap of $18 billion, operates the Discover Card with more than fifty million cardmembers, the Discover Network with millions of merchant and cash access locations, and the Goldfish credit card business in the United Kingdom. Discover Financial Services also operates the pulse ATM/debit network.


Amazon.com Inc. (NasdaqGS: AMZN)

Amazon.com, Inc. (AMZN) released its quarterly earnings yesterday after the bell. Although the price of AMZN is higher than the preferred range of most of our readers, the chart analysis of AMZN can still be very educational for traders.

Amazon.com, Inc. operates as an online retailer in North America and internationally. It operates retail Websites, such as amazon.com and amazon.ca. The company serves consumers through its retail Websites and focuses on selection, price, and convenience. It also offers programs that enable sellers to sell their products on company's websites, and their own branded Websites. In addition, the company serves developers and enterprises through Amazon Web Services, which provides access to technology infrastructure that developers can use to enable virtually various type of business. Further, it manufactures and sells the Kindle e-reader. Additionally, the company provides fulfillment services; miscellaneous marketing and promotional agreements, such as online advertising; and co-branded credit cards. Amazon.com, Inc. was founded in 1994 and is headquartered in Seattle, Washington.

To review Amazon's stock, please take a look at the 1-year chart of AMZN (Amazon.com, Inc.) below with my added notations:

MZN has created a couple of short-term price levels over the last (3) months. First, AMZN has formed a clear resistance level at $230 (navy). In addition, the stock has also been forming an uptrending support level (blue). These two levels combined have AMZN stuck within a common chart pattern known as an Ascending Triangle that will eventually have to break one way or another. Will their earnings report give AMZN the push it needs to break higher, or lower?

The Tale of the Tape: AMZN is currently stuck between its uptrending support and the $230 resistance. A long trade could be made on a break above $230. On the other side, you could enter a short trade on AMZN if the stock breaks below the uptrending support level.

This Week's Market Outlook: Be Prepared for a Short-term Reversal

Traders were relieved when the head of the European Central Bank (ECB) proclaimed, "The ECB is ready to do whatever it takes to preserve the euro." Stocks and the euro jumped on the news. Rallies based on hopes of monetary easing can be volatile but profitable for traders. They are also usually short-lived unless actions follow words.

S&P 500 Rises on Hope

Earning disappointments were in the news as market leaders like Apple (NASDAQ: AAPL), Starbucks (NASDAQ: SBUX) and Facebook (NASDAQ: FB) missed analysts' estimates. While these stocks dropped, the broad market rallied. SPDR S&P 500 (NYSE: SPY) gained 1.62% on the week, and Vanguard MSCI Europe ETF (NYSE: VGK) was up 3.29%. The rally from Tuesday's lows was even more impressive as SPY closed the week 4.25% above the low and VGK was 8.1% higher.

Bears can point to a number of reasons that the market should fall -- bad earnings, slow revenue growth, possible inflationary pressures as a result of central bank easing. The fundamentals certainly still point to weakness, but the market action is the most important information that traders act upon, and the market was up. The question traders now face is whether the gains will continue. (more)