ICE Reversal?

ICE has been grabbing more headlines than usual lately after joining with NDAQ to bid for NYX. As you can see in the six month daily below, ICE had been behaving bullish until the bid was announced. Since the end of March ICE's 50 dma has acted like resistance and key indicators have turned bullish. Monday's reaction to the news that NYX has rejected the NDAQ/ICE bid will make or break this chart:

Disclosure: I have no position in ICE.

Pullbacks

I'm really tired so this is going to be a short post on the recent pullback. I ran into a great article by Bulkowski on throwbacks and pullbacks over the weekend, take a look. Bulkowski defines a pullback as the climb in price back to the base (breakdown price) within 30 days after a descending triangle breakdown. In other words, after a stock breaks badly on large volume it often "pulls back" to the price where the break occurred. According to Bulkowski's statistics, pullbacks occur 56% of the time after an average initial decline of 9% in the three days following the break. Now take a look at the S&P 500:


Depending on where you draw the base of the descending triangle the pullback may or may not have completed last week. Notice how the S&P 500 pulled back to the August low at 1370 last week almost to the penny, then sold off again. The volume was lower on Friday as the market declined so I think there is still a good chance that the we rally back up the November lows before tanking again but we'll see. Bullkowski says there is a 56% chance that the pullback occurs so returning to 1400 on the S&P 500 should be slightly more likely than continuing to fall in the short term. I would really like to see a rally back up to that 1400 area where the 50 dma will be and declining volume would be ideal ( what we are seeing so far). However, I have little faith in this market and will take profits on the long side when I can.

Right now seems like a great time to be looking at individual stock charts for completed pullbacks for short entries. I don't have any specific charts for you tonight but maybe I'll throw some up this week. A few other noteworthy news bytes:

Bush will give his state of the union address Mon night
CFC reports earnings Tues before the bell, no conference call
FOMC decision on interest rates on Wed, market predicts .50% cut
GOOG, MA, ICE and AMZN earnings this week
Credit squeeze is a windfall for the exchanges

Disclosure: I own NYX and ICE calls, also BAC puts

NYX chart

Here is that chart I promised and to be honest it doesn't look very bullish. Certainly NYX was oversold and is due for a meaningful bounce, but there is quite a bit of resistance above. Resistance starts at $75.84 followed by the moving averages around $81 then theres a downtrend line at about $88. I will give NYX credit for having a huge intraday gain from the opening gap down. Sure the whole market came back from the lows but the dow closed down 128 points while NYX managed to finish with a gain. Volumes surged all around and this volatility must bode well for NYSE and AMEX volumes. I will try and exit my newly acquired NYX calls near the 50 dma.

On a side note, FXP is another creative ETF that trades on the AMEX, now owned by NYX. From yahoo, the FXP "seeks daily investment results, before fees and expense that correspond to twice (200%) the inverse of the daily performance of the FTSE/Xinhua China 25 index. The fund normally invests at least 80% of assets to investment that, in combination, have economic characteristics that are inverse to those if index." ProShares just went public with this ETF a few months ago but look at how much the volume as grown (good for NYX):

I also added what looks like an inverse head and shoulders pattern with a price objective near $125. I wouldn't put much weight in this pattern because this chart doesn't have much history to go on, and also this ETF was not trading during the Asian market crash over the last few days (because the US exchanges were closed). In fact, I took a call position in the FXI today which is the opposite bet to FXP, but after this international bounce is over I would be very interested in a long term short position in the Chinese markets. I went ahead and added the pattern because I saw it, even though I am currently trading against that pattern.

Disclosure: I own FXI and NYX calls.

Volume is in an uptrend!

Well it looks like the crash you expected is finally upon us. Most of you are probably aware of the carnage in worldwide markets over the past two days and the collapse in the US futures. To be honest I don't really have a whole lot to say about it, just look at some of the archived posts. For the past year we (the SG authors) have been talking about the seriousness of the issues facing the markets. Now that bear market is hitting the world in full force, well, who is really surprised? Ok, the fact that the crash of 2008 is upon us is a very serious matter, people have been financially destroyed by this event and there will be more blood on wall street before this is all said and done. For traders who will be taking advantage of the insanely high volatility tomorrow, please take these "circuit breaker" price declines into consideration.

Instead of getting all doom and gloom I thought that tonight I would write about a more positive scenario facing the exchanges, specifically the NYSE Euronext. The argument is simple, the exchanges charge small fees for every transaction that occurs. When volumes grow so do their earnings. After looking at a number of charts I have concluded that volumes swelled in the last bear market. This makes sense somewhat because volatility increases and that goes hand in hand with higher volume. Take a look at this ten year chart of the dow jones industrial average and note the volume 2000-2002:

You see pretty much the same trend on the new york stock exchange:


Volume seems to steadily increase until the end of a bear market when it spikes which is consistent with typical technical analysis. Furthermore, this seems to add to a longer term trend in volumes increasing over time. So it appears the exchanges have long term organic growth with some acceleration during bear markets. While the examples I gave are for stocks I think its safe to say you see the same thing in commodities and futures markets. In fact, the most recent headline on ICE is that they hit an all time high in futures volumes last Friday. With all the craziness in going on right now you can bet that they will be breaking that record for a fourth day in a row tomorrow.

Some have argued that with the credit freeze up the merger and acquisition activity is done for a while, but last week the New York Stock Exchange bought out the American Stock Exchange in what looks like a sweet deal for NYX. It seems like a takeover of ICE or NMX by CME or NYX is still on the table to support valuations. As far as the nyse/amex deal, the reason why seems so good for NYX is they are getting commisions on the biggest and most heavily traded etf's in the market. Take a look at these volume trends of amex ETFs over the past year (top). Notice a trend?

All of those etfs shown and options on them are now traded on the NYX owned exchanges. NYX is benefiting from both the etf boom, including the rise of inverse market etf's like QID from proshares and the increasing volume due to volatility. Now I'm no specialist on the sector but it seems pretty straightforward that the exchanges, especially NYX, are going to see a huge windfall from all this market activity. They seem to have timed their amex acquisition perfectly.

Now I know the sound of "stock exchange stocks could do well in a bear market" sounds somewhat suspicious but it makes sense to me. It would be a relatively simple thing to check if it weren't for the fact that every exchange traded exchange has come public in the last five years. Neither NYX, nor NDAQ, nor CME, nor ICE were publicly traded during the last bear market so we can't just go check their charts and see what happened. In fact the concept of a "for profit" exchange is relatively new in general, so maybe its the case that they will suffer materially in some unexpected (or expected?) way from a bear market. Let me know if you have any thoughts on this. If the markets go flat for a long time that will certainly be very bad for the exchange business, and thats a real possibility in my opinion. But for now volume is in an uptrend!

Disclosure: I have no position in NYX but I own some ICE calls.



Good luck out there tomorrow and be safe. I'll post an NYX chart tomorrow sometime, it doesn't make sense to do one until we see what happens in the morning. Stay tuned...