On the brink of chaos: sellers seem exhausted, trade in crucial decision zone

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By Joe Duarte

The rebound I predicted last week certainly came and went. And on Friday, the bond market was out of control as the January jobs report went against all expectations with an overall figure of 467,000 new jobs created against expectations that some cases were negative.

But by the end of the day, some of the selling pressure had evaporated, raising the question of what is really going on in the market. So as the drama unfolds, as I describe below, what is really happening is traders determining whether to stay or go.

Choppy data

Interestingly, there was a lot of whispering on the trading desks about employment numbers, and with good reason. In fact, there is evidence – courtesy of the BLS itself – that the number has been skewed by statistical updates.

Indeed, the explanatory language on how the number was actually derived can be found in Table C of the report. It makes clear that the final number is related to adjustments related to “population control effects, which the BLS defines as “independent estimates” of the population used to weigh the results of the survey sample among households to reflect the non-institutional civilian population aged 16 and over.

The US Census Bureau develops population controls. They are based on population figures from the decennial census, supplemented by data on births and deaths and estimates of net international migration.

To the best of my knowledge, the BLS does not define or clarify what “independent estimates” are beyond the generic description above, or who makes them.

Of course, my goal is not to blame the BLS or the Census Bureau, but simply to point out that the statistics are only as good as the data on which they are based.

In other words, even if the estimates are done carefully, because they are based on data from the Census Bureau – which has its own set of estimates – the numbers may already be out of date given that it is possible whether they are based on distorted data or incorrect sampling, which can happen with any survey.

Just as likely, data may still be in flux due to the fluid Covid-related pandemic and rapid demographic changes – deaths, movement to different states, immigration – legal or otherwise.

So, due to the complex times we live in, there’s really no way of knowing how many new jobs were created in January.

As a result, the Federal Reserve, if swayed by this data without diving deep into the numbers and making the appropriate adjustments, may indeed be making a significant policy error by raising interest rates, perhaps all the way to 0. .5% Fed hike. Fund rates in February.

Still, there were rumors and a report from Reuters in Friday night trade action that the Fed was not planning to raise interest rates by 0.5%, which likely explained the partial rally in a otherwise dismal day of trading.

However, what the Fed does not deny is that higher rates are coming. So when the Fed pulls the trigger, it should come as no surprise to anyone, because the central bank has been telling us for weeks that it is going to raise interest rates.

Indeed, higher rates are now all the rage, except in China where the ECB has already planned its own rate hikes in the not-too-distant future, and the Bank of England recently announced its first rate hike of the cycle. .

We are in no man’s land

It is what it is for sure. And the Fed will do what it wants. But here’s what every trader should be concerned about. Markets are now trading on data estimates based on other data estimates that are considered gospel truth by the algos.

This means that whatever happens next is completely unpredictable since the algos simply follow the program and don’t step back to make sure they really analyze the data before launching.

Therefore, investors should maintain a short-term trading mindset that adheres to the following principles:

  • Don’t fight the Fed.
  • Don’t fight market dynamics.
  • If an action is not stopped, keep it until the stop is reached.
  • Look for areas of relative strength in the market, as that’s where new leaders will come from – I expect them to decline, so be patient.
  • Consider options over stocks to reduce downside risk while participating in any potential upside if the market rebounds in the short term.
  • Keep a short-term perspective on any new trade – long or short.
  • Raise funds either by waiting after being arrested, or by not putting large sums to work yet – or both.
  • And be prepared for more trouble to come.

Welcome to the Edge of Chaos:

“The chaos edge is a transition space between order and disorder that is believed to exist in a wide variety of systems. This transition zone is a region of bounded instability that engenders a constant dynamic interplay between order and disorder. – Complexity labs

Rising fertilizer prices could boost CF Industries’ bottom line

I recently recommended buying shares of a fertilizer producer CF Industries (CF) as the stock is well against the general downward trend in the market. At this point, it’s a classic supply and demand story coupled with a very attractive price chart that shows a stock with strong bullish momentum, even in a crazy market.

Specifically, the prices of nitrogen and natural gas, the two most important components of CF’s fertilizer products, have recovered. Additionally, with crop inflation becoming more entrenched and farmers requiring greater amounts of fertilizer due to higher price expectations, CF has been able to pass on higher production costs to its clients.

This translated to $1 billion in cash flow over the past year, with the company expected to generate more than $2 billion in EBITDA when it reports results in mid-February.

Supply squeeze should generate profits

Here are some takeaways from the recent third quarter earnings conference call, which should fuel a strong fourth quarter earnings package

  • High crop prices and increased economic activity continue to drive demand.
  • Falling global production and government actions have created a supply constrained global market.
  • The company expects the fall ammonia application season to be the biggest since 2012 – India and Brazil are likely to lead the way.
  • Fertilizer stocks are very low.
  • Global production was weak in 2021 due to extreme weather conditions in North America, increased maintenance around the world, and ongoing shutdowns and curtailments in Europe.
  • The Russian and Chinese governments are discouraging nitrogen fertilizer exports until spring, further tightening global supply.

The price chart shows strong momentum

CF price chart shows strong momentum

(NYSE:CF) Stock charts

The price chart speaks for itself with positive momentum everywhere. Specifically, the Accumulation Distribution (ADI) and Equilibrium Volume (OBV) are rising while Volume Per Price (VBP) is showing good support at $70 and no major resistance above $75. It’s hard to find relative strength in this market, so it makes sense to have a small position in CF Industry Holdings with a well-placed sell stop.

I currently own shares in CF.

Salespeople seem exhausted. Market inside the crucial decision zone.

The New York Stock Exchange‘s Advance-Declin Line (NYA) did not fully recover last week. And it ended the week on a mixed note. But the CBOE Volatility Index (VIX) continues to roll. This suggests that the market is suffering more from a lack of buyers than overwhelming seller action. So if this continues, we can expect a continuation of the current choppy market that will rebound every time new news arrives.

A rise in VIX signals that put volume (bets that the market will go down) is up. What follows when the volume of put options increases is that the increase in selling volumes causes market makers to sell put options and simultaneously hedge their bets by selling stocks and contracts at stock index futures.

NYAD Early Decline Issues

(NYAD) Stock Charts

During this time, the S&P500 (SPX) sits in a huge area of ​​price congestion sandwiched between its 20-, 50-, and 200-day moving averages. On Balance Volume (OBV) and Accumulation Distribution (ADI) suggest that money is actually seeping into the index.

However, the Volume by Price (VBP, bars to the left of the chart) indicator suggests that there are a lot of traders in this area and the direction in which the index breaks, up or down, from from here is likely to be very significant.

Keep an eye on what’s happening between SPX 4300 and 4650.

S&P 500 Large Cap Index

(SPX) Stock charts

The Nasdaq 100 Index (NDX) is in a similar position to the S&P 500, but it’s below its 200-day moving average, which means there are far more sellers in tech than in other market segments.

Additionally, the largest VBP bar for NDX sits at the 200-day moving average, suggesting that this price zone is the most important line in the sand.

Nasdaq 100 Index

(NDX) Stock Charts

The S&P Small Cap 600 Index (SML) also remained well below its 200-day moving average and shows no signs of significant upside or downside interest at this time.

S&P 600 Small Cap Index

(SML) Stock Charts

The S&P Small Cap 600 (SML) index also broke well below its 200-day moving average. And although it is clearly oversold, it could drop significantly.

Originally published on MoneyShow.com

Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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